International Business

PREFACE
This book course in International Business is especially

designed for the students in the English teaching module of the
Faculty of International Business and Economics at the
Academy of Economic Studies Bucharest.
This course provides the necessary prerequisite for the

development of international business activities, being
especially designed to help students understand how to behave
in the international business environment. It is focused on how
to negotiate foreign transactions, such as import and export
contracts, licence, joint ventures and franchising agreements.
It helps students understand how to develop the company
across borders.
The success of a business depends on how well trained

personnel plays in an international economic environment
involving risk and uncertainty.
Issues treated:
International business environment
The organisation of the international business
Entry strategy and in international business
Culture in international business
International business operations
International business negotiations
Export, import and countertrade
Licensing and franchising operations
Closing case studies
I have attempted to design a course that is comprehensive and
up-to-date. In my opinion, to be comprehensive, an international
business textbook must:
Examine the strategies and structures of international
businesses.
Explain how and why the world's countries differ.
Present a thorough review of the economics of international
trade.
Assess the special roles of an international business's
various functions.
Many issues in international business are complex and thus

necessitate considerations of pros and cons. To demonstrate
this to students, I have adopted a critical approach that
presents the arguments for and against business strategies,
organizational structures, and so on.
International business strategy and structure and international

business operations arise out of national differences in political
economy and culture. To fully understand these issues, students
must first appreciate the differences in countries and cultures.
I have also added some closing case studies. These cases are
also designed to illustrate the relevance of materials for the
practice of international business.
The Author
THE INTERNATIONAL
1 BUSINESS ENVIRONMENT
AND GLOBALIZATION
As in all business situations, opportunities and threats stem from changes in

the environment. International business environment is more and more
dynamic and changing, with a lot of opportunities and threats. It is this
dynamic nature which gives rise to major opportunities for international
business.
1.1 Environmental Factors of Globalization
Examples of some of the major changes in the international business

environment in recent years include the following:
Newly emerging markets with significant growth potential, e.g. the
Chinese Economic Area, Eastern Europe, Indonesia, India.
Fundamental changes to the economic systems in some countries/
regions of the world, for example the collapse of the former Eastern
European Communist Bloc and European Union enlargement towards
East.
The growth of whole new trading blocs and major changes to existing
ones.
Diminishing barriers to international trade and consequent significantly
increased competition across national boundaries and often, as we shall
see later, on a global basis.
The growth of the multinational and transnational organization.
The development and impact of the Internet and new economy.
These, and other changes, are in fact considered in more depth in this and
later chapters, but at this stage it is sufficient to note that it is the
particularly dynamic nature of the international environment which
provides the source of major business opportunities.
International Business
(1) The continued liberalization of international trade
This particular aspect of the international environment is of particular

importance when considering the growth of international business. As
already indicated, there has been a continuing trend towards the
liberalization of international trade. Starting after the Second World War,
under the auspices of GATT (lately the World Trade Organization, WTO),
agreements have been reached to gradually remove trade barriers such as
tariffs and quotas. Imperfect though these agreements have sometimes been,
there is no doubt that these have helped the growth of world trade and the
rising importance of international business.
(2) Cosmopolitan customers
A third factor in the growth in importance of international business is the

changing nature of customers and demand, and in particular, the
increasingly cosmopolitan nature of today's customers.
Today's consumer is much more widely travelled compared to even a decade

ago. Combined with an increasingly global media network, today's
consumer is exposed to global lifestyles, products and brands. Increased
affluence and education on the part of customers have also served to
reinforce much more cosmopolitan attitudes and lifestyles.
At the turn of the twentieth century, our grandparents were mainly exposed
to domestic products and services. Furthermore, they weren't particularly
interested in buying "foreign" products. Today's consumer, however, travels
widely and wants to purchase the best value and most innovatory products
and services, regardless of their country of origin.
Clearly, consumers and their needs change,

together with their buying habits and the influences on these
Understanding the consumer and their needs lies at the heart of business
strategy and planning. This is no different in international business indeed,
if anything, one might argue that the need to understand or at least analyze
customer behavior is heightened when considering consumers across
international frontiers.
The International Business Environment and Globalization
(3) Improved communications
The Internet helps and facilitates the emergence of the more cosmopolitan
international consumer whose tasted have been developed a lot.
(4) Strategic networking and the international supply chain
It is not only final customers that have become more cosmopolitan in their
lifestyles and purchasing habits, but so too have organizational customers.
Strategic networking is the formation of alliances and agreements

between companies. Such alliances and agreements may involve, for
example, licensing, franchising and even mergers and acquisitions.
Strategic networking is an attempt to combine two or more companies'
skills and resources so as to be able to compete better.
International supply chains refers to the increasingly international

nature of supply in as much as companies often purchase components,
raw materials, services, etc. from very diverse parts of the world.
Increasingly, organizational buyers, whether in manufacturing, services or

retailing, are looking towards non-domestic suppliers to provide their raw
materials, components and finished products.
Some of the same factors underpinning the emergence of the more

cosmopolitan consumer, such as improved communication and so on apply
equally to the organizational customer. In addition, however, companies are
increasingly developing strategic networks with suppliers which are based
on international supply chains.
So, for example, a car which is ultimately sold in the France may have had
its engine built in Spain, its transmission in Japan, its gearbox and steering
in Korea and its trim in Brazil, with assembly in Germany or, lately, Eastern
Europe.
A number of factors underpin this growth of strategic networking and

international supply chains. So, for example, increasingly, even the largest
companies can no longer afford to develop new products on their own, but
must share the risk by developing strategic alliances with other companies,
often in different parts of the world. Similarly, sometimes a company will be
unable to gain access to an overseas market without the help of a local
company and so again, strategic alliances or joint ventures of some kind are
increasingly the order of the day. One of the most significant developments
promoting the growth of the international supply chain has been the
recognition that managing supply effectively through value chain activities
can be one of the most important sources of competitive advantage. There is
no doubt that strategic networking and the international supply chain
management which is associated with this, will continue to facilitate the
growth of international business in the future.
(5) Growth of global companies - multinationals and transnational
Factors already discussed which have served to underpin the growth of

importance of international business have in turn led to the emergence of the
global company.
The global company thinks plans and operates on a truly global basis; in
other words, it transcends international boundaries. The 1980s, 1990s and
beginning 2000s have seen the emergence of the multinational and, more
recently, transnational company. In an admittedly somewhat chicken and
egg fashion, the emergence of the global company has in turn helped fuel
further growth in international business. At this stage, we should note that
one factor in particular linking the global company with the growth of
international business itself has been the growth of the global brands which
such companies have promoted.
(6) Global brands
A combination of increasingly cosmopolitan consumers and lifestyles,

together with the growth of global companies, has led to the growth of the
global brand. Global brands transcend international boundaries, reducing the
risks for customers of buying brands produced in other countries. They also
help facilitate a feeling of "belonging" on the part of customers throughout
the world with shared lifestyles, values, aspirations, etc.
These, then, are just some of the key factors which underpin the growth in,
and importance of, international business. Here, we are simply concerned to
establish the importance of international business and the fact that the
dynamic environment which surrounds this area of business means that this
is an area of significant opportunities. Needless to say, to recognize and
appraise these opportunities is a key part of the international businesses task.
In addition to understanding the nature of the international environment and
the factors which underpin this, including competitor and customer aspects,
the international business also needs to understand and be able to apply the
tools of international marketing research together with the concepts and
techniques of competitive, absolute and comparative analysis. But what
prompts companies to consider "going international" in the first place? What
are some of the key motives and incentives?
International versus Domestic Business
Before considering the differences it might be useful, however, to consider

what is similar in international and domestic business.
Similarities
(a) The centrality of the marketing concept

You will, of course, be familiar -with the notion of the marketing
concept, namely that effective business is based around identifying
and satisfying customers" needs and wants. The importance of this
concept is no different when considering international or domestic
marketing activities.
(b) Management processes
The key processes of business management too, are no different in
international compared to domestic markets. Successful practice is
still built upon the elements of analysis, planning, implementation and
control.
(c) Management tools and techniques
All the tools and techniques pertinent to and used in domestic
business activities are also relevant in the international context. So,
for example, the tools and techniques of marketing research, market
segmentation and targeting, forecasting and so on is just the same.
(d) The marketing mix
The elements of the marketing mix used in domestic marketing are all
relevant to international marketing. So, later in the course we shall be
looking at the 7Ps of the marketing mix in the context of their
application to international markets. Obviously, the application of the
elements may differ compared to purely domestic marketing, but the
ideas and concepts arc just the same.
(e) Key decision areas/planning frameworks

Finally; the planning frameworks and key decision areas for
international business are similar to those for domestic. So in
marketing, for example, the business must establish objectives, select
target markets and positioning strategies, develop marketing strategies
encompassing the marketing mix and implement these and finally
evaluate and control marketing activities.
As with the marketing mix, there will be some differences in

application. So, for example, the business must decide the mode of
entry into international markets - a decision obviously not found in
purely domestic business, but again the principles and key areas of
decisions are just the same in international, compared to domestic
business.
Differences
With so many similarities between international and domestic business,

what, if anything is different? The deceptively simple answer to this
question (i.e. the key difference between international and domestic
business) is the following:
International business takes place across national boundaries.
At first sight, this would not appear to be a major difference but the very
fact that international business is carried on across national boundaries is the
reason for a range of major differences and applications of business
concepts and techniques.
(a) Different environment, culture and language
Operating across national boundaries means that the business

encounters a range of problems and issues not encountered when
operating exclusively in domestic markets. Again, this deceptively
simple statement masks the complexities and problems which this can
cause. So, for example, the business must deal with a different set of
environmental factors. Perhaps most significant of all, the business is
dealing with a set of customers from a different culture and language.
So, for example, in respect of marketing, research involves considering

language and respondent differences, and businesses must consider the
extent to which marketing activities, and particularly the marketing
mix, can be standardized across national boundaries.
(b) Customers
In advanced countries, the wide range of available goods and services

leaves few unsatisfied market areas. Buyers can be very fickle about
whether or not to buy, and businesses therefore must be very clear
about identifying and satisfying customer needs.
In lesser developed countries, many customers have insufficient money

to buy products. In other words, there is no "effective demand".
However, people in these countries are often aware of the most up-to-
date products through television and the cinema. Businesses in these
countries face additional problems with regard to making products
available which customers can afford.
(c) Market information and forecasting
International markets often exhibit very different rates of growth which,

combined often with a paucity of information, makes it very difficult to
develop reliable estimates of market size and sales forecasts.
(d) Competition
Businesses entering international markets, as already indicated,

generally face much fiercer competition. Furthermore, this competition
is now composed of perhaps unknown competitors from other
countries. Admittedly, the purely domestic marketer can face
international competition from both domestic and international
competitors, but generally speaking, international business moves
competitive pressures up to a new level.
(e) Environmental turbulence
Compared to domestic environments, the international environment

within which businesses must operate is much more dynamic and
unpredictable. Changes in the international environment can be very
rapid indeed, such as the much discussed withdrawal of the UK and
Italy from the Exchange Rate Mechanism of the European Union in
September 1992. Even changes that have been expected for many years
can be difficult to predict with regard to their impact and implications
for business, for example the handing back to China of Hong Kong.
Environmental factors such as inflation rates, disposable incomes and
technological and legislative changes can all change very rapidly in
international markets, making it much more difficult for business. On
the other hand, as we shall see, this very dynamism in international
markets also gives rise to major business opportunities.
Types of International Business Involvement
There are a number of different types of involvement in international

business. At one extreme, some companies have a few sporadic foreign
orders that they process as and when they arrive. At the other extreme, there
are companies with significant investments in plant, machinery and staff in
other countries and with detailed marketing, planning and implementation
in a large number of countries.
The degree of involvement can be measured by the percentage of sales

revenue or profit contribution attributable to domestic and non-domestic
sales. The amount of investment in non-domestic markets is another
indicator. Other measures are the percentage of staff working on
international markets and the relative planning importance given to
international business.
The ways in which companies move from very little to intense international
business have been explained in a number of different ways. In such a
varied situation of companies, countries and interests, any one explanation
is unlikely to be complete. Here we shall consider two such approaches.
Different Orientations, Different Management Culture
A widely used classification was developed by Howard Perlmutter to

identify four different types of attitude or orientation that influence
internationalization. The orientations are as follows:
The ethnocentric orientation is one where the attitudes and approaches
of managements are based upon their own domestic market. Little or no
consideration is given to the different needs of non-domestic customers.
The polycentric orientation is associated with multi-national enterprises

with subsidiaries strongly based in host countries. This orientation is
sometimes called multi-domestic because the company operates with an
almost domestic approach to a number of different markets.
Regiocentric orientation has become more prevalent as regional market
groupings have developed. In Europe we are seeing an increased
interest in tackling European markets.
Geocentric orientation is becoming increasingly important. It is
sometimes mistakenly thought that the geocentric approach is only for
very large companies. It is increasingly likely that all but the small
companies will need to consider a geocentric orientation. Medium-sized
companies might not compete in many markets around the world, but
they need to be aware of emerging world trends in buying behavior, in
cost levels and in technologies. Without this global vision the company
will not be able to adapt to our fast-changing world.
Increasing knowledge and the development of planning approaches.

Approaches are usually more tactical than strategic.
The key here is that the company has some investment in at least one other
country. Planning is used extensively, but usually on a multi-domestic basis.
Treats the world as an opportunity. The equidistant approach would be an

ideal.
Note that the international business approach becomes more comprehensive,

strategic and sophisticated the closer to the global stage the company has
reached.
The difference between simply exporting and international business arises

from the fact that exporting is the physical movement of a product produced
in one country to another country. Profits are made from the sales revenue
(less variable and indirect costs) gained from the non-domestic country
customer. In international and global business, profits will be earned in a
variety of ways:
Net profits remitted by subsidiary companies;
Net profits remitted from joint ventures;
License fees earned by allowing non-domestic users to use your
patented processes;
Fees earned from the sales of "know-how";
In addition, there will usually be sales revenues earned from exporting.
In general, international business is a more sophisticated process than

exporting. It is usually closer to the final customer. Global business is a
much more recent phenomenon. Whereas exporting and international
business look for profitable opportunities, almost wherever they exist,
global business seeks systematically to exploit opportunities around the
world. For the global company the markets of Europe, North America and
Japan, sometimes called the Triad, usually represent over 75% of the world
market and are therefore of crucial importance. The Triad is likely to
contain most of the world market and most of the world competition.
To fall into this category, a company needs to have made investments in

sales offices, distribution systems or production units in other countries.
These investment decisions imply greater access to resources and are
therefore more likely to be undertaken by larger companies.
You will note that the way in which we have defined international business
is very similar to definitions of multinational enterprises. Multinationals are
organizations that have companies operating in different countries, but are
controlled by a headquarters in one given country (invariably the domestic
nation of the original company.
Until recently, most Multinationals followed approaches that were more

multi-domestic than one mat segmented international market in a strategic
way. The multi-domestic idea is captured in the polycentric orientation the
management culture became centered on the host country and they became
expert in each host country. The end result was a series of adaptations to
each country, such as the following in respect of the marketing mix:
Product this is usually standardized, along with brand names.
Price this is adapted according to local costs, competition and
customer demand.
Distribution this is adapted to the distribution channels of each
country.
Promotion selling is fully adapted to the requirements of the

particular country, with sales promotion and publicity being mostly
adapted, but advertising will be based on certain standardized creative
themes and TV commercials, although media selection is adapted to the
host country media.
The connection between Multinationals and polycentric orientation is very

strong. It results in the various subsidiary companies to be strongly
influenced in their strategic planning by the country in which they are based.
As a consequence, Multinationals had a tendency, as they expanded into
more and more countries, to lose a certain amount of control with the central
headquarters often concentrating on the achievement of financial targets.
This type of approach was very powerful when its main competition was on
a country-by-country basis. In the 1980s and 1990s, though, competitive
forces developed which operate on a world region (e.g. the EU) or on a
global scale. These competitors were initially Japanese companies, but other
South-East Asian companies are becoming significant (Korean, Malaysian
and companies from Taiwan, Hong Kong and Singapore). The new
aggressors were able to benefit from economies of scale through a more
standardized approach. They also adopted a more systematic approach to
competition. The companies relying on one market at a time became
vulnerable to companies that used their resources in a coordinated way
against several markets.
1.2 Reasons for Going International
All business is ultimately about identifying opportunities in markets and

developing programs to take advantage of these. We have already
discussed some of the reasons for the growth of international business
which have served to illustrate how dynamic this area is and therefore how
it gives rise to significant opportunities. In broad terms, going international
offers several potential advantages over and above purely domestic
markets.
For example, we have already seen that international markets and trade have
tended to grow faster than more domestic economies.
Furthermore, there is substantial evidence to suggest that international

markets and business are more profitable, the companies that operate in
these markets achieve higher rates of return than their purely domestic
counterparts of a similar size. It is not difficult to think of reasons for these
higher rates of return. For example, international markets often give more
scope for economies of scale or similarly, may allow the business to source
components and raw materials, etc. more cost-effectively. Additionally; the
international business may, through effective global branding, simply be
able to command a price premium or gain leverage for shelf space in the
retail outlet compared to the purely domestic counterpart.
There are all sorts of reasons, therefore, why international business may
represent opportunities for increased profits but there are many reasons
which may underpin a decision for a company to go international.
Examples of some of these reasons are shown below.
(a) Saturated domestic markets - the international product lifecycle
Very often, the motive for going international by a company will be that its
own domestic markets are saturated, with no potential for future growth.
The business may therefore be prompted to look for other international
markets where this potential still exists.
There may be several reasons why a market may be saturated at home and
yet offer potential for growth in other markets, but one reason is the product
lifecycle. You know, of course, that the product lifecycle concept illustrates
the fact that products pass through a number of stages in their lives from
introduction through growth to eventual saturation and decline. We can also
see that a product may often be at different stages in different countries. So,
for example, the microwave oven was entering maturity in the United States
while at the same time only being at the introduction stage in the United
Kingdom. Very often, in fact, there is a pecking order to the international
product lifecycle with products and services first reaching maturity and
decline in developed economies while still being at die growth or even
introductory stage in developing economies. The point is that by carefully
identifying the next growth market, a business can achieve a fresh impetus
to growth when domestic markets have become saturated.
Lets examine in detail the significant issue of standardization and

adaptation as a strategy in international business.
Standardization
Standardization refers to the approach taken in which the marketing mix is

used in the same way in different countries. There is an important
distinction to be made between the same and similar. It is unusual for
exactly the same marketing mix elements to be used in different countries. It
is more frequently the case that the intention is to introduce the same
approach but that minor changes are required for different markets. We will
regard this as standardization.
Adaptation relates to the approach in which the marketing mix is

deliberately changed so that it relates to each market. After looking at
standardization and adaptation, we will move on to examine the issue of
globalization as a strategy. In itself globalization could be regarded as an
extreme form of standardization. As you will see, although globalization
does involve some standardization, it does not depend upon it.
The ability of companies to develop standardized approaches across each of

the elements of the marketing mix is a major debate in international
business strategy.
Approaches to Standardization
It is possible to view standardization both as a process and in terms of

implementation.
Process Standardization
Because a company can control the processes it uses, this is an easier form
of standardization than implementation. A company can establish the
particular planning methods that it thinks appropriate. In this way, analytical
methods, planning and international strategy can be controlled substantially
within the company and it can insist that the same approaches are taken by
subsidiaries in different parts of the world.
Analysis can be similar, based on policy decisions to use the same
marketing research methods and surveys. Information can be collected,
stored and disseminated in the same ways using a common information
system.
International strategies can be developed from the same analytical
methods using a standard format of marketing models and techniques.
Marketing planning can be based on similar lines in the company

headquarters and in country subsidiaries.
The marketing mix elements can be developed along standard planning
approaches. For example, the company could use the same planning
methods for advertising decisions.
Implementation Standardization
It is much harder to standardize implementation than the processes of

international marketing. The reason for this is that the implementation
involves direct contact with customers, potential customers, distribution
channel members and others. Direct contact will be influenced by the
market structure and behavior in the market. For example, in some markets
there may be strong competitors with aggressive marketing programs
designed to increase market share, whereas in other markets, competition
might be much less aggressive. Another direct contact issue is the need to
take account of the culture of the country market.
Thus, we can see that, when a company attempts to implement its chosen
strategies, it may find that its various customers do not all react in the same
ways. The company has little or no control at the implementation level and
it is more likely, therefore, that the company will have to change parts of its
marketing mix in order to satisfy customers.
Product
This is a part of the marketing mix that many companies aim to standardize.
The augmented view of the product includes the physical product plus the
brand and company name and trademarks. It includes the packaging,
warranties and guarantees. It is possible, therefore, to standardize part of the
product and adapt other elements. Some companies will have the same
physical product but may change the packaging and the labeling. Language
change is an obvious adaptation.
Price
It is very difficult to standardize price because it is influenced by so many

country factors. There are many differences in the tariff rates charged for
imports, value added tax rates, distribution channel margins and the prices
set by the main competitors. In addition, there are considerable differences
in the ability of consumers to pay a particular price level. Whilst a company
can have a policy to charge good value prices in the middle of the market
and, therefore, have a standardized process approach, the practical
implementation will give rise to many detailed adaptations.
Promotion
The selling part of promotion is usually adapted. The reason for this is the
interface between the sales force and the country distribution channel.
Because distribution channel members are strongly influenced by the culture
in the country, the sales force if it is to be successful has to adapt to local
requirements.
Public relations and sales promotions are also often adapted to fit local
requirements. It is the advertising decision that stands the best chance of
standardization. This is because it uses media that are less culturally specific
than the other elements in the marketing mix. It can also standardize the
advertising message if customers have similar buying motivations and if
they seek similar benefits.
Place (Distribution)
This is a marketing mix element that is strongly influenced by market and

country forces. It is difficult to standardize the implementation of
distribution.
In the case of service products of course, the traditional 4Ps of the marketing
mix can be extended as follows.
People
Perhaps as one might expect, this is one of the most difficult elements of the
services marketing mix to standardize. By definition, people are individuals
and in addition, of course, people differ between different cultures.
Standardization can be achieved to some extent, however, through careful
training and staff development.
Process
As you are aware, the process element of the services marketing mix relates
to things such as how the service is delivered, ordering systems and so on.
Compared to the people element, process is generally much easier to
standardize.
Physical Evidence
Like process, this element of the services marketing mix, too, can be
standardized to a high degree. Again we can use the example of fast foods
where the layout and decor is more or less standardized throughout the
world. Standardizing physical evidence is particularly important in trying to
develop a uniform company image, and is often a key part of franchise
services marketing.
You should note that we shall be considering each of these elements of the
marketing mix, including the issue of standardization versus adaptation, in
more detail in later study units of the course.
The Arguments for Standardization
The main arguments for standardization are based on two areas cost and
customers.
(a) Cost
A strong argument for standardization is presented by the general and

financial management of companies. It can be demonstrated that the
elimination of variety and the constant repetition of company activities
around the same products will give economies of scale and experience
benefits. Economies of scale relate particularly to manufacturing, whereas
the experiences effect can be gained in any part of the organization through
the efficiency gains resulting from familiarity.
Within the marketing mix the main areas of saving will be based on the high
cost areas. The highest costs, for most companies, will be in the product
area. Most companies will attempt to reduce the amount of variety in the
products that they produce. They will prefer to produce one product which
can be sold in all markets. Unfortunately, this ideal state is rarely found.
The other main area in which companies seek to standardize is the

marketing communications (promotion) area. Companies that have large
budgets for media advertising can often make substantial savings by using
the same advertisements in a number of different country markets.
(b) Customers
When customers are mobile between one country and another, as for
example in the purchase of film for cameras, there are benefits in selling the
same product and promoting it in the same way. If the product and the way
it is presented change, customers can become confused and end up buying a
different product. For the customer, a strong consistent brand image that
does not exhibit variations in different countries will be reassuring.
Even in markets in which customers are not internationally mobile, there

can be customer benefits in a standardized approach. If the same customer
segments are found across country boundaries, it makes sense to use similar
products and advertising. Whilst the benefits in this instance relate to cost
savings, there is the marketing logic of developing a marketing mix that is
based on customers. If the customers are the same, in terms of the benefits
that they seek, why not make the marketing mix the same?
In many companies the cost-saving argument will be stronger than customer

similarity it is easy to demonstrate cost savings and harder to show
customer similarity. However, it is important for companies to be responsive
to customer requirements. It is quite possible that cost savings through
standardization will be pursued too vigorously and ultimately to the
dissatisfaction of the customer. Customer satisfaction, though, can be
achieved at the same time as benefiting from standardization based on
customer similarity. The important proviso is that similar customer benefits
have been identified in different countries.
Adaptation
The reasons for adaptation lie in specific attempts to develop an appropriate

marketing mix to satisfy a specific customer group.
The type of company culture or orientation can have a strong influence on

the extent to which changes are made. In a company with a polycentric
orientation, adaptation is the likely consequence. As each subsidiary
becomes more and more familiar with its host country market, it becomes
more and more aware of the differences that exist between that country's
requirements and the head office view of what it should be doing. This leads
inevitably to a situation in which the subsidiary aims to customize its
marketing mix more precisely.
The ways in which this customization will take place will be influenced by
the overall company policies and the strength and independence of the
subsidiary. If the subsidiary is a major contributor to sales and profits, and if
the subsidiary regularly meets its corporate and marketing targets, it will be
granted more independence than a subsidiary with inexperienced and
unproven management.
Approaches to Adaptation
In a consideration of the marketing mix and the ways in which adaptation

takes place, it is clear that most companies will concentrate attempts to
standardize on products and on marketing communications. Price and
distribution are influenced by so many local factors that very precise
standardization is impossible. Some companies will use a standard price list
and some will use a standard distribution channel approach, but these are
the exceptions.
For service products, as we have seen, it is process and physical evidence

elements of the mix which are likely to be standardized, especially where
the operation is a franchise operation. For the reasons stated earlier, the
people element of the services marketing mix can be much more difficult to
standardize.
The main areas, therefore, in which the standardization/adaptation argument

will take place, will be products, marketing communications, physical
evidence and process.
For many companies it will be easier to adapt marketing communication

than products. It will be usual for the company to have a sales force that is
adapted to local customers and to their requirements. Many companies use
sales promotions in a tactical way that relates very closely to the market and
the competitive situation that exists in the country. Furthermore, public
relations are frequently developed around knowledge of local media and
journalists, and are often, in addition, based on events and activities that are
country-specific. For example, in the UK with its intense liking for animals
as pets, PR events can be based on dogs and cats; that would be unworkable
in many other countries.
Advertising, particularly if it is dependent upon the TV medium, is likely to

be the exception to the obvious need to standardize. The high cost of
developing a TV commercial is one factor that encourages its use across
many countries. A further factor is the difficulty in finding an advertising

approach with a strong, positive, demonstrable effect. If the company
develops a very good TV commercial, there will be strong pressure on
company subsidiaries to use that TV commercial.
Table 1.1 summarizes the position with regard to marketing communications

in multinational companies.
Table 1.1 Standardization and adaptation in marketing

communications
Activity Standardization or Adaptation

Selling It is very difficult to standardize the implementation of
selling. The interface with customers and the distribution
channel makes adaptation highly likely.
Sales Many approaches are tactical and, therefore, will be
promotion adapted. Some companies, especially major companies
sponsor major world sports events (such as the Olympic
Games and World Cup Football) and develop themed
sales promotions which can be standardized and used in
many different countries.
Public Most events, media, journalists and political lobbying
Relations will be at a local or country level. It is possible to develop
a standardized approach across countries, but it is not
easy. Lower-cost approaches, for example through the
press and posters, will usually be adapted to local
requirements.
Advertising Higher-cost TV advertising, particularly if high-cost,
specialized TV commercials are important will tend
towards standardization in attempts to cut the costs of
producing many different and expensive TV commercials.
Imposed Adaptation
Adaptation is not necessarily the outcome of a conscious decision by a

company to change its marketing mix to meet the needs of its customers in a
particular country. A whole series of rules, regulations and laws may also be
imposed on companies requiring them to adapt the marketing mix that has
been developed in other countries, usually the company headquarters

country. Examples of such forced changes are given in Table 1.2.
Table 1.2 Causes of Imposed Adaptations
Marketing Mix Cause of Imposed Change Element

Product Safety standards legislation
Technical standards product liability laws
Price Laws on prices
Different tax levels
Distribution Restrictions on the types of retail outlet, the types
of product they can stock
Promotion country Laws on which sales promotions can be used in a
Legal and voluntary controls on advertising
content controls on the amount of advertising that
the media can carry (which is particularly the case
for TV and radio).
People Employment legislation
Physical evidence Local planning regulations
Process Health and safety regulations
If we take the example of a car, we can see a number of imposed changes

necessary in different markets. The product will need to meet the safety
standards required in different countries resulting in changes to seat-belt
fittings, external and internal surfaces to reduce injury on impact, the type
of braking system, the strength of the body cage, etc. The product will also
need to be adapted for left-hand drive or right-hand drive. Other changes
will be imposed by local climatic and driving conditions for example, in
hot countries air-conditioning might be an almost standard part of the car.
Other adaptations to the same product may not be imposed, but will be
influenced by market demand. These will be used to enhance the car's
appeal in a specific market through such adaptations as color schemes,
different levels of instrumentation fitted as standard or different warranty
arrangements (in one country the warranty might be for one year, whereas
in another, because of competitive factors, it could be as long as three or
five years).
The Internationalization Process
I have previously examined the factors which determine where

internationally competitive industries / companies grow up. We now need to
ask, within that environment, what advantages do successful international
firms have over their competitors and why do they pursue the strategies they
do when exploiting such advantages? Porter (1990) stresses that competitive
advantage comes from either low cost or differentiated products that allow
premium prices and thus above average profits to be earned. Underlying the
strategy adopted is industry structure and the firm's positioning within that
structure. The strategy derives from understanding the five forces changing
structures in industries, namely threat of entry, bargaining power of buyers
and suppliers, degree of competitive rivalry and the threat of substitutes.
All these affect industry profitability. He then examines how strategy
changes if the firm is competing domestically or internationally.
However, what we need to do first is to try and ascertain what allows a firm
to compete internationally in the first place and then, how it uses such
advantages Therefore, we shall examine the following issues:
1. What factors determine where internationally competitive industries /

companies grow up?
2. What advantages do successful international firms have over their
competitors
3. What strategies are available to them and what determines which
strategies they follow?
4. What strategies are required to maximize their chances of successfully
implementing their chosen strategy?
In order to do this, we shall use Dunning's eclectic theory as the framework-

Dunning's eclectic approach combines many of the theories of the last thirty
years concerning the phenomena of the multinational enterprise. This can be
extended to internationally competitive firms in general.
1 What factors determine where internationally competitive

industries/companies grow up?
Dunning, related where successful international firms were likely to grow up

with the country in which the firm was originally located. National factors,
such as good education and training, fluid capital markets, good R & D and a
stable political situation, allow such firms to derive their net ownership
advantages. These may then be exploited by licensing, exports or FDI. In
essence, Dunning outlines a less detailed version of Porter's Competitive
Advantage of Nation's Theory. However, for Dunning, this is beginning of
his theory, rather than its entirety.
2 What advantages do successful international firms

have over their competitors
Foreign firms are disadvantaged compared to domestic ones when selling in,
establishing and operating production facilities in countries other than their
own, as resulting from higher costs of information about host country's
institutional frameworks, legal systems, customer's tastes, preferences and
market structures. They also include costs of communication between
subsidiary and headquarters and possible discrimination from governments
Thus, internationally trading and multinational enterprises must possess
some advantages over domestic firms, as summarized in the table below:
Table 1.3 Ownership Advantages of Successful International Companies
Type Advantage
Technological Advantages of superior production, management
and marketing techniques
Industrial organization Oligopolistic market structure and behavior.
These give them advantages of size to take
advantage of economies of scale in Research and
Development, patent legislation, marketing,
finance and management
Managerial and Superior capacity in their management and
entrepreneurial capacity to be entrepreneurial
capacity
Financial and monetary Ability to take advantage of capital market
imperfections, to take advantage of lower cost
finance
Access to raw materials Access to cheaper / more abundant raw materials
Porter (1990) stresses that competitive advantage comes from either low cost
or differentiated products that allow premium prices and thus above average
profits to be earned. Underlying the strategy adopted is industry structure
and the firms positioning within that structure. The strategy derives from
understanding the five forces changing structures in industries, namely threat
of entry, bargaining power of buyers and suppliers, degree of competitive
rivalry and the threat of substitutes. All these affect industry profitability.
3 What strategies are available to them and what determines

which strategies they follow?
However, net ownership advantages which give firm's advantages over rivals
in other markets can be exploited in three ways. They could be exploited by
licensing the advantage to overseas rivals (e.g. brewers' brands). Secondly,
the firm could exploit its advantages by direct exporting to foreign markets.
Thirdly, its advantages could be exploited by foreign direct investment,
establishing at least some of the production functions in overseas locations.
What will determine the strategy adopted will be the relative strengths of the
transaction's costs of licensing versus internalization and the relative location
advantages of home country production versus foreign production?
Licensing versus Internalization: Transactions Costs
Internalization gains arise if market imperfections prevent the effective sale

of ownership advantages to other firms, thus making their exploitation by
their original owner the only possibility. For functions brought within the
firm, the transactions cost of any market transaction outweigh any efficiency
gains that the market may have over administrative allocation within the
firm. Hood and Young (1984) summarize:
The basic idea is that the market is costly and inefficient for undertaking
certain types of transactions these transactions costs of using the market are,
the cost of finding a relevant price, the cost of defining the obligations of
both parties to a contract; the risk associated with accepting such contracts
and the taxes to be paid on market transactions. Thus, whenever transactions
can be organized and carried out at a lower cost within the firm than through
the market they will be internalized and undertaken by the firm itself.
In greater detail, the costs of market transactions and associated problems

with such transaction are:
1. The ability to license net ownership advantages Are the NOA's in the
firm licensable to another firm or are they inseparable from it. i.e.
specific managerial ability as opposed to a product patent or brand.
2. The costs of negotiating the contract lawyers / time.

3. Opportunism How can I persuade you to pay for something without
revealing it to you and thus meaning you can gain advantage from the
knowledge gained for nothing. This applies particularly to advantages in
product technology, rather than in brands.
4. Control If advantage resides in brand loyalty, licensing runs the risk of
damaging this if the licensee produces poor quality goods. Alternatively,
selling your latest technology to rivals increases the probability that they
will improve on it and overtake you in future.
Other drawbacks of licensing, more properly termed opportunity costs of
licensing include:
5. Unexploited economies of scale e.g. spare management capacity.
6. Unexploited monopoly power of internalization.
7. Unexploited advantages of transfer pricing.
Exporting Versus Foreign Direct Investment
However, even if licensing were ruled out as an option, we are still left with
the choice for the internationally competitive firm of exporting or foreign
direct investment of some pans of the production process The choice will
depend upon the relative location advantages of home versus foreign
production locations They derive from the mainstream of international
economics, essentially reflecting comparative advantage of it. Obvious
contributors are relative transportation cost of raw materials and finished
goods; the locations of materials and markets, the cultural similarities
between a multinational home and potential host country's government
policies etc. This has been summarized below:
Table 1.4 Location Factors in FDI
Factor How it Affects FDI

1. Labor costs If the product becomes standardized, then locations
enjoying lower labor costs may exert an influence on the
FDI decision of a company.
2. Marketing Factors such as market size, market growth development

factors stage and extent of local competition, may pull the
company to produce in a market it previously exported to.
This is particularly pertinent where a made in host
country is advantageous This may be to compete against
strong local competition or local regulations or tastes
involving substantially different products being produced
in the MNE's home country as were previously exported.
Of course, such a factor would only be important if the
market were large enough to sustain local production at an
economic level.
3. Trade barriers These interact with marketing factors. The existence of
such barriers, whether tariff or non tariff, may be
deliberately used to encourage FDI in a host country as a
substitute for direct exports. This may be to aid the
balance of payments.
4. Government The general social political and economic environment
policy may affect the method Of servicing the market, as may
government financial inducements.
Source: There are, therefore, a number of different strategies open to firms

when they decide to go international. These different forms of
international business activities are summarized below.
It has been suggested by many authors that firms going international go
through various stages, gradually deepening their involvement as they gain
experience. This is illustrated by the diagram below.
Figure 1.1 The Internationalization Process
Internationalization, it must be remembered however, is not a simple

process, and can be strongly affected by external or internal pressure rather
than being guided by a predefined overall strategy. Thus we can expect to
see breaks in the sequence, the jumping of stages, or indeed the reliance on
only one or more strategic routes.
What strategies are required to maximize the chances of successfully

implementing their chosen strategies?
Why firms export
Most of the research in this area talks in terms of "change agents", which can
be either external or internal to the firm. External agents would include such
things as initiatives from chambers of commerce, trade associations and
other firms. Indeed, other firms' actions seem to be the most important
external agent and include actions such as firm: buying out smaller
companies and then encouraging them to export, foreign importers and
export agents. For many companies, their first export order came unsolicited
Internal "change agents" tend to be members of the firm's top management.
More particularly, there are four factors which will determine the attitude of
management to exporting and therefore whether an export strategy is looked
upon favorably as a viable policy.
1. Management's impression of the overall attractiveness of exporting as an
abstract ideal, independently of whatever contribution exporting might
make to its own firm.
2. The degree of the firm's international orientation. Some studies suggest
that this is determined by the firm's background, traditions, and attitudes
of top management. Top management attitudes to foreign business seem
to correlate with whether such managers studied or lived abroad, studied
a foreign language abroad, whether they lived abroad long enough to
experience culture shock, whether the foreign experience was enjoyed
The younger the manager, the more internationally minded they
tend to be.
3. Management confidence in the firm's competitive advantage is also
important in the sense of management perceptions of whether the firm's
products have unique qualities or are patented, whether the firm has
technological, marketing, financial or price advantages, whether the firm
has privileged information about foreign markets or customers, and
whether the firm has efficient distribution networks.
4. The fourth determinant of whether management takes the initiative to

export, is the degree to which domestic market conditions are adverse,
which may cause management to explore the export option as a way of
survival.
The Difficulties Firms' Face in Implementing an Export Strategy
Once the decision to export has been taken, there are a number of difficulties
to overcome, some of which are outlined below:
1) Firstly, there are operational difficulties This term includes, the

administration connected with exporting, most importantly connected to
customs procedures and export documentation However, a British
Overseas Board of Trade survey found that, for firms which been
undertaking exporting, these difficulties ceased to be seen as such,
because routines and procedures had been used, such as using
forwarding agents, and dedicating staff to dealing with such procedures.
2) Finance is seen as a problem by both exporters a non exporter. For
active exporters, the main problem is the actual financing of exports. In
other words, the problems of exports draining working capital as the
market are developed. Non exporters are more aware of credit problems
and delays in payment. Additionally, the problem of dealing with
different currencies may in some circumstances also be an important
difficulty.
3) Difficulties in obtaining information are also a problem for exporters.
Exporters may need to undertake detailed desk top research before
attempting to follow an export strategy. They may also need to
undertake personal visits to customers or intermediaries in the initial
stages, and later on rely on information relayed by their representatives
or foreign subsidiaries. The information problem obviously lessens in
importance over time as experience is gained, both of the market in
question and the best sources of information in that market. The only
information problems that experienced exporters admit to concern over
is intelligence on competitors' prices and forthcoming new products.
There may also be difficulties involved in choosing the most appropriate

distribution channels, through which to sell the product. Generally there are
two types of exporter, indirect and direct. Indirect exporters sell their
products in foreign markets without any special activity for this purpose
taking place in the company. Instead export or confirming houses take on

this role. Direct exporters undertake the task of exporting itself, negotiating
contracts and handling documentation, though the product itself is typically
sold by overseas agents, distributors, company export salesman or a sales
subsidiary established for the purpose.
1.3 Global Business Developments
Globalization is a particular form of standardization, perhaps even being

seen as its ultimate form.
The increasing convergence of customer demand for some products and

services enables those products and services to be thought of as serving a
world market. For example, a worldwide market exists for fuel for cars and
lorries, for film for cameras and for many consumer durable products. The
demand for music and film entertainment services is a very wide one across
country boundaries.
A global approach needs to cover a substantial part of the world market for
the relevant product or service. This involves identifying global competitive
opportunities in order to anticipate and satisfy customer requirements
profitably whilst developing and implementing plans which are standardized
wherever possible.
With a market demand existing across many countries, and as

communications and transport systems in the world improve; it is not
surprising that some companies have sought to co-ordinate their marketing
approaches. Companies have grown larger and have resources that enable
them to take a wider and wider view of world opportunity.
Approaches to Globalization
The types of coordinated approach are obviously related to standardization
as we discussed previously. We can see globalization in the following ways:
Globalization as a Process
In this way companies can view the world market as a total opportunity.
They can develop analyses, plans, international strategies and marketing
mixes using a standardized format. Some companies will also develop a
standardized approach to competitive strategy that can be coordinated across
the world defending in some country markets and being aggressive in
others.
Using the process approach, companies can develop a completely similar

marketing mix across the world, or they can develop one that has major
elements of standardization, or one that shows considerable degrees of
adaptation. This is shown in Table 1.3.
Table 1.5 Global Process Standardization

Type Comments
Completely similar the world standard brand - this hardly
exists in its absolute form.
Major elements of this will reflect of the world. Companies might take a
some significant customer differences different approach in Asia and in Europe.
in parts standardization
Major adaptation this is most likely to occur in markets that
are culturally highly sensitive.
Food products often, but not always, fit
into this category
(b) Global Implementation Standardization
At the implementation level, standardization is possible in certain parts of

the marketing mix, but other parts will continue to demand adaptation to the
particulars of different country markets.
Table 1.6 Summarizes the different approaches.

Table 1.6 Global Implementation Standardization
Type Comments
Completely similar this does not exist. There are always local and country and
trading bloc differences that cause some adaptation, even
if it is quite minor.
Major elements of Standardization might be groupings of countries, or by
standardization standardizing the product and perhaps the advertising and
then
Adapting the other elements.
Major adaptation This approach will benefit from the process standardization,
but at the
Implementation level will look as though everything is
totally different.
Companies like Nestle will benefit from similar planning
and strategy and control processes, but will exploit market
differences to the full by using a highly adapted marketing
mix.
Influences on Globalization
There is no doubt that the trend towards globalization has been one of the
most significant developments in international business during the last
decade. More and more companies have become, and many more would
like to become, global in their operations. What then are some of the factors
which have served to drive this growth and spread of globalization? Some
of the more important factors include the following:
(a) Deregulation of Trade/Open Markets
We have seen earlier how increasingly world trade has become deregulated.
As a result, more and more markets have opened up to the aspiring global
business. Even markets which have traditionally been very difficult to move
into, such as China and some of the former Communist Eastern Bloc
countries, are now open. Japan, at one time highly protected against foreign
companies, has opened up in recent years.
(b) Global Competition
Partly as a result of freer world trade, we have seen the growth of global
competitors. Even companies that have traditionally been very insular in
their outlook and approach to business and marketing have woken up to the
recognition that increasingly their competitors operate in global markets.
One approach to dealing with local competition is for companies to go
global themselves.
(c) Risk Spreading
We have seen that the global business environment is much more dynamic
and complex. In particular, financial and other global trading systems mean
that markets can change overnight. For example, recently the Asian
economies, from being strong growth economies, almost overnight began to
experience major problems with falling share prices, company bankruptcies
and so on. So sudden were these changes that some authors have referred to
it as the Asian meltdown. A company can hedge against the risks caused
by such market and economic fluctuations by operating in several
markets/parts of the world. Global operations enable the business to spread
the risks of sudden downturns and changes in economies and markets.
(d) Economies of Scale/Experience Curve Effects
Usually, global business involves increases in the scale of operations of an

organization. As such, it enables a company to achieve potentially large
economies of scale and/or experience curve effects which would be
restricted if only domestic markets or relatively few overseas markets were
targeted. We saw in an earlier study unit that new product development and
the associated research and development costs for many products these days
are substantial. Very often these substantial costs can only be recouped if
the resulting products are marketed on a global basis.
(e) Supply Chain Management
A further impetus to developing global strategies by organizations has been

the desire to manage the supply chain more effectively so, for example,
some companies have been prompted to go global in order to secure access
to low-cost labor or raw material supplies. Sometimes companies are
prompted to go global in order to gain access to skills which are simply not
available in domestic markets, such as research and development skills,
design skills, manufacturing skills, etc.
(f) Global enabling Technologies and Skills
These perhaps facilitate the growth of global business and strategies rather
than prompt it. Increasingly, global business strategies may be developed
through access to new technologies and skills. So, for example,
developments in information technology and databases facilitate the growth
of global strategies and positions. These databases enable the construction
of detailed customer profiles across the globe by cross-matching this
intelligence to other databases, such as economic data, socio-economic
groupings, geodemographic data and so on. The business can identify global
segments and their characteristics.
(g) The Global Village
None of the above factors would be sufficient to encourage and facilitate the
growth of global marketing if customers were not receptive to global
strategies and companies. We have seen earlier, however, that the growth of
international business itself has in large measure been due to changing
customer needs and wants, and in particular an increased receptiveness and
desire for global products and services. We have only to turn on the
television to see how the world has shrunk, a phenomenon that many refer
to as the global village.
There are, essentially, two bases upon which this approach can be built.
1.4 The Global Brand and Global Strategic Approach
In this approach, the brand needs to have widespread availability in most

parts of the world (usually the Triad plus other countries) arid to be
presented in a more or less similar approach in each market. It will be
standardized as far as possible so, while adaptations do occur, they are
contained within a standardized approach.
The global brand aims to have one clear communication of its brand name,
its logo and its complete visual identity.
The global brand will have a number of adaptations. These will be confined to
areas of important local difference. There will be differences in distribution
channels, prices will vary, slight modifications might be sanctioned in the
product, and often sales promotions will be localized to the market.
The global brand will try to standardize visual communications and the
expensive elements of the product and TV and cinema advertising. The
global brand seeks widespread global availability.
Perhaps one of the most significant developments associated with global

business and marketing in recent years has been the growth of the global brand.
A global brand is generally considered to be a brand with the same

marketing mix everywhere in the world. However, under this strict
definition, it is very unlikely that there is a global brand at the moment or
that there will be many in the near future. If, though, we amend the
definition to allow for some minor adaptations in the marketing mix
between country markets, then we can identify global brands now and it is
probable that more will appear in the future. By minor adaptations we would
include changes to translate the meaning of the brand packaging into
different languages as well as other minor marketing mix changes to accord
with country rules and regulations. The substance of the product would,
though, be the same in each market and, importantly, the brand name and its
trademark would remain unaltered.
Global brands offer some key advantages and benefits both to companies
and customers. In the case of companies, global brands facilitate the growth
of worldwide customer loyalty. This, in turn, enables easier access to new
markets and, in particular, to distribution channels. Finally, a global
branding enables a company to build a global presence whilst at the same
time achieving global economies of scale in areas such as advertising and
promotion.
As far as customers are concerned, global brands often bestow status on the
customers who display them. This is particularly important in some of the
lesser-developed economies; similarly, global brands reduce the risks
associated with purchase for customers, both in consumer and business-to-
business markets. Finally, global brands help facilitate the buying process
by making a company's products easily identifiable.
No wonder, then, that global branding has been such a growth area. However,
there are disadvantages to developing and supporting the global brand. For
example, the business must pay careful attention to managing and
coordinating brands throughout the world. This can be very difficult where some
degree of adaptation is required in different markets. Finally, global brands
bring the attendant problems of pirating, counterfeiting and parallel imports.
Note that the standardized global brand is relatively rare. The reasons for
this are the wide variations between different market and cultural
conditions, differences in distribution channels, different availability of
advertising media, and price differences caused by distributor margins and
tax levels, etc.
The Global Strategic Approach
This approach is different from the global brand. The global strategic
approach looks at the world (global) opportunity. The approach to
standardization is more flexible. Standardization will be sought where it is
useful, but regional world market variation is allowed. Unilever is a company
that is moving from a multi-domestic approach through a regiocentric
approach towards a global strategic approach. The end result might be global
co-ordination but with different brands in America, Europe and Asia.
Whichever approach is taken, the global company will be following an

approach that is now described as transnational.
The transnational approach has to accommodate country differences, but it

looks for broader market opportunities and solutions. Thus, the response to
marketing issues will be on a global scale but with the flexibility for
necessary local adaptation. Further, as companies move from a position of
treating a country as being synonymous with a market and look at targeting
then-product offering at consumer segments, it becomes easier to identify
the similarities that exist and therefore can be exploited. For example, the
student population in the UK, the USA and the Far East are likely to be
similar in many ways despite significant cultural differences.
These, then, are some of the key factors which have helped drive the growth
of global business and marketing strategies. You must always be aware,
however, of some of the key factors tending to inhibit this growth or at least
which are considerations before decisions about commitments to a global
strategy are made.
(a) Cultural Factors
Clearly, one of the major factors limiting the growth of global business and
particularly standardized global strategies is differences in culture. Although
we have mentioned the growth of the global village, cultural differences still
exist in different parts of the world with these differences often being
substantial. Businesses cannot simply override these cultural differences,
and certainly ignores them at their peril.
(b) Customer Tastes and Needs
Related to, and often underpinned by, cultural factors, the growth of global
business is restricted by differences in customers' tastes and needs in
different parts of the world.
(c) Other Environmental Factors
Finally, a global approach is restricted where there are differences in some of
the key environmental forces and factors which we have already discussed.
So, for example, legal political and regulatory forces must be considered.
1.5 Globalization Strategies
Company Size and Globalization
The very large companies are those that most frequently attempt to change
from the polycentric orientation of the multinational enterprise to the
geocentric orientation of the transnational global company. These very large
companies compete in a substantial way in many markets in the world.
They are able to make considerable gains by seeking process and
implementation standardization on a worldwide scale.
Smaller companies are not necessarily prevented from taking a global

stance. They are not necessarily smaller in the relative terms of their
position in the world market for the products/services that they provide for
example, in the high technology area or, perhaps, in entertainment services.
Smaller companies can, therefore, develop both a process and
implementation standardization in a global way.
Many companies will not consider globalization because of a limited

management view. As we have indicated before, some companies will be
confined closely to their own domestic market because of their ethnocentric
orientation.
At first sight, the choice of strategies with regard to approaches to global
markets would seem to be a choice between the two alternative strategies of
standardization or adaptation for both process and implementation aspects
of marketing. However, we can distinguish between three alternative
strategies with respect to globalization as follows:
(a) Global Strategy

A truly global strategy is characterized by an attitude and an approach to
planning in an organization where no distinction is made between domestic
and foreign markets. Plans are developed on a global basis and the only
consideration in considering each market is the extent to which the market
will contribute to the achievement of overall corporate objectives.
A company which has this truly global approach to its markets and business,
therefore, will not think of itself as primarily, say, an American or a
Japanese company, even though the company may have been founded in
one of these countries and may still have its headquarters there. A global
strategy involves a company looking for and planning for global
opportunities irrespective of where in the world these occur.
A global strategy may or may not involve standardization depending on the

circumstances of the markets and other factors such as competition, the
company itself and so on. However, companies that pursue global strategies
are often looking to standardize their business plans as much as possible.
(b) Multi-domestic Strategies

Essentially, this strategy is based on developing different strategies for
different parts of the world and as such is based on the notion that the
differences between markets are more important than the similarities.
This approach may still be underpinned by a degree of standardization,
particularly with regard to the process elements of business and marketing
planning, but the elements of the marketing mix and, in particular, price and
distribution are likely to be adapted. Nevertheless, a company pursuing this
type of strategy can still seek to prosper from global opportunities.
A company adopting this strategy is often said to be thinking global, but
acting local.
(c) Grouping/Clustering Strategies: Global Segments
This approach represents something of a middle ground between the first

two strategies and essentially is a segmentation and targeting approach.
In this approach customers and/or markets are grouped together according to
the similarity of their needs and wants. Once grouped in this way, these
customers can then be targeted with a standardized, or at least relatively
standardized, marketing mix. Examples of ways in which customers can be
grouped and targeted in this way include groupings by geographical area,
grouping by trading blocs, grouping by stage of economic development and
so on.
Customized Marketing
Finally, no discussion of globalization including aspects such as global

branding would be complete without a brief mention of the trend towards
more customized marketing throughout the world.
There is some evidence to suggest that customers are increasingly looking for
customized solutions to their needs i.e. individual products and brands to
satisfy their requirements. Obviously, global brands and standardized
marketing are a complete anathema to this. At one time, of course, developing
customized marketing mixes for customers would have been impossible apart
from in the more specialized markets such as sales of high priced fashion
items, industrial products and services and so on. However, a number of
developments have begun to facilitate at least a greater degree of customized
marketing which at least some customers are looking for. Finally, the Internet
is increasingly facilitating the speed and ease with which companies and
customers can communicate on a real time interactive basis.
(b) Intense/Increased International Competition in Home Markets
Another factor which may prompt a company to go international is where it

faces intense and/or increased competition in its domestic markets,
particularly from non-domestic competitors. Sometimes the business may
seek to avoid such intense competition by looking for non- domestic
markets to maintain and expand sales and profits. The danger here, of
course, is that competition will simply follow you into your new markets.
(c) An Opportunity to Exploit a Real Competitive Advantage
A much more positive reason for going international than avoiding

increased competition in the domestic market is where a company has a
genuine competitive advantage which it wishes to exploit on an international
basis. So, for example, a company with an innovatory new product which
is, say, patent protected may feel that it wishes to gain the maximum value
by expanding its sales of the product into other countries.
(d) Economies of Scale
We have already mentioned the fact that international expansion through

expanding the potential market often enables a company to achieve
economies of scale. At one time, these economies of scale were linked to
decreases in average cost in the production and research and development
areas of the business, but increasingly, companies are also being driven by
economies of scale in the marketing area and particularly in the areas of
branding and advertising where going international can help reduce the
average costs in this increasingly expensive area of the business.
(e) Merger and Acquisition Activity
Sometimes companies find themselves in the international arena through their
merger and acquisition activities. Clearly, where the reason for the
merger/acquisition is to, say, gain access to an overseas market, then
obviously this is a conscious policy decision to go international. Sometimes,
however, a company can find itself operating in international markets where
the major reason for the merger/acquisition was perhaps to simply protect the
domestic market or to acquire a valuable distribution structure. In doing so,
however, the company may acquire/merge with a company that is already
involved in international markets and so goes international by default.
Clearly, there are many reasons why companies go international, but it is

important to stress that all the evidence suggests that where a company goes
international for positive reasons it is much more likely to be successful. So,
for example, a company that is experiencing difficulties in its domestic
markets, such as decreasing sales, increased competition, etc. will often
struggle if it attempts to move into international markets from this weak base.
This again highlights the importance of analyzing and assessing

international markets for genuine market opportunities and matching these
opportunities to company competences and strengths. This aspect of
identifying and appraising opportunities in international markets is again,

I would stress, no different to purely domestic business. But if this aspect is
no different, it raises the issue of what is involved in international business
and it is to this area that we shall now turn our attention.
Conclusions
Obviously, a firm faces a large number of issues and problems when

deciding to sell into another country's markets. Having outlined the strategic
choices facing companies generally, however, we must now examine the
specific issues facing the management Functions of companies doing
business in the international environment.
Review Questions
What factors determine whether a firm is likely to develop international

business or not?
What potential difficulties face firms once they have decided to
internationalize?
What strategies may be required in order to maximize a firm's chances
of successfully globalizing?
Which are the advantages of global brands?
What global strategies are to be taken into account when expanding
internationally?
What factors determine where internationally competitive industries
/companies grow up?
What advantages must firms considering going international have
over their overseas rivals?
What factors determine whether a firm decides to license its advantages
or not?
What factors determine whether a firm internationalizes through
exporting or foreign direct investment?
What effects can multinationals have upon the host economies in which
they are situated?
2 GLOBAL STRATEGIC
PLANNING
2.1 Reasons for Planning Globally
In previous chapter I presented some of the important reasons that motivate

companies to pursue international business opportunities, including the
potential to increase profits and sales through access to new markets; to
protect existing markets, profits, and sales; and to help satisfy management's
overall desire for growth.
However, in order to succeed in today's global marketplace, a company

must be able to quickly identify and exploit opportunities wherever they
occur, domestically or internationally.
To do this effectively, managers must fully understand why, how, and where
they intend to do business, now and over time. This requires managers to
have a clear understanding of the company's mission, a vision for how they
intend to achieve that mission, and an understanding of how they plan to
compete with other companies.
To meet these challenges, managers must understand the company's

strengths and weaknesses and be able to compare them accurately to those
of their worldwide competitors.
Strategic planning provides valuable tools that help managers address

these global challenges.
International business strategy is concerned with the way firms make

fundamental choices about developing and deploying scarce resources
internationally. International strategy involves decisions that deal with all
the various functions and activities of a company, not merely a single area
such as marketing or production.
To be effective, a company's international strategy needs to be consistent

among the various functions, products, and regional units of the company
(internal consistency) as well as with the demands of the international
competitive environment (external consistency).
The goal of international strategy is to achieve and maintain a unique and

valuable competitive position both within a nation and globally, a position
that has been termed competitive advantage. This suggests that the
international company either must perform activities different from those of
its competitors or perform the same activities in different ways. To create a
competitive advantage that is sustainable over time, the international
company should try to develop skills, or competencies, that (1) create value
for customers and for which customers are willing to pay, (2) are rare, since
competencies shared among many competitors cannot be a basis for
competitive advantage, (3) are difficult to imitate or substitute for, and
(4) are organized in a way that allows it to exploit fully the competitive
potential of these valuable, rare, and difficult to imitate competencies.
Managers of international companies that are attempting to develop a

competitive advantage face a formidable challenge: resources: time, talent,
and money are always scarce. There are many alternative ways to use these
scarce resources (for example, which nations to enter, which technologies to
invest in, and which products to develop), and these alternatives are not
equally attractive. A company's managers are forced to make choices re-
garding what to do, and what not to do, now and over time. Different
companies make different choices, and those choices have implications for
each company's ability to meet the needs of customers and create a
defensible competitive position internationally. Without adequate planning,
managers are more likely to make decisions that do not make good sense
competitively, and the company's international competitiveness may be
harmed.
Because of the challenges mentioned, many international firms have found

it necessary to institute formal global strategic planning to provide a means
for top management to identify opportunities and threats from ail over the
world, formulate strategies to handle them, and stipulate how to finance the
strategies' implementation. Global strategic plans not only provide for
consistency of action among the firm's managers worldwide but also require
the participants to consider the ramifications of their actions in the other
geographical and functional areas of the firm. These plans provide a
Global Strategic Planning
thorough, systematic foundation for making decisions regarding what

resources and competencies to develop, when and how to develop them, and
how to use those competencies to achieve competitive advantage.
Historically, more aspects of research and development and manufacturing

have been standardized and coordinated worldwide by companies than has
been the case for marketing. Many top executives believe marketing
strategies are best determined locally because of differences among the
various foreign environments. Yet there is a growing tendency to
standardize not only marketing strategies but also the total product, which
leads to their inclusion in the global strategic planning process. Of course,
their standardization can also be the result of strategic planning as the
company's managers search for ways to lower costs and present a uniform
company image as a global producer of quality products. Let us look at the
planning process.
2.2 Global Strategic Planning Process
Global strategic planning is the primary function of managers, and the

ultimate manager of strategic planning and strategy making is the firm's
chief executive officer. The process of strategic planning provides a formal
structure in which managers (1) analyze the company's external
environments, (2) analyze the company's internal environment, (3) define
the company's business and mission, (4) set corporate objectives,
(5) quantify goals, (6) formulate strategies, and (7) make tactical plans. For
ease of understanding, we present this as a linear process, but in actuality
there is considerable flexibility in the order in which firms take up these
items.
In company planning meetings that one of the writers attended, the

procedure was iterative: that is, during the analysis of the environments,
committee members could skip to a later step in the planning process to
discuss the impact of a new development on a present corporate objective.
They then often moved backward in the process to discuss the availability of
the firm's assets to take advantage of the environmental change. If they
concluded that the company had such a capability, the committee would try
to formulate a new strategy. If a viable strategy was developed, the members
would then establish the corporate objective that the strategy was designed
to attain.
Analyze Domestic, International, and Foreign Environments
Because a firm has little opportunity to control these forces, its managers
must know not only what the present values of the forces are but also where
the forces appear to be headed. An environmental scanning process similar
to the market screening process.
Analyze Corporate Controllable Variables
An analysis of the forces controlled by the firm will also include a

situational analysis and a forecast. The managers of the various functional
areas will either personally submit reports on their units or provide input to
the planning staff (if there is one), who will in turn prepare a report for the
strategy planning committee.
Often management will analyze the firm's activities from the time raw
materials enter the plant until the end product reaches the final user, what is
often called a value chain analysis. As part of this process, management
must address three key questions: (1) who are the company's target
customers, (2) what value does the company want to deliver to these
customers, and (3) how will this customer value be created. The value chain
analysis itself focuses primarily on the third question, and it refers to the set
of value-creating activities that the company is involved with, from sources
for basic raw materials or components to the ultimate delivery of the final
product or service to the final customer. A simplified value chain is shown
in figure 2.1 The Value Chain.
Figure 2.1 The Value Chain

Managerial, legal and administrative infrastructure
Human resource management
Technology development
Procurement
Creation of
Economic
Distribution and
Sourcing of raw
Product design
Manufacturing
Value
and assembly
materials and
components
Marketing
Post-sales
and sales
logistics
service
Primary Activities
The goal of this analysis is to enable management to determine the set of

activities that will comprise the company's value chain, including which
activities the company will do itself and which will be outsourced.
Management must also consider where to locate various value chain
activities (for example, should assembly be done in the company's home
nation, located in a lower cost location abroad, or located close to a
customer abroad?). It is also necessary for management to examine the
linkages among the activities in the value chain (for example, between sales
and product development, in order to ensure that customer needs arc
effectively communicated and incorporated in new products). Linkages
must be examined not merely across activities within the company, but also
in terms of managing relationships with external entities such as suppliers,
distributors, or customers within and across nations. The desired outcome of
this analysis is the identification and establishment of a superior set of well-
integrated value chain activities and linkages, a system that will permit the
organization to more effectively and efficiently develop, produce, market,
and sell the company's products and services to the target customers,
thereby creating the basis for global competitive advantage.
Knowledge as a controllable corporate resource. In today's highly

competitive, rapidly changing, and knowledge-intensive economy,
companies have the potential to achieve competitive advantages through
leveraging their organizational knowledge across national boundaries. This
organizational knowledge base includes the capabilities of employees
(individually and in teams) as well as the knowledge that gets built into the
overall organization through its various structures, systems, and
organizational routines. As a valuable, scarce, and often unique
organizational resource, knowledge is increasingly recognized by
management as the basis for competitive advantage. As a result, managers
are developing sets of techniques and practices to facilitate the flow of
knowledge into and within their companies, to build knowledge databases,
to transfer best practices, and otherwise to create the foundation for a
knowledge-based competitive advantage.
To effectively manage knowledge, companies must encourage individuals to

work together on projects or somehow share their ideas. Since much
valuable knowledge is tacit, which means that it is known well by the
individual but it is difficult to express verbally or document, systems are
needed in order to convert this tacit knowledge into explicit, codified
knowledge and then make this knowledge accessible quickly and effectively
to other employees that need it. In addition, to effectively design and deliver
products that meet customers' needs, it is often necessary to also gain access
to valuable knowledge of suppliers and customers. In some cases, it is even
necessary to establish company facilities in other locations in order to gain
access to this knowledge.
Companies face an ongoing challenge of creating mechanisms that will

systematically and routinely identify opportunities for developing and
transferring knowledge, and for ensuring that subsidiaries are willing and
able to both share what they know and to absorb knowledge from other units
of the company.
The importance of knowledge and its management is recognized by

international companies. Knowledge intensity is the opposite of capital
intensity. It's creating value from two centuries of experience, know-how
and brand equity.
After the analysis of corporate controllable variables, the planning

committee must answer questions such as the following: What are our
strengths and weaknesses? What are our human and financial resources?
Where are we with respect to our present objectives? Have we uncovered
any facts that require us to delete goals, alter them, or add new ones. After
completing this internal audit, the committee is ready to examine its
business, vision, and mission statements.
Define the Corporate Business, Vision, and Mission Statements
These broad statements are communicated to the corporation's stakeholders

(employees, stockholders, governments, suppliers, and customers) by its
leaders, explaining what the company is and where it is going. Some firms
combine two or all three, whereas others have separate statements.
After defining any or all of the three statements, management must
then set corporate objectives.
Set Corporate Objectives

Objectives direct the firm's course of action, maintain it within the
boundaries of the stated mission, and ensure its continuing existence.
Quantify the Objectives
It should be a strong preference of most top managers for verifiable
objectives; they frequently do have no quantifiable or directional goals.
Incidentally, objectives do tend to be more quantified as they progress down

the organization to the operational level, because, for the most part,
strategies at one level become the objectives for the succeeding level. Up to
this point, only what, how much, and when have been stipulated. How these
objectives are to be achieved will be determined in the formulation of
strategies.
Formulate the Competitive Strategies
Generally, participants in the strategic planning process will formulate

alternative competitive strategies, and corresponding plans of action, that
seem plausible considering the directions the external environmental forces
are taking and the company's strengths, weaknesses, opportunities, and
threats (something that endangers the business, such as a merger of two
competitors, the bankruptcy of a major customer, or a new product that
appears to make the company's product obsolete).
Suppose their analysis of the external environment convinces them that the
Japanese government is making it easier for foreign firms to enter the
market and the competitor analysis reveals that a Japanese competitor is
preparing to enter the United States (or wherever the home market is).
Should the firm adopt a defensive strategy of defending the home market by
lowering its price there, or should it attack the competitor in its home
market by establishing a subsidiary in Japan? Management may decide to
pursue either strategy or both, depending on its interpretation of the
situation.
When developing and assessing strategic alternatives, it is important to

remember that companies competing in international markets confront two
opposing forces: reduction of costs and adaptation to local markets. In order
to be competitive, firms must do what they can to lower costs per unit so
that customers will not perceive their products or services as being too
expensive. This often results in pressure for some of the company's facilities
to be located in places where costs are low, as well as developing products
that are highly standardized across multiple nations.
However, in addition to pressures to reduce costs, managers also must

attempt to respond to local pressures to modify their products to meet the
demands of the local markets in which they do business. This modification
requires the company to differentiate its strategy and product offerings from
nation to nation, reflecting differences in distribution channels,
governmental regulations, cultural preferences, and similar factors.

However, modifying products and services for the specific requirements of
local markets can involve additional expenses, which can cause the
company's costs to rise.
As a consequence of these two opposing pressures, companies basically
have three different strategies that they can use for competing
internationally: multidomestic, global, and transnational. As suggested in
figure 2.2: Type of International Business Strategy the strategy that would
be most appropriate for the company, overall and for various activities in
the value chain, depends on the amount of pressure the company faces in
terms of adapting to local markets and achieving cost reductions. Each of
these strategies has its own set of advantages and disadvantages, as
summarized below.
Figure 2.2 Type of International Business Strategy
High
Global Transnational
Strategy Strategy
Pressure to
reduce costs
Multidomestic
Strategy
Low
Pressure for local adaptation High Low
Multidomestic Strategy. A multidomestic strategy tends to be used when

there is strong pressure for the company to adapt its products or services for
local markets.
Under these circumstances, decision making tends to be more decentralized

in order to allow the company to modify its products and to respond quickly
to changes in local competition and demand. By tailoring its products for
specific markets, the company may be able to charge higher prices.
However, local adaptation of products usually will increase the company's

cost structure. In order to effectively adapt products, the company will have
to invest in additional capabilities and knowledge in terms of local culture,
language, customer demographics, human resource practices, government
regulations, distribution systems, and so forth. Adapting products too much
to local tastes may also take away the distinctiveness of a company's
products.
The extent of local adaptation may also change over time, as when customer
demands start to converge due to the emergence of global
telecommunications, media, and travel, as well as reduced differences in
income between nations. The cost and complexity of coordinating a range of
different strategies and product offerings across national and regional
markets can also be substantial.
Transnational Strategy. A transnational strategy tends to be used when a

company simultaneously confronts pressures for cost effectiveness and
local adaptation, and when there is a potential for competitive advantage
from simultaneously responding to these two divergent forces.
The location of a company's assets and capabilities will be based on where it

would be most beneficial for each specific activity, neither highly
centralized as with a global strategy, nor widely dispersed as with a
multidomestic strategy.
Typically, more upstream value chain activities, such as product

development, raw materials sourcing, and manufacturing, will be more
centralized, while the more "downstream" activities such as marketing,
sales, and service will be more decentralized, located closer to the customer.
Of course, achieving an optimal balance in locating activities is a challenge

for management, as is maintaining this balance over time as the company
faces changes in competition, customer needs, regulations, and other factors.
Management must ensure that the comparative advantages of the locations
of their various value chain activities are captured and internalized, rather
than wasted due to limitations of the organization's people, structures, and
coordination and control systems. The complexity associated with the
strategic decisions, as well as the supporting structures and systems of the
organization, will be much greater with a transnational strategy.
It is also important to remember that management must consider the

corporate culture when choosing among strategies. If the company decides
to put into effect a quality control system that includes quality circles and
heretofore there has been little employee participation in decision making,
the strategy will have to include the cost of and time for training the
employees to accept this cultural change.
Strategies may also be general. At the corporate level, strategies, like

objectives, may be rather general.
You can be sure that the marketing and design functions, which receive
these strategies as their objectives, will be required to quantify as many as
possible.
Scenarios. Because of the rapidity of changes in the uncontrollable

variables, many managers have become dissatisfied with planning for a
single set of events and have turned to scenarios, which are multiple,
plausible stories for probable futures.
Often, the what if questions raised reveal weaknesses in present strategies.

Some of the common kinds of subjects for scenarios are large and sudden
changes in sales (up or down), sudden increases in the prices of raw
materials, sudden tax increases, and a change in the political party in power.
Frequently, scenarios are used as a learning tool for preparing standby or
contingency plans.
International Strategy, Organizational Design, and Control Contingency

Plans. Many companies prepare contingency plans for worst and best case
scenarios and for critical events as well. Every operator of a nuclear plant
has contingency plans, as do most producers of petroleum and hazardous
chemicals. Because of the important impact on profits of changes in the
prices of jet fuel, contingency planning is a common strategic activity for
domestic and international airlines.
Prepare Tactical Plans
Because strategic plans are fairly broad, tactical (also called operational)
plans are a requisite for spelling out in detail how the objectives will be
reached. In other words, very specific, short-term means for achieving the
goals are the objective of tactical planning. For instance, if the British
subsidiary of an American producer of prepared foods has as a quantitative

goal a 20 percent increase in sales, its strategy might be to sell 30 percent
more to institutional users. The tactical plan could include such points as
hiring three new specialized sales representatives, attending four trade
shows, and advertising in two industry periodicals every other month next
year. This is the kind of specificity found in the tactical plan.
Strategic Plan Features and Implementation Facilitators
Sales Forecasts and Budgets

Two prominent features of the strategic plan are sales forecasts and budgets.
The sales forecast not only provides management with an estimate of the
revenue to be received and the units to be sold but also serves as the basis
for planning in the other functional areas. Without this information,
management cannot formulate the production, financial, and procurement
plans. Budgets, like sales forecasts, arc both a planning and a control
technique. During planning, they coordinate all the functions within the firm
and provide management with a detailed statement of future operating
results,
Plan Implementation Facilitators

Once the plan has been prepared, it must be implemented. Two of the most
important plan implementation facilitators that management employs are
policies and procedures.
Policies. Policies are broad guidelines issued by upper management for the
purpose of assisting lower-level managers in handling recurring problems.
Because policies are broad, they permit discretionary action and
interpretation. The object of a policy is to economize managerial time and
promote consistency among the various operating units. If the distribution
policy states that the firm's policy is to sell through wholesalers, marketing
managers throughout the world know that they should normally use
wholesalers and avoid selling directly to retailers. The disclosure of the
widespread occurrence of bribery prompted company presidents to issue
policy statements condemning this practice. Managers were put on notice by
these statements that they were not to offer bribes.
Procedures. Procedures prescribe how certain activities will be carried out,

thereby ensuring uniform action on the part of all corporate members. For
instance, most international corporate headquarters issue procedures for
their subsidiaries to follow in preparing annual reports and budgets. This

assures corporate management that whether the budgets originate in
Thailand, Brazil, or the United States, they will be prepared using the same
format, which facilitates comparison.
Kinds of Strategic Plans
Time Horizon
Although strategic plans may be classified as short, medium or long-term,
there is little agreement about the length of these periods. For some, long-
range planning may be for a five-year period. For others, this would be the
length of a medium-term plan; their long range might cover 15 years or
more. Short-range plans are usually for one to three years; however, even
long-term plans are subject to review annually or more frequently if a
situation requires it. Furthermore, the time horizon will vary according to
the age of the firm and the stability of its market. A new venture is
extremely difficult to plan for more than three years in advance, but a five-
or six-year horizon is probably sufficient for a mature company in a steady
market.
Level in the Organization

Each organizational level of the company will have its level of plan. For
example, if there are four organizational levels, there will be four levels of
plans, each of which will generally be more specific than the plan that is at
the level above. In addition, the functional areas at each level will have their
own plans and sometimes will be subject to the same hierarchy, depending
mainly on how the company is organized.
Methods of Planning
Top-Down Planning
In top-down planning, corporate headquarters develops and provides
guidelines that include the definition of the business, the mission statement,
company objectives, financial assumptions, the content of the plan, and
special issues. Disadvantages of top-down planning are that it restricts
initiative at the lower levels and shows some insensitivity to local
conditions, particularly within ethnocentric management teams.
Furthermore, especially in an international company, there are so many
interrelationships that consultation is necessary. Can top management, for

example, decide on rationalization of manufacturing without obtaining the
opinions of the local units as to its feasibility?
The advantage of top-down planning is that the home office with its global
perspective should be able to formulate plans that ensure the optimal
corporate wide use of the firm's scarce resources.
Bottom-Up Planning
Bottom-up planning operates in the opposite manner. The lowest operating
levels inform top management about what they expect to do, and the total
becomes the firm's goals. The advantage of bottom-up planning is that the
people responsible for attaining the goals are formulating them. Who knows
better than the subsidiaries' directors what and how much the subsidiaries
can sell? Because the subsidiaries' directors set the goals with no coercion
from top management, they feel obligated to make their word good.
However, there is also a disadvantage. Each affiliate is free to some extent
to pursue the goals it wishes to pursue, and so there is no guarantee that the
sum total of all the affiliates' goals will coincide with those of headquarters.
When discrepancies occur, extra time must be taken at headquarters to
eliminate them. Japanese companies, particularly larger firms, almost
invariably use bottom-up planning because they strive for a consensus at
every level.
Iterative Planning
It appears that iterative planning is becoming more popular, especially in
global companies that seek to have a single global plan while operating in
many diverse foreign environments. Iterative planning combines aspects of
both top-down and bottom-up planning.
New Directions in Planning

Planning during the 1960s and early 1970s commonly consisted of a
company's CEO and the head of planning getting together to devise a
corporate plan, which would then be handed to the operating people for
execution. Changes in the business environment, however, caused changes
to be made in three areas: (1) who does the planning, (2) how it is done, and
(3) the contents of the plan.
Who Does It
By the mid-1970s, strategic planners had become influential executives,

especially in many large U.S. corporations. They were accustomed to
writing a blueprint for each subsidiary, which they would then present to the
management of each operating unit. The planners' power grew and the
operating managers' influence waned, and of course there was hostility
between the two groups.
By the 1980s, world uncertainty had made long-range planning in detail

impossible and stronger competition made a practical knowledge of the
company and the industry an essential input to strategic planning. This
brought senior operating managers into the planning process, enabling
companies to change the role and reduce the size of their planning staffs.
Another change involves bringing into the company's strategic planning

process teams of line and staff managers with a wide range of ages. In the
1990s, Electronic Data Systems (EDS), international business consultants,
began bringing in a group of staff people from around the world for a
yearlong assignment to work on strategy planning. The members ranged
from a 26-year-old systems engineer with two years in the company to a
60-year-old corporate vice president who had worked 25 years with EDS.
The group identified discontinuities that were either threats or opportunities
for the firm, defined the firm's core competencies (what it docs best), and
wrote a strategic intent a clearly defined goal that requires extra effort
for the company to attain it.
Many firms have introduced another innovation to the planning process

bringing in customers and suppliers in order to have firsthand experience
with the firm's markets.
How It Is Done
By the 1980s, firms were using computer models and sophisticated

forecasting methods to help produce the voluminous plans we just
mentioned. Those plans were not only huge but also very detailed.
However, the less quantifiable factors relating to sociopolitical
developments were becoming increasingly important. Also, the rapid rise in
the levels of uncertainty made it clear to top managers that there was no
point in using advanced techniques to make detailed five-year forecasts
when various crises were exposing the nonsense of many previous forecasts.
Summary of the Planning Process
If major corporations are to develop the flexibility to compete, they must

make the following major changes in the way they plan:
1. Top management must assume a more explicit strategic decision-

making role, dedicating a large amount of time to deciding how things
ought to be instead of listening to analyses of how they are.
2. The nature of planning must undergo a fundamental change from an
exercise in forecasting to an exercise in creativity.
3. Planning processes and tools that assume a future much like the past
must be replaced by a mind-set that is obsessed with being first to
recognize change and turn it into a competitive advantage.
4. The role of the planner must change from being a purveyor of
incrementalism to being a crusader for action and an alter ego to line
management.
5. Strategic planning must be restored to the core of line management
responsibilities.
2.3 Organizational Design
Planning, it is said, is nothing unless and until it generates action. This

statement illustrates the importance of having effective organizational
structures, systems and procedures allied to the strategic international
business and marketing planning process. In addition, given that plans are
implemented through: and by people, the human resource aspects of
international strategic planning are also crucial.
The way in which a company organizes its activities has a significant

influence upon its success. Organizational structures and procedures
influences organizational effectiveness and efficiency in a wide variety of
ways including, for example, speed of response to market changes, access to
and use of resources, communication systems and control and evaluation of
plans. In this study unit we will look at different organizational structures
and the reasons why some structures will be preferred in certain situations.
We shall also be examining the notion of organizational culture and its
influence upon the international planning process. The effectiveness and the
efficiency of the international organization are influenced by the resources
of the organization. Amongst the most important of these resources are a
company's human resources. We shall also be looking, therefore, at the

management and control of human resources in international marketing, and
in particular some of the issues which arise when choosing between and
managing local, expatriate and global staff.
Organizational design normally follows planning because the organization

must implement the strategic plan. The planning process itself, because it
encompasses an analysis of the firm's external environments as well as its
strengths and weaknesses, often discloses a need to alter the organization.
Changes in strategy may require changes in the organization, but the reverse
is also true. For instance, a new CEO may join the firm, or the company
may acquire another business. Planning and organizing are so closely
related that usually the structure of the organization is treated by
management as an integral part of the planning process.
Organizational Design Concerns
Two of the concerns that management faces in designing the organizational

structure are (1) finding the most effective way to departmentalize to take
advantage of the efficiencies gained from the specialization of labor and
(2) coordinating the activities of those departments to enable the firm to
meet its overall objectives. As all managers know, these two concerns run
counter to each other; that is, the gain from increased specialization of labor
may at times be nullified by the increased cost of coordination. It is this
search for an optimum balance between them that often leads to a
reorganization of the firm's structure.
Evolution of the Global Company
The type of organizational structure that is appropriate for an organization

will depend upon many issues. Some issues are fairly obvious. For example,
small and medium-sized businesses will have smaller and less complicated
organizational structures than very large companies. The number of
different country markets and the current size of the company market share
in different markets will influence the need for the number and type of
people to be employed internationally. The types of product and service and
the overall product mix will affect the organization.
Perhaps less obvious as an influence on organizational structure will be the

amount of experience that the company has in international markets. New
and inexperienced companies in international markets are likely to use
different approaches and have different tasks when compared with

companies who have been established successfully in the market-place for a
number of years. Another important influence on the organization is the
level of challenge of the objectives that have been set by the organization. If
the company is seeking to grow rapidly, it will need a different type of
organization from a company that is attempting to hold a stable position.
Another important influence on the international organization is the extent
to which the company is trying to standardize its activities. A company with
a policy of running separate country operations will organize itself quite
differently from a company with a pan-European or a global standardization
approach.
Horizontal Structures
As in any organization, the international business must weigh a number of

competing bases upon which to divide its operations and decision making.
(a) Centralization and Decentralization
There are several conflicting pressures as companies expand their business

internationally. As the company enters new country markets and expands its
product mix, it comes under pressure to decentralize. By allowing more
autonomy at the local country level, it can develop and implement plans that
are more appropriate for the specific needs of the customers in that country.
As the company allows more decentralized decision-making, it finds that
products are extensively adapted or are totally different between one country
and another. Company and brand names, trade marks, and advertising
campaigns will spread apart. In allowing differences, the company is
denying itself the opportunities to make cost-saving economies. It is denied
large economies of scale. It is denied some of the benefits of increasing
experience, because the experience effect is limited to the country operation.
If the company operations were more similar, then the total volume of
production and sales would build up and thus allow economies to be
achieved.
A different pressure is to centralize. Companies may wish to centralize their

key activities in order to co-ordinate and control their international
activities. The centralized approach has the benefits of organizational
neatness, of standardization and of the opportunities to profit from scale and
experience advantages. More recently, some companies have sought a more
centralized approach to allow them to develop an organizational capability
to launch products simultaneously in a number of different country markets.

Another reason for more centralized control is to mobilize the ability to plan
and to implement international competition strategies.
Certain difficulties result from an over-rigid approach to centralization. The

main difficulties are that central headquarters will be too remote,
geographically and culturally, to understand the particular requirements of
specific country markets. A further difficulty is the not invented here
syndrome. Managers who are required to manage programs that have been
developed at central headquarters will not feel involved with the plans and
will, therefore, not be so highly motivated. The extent to which the
objectives of the plans are achieved will be influenced by the enthusiasm
and motivation of the people employed at country level. The not invented
here syndrome, therefore, needs to be taken seriously.
Specialization
In developing the international organization, the company will need to take

account of specialization across the dimensions of function, product and
geography. In most organizations a balance between the conflicting interests
of these three dimensions needs to be reached.
Function is concerned with occupational specialization. Functional

specialization becomes more important with the growth in
organizational size and complexity so, for example, the marketing
function in a large organization itself will require functional specialists
in marketing management, selling, sales promotion, and marketing
research and so on.
Product is concerned with the co-ordination, integration and control of

activities based on the product. This type of specialization enables the
company to deliver high levels of expertise in relation to particular
products.
Geography is concerned with matching the company with its external
environment. In the domestic market, most companies organize their sales
force with specialization based on areas and regions within the country. In
international business, it is usual to base some of the organizational
structure around countries, trading blocs and world regions.
In this way, closeness to customers and an improved knowledge of the
factors influencing the market-place are achieved.
Extent of International Involvement and Structure
We have previously identified various stages in the growth of international

involvement from an export selling to a global marketing stage. We can
build a match between these stages and the type of organization appropriate
to the approach to international business. This is outlined in the following
table:
As the company expands its international sales and profits, it inevitably
finds that ad hoc arrangements are insufficient. The early arrangements are
primarily concerned with facilitating the order by arranging the physical
dispatch of the product, and the necessary financial details of which
currency is being specified and how the invoice will be paid. With more
orders the company will benefit by developing a specialist department to
handle the various demands of exporting. Over time the export department
becomes less burdened by the administrative detail of exporting and begins
to become more proactive in developing business plans.
Increasing size will cause the company to consider the need to expand the
function and status of the export department into a division. Further
company expansion in its international business will bring forward the need
to co-ordinate activities by parts of the world, for example Asia, and at its
ultimate to attempt to develop a transnational organization. In all
organizational structures, it is probable that there will be these three levels
of management responsibility. The recent moves by many companies to
reduce costs and to improve organizational responsiveness by reducing the
number of layers in the organization would tend to flatten the pyramid, but
there will still invariably be a small number of senior managers involved in
strategy and a larger number of tactical managers (middle management)
concerned with organizing and leading lower level operational management
(supervisors).
Factors Affecting Choice of Organizational Structure
We have already touched on several factors which will affect the choice of
the most appropriate type of organizational structure for international
business. Summarizing these, the following represent the major factors
which will affect this choice:
Company size
Extent of international market spread
Range and diversity of products/services

Level and nature of involvement in international marketing
Overall corporate and marketing objectives
Company capabilities and resources
Organizational culture
Many of these are self-explanatory but the final two on our list of factors
affecting organizational structure, namely organizational culture and
company capabilities and resources, need exploring further.
Companies often enter foreign markets first by exporting and then, as sales
increase, by forming overseas sales companies and eventually setting up
manufacturing facilities. As the firm's foreign involvement changed, its
organization frequently changed. It might first have had no one responsible
for international business: the firm's marketing department might have filled
the export orders. Next, an export department might have been created,
possibly in the marketing department, and when the company began to
invest in various overseas locations, it could have formed an international
division to take charge of all overseas involvement. Larger firms commonly
organized their international divisions on a regional or geographical basis
(Figure 2.3 Global Corporate Organization Graphical Regions). As their
overseas operations increased in importance and scope, most management,
with some exceptions, felt the need to eliminate international divisions and
establish worldwide organizations based on product, region, or function.
Increasingly, customer classes are also a top-level dimension. Some service
companies and financial institutions are also organized this way. At
secondary, tertiary, and still lower levels, these four dimensions plus
process, national subsidiary, and international or domestic, provide the basis
for subdivisions.
Global Corporate Form Geographical Regions
Firms in which geographical regions are the primary basis for division put
the responsibility for all activities under area managers who report directly
to the chief executive officer. This kind of organization simplifies the task
of directing worldwide operations, because every country in the world is
clearly under the control of someone who is in contact with headquarters
(see figure).
Of course, this organizational type is used for both multinational

(multidomestic) and global companies. Global companies that use it
consider the division in which the home country is located as just another
division for purposes of resource allocation and a source of management
personnel. Some U.S. global companies have created a North American
division that includes Canada, Mexico, and Central American countries in
addition to the United States, possibly in part to emphasize that the home
country is given no preference.
The regionalized organization appears to be popular with companies that

manufacture products with a rather low, or at least stable, technological
content that require strong marketing ability. It is also favored by firms with
diverse products, each having different product requirements, competitive
environments, and political risks. Producers of consumer products, such as
prepared foods, pharmaceuticals, and household products, employ this type
of organization. The disadvantage of an organization divided into
geographical regions is that each region must have its own product and
functional specialists so that although the duplication of area specialists
found in product divisions is eliminated, duplication of product and
functional specialists is necessary.
Production coordination across regions presents difficult problems, as does

global product planning. To alleviate these problems, managements often
place specialized product managers on the headquarters staff. Although
these managers have no line authority, they do provide input to corporate
decisions concerning products.
Figure 2.3 Global Corporate Organization Graphical Regions
CEO
Asia/Pacific Europe/Africa/ Latin North Corporate Staff

Division Mideast Division American American - includes
Division Division Product
Specialists
Managements that changed to these types of organizations felt they would

(1) be more capable of developing competitive strategies to confront the
new global competition. (2) obtain lower production costs by promoting
worldwide product standardization and manufacturing rationalization, and
(3) enhance technology transfer and the allocation of company resources.
Global Corporate Form-Product
Frequently, this structure represents a return to export department times in

that the domestic product division has been given responsibility for global
line and staff operations. In the present-day global form, product divisions
are responsible for the worldwide operations such as marketing and
production of products under their control. Each division generally has
regional experts, so while this organizational form avoids the duplication of
product experts common in a company with an international division, it
creates a duplication of area experts.
Occasionally, to avoid placing regional specialists in each product division,

management will have a group of managerial specialists in an international
division who advise the product divisions but have no authority over them
(see figure 2.4).
Figure 2.4 Global Corporate FromProduct
CEO
World Wide Worldwide Worldwide Corporate Staff

Product Product Product includes International
Division A Division B Division C Division with area
experts
Global Corporate FormFunction
Few firms are organized by function at the top level. Those that are
obviously believe worldwide functional expertise is more significant to the
firm than is product or area knowledge. In this type of organization, those
reporting to the CEO might be the senior executives responsible for each
functional area (marketing, production, finance, and so on), as in Figure 2.5.
The commonality among the users of the functional form is a narrow and
highly integrated product mix, such as that of aircraft manufacturers or oil
refining companies.
Similarly, in late 1998, General Motors (GM) restructured its worldwide

automobile operations. The company was trying to be both 'global' and
'local' at the same time in order to capitalize on worldwide knowledge-
sharing and to achieve economies of scale, while at the same time retaining
the flexibility to tailor individual products to individual markets.
To achieve these goals, GM reorganized its activities into a single global
operation: GM Automotive. Functions such as purchasing, manufacturing,
engineering, research and development (R&D), human resources, and
communications have been set up on a global basis, although the company
has put into place mechanisms to allow enough local control to meet the
needs of local markets.
Figure 2.5 Functional form
CEO
Administration Engineering Finance Marketing Manufacturing
Hybrid Forms
In a hybrid organization, a mixture of the organizational forms is used at the

top level and may or may not be present at the lower levels. Figure 2.6
illustrates a simple hybrid form.
Such combinations are often the result of a regionally organized company

having introduced a new and different product line that management
believes can best be handled by a worldwide product division. An acquired
company with distinct products and a functioning marketing network may
be incorporated as a product division even though the rest of the firm is
organized on a regional basis. Later, after corporate management becomes

familiar with the operation, it may be regionalized.
Figure 2.6 Hybrid forms
CEO
Domestic Domestic International Corporate

Division A Division B Division Staff
Pacific Division Worldwide Original

(Products A&B) Product Equipment
Division C (Products A&B)
A mixed structure may also result from the firm's selling to a sizable,
homogeneous class of customers. Special divisions for handling sales to the
military or to original equipment manufacturers are often established at the
same level as regional or product divisions.
Matrix Organization
The matrix organization has evolved from management's attempt to match

product, regional, and functional expertise while still maintaining clear lines
of authority. It is called a matrix because an organization based on one or
possibly two dimensions is superimposed on an organization based on
another dimension. In an organization of two dimensions, such as area and
product, both the area managers and the product managers will be at the
same level and their responsibilities will overlap. An individual manager
say, a marketing manager in Germany will have a multiple reporting
relationship, being responsible to the area manager and in some instances to
an international or worldwide marketing manager at headquarters. Figure
2.7 illustrates an extremely simple matrix organization based on two
organizational dimensions. Note that the country managers are responsible
to both the area managers and the product line managers.
Problems with the Matrix structure. Although at one time it seemed that the
matrix organizational form would enable firms to have the advantages of the
product, regional, and functional forms, the disadvantages of the matrix
form have kept most worldwide companies.
Figure 2.7 Matrix Organization
CEO
Product Region
Country
One problem with the matrix is that the two or three managers (if it is a
three-dimensional matrix) must agree on a decision. This can lead to less-
than-optimum compromises, delayed responses, and power politics where
more attention is paid to the process than to the problem. When the
managers cannot agree, the problem goes higher in the organization and
takes top management away from its duties. Because of these difficulties,
many firms have maintained their original organizations based on product,
function, region, or international division and have built into the structure
accountability for the other organizational dimensions; this is called by
some a matrix overlay.
Matrix Overlay. The matrix overlay attempts to address the problems of the
matrix structure by requiring accountability of all functions in the
organization while avoiding the burdensome management stresses of a pure
matrix structure. We have already mentioned how a firm organized by
product may have regional specialists in a staff function with the
requirement that they have input to product decisions. They may even be
organized in an international division, as was mentioned previously.
Conversely, a regional organization would have product managers on its
staff that provides input to regional decisions.
Strategic Business Units
Strategic business units (SBUs), which, are an organizational form in which

product divisions have been defined as though they were distinct,
independent businesses. An SBU is defined as a self-contained business
entity with a clearly defined market, specific competitors, the ability to carry
out its business mission, and a size appropriate for control by a single
manager. Most SBUs are based on product lines, and if a product must be
modified to suit different markets, a worldwide SBU may be divided into a
few product/market SBUs serving various markets or groups of countries.
Changes in Organizational Forms
The rapidly changing business environment caused by increased global

competition, customer preference for custom-made rather than mass-
produced products, and faster technological change is pressuring companies
to step up their search for organizational forms that will enable them to act
more quickly, reduce costs, and improve the quality of product offerings.
Not only are they mixing older, established forms, they are also changing to
different forms, many of which are modified versions of long-established
forms with new names.
What is new is the acceptance by many companies of the need for frequent
reorganization. Present in these reorganizations, called reengineering by
many, are a significant reduction in the levels of middle management,
restructuring of work processes to reduce the fragmenting of the process
across functional departments, empowerment of employees, and the use of
computers for instant communication and swift transmittal of information.
CEOs are striving to make their organizations lean, flat, fast to respond, and
innovative.
2.4 Trends in Company Organization
Two organizational forms are now receiving the attention of many CEOs:
the virtual corporation and the horizontal corporation.
Virtual Corporation
A virtual corporation, also called a network corporation, is an organization
that coordinates economic activity to deliver value to customers using
resources outside the traditional boundaries of the organization.
In other words, it relies to a great extent on third parties to conduct its
business.
Outsourcing once was used for downsizing and cost reduction, but now
companies are using it to obtain specialized expertise which they don't have
but need in order to serve new markets or adopt new technology.
The evolution of the technology infrastructure has made possible changes in

the work force and working methods, such as teleworking, home offices,
and flexible working practices. All these factors have contributed to the
increase in virtual corporations,
Global networking on the Internet has made worldwide outsourcing

possible for firms of all sizes.
Nokia is a real virtual corporation: it outsourcers practically everything: the

design, marketing, chip fabrication. Amazingly, the firm became one of the
world's largest telephone companies in less than two years.
Although the name is new, the virtual corporation concept has existed for
decades. It has been extremely common for a group of construction firms,
each with a special area of expertise, to form a consortium to bid on a
contract for constructing a road or an airfield, for example. After finishing
the job, the consortium would disband.
These latter firms are also called modular corporations.
The virtual corporation concept has several potential benefits. In particular,

it permits greater flexibility than is associated with more typical corporate
structures, and rather than building competence from the ground up and
incurring high start-up costs that could limit future production decisions,
virtual corporations form a network of dynamic relationships that allow
them to take advantage of the competencies of other organizations and
respond rapidly to changing circumstances. However, this form of
organization can have disadvantages, including the potential to reduce
management's control over the corporation's activities (it is vulnerable to the
opportunistic actions of partners, including cost increases, unintended
"borrowing" of technical and other knowledge, and potential departure from
the relationship at inappropriate times). From the standpoint of employees,
this form of organization may replace the security of long-term employment
and the promise of ever-increasing salaries with the insecurity of the market
a global market.
Horizontal Corporation
Another organizational form, the horizontal corporation, has been adopted

by some large technology-oriented global firms in highly competitive
industries such as electronics and computers.
In many companies teams are drawn from different departments to solve a

problem or deliver a product.
This organization has been characterized as "antiorganization" because its

designers are seeking to remove the constraints imposed by the conventional
organizational structures
In a horizontal corporation, employees worldwide create, build, and market

the company's products through a carefully cultivated system of
interrelationships. Marketers in Great Britain speak directly to production
people in Brazil without having to go through the home office in Germany,
for example. Proponents of the horizontal organization claim lateral
relationships incite innovation and new product development. They also
state that the organization puts greater decision-making responsibility in
the hands of middle managers, who are not required to clear every detail and
event with higher-ups. The idea is to substitute cooperation and
coordination, which are in everyone's interests, for strict control and
supervision.
Corporate Survival into the 21st Century
Managers will make greater use of the dynamic network structure that
breaks down the major functions of the firm into small companies
coordinated by a small-sized headquarters organization. Business functions
such as marketing and accounting may be provided by separate
organizations connected by computers to a central office. To attain the
optimum level of vertical integration, a firm must focus on its core business.
Anything not essential to the business can be done cheaper and faster by
outside suppliers.
As American companies prepare for the global battles of the 21st century;
we must remember that organizations, like people, have life cycles. In their
youth, they're small and fast-growing, but as they age, they often become
big, complex, and out of touch with their markets. The firms of tomorrow
must learn how to be large and entrepreneurial.
Conclusion: Small is not better; focused is better.
Control
Every successful company uses controls to put its plans into effect, evaluate
their effectiveness, make desirable corrections, and evaluate and reward or
correct executive performance. Matters are more complicated for an
international company than for a one-country operation. In earlier chapters,
we brought out the complicating causes. They include different languages,

cultures, and attitudes; different taxes and accounting methods; different
currencies, labor costs, and market sizes; different degrees of political
stability and security for personnel and property; and many more. For these
reasons, international companies need controls even more than do domestic
ones.
Subsidiaries, 100 Percent Owned
The words subsidiaries and affiliates sometimes are used interchangeably,

and we shall examine first the control of those in which the parent has
100 percent ownership. This avoids for now the additional complications of
joint ventures or subsidiaries in which the parent has less than 100 percent
ownership. We shall deal with those later in the chapter.
Where Are Decisions Made?
There are three possibilities. Two of them are that all decisions are made at
either the international company headquarters or the subsidiary level.
Theoretically, all decisions could be made at one location or the other.
As common sense would indicate, they are not; instead, some decisions are
made at one place, some are made at the other place, and some are made
cooperatively. Many variables determine which decision is made where.
Some of the more significant variables are product and equipment, the
competence of subsidiary management and reliance on that management by
the headquarters and how long it has been one, the detriment of a subsidiary
for the benefit of the enterprise.
Product and Equipment
As to decision location, questions of standardization of product and

equipment and second markets can be important.
Standardize? A large global manufacturers of consumer products are

developing standardized products from the outset for global or at least
regional markets. In these situations, the affiliates have to follow company
policy. Of course, the representatives of the affiliates have an opportunity to
take part in the product design, contrary to the way new products were
introduced before the globalization strategy became so popular. Then, the
international product life cycle, new products often have been introduced
first in the home market. After the production process has been stabilized,
the specifications are sent to the affiliates (second markets) for local
production, where adaptations can be made if the local managements
deemed them necessary for their markets.
In a firm without a global product policy, the preference of the operations

management people in the home office has always been to standardize the
product or at least the production process in as many overseas plants as
possible. If, however, any subsidiary can demonstrate that the profit
potential is greater for a product tailored for its own market than what the
company would realize from global standardization, the subsidiary
ordinarily is allowed to proceed. Of course, the decision in such a case is
cooperative in that the parent has the power to veto or override its
subsidiary's decision.
Competence of Subsidiary Management and Headquarters'

Reliance on It
Reliance on subsidiary management can depend on how well the executives

know one another and how well they know company policies, on whether
headquarters management feels that it understands host country conditions,
on the distances between the home country and the host countries, and on
how big and old the parent company is.
Moving Executives Around. Many ICs have a policy of transferring

promising management personnel between parent headquarters and
subsidiaries and among subsidiaries. Thus, the manager learns firsthand the
policies of headquarters and the problems of putting those policies into
effect at subsidiary levels.
A result of such transfers, which is difficult to measure but nevertheless

important, is a network of intra-IC personal relationships. This tends to
increase the confidence of executives in one another and to make
communication among executives easier and less subject to error.
Another development is that some ICs have moved their regional executives
into headquarters to improve communications and reduce cost.
Understanding Host Country Conditions. One element in the degree of

headquarters' reliance on subsidiary management is the familiarity of
headquarters with conditions in the subsidiary's host country. The less
familiar or the more different conditions in the host country are perceived to
be, the more likely headquarters is to rely on subsidiary management.
How Far Away Is the Host Country? Another element in the degree of
headquarters' reliance on subsidiary management is the distance of the host
country from home headquarters.
Thus, over time, the headquarters of a successful company is run by

experienced executives who are confident of their knowledge of the
business in the home and host countries and in combinations thereof.
It follows that in larger, older organizations, more decisions are made al

headquarters and fewer arc delegated to subsidiaries. Smaller companies, in
business for shorter periods of lime, tend to be able to afford fewer
internationally experienced executives and will not have had time to
develop them internally. Smaller, newer companies often have no choice but
to delegate decisions to subsidiary managements.
Benefiting the Enterprise to the Detriment of a Subsidiary
An international company (IC) has opportunities to source raw materials

and components, locate factories, allocate orders, and govern intrafirm
pricing that are not available to a non-IC. Such activities may be beneficial
to the enterprise yet may result in a subsidiary detriment.
Moving Production Factors. For any number of reasons, an IC may decide

to move factors of production from one country to another or to expand in
one country in preference to another. In addition to the cost, availability or
skill levels of labor, other possible reasons include such factors as taxation,
market, currency, and political stability issues.
The subsidiary from which factors are being taken would be unenthusiastic.
Its management would be slow, at best, to cut the company's capacity.
Headquarters would make such decisions.
Which Subsidiary Gets the Order? Similarly, if an order says, from an

Argentine customer could be filled from a subsidiary in France or another in
South Africa or a third in Brazil, parent headquarters might decide which
subsidiary gets the business. Among the considerations in the decision
would be transportation costs, production costs, comparative tariff rates,
customers' currency restrictions, comparative order backlogs, and taxes.
Having such a decision made by IC headquarters avoids price competition
among members of the same IC group.
Multi country production. Frequently, the size of the market in a single

country is too small to permit economies of scale in manufacturing an entire
industrial product for that one market.
Thus, one country makes the engine, a second country has the body-
stamping plant, a third makes the transmission, and so forth. In this fashion,
each operation achieves the efficiency and cost savings of economies of

scale. Of course, this kind of multinational production demands a high
degree of IC headquarters control and coordination.
Which Subsidiary Books the Profit? In certain circumstances, an IC may

have some choice of two or more countries in which to declare profits. Such
circumstances may arise where two or more units of the IC cooperate in
supplying components or services under a contract with a customer
unrelated to any part of the IC. Under these conditions, there may be
opportunities to allocate higher prices to one unit or subsidiary and lower
prices to another within the global price to the customer.
If the host country of one of the subsidiaries has lower taxes than the other
host countries, it would be natural to try to maximize profits in the lower-
tax country and minimize them in the higher-tax country. Other differences
between host countries could dictate the allocation of profit to or from the
subsidiaries located there. Such differences could include currency controls,
labor relations, political climate, and social unrest. It is sensible to direct or
allocate as much profit as reasonably possible to subsidiaries in countries
with the fewest currency controls, the best labor relations and political
climate, and the least social unrest.
The intrafirm transaction may also give a company choices regarding profit
location. Pricing between members of the same enterprise is referred to as
transfer pricing, and while IC headquarters could permit undirected,
arm's-length negotiations between itself and its subsidiaries, that might not
yield the most advantageous results for the enterprise as a whole.
Price and profit allocation decisions like these are usually best made at
parent company headquarters, which is supposed to maintain the overall
view, looking out for the best interests of the enterprise. Naturally,
subsidiary management does not gladly make decisions to accept lower
profits, largely because its evaluation may suffer.
2.5 Organizational Culture
Organizational culture refers to the values, beliefs and attitudes that

influence decision-making and behavior within a company.
We can consider culture in several ways.
Here, we shall consider the following aspects of what constitutes

organizational culture and review their implications for the international
business.
Country influences
Company factors
Management style and structure
Employee composition
Country Influences
All companies originate from a particular country. For many companies

their organizational culture is strongly determined by their country of
origin. We have mentioned on a number of occasions how Japanese
companies differ in their organizational approach. Japanese society is
characterized by politeness and consensus decision-making; therefore
organizational culture will be different from the typical US company with
its stronger emphasis on directness and individualism.
The strength of the country influence on the company will vary. Companies
with a macro pyramid structure might be influenced by the location of the
central headquarters, which in turn is invariably based in the origins of the
company.
Company Factors
Company factors will revolve around the history and age of the company.
Companies that are new will have a different set of values from companies
that have been established for a long time. The origins of the company in
craft practices might influence attitudes in the company long after
production techniques have changed.
For example, a company with an ethnocentric orientation may find it

difficult to develop international markets, because the company is centered
on the home market production might find it difficult to spare the time in
the production schedule to produce a strange foreign order; the advertising
manager might be more interested in the home market. On the other hand, a
polycentric orientation will limit standardization and co-operation, and
regiocentric will concentrate on one part of the world to the exclusion of
other opportunities. Geocentric culture will be much more expansionist
although it might, however, result in lost opportunities at the country level.
Management Style and Structure
The values of managers are influential in shaping the culture of the

company. Companies can evolve into recruiting a certain type of manager to
perpetuate the existing management style. Different types of management

style are related to those managers who seek to defend the existing business,
those that are more entrepreneurial by constantly looking for new market
opportunities, and those managers who look for more careful growth
through the rigorous analysis of market opportunity.
In considering management style, we find that some management styles

might be culturally related. For example, Chinese managers might be very
hard-working and inclined to consider higher risk markets and product
developments. UK managers have sometimes been criticized for failing to
take risks. They have tended to avoid commercializing the apparent
opportunities that have developed out of research and development programs.
Management structure can also influence the culture of the company.

The controls are fewer but the fear engendered in failing to achieve the
financial objectives can substantially invade the culture of the company.
Employee Composition
Most companies start by employing people from within their own culture
and/or nation state. In some countries this will mean the same thing for
example, most people in Japan are Japanese and therefore Japanese
companies located in Japan will employ Japanese people. A company in the
US, though, whilst employing US citizens, might employ people from a
wide range of cultural influences some employees might be of Italian,
Irish, Dutch, Puerto Rican or Mexican origin. The degree of international
spread incorporated within the company will initially, therefore, depend
considerably on the country and the employment policies of the company.
Growth in the company and in its involvement in international markets will

result in the employment of more and more people from different cultures
and different countries. The company can seek to develop a more
international organization by recruiting, training and developing, and
promoting people of different nationalities to achieve a team of multi-
cultural international managers.
The company can make choices about the use of expatriates to staff its
international operations. The extensive use of expatriate managers on short
to medium assignments of six months to three years will provide expertise
and consistency to the remoter parts of the organization. However, the
damage caused is in the slowing down of a more international organization.
It is the transnational organization that will be particularly anxious to
develop a team of very experienced and culturally sensitive international
managers. The need to develop equidistant managers in the true global

business is vital. Such managers develop and respond to the most important
strategic issues wherever they arise around the globe. This contrasts with the
typical manager who tends to be most influenced by home-country events.
The international company could use expatriates, nationals or global

managers. For many companies, expatriates have been used whilst the
managers taken on at national level are developed to reach the company
standard. Once the national managers have shown their ability to perform,
expatriate managers are used less and less frequently. The more successful
national managers will be promoted into international positions.
The global manager, with equidistant cultural abilities, is quite rare. It is

arguable whether there are companies that are operating on a truly global
basis. However, it is certainly true that there is a shortage of international
managers with a high level of country-specific knowledge across many
countries and a cultural awareness that enables them to analyze, develop and
implement successful strategies.
We shall discuss the issue of deciding between using expatriates, nationals

or global managers in more detail in the next section, together with the
related issue of whether to use in-house or external resources.
2.6 Staffing the International Business
As companies grow and become more dependent upon international

business to contribute to their total sales revenue and profits, they will
employ more and more people internationally. The ways in which staff
is deployed is of great importance and we shall examine three aspects of
this in this section,
The capability of an organization to manage its tasks effectively is both
an in-house and an external resources decision. Whilst lower cost is an
important factor in the decision to use external resources, there are
important cultural benefits to be gained from using locally based
agencies and consultancies.
Expatriates have been used by many multinational organizations to
inject unavailable local expertise. They have also been used to provide
glue for the organization. The movement of expatriates from
corporate headquarters to subsidiaries around the world provides the
means to diffuse the culture of the company.
Whilst expatriates can help the control and co-ordination of the

company, they can block the development of local managers; a
challenge facing management in the future is how to develop local
management and to develop multicultural management teams. These
times will be based on talent rather than on headquarters country
citizenship. For the world's largest companies the equidistant manager
will be the very difficult goal.
In-House and External Resources
The general trend in many businesses is use direct employment of people

within the organization to concentrate on the main activities of the business.
For activities that are undertaken less frequently or are less central to the
company, the organization will buy-in agencies, consultancies and people
on short-term contracts it will use external resources.
For example, in the marketing area, many functions can be bought-in from
outside. It is common to use advertising agencies their use being based
primarily on the cost-saving advantages derived through the commission
system. In areas such as logistics, the use of external resources will be
justified partly through cost savings and partly through the need to buy-in
specialist expertise that is not available in-house for example, freight
forwarders can use their considerable knowledge of freight handling and
international transport systems to make cost-saving, efficient decisions. The
infrequent exporter, on the other hand, will lack information about the best
possible routes and price deals available. Because of a lack of consistent
throughput of export orders, the infrequent exporter will not need to employ
people on a full-time basis. This then becomes a vicious circle because
without full-time specialist people working in-house, the company will not
develop experience of the rapidly changing world of international logistics.
Review Questions
Present the stages of the evolution of the global company.

Centralization versus decentralization in global companies.
Explain the trends in company organization.
3
CULTURE
AND INTERNATIONAL
BUSINESS
The national characteristics you encounter in this chapter and elsewhere

are generalizations. They are broadly true, but there are always exceptions.
Furthermore, characteristics change over time.
Before we examine the significance of culture for international

businesspeople, let us first define culture.
Although there are almost as many definitions of culture as there are

anthropologists, most anthropologists view culture as the sum total of the
beliefs, rules, techniques, institutions, and artifacts that characterize human
populations.
Culture is the shared values and beliefs of a society its design for living.
However, with such an all-embracing issue as this, precise definitions rarely
give usable meanings. Thus, within the culture of most societies, there are
almost always a variety of different subcultures for example youth
culture, student culture and so on.
Culture is learnt and the main force for transmission of whatever type of
culture is the reference groups to which individuals belong. In this way,
therefore, culture may also be thought of as the way in which people interact
with each other in a group that shares some common sense of belonging.
In other words, culture consists of the learned patterns of behavior common

to the members of a given society' the unique lifestyle of a particular
group of people/ Most anthropologists also agrees that:
Culture is learned, not innate.
The various aspects of culture are interrelated.
Culture is shared.
Culture defines the boundaries of different groups.
Because society is composed of people and their culture, it is virtually

impossible to speak of one without referring to the other. Anthropologists
often use the terms interchangeably or combine them into one word
sociocultural. This is the term we shall use, because the variables in which
businesspeople are interested are both social and cultural.
When people work in societies and cultures that differ from their own, the
problems they encounter in dealing with a single set of cultures are
multiplied by the number of cultural sets they find in each of their foreign
markets.
All too often, unfortunately, people who are familiar with only one cultural
pattern may believe they have an awareness of cultural differences
elsewhere, when in reality they do not. Unless they have had occasion to
make comparisons with other cultures, they are probably not even aware of
the important features of their own. They are probably also oblivious to the
fact that many societies consider their culture superior to all others
(ethnocentricity) and that their attempts to introduce the "German way" or
the American way may be met with stubborn resistance.
Business and marketing strategy, whether it be at home or abroad, can only

be effective if it is developed to meet the specific needs of a target group.
In this study unit, we will use a structured way of analyzing the external
environment which faces the company in an international setting and which,
importantly, influences the purchasing decisions of the customer.
Although there are a number of ways in which this may be approached, the
most common form of analysis in marketing is characterized by the initials
SLEPT looking at social (or social/cultural), legal, economic, political and
technological factors. We shall use this approach and consider each element
separately.
In addition to the SLEPT factors, we will also look at the significance of the
C factors Countries, Currencies and Competitors. These too have a
substantial influence on the external environment of international business.
Finally, we will also look at additional and increasingly important ethical,

social and green considerations in the international business environment,
together with the role of pressure groups.
Culture and International Business
3.1 Socio-Cultural Factors
Culture and Values
The word culture is often used loosely in everyday language to describe a

number of quite distinct concepts; for example, the word is often used to
describe concepts such as organisational culture as well as arts and
culture. What all of these concepts have in common is the implication that
culture is an abstract entity which involves a number of usually man-made,
collective and shared artifacts, behavioral patterns, values or other concepts
which taken together form the culture as a whole. For example, people in an
organisation are said to share the organisational culture yet, at the same
time, they define the organisational culture.
Historically, the word derives from the Latin word colere, which could be
translated as to build, to care for, to plant or to cultivate. Thus
culture usually referres to something that is derived from, or created by
the intervention of humans culture is cultivated. With this definition in
mind, the word culture is often used to describe something refined,
especially high culture, or describing the concept of selected, valuable and
cultivated artefacts of a society.
On a more basic level, culture has been used to describe the modus
operandi of a group of people, such as implied by organisational culture.
This concept of culture implies not only the shared modus operandi but also
the shared values that underpin the modus operandi. A company can be said,
for example, to have a highly competitive culture, thus implying that
competitiveness is valued highly within that company, or in other words
forms a core value within the company as a whole. Hence it can be argued,
that competitiveness is a shared value among those people working in that
company. It also implies that the company as a whole will behave very
competitively in the way it is conducting its business. Thus the concept
describes both the underlying value as well as the behaviour that can be
observed. Notably, the concept does not necessarily imply that all
employees share the same value to the same degree, but it does imply that
the employees will be more likely to share the common value, and express
it, if not necessarily individually, then collectively. On a broader scale,
Triandis introduced the concept of subjective culture, or a characteristic
way of perceiving its social environment (Triandis, 1972, p. viii) common
to a culture. Based on these perceptions, and what has been perceived to
work well in the past, values are passed on from generation to generation.
Not surprisingly this concept of shared values resulting in shared behavior

and artifacts has also been applied to other groups outside ones own group
or society. For example, Kroeber & Kluckhohn definition of culture reads
Culture consists of patterns, explicit and implicit, of and for behavior
acquired and transmitted by symbols, constituting the distinctive
achievements of human groups, including their embodiment in artifacts; the
essential core of culture consists of traditional (i.e. historically derived and
selected) ideas and especially their attached values; culture systems may, on
the one hand, be considered as products of action, on the other, as
conditional elements of future action. (Kroeber & Kluckhohn 1952, p. 181;
cited by Adler 1997, p. 14)
This definition implies the existence of a larger culture (or meta-culture)

of the different cultures that make up ones societys culture. Using this
concept, it is implied that one can distinguish between the culture of the
society of which one forms part and the culture of another society at large,
of which one does not form part. This concept is manifest in the usage of the
word culture when talking about, for example, the French culture or
the multifaceted values and resulting behaviour and artifacts that abstractly
represent France, the French society as well as the French person at a high
level of abstraction. In other words, the concept of French culture implies
that the society shares certain values and exhibits resultant behavior and
artifacts, which can easily be distinguished from other cultures, such as
the German culture or the Spanish culture.
The idea of a shared, yet distinctive, set of values held by one society with
resulting behavior and artifacts is also fundamental to the basic idea of
culture within the realm of intercultural communication. Hofstede (2001)
defined culture as the collective programming of the mind which
distinguishes the member of one group or category of people from
another(p. 9). The mind stands for head, heart, and hands that is, for
thinking, feeling, and acting, with consequences for belifs, attitudes, and
skills. Hofstede expands the concept of collective programming by
suggesting that culture could therefore be situated between human nature,
which is not programmed, nor programmable on the one side and the
individuals personality on the other side. This idea of the culture in the
individual is particularly useful for explaining the concept of culture on the
one side as well as allowing for the diversity of individual personalities
within any one culture.
Another concept of culture, yet not a contradictory but rather refining

concept, is put forward by Hall. Hall (1983) views culture as often
subconscious. He compares culture to an invisible control mechanism
operating in our thoughts. In his view, men become only aware of this control
mechanism when it is severely challenged, for example by exposure to a
different culture. Hall believes that members of a given society, internalise the
cultural components of that society, and act within the limits as set out by
what is culturally acceptable: Culture has always dictated where to draw
the line separating one thing from another. These lines are arbitrary, but once
learned and internalised they are treated as real. (1983, p. 230).
The above definitions see culture as a concept that is subconscious most of

the time, and which represents a set of shared values that manifest
themselves in the behavior and other artifacts of a given group. Culture is
also programmed or learned, i.e. it does not form part of the human
nature and it is distinct from individual personality, however it is shared by
the members of one group.
As indicated above, culture consists of various levels. At the most

rudimentary, culture consists of two levels: a level of values, or an
invisible level, and a visible level of resultant behavior or artifacts of some
form. This view of culture is embodied in the popular iceberg model of
culture. The idea behind this model is that culture can be pictured as an
iceberg: only a very small portion of the iceberg is visible above the
waterline. However, the tip of the iceberg is in fact supported by a much
larger, although invisible, part underneath the waterline. This part of the
iceberg is its foundation.
The social/cultural element is particularly important in SLEPT analysis and

plays a considerable part in determining how the legal, economic, political
and technological elements work.
It is important at the outset, though, to raise a word of caution in looking at

these factors. There is sometimes a tendency to treat social and cultural
differences in a rather superficial way by thinking about stereotypes for
example, the British as being reserved, Americans as being loud,
Afro-Caribbean as being colorful and gregarious, etc. This is a dangerous
oversimplification and needs always to be avoided.
We have linked social and cultural factors together because they are so
inextricably connected.
Social factors are reasonably straightforward to identify in terms of the

concepts of reference groups, social roles and status.
Reference groups are all those groups that have a direct or an indirect
influence on a person's attitude or behavior. These include family
groups, friendship groups, workplace groups, religious groups and
professional groups. The family probably represents the most important
primary reference group that will influence a person's life.
In each group to which a person belongs (and it is important that we

remember that individuals will belong to a number of groups), his or
her actions and influence in that group will be determined by the role
and status of the position held. For example, a woman within a family
may have a number of roles - wife, mother, daughter, etc. If she also has
paid employment, her role and position within the organization in
which she works is likely to be very different from that or those within
the family.
But what influences these reference groups? Why do they behave the way
they do? Thinking of the family it is easy to see that this varies a great deal
from country to country. The answer is culture.
One of the reasons that culture is so difficult to define is because it has so

many elements that interrelate and change over time. One way of analyzing
it is to seek categories of significant elements as in the following diagram.
You can probably add a number of other elements each of these categories,
or even as sub-divisions of individual elements themselves. To illustrate the
complexities involved, consider language. This is often a first consideration
in looking at an international market. However, not all countries are
linguistically homogeneous India or Nigeria, for example, comprise a few
hundred subcultures, each with its own language or dialect and who
communicate only in a national context with a common language. In a
business context, this situation creates further complexities by the need
translation and, hence the communication becomes vulnerable to distortion.
Figure 3.1 Elements of Culture
There have been many attempts over the years to devise a method of testing
for cultural significance across countries. The 72 cultural universals
devised by Murdock (1945), listed below, identify elements that can be
found, in some form, in all societies.
Figure 3.2 Common Cultural Elements
Age grading Food taboos Music

Athletic sports Funeral rites Mythology
Bodily adornment Games Numerals
Calendar Gestures Obstetrics
Cleanliness training Gift giving Penal sanctions
Community organization Government Personal names
Cooking Greetings Population policy
Co-operative labor Hairstyles Postnatal care
Cosmology Hospitality Pregnancy usages
Courtship Housing hygiene Property rights
Dancing Incest taboos Propitiation of
Decorative art Inheritance rules supernatural beings
Divination Joking Puberty customs
Division of labor Kin groups Religious rituals
Dream interpretation Kinship nomenclature Residence rules
Education Language Sexual restrictions
Eschatology Law Soul concepts
Ethics Luck superstitions Status differentiation
Ethno botany Magic Surgery
Etiquette Marriage Tool making
Faith healing Mealtimes Trade
* Family Medicine Visiting
Feasting Modesty concerning Weaning
Fire making natural functions Weather control
Folklore Mourning
Culture and Business
Comparisons of culture by identification of the differences and similarities

in these elements are the most effective way of utilizing such a broad range
of variables. For businesses considering international markets it is essential
to be aware of these cultural differences.
(a) Self-reference criterion (SRC)

It is very easy to use one's own cultural experience and values when
viewing other people and cultures. In fact, it is almost impossible not
to. In international business, though, the ability to think about other
cultures from a culturally neutral standpoint can be very useful. It is
the key to being able to identify differences in behavior, markets and
systems resulting from differences in culture and thus understanding
the requirements of trading with and within another culture.
In 1966, Lee used the term self-reference criterion (SRC) as

describing the approach of judging other cultural values and practices
based upon ones own cultural standpoint. He went on to suggest a
four-step approach to avoid it. The steps are:
(i) Define the situation, problem or goal in terms of the home

country cultural traits, habits and norms.
(ii) Define the situation, problem or goal in terms of the foreign
culture traits, habits and norms.
(iii) Isolate the SRC influences in the definitions and examine them
carefully to see how they complicate consideration of the issue.
(iv) Redefine the situation, problem or goal without the SRC
influence and derive a specification or solution which is
appropriate for the foreign market.
Let's approach is a logical way to reduce cultural difficulties.
However, in practice it is quite difficult to be sure that step (ii) is
carried out accurately. Accurate definition of problems in terms of a
foreign culture needs a good knowledge of that culture. Without this it
will be far too SRC biased and may result in inappropriate actions -
for example, offensive or misleading brand names being used arid
irrelevant product features being promoted.
(b) High and Low Context Cultures

In communication, some information is transmitted by spoken and
written language and some by the context or setting within which the
language is used. The relative importance of these two means of
transmission within a culture can have important consequences for
business communications.
Using this criterion, it is possible to classify cultures into:

low context cultures those where most information results from
the language itself; and
high context cultures those where much information is
communicated by the context within which the communication
takes places.
We can place societies into these two broad categories as a guide to
the use of communication -for example:
High Context Cultures Low Context Cultures

Japanese German
Mediterranean English
Asian Scandinavian
Arab American
The importance of this distinction can be seen if we consider some of the

facets of business communications and processes outside of the purely
written or spoken word.
(i) Body language
This is a key element of oral communication and may serve to confirm
or refute the message conveyed as well as giving information about the
understanding and attitudes of the participants. Its importance can be
magnified when communicating in a different culture from one's own,
when the role and significance of the messages conveyed by body
language may be also is different. In high context cultures, adherence to
particular norms of behaviour and appearance considered appropriate to
the setting within which personal interactions take place can be much
more important than in low context cultures.
(ii) Time
Consider the following questions:
What is the importance of punctuality for meetings?
Is late arrival deemed to be discourteous?
Are meetings well planned and do they run to schedule?
In a high context culture, establishing mutual understanding and
developing friendship are seen as highly important. Time constraints
will not necessarily take precedence over this and, therefore, it may be
quite normal for meetings to overrun or to start late, or for individual

punctuality not to be considered particularly important. In contrast,
these norms of behaviour are likely to be a sign of inefficiency by
participants from a low context culture.
(iii) Space
Space should be looked at in two ways; physical space and personal
space for example, does physical space confer status (in, say, office
size) and how close is it acceptable to get to people? Again, these
elements are culturally conditioned. In high context cultures, for
example, it is more normal for there people to feel comfortable close
together and distance between participants may be a sign of coldness.
(iv) Friendship
In high context cultures, deals often relate more to the people that you
know and, therefore, social interaction and developing friendships is a
key aspect to business. In low context cultures the UK and US are
good examples friendship may be useful, but it is the contractual
quality of the deal that is all-important.
(v) Contracts
The way in which contracts are negotiated differs. Lengthy haggling is
normal in high context cultures and various inducements to purchase,
which could be thought of as bribes in the US and UK, may not only be
acceptable but also expected.
The way in which contracts are interpreted and delivery monitored also
varies. In high context cultures, it is expected that friends will help each
other out. In low context cultures it is more likely that lawyers will be
brought in to argue interpretation and resolve difficulties.
These issues highlight the need for the international marketing manager to
be aware of the dissimilarities in an international market. We must
remember, however, that it is as important to identify the similarities and to
ensure that best advantage can be gained from them.
(c) The Cultural Sensitivity of Products and Services
The products and services offered for sale in a particular society, and the
way in which they are offered for sale, have to be acceptable to that
society, hi the main, consumer products are more culturally sensitive than
business-to-business products, and those that are closest to the core
beliefs of culture are the most sensitive of all. Often these relate to family
and religion gatherings.
Food is particularly culturally sensitive because it has strong symbolic

values which have been reinforced from our youngest days within a family.
For example, in the UK, although the traditional Sunday lunch is much less
usual nowadays, it still conjures up for British people a set of images that
will cover the food served, the time it is served, the formality of the
proceedings, etc. In contrast, a comparable meal in say France, a country
quite close to the UK, will have significant differences the time, the food,
the drink, the length of time it takes to finish the meal and the acceptable
behavior of children. Pork is probably an extreme example of a food product
that carries strong taboos in some cultures for Jews and Muslims it has
particularly offensive overtones and they will not eat it. Other religions also
specify acceptable and non-acceptable foods.
Thus, when we look at products for an international market we must try to

estimate how different cultures will view those products. Note, though, that
newer products to the market, such as consumer durables, are invariably less
culturally sensitive.
Cultural Awareness in Negotiations
Negotiation is not just a matter of arriving at a contract the deal. It is a

complicated process that involves a number of factors, many of which are
culturally determined. One must never assume that the counterpart from
another culture thinks alike. Doing so can lead to misunderstanding,
frustration, and distrust, which may sour the climate of the negotiation and
even lead to failure to arrive at an agreement. Classic examples are the
question of time, disagreement on the importance of protocol, and conflicts
arising from a deal orientation versus a relationship-establishing orientation
in negotiation meetings. The question of time can create frustration and
misunderstanding between a culture emphasizing punctuality, such as
Germany, and one where punctuality is of less importance, such as in Latin
cultures. German negotiators can easily interpret Latin time as being
disrespectful if they are kept waiting. On the other hand, representatives
from Latin cultures can feel that the German emphasis on punctuality is
pushy. These conflicting reactions can create an underlying tension,
which could sour the atmosphere surrounding the negotiation. Disagreement
on the importance of protocol between formal cultures, such as Japan, and
informal cultures, such as the United States, can be equally disruptive. The
Japanese culture is characterized by rituals such as bowing and the
formalistic exchanging of business cards (with both hands), which shows
the status of the individuals and others acceptance of this status. The
American emphasis on informality and the attempt to be on a personal first-

name basis may be interpreted as disrespectful, particularly among the older
and more traditional members of a Japanese delegation. This could lead to a
loss of face, which is serious in Japanese culture and in most cases is
irreversible. Finally, the goal of the negotiation process may be totally
different for the two teams. U.S. negotiators are traditionally deal-oriented,
and the purpose of their negotiation is to arrive at a written, binding
contract. Saudi negotiators, on the other hand, are more relationship-
oriented, and their goal is to form a friendship that will be the basis of a
long-lasting business relationship. The standard saying is, establish
friendship and business will follow. Thus, a Saudi might regard an
American push for the signed contract as a sign of distrust. Furthermore, the
establishing of a relationship takes more time than many American
negotiators have budgeted. With a return ticket on a specific flight
purchased, the American may push for the conclusion of negotiations, where
the Saudi would like to take the extra time necessary to get to know his
counterpart(s).
Time Orientations
All cultures have unique concepts of time and ways of managing it.
Americans tend to worship time and manage it as though it were a tangible
and scarce resource: Time is money. Few cultures perhaps the Germans
and Swiss can compete with the American obsession with time. In most
countries, time is more flexible. Being late to an appointment, or taking a
long time to get down to business is the accepted norm in most
Mediterranean and Arab countries. Cultural time differences can be
categorized according to whether they are monochronic (sequential) or
polychronic (synchronic) and according to the culture's orientation to past,
present, and future.
Monochronic & Polychronic
Two different orientations to time exist across the world: monchronic and
polychronic. Monochronic approaches to time are linear, sequential and
involve focusing on one thing at a time. These approaches are most common
in the European-influenced cultures of the United States, Germany,
Switzerland, and Scandinavia. Japanese people also tend toward this end of
the time continuum. Polychronic orientations to time involve simultaneous
occurrences of many things and the involvement of many people. The time
it takes to complete an interaction is elastic, and more important than any
schedule. This orientation is most common in Mediterranean and Latin

cultures including France, Italy, Greece, and Mexico, as well as some
Eastern and African cultures.
Negotiators from polychronic cultures tend to:
start and end meetings at flexible times,

take breaks when it seems appropriate,
be comfortable with a high flow of information,
expect to read each others' thoughts and minds,
sometimes overlap talk,
view start times as flexible and not take lateness personally.
Negotiators from monochronic cultures tend to:

prefer prompt beginnings and endings,
schedule breaks,
deal with one agenda item at a time,
rely on specific, detailed, and explicit communication,
prefer to talk in sequence,
view lateness as devaluing or evidence of lack of respect.
Past, Present, and Future Orientations
Different cultures function according to different orientations towards the

past, present, and future. In general, cultures are either future-oriented or
past-oriented. That is, activities in the present are either designed to
influence future events or likely to be influenced by past events. In the
United States, the present is heavily influenced by the short-termed future.
Asian cultures tend to be oriented toward a more distant future. Mexicans
and many Latin cultures, on the other hand, are more heavily influenced by
the past. Part of the difference may be related to cultural concepts of control
over the environment, which may in turn be related to religious tradition.
Mexico, for instance, is usually viewed as a fatalistic culture where the past
is in control of the present and future. Americans, by contrast, have a greater
sense of control over present and future events.
Time Equals Money versus Relationship
Some cultures, America, for example, perceive time as a commodity, an

asset, and a very high importance is placed on it time equals money. The
conservation of time is therefore an efficient process in these cultures.
Punctuality is expected behavior; tardiness is unacceptable. People in other
cultures, however, do not place as much of a premium on time and
punctuality; to them, time does not equal money, and tardiness is quite
acceptable. In some cultures punctuality is viewed as unreasonable
behavior. Individuals in these cultures place a much greater premium on
relationships and a more relaxed lifestyle than do on time and punctuality.
Thus, business people in these cultures generally would be offended by

individuals applying time-oriented behavior in business transactions; they
prefer that an amicable relationship be establish before business is
conducted.
Exhibit 3.1 Relationship-oriented cultures - Guatemala
The inexperienced American visitor in Guatemala often tries to force

business relationships. The abrupt always watching the clock style is
often ineffective in Guatemala. A more informed business person would
engage in small talk about the country, show an interest in the families of
his or her associates, join them for lunch or dinner, and generally allow time
for a personal relationship to develop. This hols true for Latin America in
general.
Charles Ford, commercial attach in Guatemala
Source: Carl Rodrigues, International Management A Cultural Approach,

p. 304
Schedules
Schedules are important to individuals in some cultures, but relatively

unimportant to others. In other words, individuals in some cultures possess a
it must be done by tomorrow mentality, while people in other cultures
possess a when it gets done is when it is done mentality. Furthermore, in
some cultures what task gets done depends on task importance factors, but
in some cultures it depends on factors such as relationship.
Exhibit 3.2 Schedules Importance in Arab Countries
In the Arab East, time does not generally include schedules as Americans
know and use them. The time required to get something accomplished
depends on the relationship. More important people get fast service from
less important people, and conversely. Close relatives take absolute priority,
nonrelatives are kept waiting.

p. 304
Therefore, telling someone in the Middle East that something must be done
now or by the end of the day or by tomorrow may often prove to be a
mistake. The recipient of the direction may stop work because he or she is
placed under pressure and/or because he or she may view the person issuing
the directive as being too pushy.
Time & Decision Making
Some cultures take a long time to make important decisions; others make
them quickly. Consequently, low-level maagers in cultures that take a long
time to make important decisisons often try to heighten their work status by
taking a long time to make routine decisions. And foreign managers who try
to make important decisions quickly in these cultures are likely to
downgrade their importance in local peoples eyes.
Exhibit 3.3 Decision Making - Ethiopia
In Ethiopia, the time required for a decision is directly proportional to its

importance. This is so much the case that low-level bureaucrats there have a
way of trying to elevate the prestige of their work by taking a long time to
make up their minds. Americans in that part of the world are innocently
prone to downgrade their work in the local peoples eyes by trying to speed
things up.

p. 305
Thoughts Patterns
Another dimension of time relevant to negotiations is the focus on past,

present, or future. Cultures like Iran, India, and the Far East can be
categorized as past-oriented. They are also called circular cultures.
Individuals in these cultures believe that since they can see what happened
in the past, their past is ahead of them, and since they cannot see into the
future, their future is behind them. Many people in these cultures view
change as being bad, thus they do not see business opportunities that lie
ahead.
In contrast, some cultures thoughts patterns are linear. Linear cultures, the
United States, for example, view the past as being behind them and the
future ahead. Individuals in these cultures tend to view change as being
good and attempt to take advantage of the business opportunities they
foresee in the future.
Circular-oriented people are likely to see a future-oriented persons behavior

as forward and aggressive. Thus, people in linear cultures are far more
opened to new ideas and the setting of objectives than are people in circular
cultures.
Contract
American look at negotiations as a means of reaching a contract and stress

legality and the binding nature of a written document, which sets out rights
and duties that can be upheld in a court of law. Other cultures look at
negotiations as a means of establishing a relationship that will be the basis
of future business. For Americans, a contract is the sign of closing a deal,
while for some other cultures it begins a relationship. The emphasis on a
binding legal document may be interpreted by other cultures as a sign of
lack of trust. They often see a contract as a general outline of the present
situation, which can be altered if a new situation arises. Thus, for legalistic
cultures, such as Western European and North American, the Oriental
tendency to look at a contract as a point of departure is very frustrating. The
legalist interprets changes in a contract as breach of contract, which can be
brought to court. Many Oriental negotiators feel that if a situation changes,
the agreement should change, and that the original agreement was a
statement of principles that can be worked out over time if the relationship
between the two sides is good.
Deal versus Relationship
A basic source of misunderstanding is an emphasis on making a deal versus

establishing a relationship. Making a deal is typical of legalistic cultures
such as Western European and North American, whereas establishing a
relationship is typical of Oriental, Latin American and Arab cultures.
Of course, building trust and rapport with the customer is important
everywhere in the world, not only in relationship-oriented cultures.
The difference is that with Arabs, Africans, Latin Americans and most
Asians one has to develop that climate of trust before one starts talking
business. In these cultures first one makes a friend, then a deal.
Legalistic cultures try to establish an airtight contract that takes into

consideration all contingencies. Members of a relationship-oriented culture
realize that the world is not static and unanticipated changes will occur that
will require the reinterpretation of the original agreement. Thus, when a
Japanese businessman seeks to modify a contract, the American will likely
feel that he is being cheated. Whereas the Japanese will likely feel that
theAmerican is being unreasonabely rigid and distrustful. The difference in
emphasis on deal versus relationship may even affect the emphasis on the
negotiation. A Japanese or a Chinese negotiator will likely begin with an
agreement on general principles, while an American will begin with specific
details.
In relationship-oriented cultures the relationship one builds with a

counterpart will have a strong personal component in addition to the
company-to-company aspect. The customer or partner will want also a
personal commitment in addition to the companys to the success of the
venture. For example, a Japanese partner may want to be able to phone at
any hour of the day or night to solve problems and smooth out difficulties.
And because of this personal element it is important that continuity is
maintained as far as possible throughtout the relationship.
Naturally, the emphasis on building a relationship results in a more

prolonged negotiation period. The American impatience to close the deal
might not consider the importance of establishing a sound relationship,
which is disconcerting for representatives of relationship-oriented cultures.
Failure to recognize the importance of personal relationship can undermine
the basic foundation of a working relationship. It is almost contradictory that
American, who are extremely social, often place so little emphasis on
relationship-building in international negotiations.
Exhibit 3.4 Getting to Know Each Other

Lars Larsen and his technical colleague Christina are the representatives of
the Danish manufacturer, Danmark Widgets. The company is looking for a
distributor on the Japanese market. The first meeting with Nihon World
Widgets, a potential Japanese partner, starts with the elaborate greeting
ritual of the meishi, the formal exchange of business cards. Lubricated with
large quantities of tea the two sides then dialogue about everything on earth
except the matter that brought them together: widgets.
The visitors answer polite questions about Copenhagen and Denmark and
respond with a similar number of questions about Tokyo and Japan. The two
sides discuss weather, sports, music, movies all part of the relationship-
oriented cultures getting to know you game.
Nor are Christina and Kars surprised when the meeting ends without a single
mention of business. When Watanabe-san suggests another meeting on
Wednesday they accept his offer of arranging transport back to their hotel.
The second meeting with NWW again ends without a discussion of widgets.
But this time Watanabe-san invites his visitors to a Japanese restaurant
dinner a good omen.
At the restaurant the four Japanese men are impressed with the elegant way
Christina handels her chopsticks. Lars is somewhat less adept with the
unfamiliar utensils but shows that he can sip his sake with aplomb, but it is
when the dinner is over that Christina really demonstrates her thorough
grasp of the Japanese social protocol. She suddenly puts a hand to her
temple and excuses herself politely. Watanabe-san, Im sorry. I seem to
have developed a rather bad headache. Would you mind terribly if I go back
to the hotel now?
Of course, Mr. Watanabe does not mind! This diplomatic headache frees the
men to spend the next three or four hours in the way they should: building a
relationship over beer, karaoke and whisky. Probably a good deal of each.
So it is no great surprise when at next mornings meeting it is Christina who
leads the Danish side of the business meeting whilr Lars gulps quantities of
white aspirin and black coffee. The Japanese now feel they know their
foreign counterparts well enough to discuss business. They signal their
readiness by asking a number of detailed questions about those famous
Superwidhgets.
Source: Richard R. Gesteland, Cross-Cultural Business Behavior, p. 28
Protocol
Protocol concerns the importance of the forml aspect of the negotiation.

It includes aspects such as how to address people (first or last mane), use of
titles, dress, gift giving, exchance of business cards, the respect of age, the
shape of the negotiating table, the palcement of negotiators, etiquette of
conducting business over meal, and so forth. Americans are informal and
have a tendency to over-look the importance of protocol, which can be
interpreted as impoliteness. Protocol functions to establish a relationship, an
those who overlook the importance of relationship may overlook the
importance of protocol. It helps to establish respect through gift giving and
business card exchange, and respect for culturally determined rules of the
game. Failure to consider protocol can be interpreted as both a persona
affront and an affront to the culture of ones counterparts. Americans have
the tendency to address the member of the other team that speaks English
best, thus overlooking a senior member of the other team, an act which
ignores seniority and implicitly shows disrespect to the point of cusing loss
of face. As protocol establishes a recognition of seniority among
counterparts, failure to observe it can be equal to an unintentional insult. In
analyzing ones counterparts, one has to decide both how important protocol
is and what aspects of protocol are important.
Gift Giving
In some cultures, gifts are expected, and failure to present them is

considered an insult, whereas in others, offering gift is considered offensive.
For example, gifts are rarely exchanged in Germany and are usually
inappropiate. The present may be given during the initial visit or afterwards,
in private or on public. For instance, in Japan, where gift-giving is an
important part if doing business (it helps symbolize the depth and strength
of a business relationship), the exchanging of gifts usually takes place at the
first meeting. The gift given to a Japanese associate should consist of
multiple contents that can be shared with the group. The type of gift given
also varies from one culture to another. For example, white flowers are
typically not given in Asia, where the color white is symbolic of death. In
China, giving a clock shakes the superstitious. The phrase to give a clock
sounds like a Chinese expression that means to care for a dying patient. In
Belgium, gift-giving is not a normal custom flowers may be given as a gift
when invited to someones home, but not chrysanthemums, as they are used
mainly for funerals.
Exhibit 3.5 Business Gifts
WHAT to give: watch out for culture-specific taboos. Avoid sharp objects
such as knives in some cultures they symbolize the ending of a relationship.
In china avoid clocks and watches. They bring bad luck because the word for
clock sounds like another Chinese word which refers to death.
Good choices are good quality writing instruments, branded whiskey or
cognac (in non-muslim countries), picture books about your city, region or
country and products your home country is famous for.
WHEN to give: In Europe, after the agreement is signed. In Japan and most
other Asian countries at the end of the meeting. Note that North America is
not a gift-giving culture. Many companies have strict policies concerning
gifts, especially for people with purchasing responsibilities.
HOW to give: In Japan the wrapping of the gift is more important than the
gift itself. In Japan and the rest of Asia present and receive any gift with
both hands except in Thailand where you hand over the present with your
right hand supported by your left. In Asia your gift will probably be
unwrapped after you leave. In Europe and North and South America it will
more likely be opened in front of you.
Greetings
Knowledge of a cultures greeting behavior is important because first

impressions are important to the development of relationships. Many
cultures use a handshake as a major form of greeting, some use a hug, some
a combination of a handshake and a hug, but some cultures do not greet by
touching. For example, Australians and American use a strong handshake,
but the French use a light, gentle, single shake. Many Latin European
cultures greet with an abrazo a combination of handshake, hug, and
shoulder pats. The Japanese greeting involves a bow, and the Laotian
greeting involves bringing palms together in prayer-like form and bowing.
In many cultures kissing hand, cheek or lips is used as a form of
greeting. Non-Europeans visitors tend to be perplexed by the variety of
kissing rituals in the multicultural mosaic that is Europe. Whether one
wishes to participate or not in these rituals, there are some things one should
know: it is a custom to kiss and be kissed the first time one meets someone;
when kissing a womans hand or cheek one does not actually touch the skin,
but kisses the air a few milimeters from her hand or cheek; as concerns
cheek-kissing, the proper British usually kiss just once (on the right cheek),
the French twice (left, right) and the passionate Belgians three times (left,
right, left); the reticent Germans seem to do very little cheek-kissing. Like
the Italians and Spanish, a German is more likely to kiss a womans hand;
the Russians use to greet their visitors, eve the male ones, by kissing them
on the lips while enfolding them in a great bear hug.
Apart from the non-verbal greetings, the verbal ones also play a very
important role in showing proper consideration. However, most of the
expressions used are standard, sometimes rethorical expressions, calling
only for an automatic response. For instance Americans say Hi, how are
you?. Some Asians and Europeans seem to be confused by this question,
thinking the American is actually asking after their health. In fact it is a
meaningless expression calling for the automatic response Fine! How are
you? whereupon everyone gets right down to business. Many Europeans
consider the Americans superficial for not actually waiting for a response.
Unlike the Americans, the Germans are likely to ask Wie geht es Ihnen?
only if one has been ill and they want to know if one has recovered. But
Europeans also use many aparently meaningless mantras when being
introduced to someone for the first time. Germans for example will say:
Sehr angenehm, meaning it is a great pleasure to meet you!. But how
can one know it is going to be such a great pleasure when one does not even
know you? But the Germans are not the only Europeans using phrases like
this. When introduced to a British, he/she will say Pleasure to meet you!,
while a French will say Enchant!, which literally translates into I am
enchanted to meet you!
Decision Making
Approaches to decision making can be divided into individual and

consensus. While in American teams the decision-making power often lies
in the hands of individuals, other cultures emphasize group agreement by
consensus, which naturally takes longer to achieve. Several negotiation
experts have characterized the American approach as a John Wayne style
where an individual arrives on the scene, conducts the negotiations as
quickly as possible, and hopes to leave with a signed contract. This
individualistic approach has several drawbacks. First, it is Monochronic,
second, it overlooks the importance of establishing relationship, and third it
can lead to excessive ego involvement. Believing that success or failure is
individual, the John Wayne negotiator may take his counterparts maneuvers
personally and emotionally and lose his calm objectivity. This may lead to
overreaction, which may decrease his effectiveness as a negotiator as well as
poison the personal relationship between himself and his counterparts.
Another problem can arise through misinterpreting the decision making
process. Members of a team from a individualistic culture may conclude that
the members of the negotiating team have the power to make the final
decision. They will then be frustrated to find out that an agreement which
they thought was final will be submitted to a larger group for approval.
By then, they have stated their position, which makes them vulnerable, and
the senior official of the other team can keep what is acceptable and demand
that the rest be renegotiated.
An individual versus consensus approach will also impact on the concession

process. An individual approach will allow for more flexibility in
concession making. American teams tend to begin with an ideal contract and
then make concessions until a compromise is reached. However, consensus-
oriented teams have very little leeway in making concessions due to the
difficulty they have in reaching consensus in their group. The consensus
approach makes concessions difficult for the Japanese. The Russians often
adopt an even more inflexible position, since they view compromise as a
sign of weakness. Thus, whereas the Americans are generally willing to
make concessions to reach an agreement, this approach may conflict with
other cultures negotiating styles.
Conflict
Conflict is not seen as necessarily negative by American negotiators and is

often seen as part of the negotiating process. Emotions perhaps are more
accepted than in some Asian cultures. Thus, American negotiators can
appear more confrontational than some of their Asian counterparts, the
Koreans being a notable exception. Certain aspects of conflict are stating
that you disagree, making threats in terms of if you do not accept this, we
will, including threats of breaking off negotiations, using the word no,
and interrupting. This is one of the classic differences between Western
European and Japanese negotiators. Japanese learn at an early age to avoid
social conflict and save face. The Japanese generally do not like negotiating
across a table. They sound out their counterparts in advance and hope to use
formal meetings to present areas of agreement. The Japanese will question
their counterparts in detail, not because they do not understand what is being
said, but because they are looking for areas of agreement on which to build
a consensus. Often adjustments in position will be worked out outside of the
negotiating room during breaks, where the Japanese negotiator will fish for
possible agreement. The negotiator must be constantly aware of statements
made outside of the negotiating room, since a suggestion may be subtly
raised so as to be as easily withdrawn if not met by approval. This allows
the all-important face saving. Thus, subtlety is the key. As Thayer and
Weiss state, Japanese negotiating style has been described as awase (to
combine and adjust one thing to another). Instead of directly addressing
issues, openly stating proposals and counterproposals, and generally relying
on exact concepts and standardized meanings features of an erabi (to
select) culture such as the United States awase style entails inferring the
positions of the parties, assuming approximate meanings and adjusting to
the situation. This style emphasizes proper form and process, even over the
substance of decisions, and explains the Japanese preference for informal
explorations and agreement behind-the-scenes prior to formal sessions 1 .
Thus, those from cultures where conflict is acceptable must be extremely
sensitive to subtle forms of communication by members of cultures where
conflict in unacceptable.
Direct versus Indirect Communication
Direct communication involves stating exactly what one means and

expecting straight answers from others. It also involves asking questions and
expecting direct answers. This is referred to as low-context communication,
where facts and not the situation are important. In high-context
communication, cultural constraints prevent a direct answer, and thus one
has to interpret responses. For example, no is rarely used and can be
replaced by a bit difficult. Yes may not mean agreement, but simply
that a request has been understood. Ill think about it, for an American,
will mean that a possibility of acceptance exists, whereas for a Japanese it
might be a polite form of no.
High-context cultures (including much of the Middle East, Asia, Africa, and
South America) are relational, collectivist, intuitive, and contemplative. This
means that people in these cultures emphasize interpersonal relationships.
Developing trust is an important first step to any business transaction.
According to Hall, these cultures are collectivist, preferring group harmony
and consensus to individual achievement. And people in these cultures are
less governed by reason than by intuition or feelings. Words are not so
important as context, which might include the speakers tone of voice, facial
1
Nathaniel B. Thayer and Stephen E. Wisse, Japan: The Changing Logic of a Former
Minor Power.
expression, gestures, posture and even the persons family history and
status. A Japanese manager explained his cultures communication style to
an American: We are a homogeneous people and dont have to speak as
much as you do here. When we say one word, we understand ten, but here
you have to say ten to understand one. High-context communication tends
to be more indirect and more formal. Flowery language, humility, and
elaborate apologies are typical. High-context cultures are characterized by
extensive information networks among family, friends, associates, and even
clients. Their relationships are close and personal. They keep well informed
about the people who are important in their lives. This extensive background
knowledge is automatically brought to bear in giving meanings to events
and communications. Nothing that happens to them can be described as an
isolated event; everything is connected to meaningful context.
Low-context cultures (including North America and much of Western

Europe) are logical, linear, individualistic, and action-oriented. People from
low-context cultures value logic, facts, and directness. Solving a problem
means lining up the facts and evaluating one after another. Decisions are
based on fact rather than intuition. Discussions end with actions. And
communicators are expected to be straightforward, concise, and efficient in
telling what action is expected. To be absolutely clear, they strive to use
precise words and intend them to be taken literally. Explicit contracts
conclude negotiations. This is very different from communicators in high-
context cultures who depend less on language precision and legal
documents. High-context business people may even distrust contracts and be
offended by the lack of trust they suggest.
Eye contact is another area of difference. Americans look each other directly
in the eyes, which may be considered impolite in some other countries.
However, an American can interpret not looking one in the eyes, as a reason
for distrust. Silence is another source of misunderstanding. Silence is
perfectly acceptable in certain cultures, whereas it can be a source of
embarrassment in others. It can even be used to gain concessions, where the
members of one culture simply outwait the members of another who find
silence unbearable, break down, and make a comment that leads to a
concession. Often body language or grunts express more than words, and
negotiators from low-context cultures must be careful about their own body
language so as not to send false messages. They must also be aware of
high-context culture representatives body language to infer meaning where
verbal communication does not exist.
Reserved versus Expressive (Nonverbal Communication)
There are three types of interpersonal communication:

verbal communication has to do with words and the meaning of
words;
paraverbal communication refers among other things to how loud the
words are spoken, the meaning of silence and the significance of
conversational overlap;
nonverbal communication, also known as body language, people
communicate without using words.
In a negotiation both the para- and nonverbal language can be
misinterpreted, especially when the negotiators come from different
cultures - some from expressive ones, others from reserved ones.
Countries in the Mediterranean region, Latin Europe and Latin America are
considered as being very expressive, while East and Southeast Asian as well
as Nordic and Germanic European countries are thought to be reserved ones.
In the middle are the moderately expressive cultures such as the USA,
Canada, Australia, New Zealand, Eastern Europe and South Asia.
Expressive people tend to be uncomfortable with more than a second or two

of silence during a conversation. In direct contrast, people from reserved
cultures feel at ease with much longer silence. Japanese negotiators for
example often sit without speaking for what seems like an eternity to
voluble Mexicans, Greeks and Americans. After three or four seconds the
latter feel compelled to say something anything to fill the awful silence.
Unfortunately, the loquacity of expressive people tends to irritate the
reticent Japanese, who seem to value the space between the spoken words
just as much as the words themselves. Negotiators from reserved cultures do
not feel the need to engage in constant, stream-of-consciousness blabbing
the way many of their expressive counterparts do.
Conversational overlap is another term for interrupting another speaker.

While expressive people regard interruptions as a normal part of
conversation, people from reserved cultures consider overlap extremely
rude. For instance, northern European and North American negotiators are
often frustrated by the constant interruptions they experience while
conducting meetings in Italy, Spain or the former Yugoslavia.
Scandinavian researchers have studied conversational patterns during

business negotiations between restrained Swedes and Danes and their more
expressive Spanish counterparts. The tests showed that Spanish negotiators
interrupt Swedes about five times as often as Swedes interrupt Spaniards.
Since Scandinavians find interruptions disruptive and rude, conflicts can
arise easily during meetings with expressive southerners.
Figure 3.3 diagrams the differences in conversational behavior across the

international bargaining table.
Figure 3.3
Expressive Negotiators: Overlapping each other

1st Speaker:
2nd Speaker:
Reserved Negotiators: Taking turns to avoid overlap
1st Speaker:
2nd Speaker:
Japanese Negotiators: Intervals of silence between speakers
1st Speaker:
2nd Speaker:
Source: Richard R. Gesteland, Cross-Cultural Business Behavior, Copenhagen

Business School Press, 1997
The expressive negotiators typically overlap each other whereas more

reticent ones take turns in a sort of a verbal table tennis match. But the
superpolite Japanese not only take turns to avoid overlap, they go a step
further, often pausing five or ten seconds before taking their conversational
turn. Problems occur with overlap unless both sides know about this cultural
difference. Otherwise Latins and Arabs tend to think the Japanese are at loss
for words or indecisive and the Japanese may find their voluble counterpart
rude and insulting.
At sales meetings it is primarily the sellers responsibility to adapt his or her

conversational behavior. During joint venture or strategic alliance talks
however each side should strive to meet the other half way. The problem is,
cross-cultural negotiators can make those adjustments only if they are aware
that the potential for a communication conflict does exist.
There are four key elements of nonverbal negotiating behavior:

Proxemics spatial behavior, interpersonal distance;
Haptics touch behavior;
Oculesics gaze behavior, eye contact;
Kinesics body movement, gestures.
Exhibit 3.6 Bilingual Labels

As one of North Americas largest importers of cotton garments, Great
Northen Apparel of Toronto decided it was high time to start sourcing men
dress shirts in China. From an industry contact in the United States vice
president Pete Martin heard about Evergreen Garments, a large
manufacturer in Guangzhou with several years of experience supplying Los
Angeles and New York importers.
After considerable correspondence, Pete Martin flew to Guangzhou to
finalize a purchase agreement for 8000 dozen shirts. Discussions with
Evergreen Garment people proceeded slowly but amiably, lubricated by
endless cups of Chinese tea and punctuated by a couple of enormous
banquets. Pete and Evergreen team needed a week of nonstop meetings to
agree on fabric construction, size and color breakdown, packing, carton
markings, delivery, price and payment terms.
Exhausted from these interminable negotiations, Pete was looking forward
to the signing ceremony on the last day of his visit. At this point however,
Pete suddenly remembered that Evergreen had not yet done business with
Canada and hence might not be familiar with the Canadian bilingual
merchandise labelling requirements. So he carefully explained that all
apparel sold in Canada must carry labels showing fiber content and
laundering instructions in both French and English.
This news seemed to cause some concern among the Evergreen team.
Managing director Li had a long discussion with his production and export
people and then replied with a smile, Mr. Martin, I am afraid that supplying
garment labels in French and English will be a bit difficult. The question of
bilingual labels will require further study.
Careful to hide his irritation Pete further explained that bilingual labelling
was required by law in Canada. If you wish we can send you the exact
wording of the labels in both languages. Just let me know. But the bottom
line is that we really have no choice its the law.
The Chinese negotiating got together for another discussion. After a time
Mr. Li spoke up with a smile, Mr. Martin, as we said before this will be
difficult. But of course we at Evergreen Garments will do our best to solve
the problem. Relieved to have settled this last issue, Pete Martin signed the
purchase contract and said his formal goodbyes to Mr. Li and his team.
On a warm spring day seven months later, Pete got a call from the quality
control chief at the Great Northern import warehouse. Mr. Martin, we have
a problem here. You know those 96,000 shirts that just came in from China?
Well, theyve got bilingual labels on them all right. But the labels are in
English and Chinese!
Stunned, Pete slimed back in his chair, mentally calculating the huge
expense of removing the illegal labels and having correct ones sewn in the
spec samples he had approved a few months ago had come in without
garment labels, but that often happened and he had not thought much about
it at the time. After all, the Chinese had agreed to supply French and English
labels hadnt they?
Space orientations differ across cultures. They have to do with territory,

divisions between private and public, comfortable personal distance,
comfort or lack of comfort with physical touch and contact, and
expectations about where and how contact will take place. In Northern
European countries, personal space is much larger than in Southern
European countries. For a German or a Swedish person, for example, the
Italians or the Greeks get too close. An American etiquette manual advises
this about personal space: When you meet someone, don't stand too close.
(Remember the angry expression, Stay out of my face!). An
uncomfortable closeness is very annoying to the other person, so keep your
physical distance, or he'll have to keep backing off from you. A minimum of
two feet away from the other person will do it.
The approximate range of same-gender distance across cultures in a

business situation varies from 20-35cms (close) in the Arab World, the
Mediterranean region, Latin Europe and Latin America, to 40-60 cms
(distant) in most Asian countries, northern, central and eastern Europe and
North America.
Certain cultures, including Mediterranean, Arab, and Latin American, are

more tactile and allow more touching. Asian, indigenous American,
Canadian, and U.S. cultures tend to discourage touching outside of intimate

situations. Certain cultures allow cross-gender touching, including the
United States, while same-gender touching is less acceptable. These rules
change in Japan, where women are frequently seen holding hands, but not
men. In the Mediterranean, it is common to see men holding hands or
touching in public, but not women. Greeting rituals fit with these patterns,
so awareness of local norms is important for negotiators.
Differences in touching behavior appear even between cultures located

fairly close together on the chart. For example, the variation between British
and French is surprisingly large considering that these two countries are
separated only by a narrow channel of water. A study compared the
touching behavior in Paris and London cafs by counting the number of
times couples touched each other on the hand, arm, shoulder etc.
The resultats were: 100 touches in Paris, andexactly zero in London.
Space also relates to comfort with eye contact and attributions related to eye
contact or lack of eye contact. In United States and Canadian dominant
culture settings as well as many Arab cultures, eye contact is taken as a sign
of reliability and trustworthiness. In North American indigenous settings,
eye contact may be seen as disrespectful and inappropriate. Similarly, in
Asian settings, looking down is usually interpreted as a sign of respect.
Beyond these generalizations is a great deal of complexity. Lederach
observes, for example, that in Central America, a slight movement of the
eyes may indicate embarrassment, showing respect, or disagreement.
Seating arrangements for negotiations should take norms for space into
account. In general, Americans tend to talk with people seated opposite
them, or at an angle. For the Chinese, these arrangements may lead them to
feel alienated and uneasy. They may prefer to converse while sitting side by
side. There are large differences in spatial preferences according to gender,
age, generation, socioeconomic class, and context. These differences vary
by group, but should be considered in any exploration of space as a variable
in negotiations.
Two aspects of kinesics are of special importance for international

negotiators: facial expressions and hand and arm gestures. Expressive
people employ plenty of both while the reserved ones are famous for
pocker faces and little bodily movement. Expressive negotiators
gesticulate to add emphasis to what they are saying as well as to send
nonverbal messages. Those from reserved cultures value restrained
nonverbal behavior and discourage open display of emotion. Expressive

Latins seem to wear their hearts on their sleeves. They trust people who
show their feelings openly and distrust those who mask their emotions.
In contrast, the taciturn Japanese and Germans may regard such displays as
childish and immature.
With nonverbal communication the problems arise from the fact that the
same gesture means different things in different parts of the world. Raised
eyebrows for example. For the North Americans it suggests interest,
surprise; for the British skepticism, and for the Chinese, disagreement.
For the Germans it is a way to say You are so clever!, while for the Arabs
it is a way of saying no.
There are numerous ambiguous gestures that the international negotiator has
to take into consideration in order to avoid unpleasant situations. Here are
some of the most common:
Use of left hand the left hand is considered unclean in Muslim, Hindu
and Buddhist cultures. Avoid touching people or handing them objects
such as the business card with the left hand.
Showing the sole of the shoe the bottom of ones shoe or foot is also
regarded as unclean in the same cultures. Foreign visitors should avoid
crossing their legs in such a way that the sole of their shoe is visible to
anyone.
Patting a child on the head the buddhist-influenced cultures of
Southeast Asia believe that a childs soul resides in his or her head.
To touch the head risks damaging the soul.
Fist in palm while this gesture is used for emphasis in most European
and North American cultures, it is a very obscene sexual gesture in
Southeast Asia.
Tapping ones head his gestures has various meanings throughout
Europe: in France, Italy and Germany tapping ones forehead or temple
with the finger while looking at someone says nonverbally You are so
stupid!. In Spain and Great Britain the same gesture is self-referebtial
and means I am so clever. In the Netherlands, if a Dutchman taps the
right side of his head with the indexfinger vertical it translates: You
are a very smart person. But if he taps his forehead with the finger
horizontal he is saying You are an idiot.
The Thumbs up sign while in most parts of the world this sign
means Great!, in Germany and other European countries it signifies
the numeral one and for some European and Muslim people it is a very
rude sexual sign.
The A-OK sign the thumb-andforefinger circle is easily the most
dangerous and ambiguous of gestures. Of course most of its multiple
meanings are harmless: for North Americans it means everything is
works properly; for the Japanese the circular shape looks like a coin, so
it means Now we are talking about money. In the south of France that
shape symbolizes the zero, so it indicates qiute the opposite nothing
or worthless. But in the Iberian peninsula, much of Latin America, parts
of Europe and Russia it is used as a vulgar sexual suggestion, extremely
insulting.
Hofstedes Cultural Dimensions
One of the most popular theories addressing the impact of culture on the
management process is that developed by Geert Hofstede, a researcher from
the Netherlands. He proposed a paradigm to study the impact of national
culture on individual behavior and examined the values and beliefs of
116,000 IBM employees based in forty nations throughout the world
(he subsequently conducted the study in ten other countries). Hofstede
developed a typology consisting of four national, cultural dimensions by
which a society can be classified: power distance, uncertainty avoidance,
individualismcollectivism, masculinityfeminity.
These cultural dimensions have an impact on international management in

many ways. For example, people in large power distance cultures prefer
stronger leadership than do people in small power distance cultures, and
people in strong uncertainty avoidance cultures take fewer risks than
individuals in weak uncertainty avoidance cultures.
Power Distance
Hofstede uses the idea of power distance to describe the degree of deference
and acceptance of unequal power between people. Cultures where there is a
comfort with high power distance are those where some people are
considered superior to others because of their social status, gender, race,

age, education, birth, personal achievements, family background or other
factors. Cultures with low power distance tend to assume equality among
people, and focus more on earned status than ascribed status. Generally, the
more unequally wealth is distributed, the higher will be the power distance
in any national setting. According to Hofstede, national cultures with a high
power distance include Arab countries, Guatemala, Malaysia, the
Philippines, Mexico, Indonesia, and India. Negotiators from these countries
tend to be comfortable with
hierarchical structures,
clear authority figures, and
the right to use power with discretion.
Countries with a low power distance include Austria, Denmark, Israel,

New Zealand, Ireland, Sweden, Norway, Finland, Switzerland, Britain, and
Germany. Negotiators from these countries tend to be comfortable with
democratic structures and flat organizational hierarchies,
shared authority,
the right to use power only in limited circumstances and for legitimate
purposes.
Uncertainty Avoidance
Another of Hofstedes categories has to do with the way national cultures

relate to uncertainty and ambiguity, and therefore, how well they may adapt
to change. Generally, countries that show the most discomfort with
ambiguity and uncertainty include Arab, Muslim, and traditional African
countries, where high value is placed on conformity and safety, risk
avoidance, and reliance on formal rules and rituals. Uncertainty-avoiding
cultures are characterized by strict laws and rules, high degrees of
formalization, and intolerance of behaviors and opinions that differ from
their own. Trust tends to be vested only in close family and friends. It may
be difficult for outsider negotiators to establish
Hofstede identified the United States, Scandinavia, and Singapore as having

a higher tolerance for uncertainty. Members of these national cultures tend
to value risk-taking, problem-solving, flat organizational structures, and
tolerance for ambiguity. It may be easier for outsiders to establish trusting
relationships with negotiating partners in these cultural contexts.
Masculinity-Femininity
Hofstede used the terms masculinity and femininity to refer to the degree to
which a culture values assertiveness or nurturing and social support. The
terms also refer to the degree to which socially prescribed roles operate for
men and women. Hofstede rated countries and regions such as Japan and
Latin America as preferring values of assertiveness, task-orientation, and
achievement. In these cultures, there tend to be more rigid gender roles and
live to work orientations. In countries and regions rated feminine such as
Scandinavia, Thailand, and Portugal, values of cooperation, nurturing, and
relationship solidarity with those less fortunate prevail, and the ethic is more
one of work to live. Of course, it is important to remember that
associations with gender vary greatly across cultures, so that elements
considered masculine in one culture might be considered feminine in
another. Negotiators may find it useful to consider the way gender roles play
out in the cultural contexts of their negotiating partners.
Individualism Collectivism
Individualism exists when people look at themselves primarily as

individuals and secondarily as members of groups. Self-interest motivates
behavior, and everyone is expected to look after themselves and their
immediate families. Collectivism is the opposite of individualism. In
collectivist societies, people see themselves primarily as members of groups
and secondarily as individuals. The group (family, clan, tribe, organization,
social club) is the main determinant of individual beliefs and values. The
United States is supposed to have an individualistic culture, whereas Japan
is said to have a collectivist one.
Exhibit 3.7 The Power Distance Dimension

Small Power Distance Large Power Distance
Inequality in society should be There should be an order of
minimized. inequality in this world in which
everybody has a rightful place; high
and low are protected by this order.
All people should be independent. A few people should be independent;
most should be dependent.
Hierarchy means inequality of the Hierarchy means existential
roles, established by convenience. inequality.
Superiors consider subordinates to Superiors consider subordinates to
be people like me. be a different kind of people.
Superiors are accessible. Superiors are inaccessible.
The use of power should be Power is a basic fact of society that
legitimate and is subject to the antedates good or evil. Its legitimacy
judgment as to whether it is good is irrelevant.
or evil.
All should have equal rights. Power-holders are entitled to
privileges.
Those in power should try to look Those in power should try to look as
less powerful than they are. powerful as possible.
The system is to blame. The underdog is to blame.
The way to change a social system The way to change a social system is
is to redistribute power. to dethrone those in power.
People at various power levels feel Other people are a potential threat to
less threatened and more prepared ones power and can rarely be
to trust people. trusted.
Latent harmony exists between the Latent conflict exists between the
powerful and the powerless. powerful and the powerless.
Cooperation among the powerless Cooperation among the powerless is
can be based on solidarity. difficult to attain because of their
low-faith-in-people norm.
Source: Geert Hofstede, Motivation, Leadership, and Organization:
Do American Theories Apply Abroad? in Carl Rodrigues,
International Management-A Cultural Approach, p. 14
Exhibit 3.8 The Uncertainty Avoidance Dimension

Weak Uncertainty Avoidance Strong Uncertainty Avoidance
The uncertainty inherent in life is The uncertainty inherent in life is
more easily accepted and each day felt as a continuous threat that must
is taken as it comes. be fought.
Ease and lower stress are Higher anxiety and stress are
experienced. experienced.
Time is money.
Time is free. There is an inner urge to work hard.
Hard work, as such, is not a virtue.
Aggressive behavior is frowned Aggressive behavior of self and
upon. other is accepted.
Less showing of emotions is More showing of emotions is
preferred. preferred.
Conflict and competition can be Conflict and competition can
contained on the level of fair play unleash aggression and should
and can be used constructively. therefore be avoided.
More acceptance of dissent is
entailed.
Deviation is not considered A strong need for consensus is
threatening; greater tolerance is involved.
shown. Deviant persons and ideas are
dangerous; intolerance holds sway.
The ambience is one of less Nationalism is pervasive.
nationalism.
More positive feelings toward Younger people are suspect.
younger people are seen.
There is more willingness to take There is great concern with security
risks in life. in life.
The accent is on relativism, The search is for ultimate, absolute
empiricism. truths and values.
There should be as few rules as There is a need for written rules
possible. and regulations.
If rules cannot be kept, we should If rules cannot be kept, we are

change them. sinners and should repent.
Belief is placed in generalists and Belief is placed in experts and their
common sense. knowledge.
The authorities are there to serve the Ordinary citizens are incompetent
citizens. compared with the authorities.
Exhibit 3.9 The Masculinity-Feminity Dimension

Feminine Masculine
Men need not be assertive, but can Men should be assertive. Women
also assume nurturing roles. should be nurturing.
Sex roles in society are more fluid. Sex roles in society are clearly
differentiated.
There should be equality between Men should dominate in society.
the sexes.
Quality of life is important. Performance is what counts.
You work in order to live. You live in order to work.
People and environment are Money and things are important.
important.
Interdependence is the ideal. Independence is the ideal.
One sympathizes with the One admires the successful
unfortunate. achiever.
Small and slow are beautiful. Big and fast are beautiful.
Unisex and androgyny are ideal. Ostentatious manliness
(machismo) is appreciated.
Exhibit 3.10 The Individualism-Collectivism Dimension

Collectivist Individualist
In society, people are born into In society, everybody is supposed
extended families or clans who to take care of himself/herself and
protect them in exchange for loyalty. his/her immediate family.
We consciousness holds sway. I consciousness holds sway.
Identity is based on the social Identity is based in the individual.
system.
There is emotional dependence of There is emotional independence of
the individual on organizations and the individual from organizations or
institutions. institutions.
The involvement with organizations The involvement with organizations
is moral. is calculated.
The emphasis is on belonging to The emphasis is on individual
organizations; membership is ideal. initiative and achievement;
leadership is ideal.
Private life is invaded by Everybody has the right to a private
organizations and clans to which life and opinion.
one belongs; opinions are
predetermined.
Expertise, order, duty, and security Autonomy, variety, pleasure, and
are provided by the organization or individual financial security are
clan. sought in the system.
Friendships are predetermined by The need is for specific friendship.
stable social relationships, but there
is need for prestige within these
relationships.
Belief is placed in-group decisions. Belief is placed in individual
decisions.
Value standards differ for in-groups Value standards should apply to all
and out-groups (particularism). (universalism).
3.2 Legal Factors
The legal environment within which international business operates

comprises three elements:
Home country law this defines what is considered by the home culture
to be acceptable behavior both at home and in dealings with a foreign
country.
Host country law this defines acceptable behavior within the country
in which you wish to trade.
International law there is no international legislative body but there
are a series of conventions, agreements and treaties, the enforcement of
which relies on national sovereignties.
In light of this the international business must be aware of which jurisdiction
will apply. Inevitable conflicts will emerge which may give rise to not only
practical problems, but also moral issues as the legal environment in a
foreign market conflicts with the cultural values of the home country.
There are also three main types of legal system operating in the world
common law, civil or code law and Islamic law.
Common law This system of law, used in the UK, the United States
and Canada, is based upon tradition and on legal precedents. Laws are
passed by government, but are then interpreted by the courts. The
interpretation of the law then becomes the legal precedent for similar
cases in the future.
Civil or code law Civil or code law is based upon laws that are written
down. It is usual for there to be three different written types of law -
commercial, civi5 and criminal. The aim in code law is to develop an
inclusive set of written codes that will cover all possible situations.
Islamic law This type of law, based upon the Koran, incorporates
social and religious obligations in addition to legal duties. An important
element in Islamic law is the achievement of social justice. One feature
of Islamic law that shows the difference between it and common and
civil law is that it is unlawful to charge interest on loans.
The Law and Business
Legal factors provide the regulatory framework within which international

business must operate and the legal system applying to business in a particular
country has an important influence on many aspects of international trade

for example:
(a) Regulation of Contracts

The establishments of the legal rights of the buyer and the seller.
The establishment of the terms and conditions between agent and
principals.
The mechanisms for the resolution of disputes regarding both the
appropriateness of the quality of the merchandise (and so on) in respect
of exported goods and responsibilities of agents.
(b) Regulation of the Business Environment

Legislation can condition what companies can and cannot do, including:
export/import controls, tariff/non-tariff barriers and competition

controls;
pricing controls for example, resale price maintenance and price
increases;
the registration and enforcement of trade marks, brand names and
patents;
product liability and product safety;
advertising and sales promotions what can be promoted and how it can
be promoted;
labeling;
Environmental issues for example, Germany has strong laws regarding
excess packaging which makes manufacturers responsible for the
responsible disposal of extra packaging materials.
It goes without saying that businesses must be careful to operate within the
laws and regulations of the countries in which they are trading. This is
particularly important when the business is trying to establish a global
approach and, therefore, wishes to standardize operations and marketing as
much as possible. So, for example, in some countries certain types of
advertising may be illegal and the business cannot apply an approach used
elsewhere in the world. Countries often differ considerably with regard to,
for example, competition policy and price legislation. In the same way there
is considerable difference throughout the world with respect to what is

considered legal when offering gifts to organizational and government
buyers.
Even countries which, in all other respects, appear to be very similar and are
even supposedly bound by trading agreements because they are members of
a trading bloc can in fact be very different when it comes to legislation.
So, for example, Germany has much stronger legislation with regard to
green issues than many other members of the European Union. For example,
all packaging in Germany must be recyclable and the supplier is responsible
for any pollution caused. This is very different to legislation operating in,
say, the UK or France.
3.3 Economic Factors
The economy of any country is the end result of the production and the
distribution of wealth. As we know this is a continually moving feast, but
whereas in some countries the fluctuations are small over a prolonged
period of time, in others changes can be great and almost overnight. Before
we look at some of the indicators of the economic environment of a country,
we should briefly note some of the underlying resources that influence it.
Economic Resources
The three factors of production labor, land and capital are the key resources
of economic activity. We shall interpret these factors in a broader sense here
in as much as they represent important considerations for business.
(a) Population
Since the 18th Century the world has undergone a population explosion
which has impacted on all aspects of life. In economic terms, population is
an important factor. The availability of labor is an essential resource in the
manufacture of goods and services, whilst at the same time the population as
a whole provides a market for the goods and services produced.
However, it is not just the size of the population which is important but also
its age, sex and geographic distribution. If, for example, as is the case in
most advanced countries, there is an increasing proportion of dependent
population i.e. the old, the young and the unemployed -then resources will
be channelled into supporting them and consequently economic growth will
be slow.
(b) Natural resources
A country's ability to generate wealth will be linked not only to its

population but also to its geography. This conditions not only the
availability of natural resources land, water, minerals, etc. but its ability
to exploit them productively. Thus, the climate and terrain can be important
in respect of the ability of a country to develop, for example, forestry as a
productive industry and to develop effective transport systems (including
port facilities).
(c) Infrastructure
The ability of a country to utilize its labor and natural resources will be
influenced by its infrastructure. By this we mean the stage of development
of its housing, transport, communication, energy, etc. systems.
These elements are very much linked to the existing stage of economic
development and you will remember, in Study Unit 2, that we classified
countries into three groups less developed countries, newly industrialized
countries and highly industrialized countries.
Economic Indicators
These are factors which provide information about the economic

development and conditions in a country.
(a) Income
When we consider the economic factors, the distribution of wealth is

perhaps the key consideration in the selection of target markets.
Countries can be considered in terms of their total income, or gross national

product. Using such a league table, the US, Japan and Germany have the top
positions. Indeed, the concept of the importance of the Triad is based upon
the large size of the GNPs of the US, Japan and Europe.
From an individual company point of view, the total income figure for a
country can be used as a rough guide to a specific market size. Thus, a
country might already be in the maturity phase with its markets reliant upon
low levels of replacement sales. In other less developed countries, with
lower levels of GNP, the market might be growing rapidly with initial
purchasing. For example, the electricity supply industry in the top GNP
countries is well established, but in countries with lower levels of GNP but
with high growth rates, the demand for electricity might be increasing
rapidly this would create a strong growth in the market for electricity
supply equipment and transmission in those countries.
In most instances, though, companies are more concerned with market
segment(s) rather than the total market in any one country. Because of this,
companies will be more interested in the GNP per person or per capita than
the grand total. Breaking down GNP per capita further, companies will be
interested in the level of disposable income after various commitments of
taxes, health and social security payments and other major payments have
been made. This is usually a better indicator of available expenditure, in the
majority of consumer markets, than GNP per capita. If this approach is used,
considerable market segments can be identified in countries that are often
thought to be quite poor. For example, in India there is an affluent middle
class with a considerable disposable income. The total size of this segment
is larger than the populations of most other countries in the world.
Certain general relationships exist between income levels and expenditure
patterns. For example, the amount of income spent on food, expressed as a
percentage of income, is higher in poor families and in poor countries than it
is in richer countries. There are variations in the general rule. For example,
in Japan, almost 20% of consumer spending is allocated to food, compared
with 15% in the US, 13% in Germany and 11% in Britain. The explanation
for the high spending on food in Japan is partially based upon the high
prices of food there, caused by protectionist economic policies in Japan to
support local agricultural products. In part, though, expenditure on food is
influenced by culture - food in Britain is given a comparatively low priority,
whereas in Japan and France food is seen to be more important. This results
in higher consumer expenditure on food.
(b) Inflation
This is a major influence in most countries. In some countries, for example

the UK, one of the main reasons explained by government for economic
decisions is a desire to control inflation to a particular target level. In other
countries, inflation rates are so high that pricing and other decisions have to
take account of the constantly increasing price of goods and services.
The Asian countries of China, India, South Korea and Taiwan have all
achieved rapid growth during the past decade with inflation rates usually
below 10%.
Latin and South America is different and here there are several stories to
tell. Some countries, for example Brazil which has sometimes experienced
inflation rates in the order of 2,000%, have a long history of uncontrolled
inflation. Argentina had very high inflation rates in the 1980s but has now
brought the rate down to 11%. Mexico, whilst never as out of control as
Argentina, has succeeded in bringing its inflation rate down from over 100%
to under 10%. Chile has maintained the best record its inflation rate never
increased much above 20% in the 1980s and is now down to around 12%.
(c) Capital Investment
This is associated with economic growth. Recently, countries in Asia have

been spending a higher proportion of their Gross Domestic Product (GDP)
on fixed capital investment than other countries around the world. At the
beginning of the 1990s, financed mainly by the high level of domestic
savings, the Asian countries of South Korea, Thailand, Singapore, China,
Malaysia and Indonesia all invested 30% or more of their GDP into fixed
capital. Latin American countries typically invested around 20-25%.
(d) Government Policies
Other economic influences that can be important are the level of

government budget deficit or surplus.
The level of official reserves of foreign currencies and gold and special
drawing rights in the International Monetary Fund shows a countrys ability
to meet its external obligations. If reserves are going down rapidly, this will
have an almost certain downward effect on the value of that countrys
currency. Declining official reserves shows a decline in confidence in the
countrys economy. It could be linked to deteriorations in the countrys
balance of trade and the balance of payments.
Government decisions taken to influence economic performance by, for

example, reducing inflation or to stabilize the foreign exchange rate, will
affect the level of personal and corporate taxation. If taxation increases,
other factors remaining constant, market sizes will decrease in the consumer
and most business markets. On the other hand, government markets will
increase to reflect the higher influence of the government in the total
market-place of that country.
3.4 Political and Technological Factors
In an ideal world, companies would like to have a political climate that

does not change and is supportive to business interests. They would like
to see policies which lead to:
Low inflation rates
Steady market growth
Low taxes on company profits
No restrictions on the ability to repatriate profits
No restrictions on local content
Support for a market economy
A lack of government intervention, for example no controls on price
levels or profit levels
The encouragement of inward investment by foreign companies.
However, it is unlikely that this situation would persist in any country.
From a business point of view, the major political problem is likely to be

instability. Instability may arise through frequent changes in the ruling
political party or elite, and/or through frequent changes of policy by a stable
ruling political party. If the political situation is one in which the
environment surrounding the company is predictable, companies can
develop and implement international business plans with some confidence.
If the government changes direction frequently, medium- and long-term
planning becomes very difficult and companies will feel forced to adopt
short-term, highly pragmatic approaches.
Note that, even in politically stable countries, democratic elections which

could change the ruling political party take place every five years or so.
When a new party takes power, there is likely to be a measure of uncertainty
whilst it settles into the job of running the country and the effect of new
policies is awaited. Even if the same political party is in power for many
years, there will be a variety of political and economic issues that will cause
it to make changes in political and economic directions, and most
governments pass laws which affect market opportunities from rime to time.
Other forms of stable government may create problems for business for
example:
where the political party in power does not support business interests,
where the ruling power base is autocratic and is not subject to various
checks and balances to prevent the abuse of power.
Stability, though, is not the only issue of interest to business. It is also

concerned that governments take political and economic decisions that do
not cause the economy to decline or become less profitable for companies.
For example, many Latin American countries were not able to prevent
runaway inflation in the 1980s, and other governments have acted in ways
which conflict with business interests by such policies as increasing
corporate taxation or using price controls to try and control inflation.
There have been various attempts to identify the level of risk inherent in a
country. One such approach is the Business Environment Risk Index (BERI)
which was started in the US in 1972. In the BERI ratings, countries are
evaluated on 15 economic, political and financial factors on a scale from
zero to four. The factors that relate most strongly to political areas are
political stability, attitudes to foreign investors, nationalization, bureaucratic
delays, and currency convertibility. Scores on the BERI scale are calculated
out of 100 and a score of 80 or more indicates an acceptable level of risk.
However, scores of 40 or Jess suggest that the level of risk is probably
unacceptable and companies should think carefully before commencing
business in countries with this sort of score.
Technological Factors
You will be well aware that there has been a rapid growth in the speed of
technological advancement over the recent decades. One of the remarkable
features of this has been the way in which access to advanced technology
has spread from one or two countries to many countries around the world. It
is now not unusual to see people, without what many cultures would
perhaps consider the essentials for existence, using computers in offices and
shops, communicating by mobile telephone and watching television
programs via satellite. Wide variations in technology between countries are
less a feature of the international environment than is the case with legal,
economic and political factors.
This has partly been the result of the development of multinational and
transnational companies and partly the result of government intervention.
The practice of multinational companies basing their operations in those
countries around the world that provide the best returns has increasingly
meant that countries with low costs for labor and for factory and office
sites are being used to produce components and sometimes the final
assembled product. As part of this process, a great deal of technology
transfer takes place.
In addition, governments in many countries have encouraged the
development of high-tech industries and investment in education and
training to ensure a competent, skilled workforce as a means of
accelerating economic growth and to reduce levels of unemployment.
The availability of technology is, therefore, less based on a few countries;
although it would be true to say that some countries have a much wider
range of advanced technology than others.
There are a number of issues in respect of this spread which have important
consequences for international business.
Availability of Information
The developments in communications and by that we mean personal

communications, transport and the media mean that we live in a shrinking
world. Information about events almost anywhere in the world can be
obtained almost immediately by anyone anywhere. For example, when
Perrier experienced a pollution problem at the bottling plant in France, this
was flashed all over the world within 24 hours, and by the next day, shelves
in supermarkets and retailers throughout the world had been emptied of
Perrier products.
Consumers can access information now at the touch of a button making it

much easier to say, compare prices. This puts a premium on information,
and particularly on its access, control and analysis.
A number of developments arise from this:

satellite and cable television has opened up the number of ways in which
people across the world can receive information and particularly
advertising with minimal control over content by individual states;
companies need to pay particular attention to the need to get their own
interpretations across to the public in the face of competing analyses
and this has given rise to the phenomenon of spin doctors attempting
to manage the way in which events are reported and perceived;
businesses need to exploit a wide range of technologies in
communicating and conducting operations.
Technology Life Cycles and Development Costs
New technologies and products can be extremely expensive to develop - for

example, a new pharmaceutical product will cost millions of dollars to bring
to the market, and a new model of car for mass production will entail a huge
amount of investment. On the other hand, the speed of technological and
market change means that technologies and the products they underpin have
ever shorter product lifecycles before the next generation of technology and
products is developed.
The technology of a society is the mix of the usable knowledge that the
society applies and directs toward the attainment of cultural and economic
objectives; it exists in some form in every cultural organization. It is
significant in the efforts of developing nations to improve their level of
living and a vital factor in the competitive strategies of multinational firms.
Technological superiority is the goal of most companies, of course, but it is

especially important to international companies because:
1. It enables a firm to be competitive or even attain leadership in world
markets.
2. It can be sold (via licensing or management contract), or it can be
embodied in the company's products.
3. It can give a firm confidence to enter a foreign market even when other
companies are already established there.
4. It can enable the firm to obtain better than usual conditions for a foreign
market investment because the host government wants the technology
that only the firm has (for example, permission for a wholly owned
subsidiary in a country where the government normally insists on joint
ventures with a local majority).
5. It can enable a company with only a minority equity position to control
a joint venture and preserve it as a captive market for semi processed
inputs that it but not the joint venture produces.
6. It can change the international division of labor. Some firms that moved
production overseas where labor was cheaper have returned to their
home countries because production methods based on new technology
have reduced the direct labor content of their products.
The high cost of research and development to produce die next generation of
products coupled with shorter technology life cycles has given an impetus to
two developments.
One is the need to market products to more and more country markets in
an attempt to justify and recoup the high costs of research, development
and product launch. In many products, the market in any one country is
less and less likely to be sufficiently large to achieve a break-even
position. This has resulted in regiocentric and geocentric planning
becoming more relevant.
The second development is the use of alliances, of various types, in an
attempt to share some of the costs of product development. Often,
businesses are not able to recoup the high costs of investment in new
products and technologies before they are made obsolete. As a result, we
are increasingly seeing the joint development of technologies and new
products between different companies throughout the world so that
investment costs and risks can be shared. So, for example, the Advanced
Photography System was developed through the joint efforts of the
leading companies in this market including, for example, Kodak, Fujitsu
and Sony. In the future, we can expect to see even greater co-operation
and collaboration on an international basis by companies to develop new
technologies.
The Internet
It has been widely predicted that the Internet is destined to change virtually
every facet of our lives, including the whole nature and operation of
business. Its major impact in respect of international business is that it
enables the process of buying and selling across international boundaries
without any reference to the traditional methods of conducting such
transactions - face-to-face contact, use of agents and intermediaries, offices
and facilities abroad, etc.
The characteristics of the Internet are such that:

It facilitates global marketing for the smaller companies which in the
past perhaps have faced major disadvantages compared to their larger
counterparts.
It enables customers to compare and contrast competitor offerings much

easier and on a much wider basis than before.
It is a cost-effective and convenient way of purchasing products and
services for both consumers and business-to-business customers.
Of course, none of this will happen if customers do not have access to the
Internet, but increasingly they will. The costs of computers and access to the
Net are dropping significantly. Further, technological developments mean
that in the future, access will be through other means, such as conventional
digital TVs and mobile phones. More and more customers in the future,
therefore, will be able to access the Net.
The use of the Internet by businesses is growing rapidly both for

advertising their products and services and for actually selling them.
Virtually all the large multinational companies have now developed web
sites, but interestingly enough, it is the smaller, newer companies who have
been the quickest to realize the potential of the Internet for commercial
purposes. Companies like Amazon, an Internet book sales company, which
has grown from nothing in just two or three years to being one of the largest
in the market, all through Web-based sales.
There is no doubt then that the Internet will give rise to some of the major
opportunities and threats for international business in the future. It is also
likely to impact on the whole nature of marketing operations ranging from
access to, and the use of, data through to the concepts of market
segmentation and targeting, and the way in which elements of the marketing
mix are applied.
3.5 The C Factors
In the same way that the letter P is used to help us remember the elements in
the marketing mix (product, place, promotion and price), a number of
writers have used the letter C to identify various elements in the analysis of
international markets.
Country
The concept of the country is significant in international business. This

might seem rather self evident, but it is important to understand how the
concept is used and what its limitations are.
Companies often use countries both as a unit of analysis and as a basis for
their organizational structure. In terms of analysis, in many ways the
boundary between one country and the next country changes markets.
We often find that the laws change, the types of retail outlet are different the
types of tax paid on income and on expenditure are different, newspapers,
radio and television are different. In addition, the spoken language may well
be different, although in the border areas it is not uncommon for people to
speak both the languages of the neighboring countries.
Thus, it is very often the case that there are many differences in the business
environment caused by the different rules, regulations and customs that
relate to one country and not to the next.
It is important, however, not to fall into the trap of assuming that a country
constitutes a homogeneous market. We have already used the example of
India, where there are many different languages, considerable divisions in
the society caused by the caste system and a large proportion of wealth is
owned by approximately 5% of the population. Consider also the United
States of America. They may be united, but many states have their own laws
and very different cultural values consider the difference between those
living in multicultural New York State and those living in the deep south.
Additionally, in some parts of the world, the development of trading blocs

has started to mean that companies need to consider trading blocs or world
regions as another basis for their analysis. For example, Japanese and US
companies might need to develop analyses based upon the European Union
as well as the individual countries within the EU. In addition, companies
might change their organizational structures to allow a pan-European
organization and culture to develop. A European head office might be
started in Paris, Brussels or perhaps London.
Finally, in some ways, countries and country boundaries may increasingly

not be the best way of thinking about market boundaries and target markets
for the international business. As we shall see in later study units, it may be
more useful to look for similarities and differences with respect to, for
example, customer needs and wants, in order to group customers and
markets rather than grouping them by country.
Currency
One of the major differences between countries and one that keeps the
concept of the country strong in business terms is that each country has its
own currency. Thus, neighboring countries, which may be similar in many
other respects, will have different currencies.
This is a significant issue for international business. At its lowest level, the
problem is simply the need to change one currency into another in order to
effect payment for international transactions-thus, if you export products to
a company in Argentina, your customer will normally only have pesos to
pay your invoice and either you or your customer will have to exchange
currency so that both parties end up with currencies that are acceptable to
themselves. The other, more significant, problem is that currencies change
values.
In terms of the financial implications, companies need to take steps to

manage the risk that variations in the exchange rate will cause the value of
payments due in a different currency to fall in terms of their own domestic
currency. There are number of measures that can be taken for example,
buying foreign currency forward at a fixed rate in order to remove the risk
and obtain certainty about its future income and profit levels. We shall
return to this when we consider international finance later in the course.
Large international companies often try to develop their international

operations to avoid the need to exchange currencies. If they can exchange
products and services between different subsidiaries in different countries,
they can minimize the amount of currency that needs to be exchanged. Most
of the exchange can be handled internally within the company accounting
system.
Changes in foreign currency exchange rates can also influence pricing

decisions. Over minor exchange rate fluctuations, the company can invariably
adjust its profit margins in order to maintain a constant price to the customer.
However, if the fluctuations are considerable, the company might need to
change its business strategy radically. The problems arise when its own
currency is appreciating, therefore making its products more expensive in
other currencies and, hence, less competitive with other producers, principally
local ones which are not affected by exchange rates. One solution would be to
drive down costs in order to avoid increasing prices for example, embarking
on substantial cost reduction programmes in its home production or finding
different distribution channel arrangements with lower distributor margins.

Alternatively, it might attempt to develop a more expensive image and
positioning to help to justify the higher price.
As we saw in Study Unit 3, regional trading blocs may attempt to minimize
some of the problems caused by different currencies by adopting common
rules for, say, fixing exchange values between member countries. In the case
of the European Union, we have seen the introduction of a common
currency, the Euro, in order to reduce some of the problems caused by
volatile currencies and exchange rates.
Competitors
In international markets, competition is often more difficult to manage

than in the home domestic market. The reasons for this include:
In international markets the company often has a lower market share,
sometimes very much lower, than in the domestic market. This results in
a less powerful position. It also results in costs which are relatively
higher because of the lower scale of operations, activities such as
marketing research or advertising are more expensive per unit of product
sold.
The development of more international companies means that, in any
one market, the number of companies looking for a share of that market
is increasing. As business looks beyond its domestic markets, companies
from all around the world are becoming more world regional and global
in their business strategies and in the co-ordination of their strategies
towards competition.
Companies are becoming more and more successful in their own
markets developing products and services which can compete with
foreign multinationals on most terms and often undercutting them on
price. The more successful such companies become, the more difficult it
is for international companies to retain their share of the market. Further,
many of these companies are themselves looking to international
markets for growth. When added to the difficulties of obtaining high
quality information and the barriers resulting from cultural differences,
these factors make it increasingly difficult to compete successfully with
competitors in non-domestic markets. Furthermore, some competitors
will have advantages resulting from lower operating costs and/or from
currencies that are depreciating.
3.6 The Use of SLEPT and C Factors in International Business Planning
Whilst essentially straightforward, the information covered by the SLEPT

and C Factors is extensive. However, understanding the factors is only of
value if they are applied to assist the organization deciding where to go in
international business planning. Successful business strategy, whether at
home or abroad, is about developing markets for products and services, and
this can only be effective if it is applied to meet the specified needs of a
target group of customers i.e. individuals making their purchasing
decisions against the background of a dynamic macro environment.
The overall importance of the SLEPT and C Factors is that together they
constitute the macro environment within which business operates.
Cross Cultural Analysis
Cross cultural analysis is a means of bringing together the factors by

considering them against a number of key business elements.
(a) Needs and wants

Here the key question is what needs or wants does the product or
service satisfy at the moment in the particular market? To answer
this, the SLEPT and C factors need to be assessed against the
particulars of the product in question.
If the answer is not readily apparent, or there is none, then the

business needs to consider either how the product should be presented
to satisfy current needs or wants for example, should the product be
made cheaper, does it need a more comprehensive and locally
responsive level of customer service, etc. or whether the product
itself needs to be modified.
(b) Patterns of buying behavior

Here the key questions are who buys, who influences the buyer and
who uses the product?
The answers here are likely to be strongly influenced by social and

cultural factors such as the roles of men, women and children. Note,
though, that in all societies, cultural patterns change over time and
these roles are themselves changing in many countries. We need,
therefore, to try to establish how deeply culturally ingrained are
buying behavior patterns for example, who goes shopping and how
much influence each participant in the buying process has in the final
purchase decision.
We shall consider buyer behavior patterns in more depth in the next
study unit.
(c) Cultural influences
Using high and low context culture and the cultural sensitivity of
products, we can look to see if there are important cultural influences
that relate to the product or service and the way in which it is
presented. Big context differences between markets will almost
certainly point to differences in the way the product will be perceived
and the way it might be used. It is also important to consider the way
in which the product relates to values in respect of religion, family,
morality, work and recreation. If these values are likely to affect the
way in which the product is viewed, marketing plans wilt need to be
amended in some way.
(d) Methods of communication
We need to know how differences in the SLEPT and C Factors will
influence the effectiveness of marketing communications
advertising, public relations, sales promotion and packaging. What
languages should be used, what sort of messages seem to work best, is
advertising an accepted method to communicate persuasive messages?
Again, cultural values and context will be significant - for example, in
the US, many advertisements feature a direct hard-sell style, whereas
in Japan, advertising is much more likely to develop images and in the
UK, humor is an accepted form of advertising. The economic and
technological framework of the country will also influence
communication through the ways in which the message may actually
be delivered to the target market.
(e) Methods of selling
Here the main concerns are what types of salespeople are likely to be
effective do they need to come from a particular race or religious
background, what language(s) do they need to speak etc.
Social and cultural factors will predominate. Thus, it is probable that
considerable cultural training will be required before a salesperson
from a low context culture such as the US will be successful in a high
context culture such as Japan.
(f) Methods of distribution

We need to be aware that entrants into a country market are frequently
unable to put together their ideal distribution channel. Other
companies will have established distribution arrangements and,
therefore, there might not be space for the new entrant. In Japan, the
particularly closely knit distribution systems operating between
several layers of wholesalers and the retail level make it especially
difficult for non-Japanese companies to establish effective working
contacts with distribution channel intermediaries. We have to consider
how customers view different types of retailer, wholesaler, agent and
distributor.
Use of Interpreters
One means of bridging the social and cultural divide is to use interpreters to
aid communication.
Interpreters are very useful in international business because of the need to

find a common language in situations where people are not fully conversant
with the different languages involved. They are, therefore, widely used to
translate from one language into another in meetings, conferences,
exhibitions and trade fairs, sales negotiations and factory visits. (Note that
interpreters are used in spoken language situations translators will be used
in written language situations.)
The following points need to be understood about use of interpreters:

100% accurate interpretation of one language into another is rarely
possible, no matter how much that may be expected by the participants.
Misunderstandings will be limited when high-quality and reliable
interpreters are used. The more that they know about the product, the
industry and the technology used, the more likely they are to be
accurate.
It is common for certain words or phrases to be impossible to translate
without a complicated explanation of the cultural context in which they
are used. For example, in Japanese, the word no practically does
not exist, and in some situations the word yes can in fact mean no.
A straightforward interpretation of the words will result in
misunderstanding.
It is clear that translation and interpretation often cannot be avoided in

international business. However, it must be remembered that changing the
language does not necessarily mean the correct messages will be
transmitted. It is important to manage the process of translation and
interpretation to limit the extent of poor and incorrect communication.
Identifying Opportunities and Threats
Businesses must not only be aware of the SLEPT and C Factors, but ideally
must be able to forecast and anticipate them. It is these factors, or rather
trends and changes in them, which give rise to the major opportunities and
threats which the international business must take account of. In fact, being
able to anticipate and respond to these trends and changes is increasingly the
key element in competitive success for the international business. In
particular, adaptation of marketing strategies and plans through the marketing
mix, in order to achieve a strategic fit with the environment, is essential.
We must remember, however, that achieving this is much more difficult in
international business because of the following aspects of the environment:
The international business is faced with much more diverse
environments than the purely domestic marketer.
Unlike the domestic environment, often these environments will be
relatively unfamiliar to the business.
International business environments are generally more dynamic and
therefore difficult to predict.
The business therefore needs good systems of marketing research and
intelligence coupled with an awareness and sensitivity to different
environments. Finally, sensing opportunity and threats and responding to
these requires good forecasting systems and flexible systems of company
operation and structure.
3.7 Corporate Social Responsibility and International Business
In addition to the conventional SLEPT and C Factors, recent years have

seen the growth of a number of other macro-environmental issues which the
international business must be aware of and respond to. Of particular
significance has been the growth in importance of ethical/social and green
(environmental) issues. Related to these, and indeed partly responsible for
their growth in importance, has been the emergence of often very highly
organized and vociferous pressure groups.
Ethical, Social and Green Issues
Concern with social and ethical aspects of international business and

marketing has grown as customers have become more aware of their
possible harmful social implications and the, admittedly and thankfully
relatively small, amount of unethical practices by some businesses.
Of particular concern is the exploitation of developing countries by

multinational companies through the depletion of their natural resources for
little return, the degradation of their environment and the payment of low
wages for the production of products which sell in developed countries for
very high prices. The global tobacco companies have been criticized for
switching their marketing efforts from the developed countries, where
cigarette sales have been falling, to the newly emerging industrialized
countries who have been persuaded to increase their purchases of cigarettes.
The size and power of the multinationals has, in the past, enabled
unscrupulous companies to get away with socially unacceptable and
unethical practices. However, this is changing partly as a result of
legislation by both home and host countries, partly as a recognition of the
public relations problem that such practices can pose to companies, but most
importantly because of changing social values, with customers throughout
the world now demanding that companies operate socially and ethically
acceptable business policies and programs.
Green issues, too, have become an important concern for customers

throughout the world. We have already referred to the depletion of the
worlds resources through the worst excesses of some of the multinationals,
particularly in industries such as mining, forestry and oil extraction, but
governments are increasingly requiring that companies operate and
implement policies which do not harm the environment. Similarly, customers
are increasingly demanding green products, produced with green credentials.
For the company unable, or unwilling, to respond to this increased

awareness of social, ethical and green issues, consumer demands for socially
responsibility represents a distinct threat. However, the more astute
companies have recognized that, in fact, this represents a distinct marketing
opportunity. Such companies have responded to this growth in awareness
and the emergence of pressure groups by introducing business policies and
strategies which are more socially and ethically sensitive and products and
services which are distinctly green in their credentials. So, for example,
increasingly timber companies operate environmentally friendly policies of
only producing and marketing timber from managed forests.
Pressure Groups
There is no doubt that pressure groups of one sort or another have been
important and influential in encouraging companies to be more
socially/ethically and environmentally responsible. For example, Shell
recently proposed to sink a disused oil drilling platform in the North Sea
leading, it was suggested, to potential significant levels of pollution. Only
after concerted efforts by pressure groups, and in particular Greenpeace,
were these proposals by Shell withdrawn.
Furthermore, these pressure groups are increasingly organizing on an

international/global basis so as to match the power of the global companies.
We saw in an earlier study unit for example, that the recent world trade
discussions were effectively destroyed by the activities of a number of
pressure groups who organized demonstrations to disrupt the talks.
Moreover, these pressure groups organize themselves internationally
through the use of the Internet. It is likely that pressure groups will continue
to grow in importance with regard to the operation of international business,
and that access to and use of communications technology will enable these
groups to act quickly and powerfully to make their feelings known.
How do international businesspeople learn to live with other cultures? The

first step is to realize that there are cultures different from their own. Then
they must go on to learn the characteristics of those cultures so that they may
adapt to them. E. T. Hall, a famous anthropologist, claims this can be
accomplished in only two ways: (1) spend a lifetime in a country or
(2) undergo an extensive, highly sophisticated training program that covers
the main characteristics of a culture, including the language. The program he
mentions must be more than a briefing on a country's customs. It should be a
study of what culture is and what it does, imparting some knowledge of the
various ways in which human behavior has been institutionalized in a
country.
3.8 Business Functions and Culture
Marketing
In marketing, the wide variation in attitudes and values prevents many firms
from using the same marketing mix in all markets.
Human Resource Management
The national culture is also a key determinant for the evaluation of

managers. In the United States, results are generally the criteria for the
selection and promotion of executives, but in Great Britain, an American
general manager complained that people were promoted because of the

school they had attended and their family background but not for their
accomplishments. School ties are important in France, too.
Production and Finance
Personnel problems can result from differences in attitudes toward authority,

another socio-cultural variable. Latin Americans have traditionally regarded
the manager as the patron, an authoritarian figure responsible for their
welfare. When American managers accustomed to a participative leadership
style are transferred to Latin America, they must become more authoritarian,
or their employees will consider them weak and incompetent and they will
encounter serious difficulties in having their orders carried out.
A production manager who had been sent to Peru from the United States
was convinced that he could motivate the workers to achieve higher
productivity by instituting a more democratic decision-making style. He
brought in trainers from the home office to teach the supervisors how to
solicit suggestions and feedback from the workers.
Shortly after the new management style was introduced, the workers began
quitting their jobs. When asked why, they replied that the new production
manager and his supervisors apparently didn't know what to do and were
therefore asking the workers for advice. The workers thought the company
wouldn't last long with that kind of management, and they wanted to quit
before the collapse, because then everyone would be hunting for a job at the
same lime.
Production managers have found that attitudes toward change can seriously
influence the acceptance of new production methods; even treasurers realize
the strength of the sociocultural forces when, armed with excellent balance
sheets, they approach local banks, only to find that the banks attach far more
importance to who they are than to how strong their companies are.
Sociocultural Components
It should be apparent that to be successful in their relationships with people

in other countries, international businesspeople must be students of culture.
They must have factual knowledge, which is relatively easy to obtain, but
they must also become sensitive to cultural differences, and this is more
difficult. Hall, as we saw, recommended spending a lifetime in a country or,
in lieu of this, undergoing an extensive program to study what the culture is
and what it does. But most newcomers to international business do not even
have the opportunity for area orientation. They can, however, take the
important first step of realizing that there are other cultures. In this short
chapter, we cannot do more than point out some of the important
sociocultural differences as they concern businesspeople in the hope that
you will become more aware of the need to be culturally sensitive to know
that there are cultural differences for which you must look. Remember that
the more you know about another person's culture, the better your
predictions of that person's behavior will be.
The concept of culture is so broad that even ethnologists (cultural

anthropologists) have to break it down into topics to facilitate its study.
A listing of such topics will give us a better understanding of what culture is
and may also serve as a guide to international managers when they are
analyzing a particular problem from the sociocultural viewpoint.
Experts vary considerably as to what they consider to be the components of

culture, but the following list is representative of their thinking. Culture is:
1. Aesthetics
2. Attitudes and beliefs
3. Religion
4. Material culture
5. Education
6. Language
7. Societal organization
8. Legal characteristics
9. Political structures
We shall examine the first seven components and leave the legal
characteristics and political structures for later.
Aesthetics
Aesthetics pertains to a cultures sense of beauty and good taste and is

expressed in its art, drama, music, folklore, and dances.
Art
Of particular interest to international businesspeople are the formal aspects

of art, color, and form because of the symbolic meanings they convey.
Colors, especially, can be deceptive because they mean different things to
different cultures. The color of mourning is black in the United States and
Mexico, black and white in the Far East, and purple in Brazil. Green is a
propitious color in the Islamic world, and any ad or package featuring green
is looked at favorably there. While in the United States mints are packaged
in blue or green paper, in Africa the wrapper is red. So marketers must be
careful to check if colors have any special meanings before using them for
products, packages, or advertisements.
Be careful of symbols, too. Seven signifies good luck in the United States
but the opposite in Singapore, Ghana, and Kenya. In Japan, the number four
is unlucky. If you are giving a Japanese client golf balls, make sure there are
more or less than four in the package. Also, in general, avoid using a
nation's flag or any symbols connected with religion.
Nike, the athletic shoe marketer, recalled 38,000 pairs of shoes carrying the
word air written in flaming letters because, according to Muslims, it
resembles the word Allah in Arabic. Another 30,000 pairs were diverted
from Arabian countries to less-sensitive countries.
It is also important to learn whether there are local aesthetic preferences for
form that could affect the design of products, packaging, or even the
building in which the firm is located.
The American style of steel and glass in the midst of oriental architecture
will be a constant reminder to the local population of the outsider's presence.
Feng Shui. In Asia, it is often believed that if buildings, furniture, roads, and
other human-made objects are placed in harmony with nature, they can
bring good fortune. If they are not, they will cause a disaster.
Music and Folklore
Musical commercials are generally popular worldwide, but the marketer

must know what kind of music each market prefers, because tastes vary.
Thus, a commercial that used a ballad in the United States might be better
received to the tune of a bolero in Mexico or a samba in Brazil. However, if
the advertiser is looking to the youth market with a product that is patently
American, then American music will help reinforce its image.
Those who wish to steep themselves in a culture find it useful to study its
folklore, which can disclose much about a societys way of life. The
incorrect use of folklore can sometimes cost the firm a share of the market.
In another instance, a U.S. company may be paying handsome royalties to
use American cartoon characters in its promotion, only to find they are
considerably less important in foreign markets.
Attitudes and Beliefs
Every culture has a set of attitudes and beliefs that influence nearly all
aspects of human behavior and help bring order to a society and its
individuals. The more managers can learn about certain key attitudes, the
better prepared they will be to understand why people behave as they do,
especially when their reactions differ from those that the managers have
learned to expect in dealing with their own people.
Among the wide variety of subjects covered by attitudes and beliefs, some
are of prime importance to the businessperson. These include attitudes
toward time, toward achievement and work, and toward change.
Attitudes toward Time
This cultural characteristic probably presents more adaptation problems for

Americans overseas than does any other. Time is important in the United
States, and if we must wait past the appointed hour to see an individual, we
may assume this person is not giving our meeting the importance it
deserves. Yet the wait could mean just the opposite elsewhere. Latin
American or Middle Eastern executives may be taking care of the minor
details of their business so that they can attend to their important visitor
without interruption.
An American who has worked in the Middle Hast for 20 years explains the
Middle Eastern concept of time this way: At worst, there is no concept at all
of time in the Middle East. At best, there is a sort of open-ended concept.
The head of Egypts Industrial Design Center, an Egyptian, states, The
simple wristwatch is, in some respects, much too sophisticated an instrument
for the Middle East. One of the first things a foreigner should learn in Egypt is
to ignore the second hand. The minute hand can also be an obstacle if he
expects Egyptians to be as conscious as he of time ticking away.
Probably even more critical than short-term patience is long-term patience.

American preoccupation with monthly profit and loss statements is a
formidable barrier to the establishment of successful business relationships with
Asian and Middle Eastern executives, especially during the development of
joint ventures and other business relationships that have good potential in the
long run precisely the factors in which these people are most interested.
Americans, Be Prompt. If an appointment is made with a group of Germans

to see them at 12 noon, we can be sure they will be there, but to get the same
response from a Brazilian, we must say noon English hour. If not, the
Brazilian may show up anytime between noon and 2 oclock.
Should Americans follow the local custom or be prompt? It depends. In

Spain, a general rule is to never be punctual. If you are, you will be
considered early. However, in the Middle East, the American penchant for
punctuality is well known and lateness by Americans is considered impolite.
The Arabian executives, nonetheless, usually will not arrive at the appointed
hour; why should they change their lifetime habits for a stranger?
Manana. Probably one of the most vexing problems for a newcomer to Latin
America is the manana attitude. Ask the maintenance man when the
machine will be ready, and he responds manana. The American assumes
this means "tomorrow," the literal translation, but the maintenance man
means "in the near future," and if he is reprimanded for not having the
machine ready the next day, he is bewildered. He reasons that everyone
knows manana means in the next few days.
This example illustrates that the ability to speak the local language is only
half the task of communicating. A manager of an American subsidiary in
Saudi Arabia says, You can be talking the same language with someone,
but are you talking on the same wavelength? He states that he has met few
Japanese or Koreans fluent in Arabic, yet they are able to understand and
adapt to local conditions much better than Westerners can because they
seem to be more sensitive to the Middle Easterners mentality.
Adios, Siesta. The revered three-hour siesta has disappeared from both
Mexico and Spain. In April 1999 the federal government issued new
regulations that required most public employees from clerks to cabinet
ministers to begin work at 9 A.M. and leave work al 6 P.M., and instead of
three hours for lunch, they now have only one hour. To be sure that people
leave at 6 P.M. and not at 8 P.M. as they used to, the lights and air-
conditioning are turned off at 6 P.M. sharp. One result of this change is that
people are finding that much work is being done before noon, a rarity under
the old schedule. Since people are no longer drowsy in the afternoon as a
result of the banquet they used to eat at lunchtime, they now tend to make
decisions in the afternoon instead of waiting until the evening.
In Spain the three-hour siesta is disappearing for other reasons. Spain's

growing economy has increased traffic in the cities and allowed young
people to move to the suburbs, but this has created longer commutes,
making it more difficult to dash home for a siesta. A survey taken by a
Spanish mattress company found that only 25 percent of all Spaniards
surveyed still take a siesta and few people actually get into bed anymore.
The company's marketing director explained, The siesta is nothing more
than a clich for most working people in Spain. They don't have time for it.
Directness and Drive
American directness and drive are interpreted by many foreigners as brash

and rude. Although we want to get to the want point in a discussion, this
attitude often irritates others. Time-honored formalities are a vital part of
doing business and help establish amicable relations, which are considered
by people in many countries to be a necessary prerequisite to business
discussions. Any attempt to move the negotiations along by ignoring some
of the accepted courtesies invites disaster.
Deadlines. Our emphasis on speed and deadlines is often used against us in

business dealings abroad. In Far Eastern countries such as Japan, an
American may be asked how long he or she plans to stay at the first
meeting. Then negotiations are purposely not finalized until a few hours
before the Americans departure, when the Japanese know they can wring
extra concessions from the foreigner because of his or her haste to finish and
return home on schedule.
Three Americans, none of whom had ever been to Japan, went to sell
tractors to Japanese buyers. They thought the discussions had gone well and
prepared to wrap up the deal. However, there was no reaction from the
Japanese. The silence became disquieting, and so the Americans lowered the
price. Because there was still no reaction, they again lowered the price. This
went on until their price was far lower than they had planned. What they
didnt know was that the Japanese had become silent not to indicate
rejection of the proposition but merely to think it over, a customary
Japanese negotiating practice.
Attitudes toward Achievement and Work
Germans put leisure first and work second says a German-born woman
now living in the United States. In America, its the other way around.
To the consternation of the production manager with a huge back order in

developing countries, the promise of overtime often fails to keep workers on
the job. In fact, raising employees salaries frequently results in their working
less (economists call this effect the backward-bending labor supply curve).
It is important, however, to note that an additional change has occurred

repeatedly in many developing countries as more consumer goods have
become available. The demonstration effect (seeing others with these goods)
and improvements in infrastructure (roads to bring the products to them and
electric power to operate the products) cause workers to realize they can
have greater prestige and pleasure by owning more goods. Thus, their
attitude toward work changes not because of any alteration of their moral or
religious values but because they now want what only money can buy.
A Mexican distributor came to one of the writers to complain that a number

of his salesmen were producing well for the first week or two of the month
but were then slacking off. Investigation showed that the commissions plus
salary earned during the periods of high production were about the same
each time. It was apparent that the salesmen had earned what they required
to live so that they could loaf the rest of the month. By instituting contests
and informing the salesmen's wives about the prizes to be won, the company
obtained considerable improvement.
Job Prestige. Another aspect of the attitude toward work is the prestige
associated with certain kinds of employment. Many developing countries
exhibit a disdain for physical labor. The result is an overabundance of
attorneys and economists and a lack of toolmakers and welders even when
the wages are higher for the latter.
Managers act likely to encounter sharp differences in attitudes toward work

and achievement in other cultures compared to their own. However, they
must recruit subordinates with a need to get ahead whatever the underlying
motive. One good source for such people is among relatively well-educated
members of the working class who view work as a route to the prestige and
social acceptance that have been denied them because of their birth.
Attitudes toward Change
The American firm, accustomed to the rapid acceptance by Americans of

something new, is frequently surprised to find that newness does not carry that
kind of magic in markets where something tried and proven is preferred to the
unknown. Europeans are fond of reminding Americans that they are a young
nation lacking traditions. The near reverence for traditional methods makes it
more difficult for a production manager to install a new process, a marketer to
introduce a new product, or a treasurer to change an accounting system.
The New Idea. Yet undeniably, international firms are agents of change, and
their personnel must be able to counter resistance to it. The new idea will be
more readily acceptable the closer it can be related to the traditional one
while at the same time being made to show its relative advantage. To other
words, the more consistent a new idea is with a society's attitudes and
experiences, the more quickly it will be adopted.
3
Religion
Religion, an important component of culture, is responsible for many of the

attitudes and beliefs affecting human behavior. Knowledge of the basic
tenets of some of the more popular religions will contribute to a better
understanding of why people's attitudes vary so greatly from country to
country. Figure 9.1 presents a map of the major religions of the world.
Work Ethic
We have already mentioned the marked differences in attitudes toward work

and achievement. Europeans and Americans generally view work as a moral
virtue and look unfavorably on the idle. This view stems in part from the
Protestant work ethic as expressed by Luther and Calvin, who believed it was
the duty of Christians to glorify God by hard work and the practice of thrift.
In Asian countries where Confucianism is strong, the same attitude toward

work is called the Confucian work ethic, and in Japan, its called the Shinto
work ethic after the principal religion of that nation. As mentioned, because
of other factors such as a growing feeling of prosperity and a shift to a
five-day workweek (with two days off, workers develop new interests)
Japanese employers are finding that younger workers no longer have the
same dedication to their jobs that their predecessors had. Workers rarely
show up early to warm the oil in their machines before their shifts start, and
some management trainees are actually taking all of their 15 days of
vacation time. A recent college graduate claims, Students ski in the winter
and play tennis in the summer. What the companies sometimes find out is
that some new employees like skiing better than working.
Asian Religions
People from the Western world will encounter some very different notions
about God. people, and reality in Asian religions. In the Judeo-Christian
tradition, this world is real and significant because it was created by God.
Human beings are likewise significant; so is time, because it began with
God's creation and will end when His will has been fulfilled. Each human
being has only one lifetime to heed God's word and achieve everlasting life.
In the religions of India, the ideas of reality are different. There is a notion
that this world is an illusion because nothing is permanent. Time is cyclical,
and so all living things, including humans, are in a constant process of birth,
death, and reincarnation. The goal of salvation is to escape from the cycle
and move into a state of eternal bliss (nirvana). The notion of karma (moral
retribution) holds that evil committed in one lifetime will be punished in the
next. Thus, karma is a powerful impetus to do good so as to achieve a higher
spiritual status in the next life. Asians who hold these views cannot imagine
that they have not had past lives when they may have been plants, animals,
or human beings. Of the seven best-known religions that originated in Asia,
four came from India (Hinduism, Buddhism, Jainism, and Sikhism), two
from China (Confucianism and Taoism), and one from Japan.
Material Culture
Material culture refers to all human-made objects and is concerned with how
people make things (technology) and who makes what and why (economics).
Review Questions:
Which are the determinants of culture?

Analyze a country using SLEPT method.
What is the culture impact on business functions?
Provide examples of how a culture influenced the way of doing
business.
Analyze the relationship: Internet-business culture.
Provide examples of corporate social responsibility projects in Easter
Europe.
4
INTERNATIONAL
BUSINESS NEGOCIATIONS
Negotiation has been defined quite differently by a number of authors,

researchers and academics. Below is a sample of those definitions:
The processes by which two or more interdependent parties who do

not have identical preferences across decision alternatives make joint
decisions (Bazerman & Carroll, 1987).
It seems best to define negotiation as including all cases in which
two or more parties are communicating, each for the purpose of
influencing the others decision. (Fisher, 1991).
Communication is at the heart of the negotiating process and is the
central instrumental process. (Lewicki & Utterer, 1985).
Negotiation includes cooperation and competition. (Lax & Sebenius,
1986).
4.1 Types of Negotiation
Understanding the importance of identifying the type of negotiation one is

involved in often means the difference between success and a poor outcome.
Out of habit, most people enter into every negotiation in the same way. This
is not only time-consuming, but also counter-productive. Everyone is
different. Every situation is different. So one should vary the approach to
negotiating according to the person one is dealing with, and according to the
desired outcome of the negotiation process.
There are three types of negotiation that are commonly used in the business
world. Viewed in a one-dimensional linear flow, at one end is the Quick
Type, the other end the Deliberate Type, and right in the middle is the
Compromise Type.
The Quick Type
This approach should be used when one needs to negotiate in a hurry.

The main consideration of using this type of negotiation is that the
businesses contact with that individual or organization is limited only to the
current deal. A characteristic of the quick style is that it is fairly competitive
for both the buyer and the seller. Both take a position; neither is keen to
move from that position.
Most academic researchers refer to this type of approach as a distributive

negotiation. The behavioral characteristics exhibited by parties using a
quick approach style of negotiation have been researched at length.
The person using this type of negotiation sees competition as a necessary
part of winning and will focus on the deal at the expense of any relationship.
Lax and Sebenius (1986) describe distributive negotiation as competitive,

with both parties attempting to claim benefits for themselves (Roy H.
Andes, art. 27, P 125). This is win-lose negotiation type, for the gains of one
party necessarily deprive the other party of the same value. This type of
negotiation often destroys relationships and the immediate value is seen as
the prize.
The Compromise Type
This type of approach to negotiation is often seen as an effective form of

negotiation, as each side walks away from the table with some form of deal.
The relationship is preserved and an outcome is achieved, often fairly
quickly.
This style is used when it is obvious that both parties want to reach an
agreement even if there still are a couple of points that need to be resolved.
Phrases such as, Lets split the difference! or Lets meet half way! are
commonly heard during this type of negotiation. Even if it is a win-win
approach, it often results in a sub-optimal outcome. Nevertheless, as
pressure is applied to budgets, forecasts and incentives, this type of
negotiation is becoming very popular.
International Business Negotiations
The Deliberate Type
If the quick type of negotiation is for use when there is no ongoing business
commitment, then the deliberate approach it is used in order to develop or
maintain a long-term relationship, when it is more important to come to an
agreement that satisfies both parties.
This approach is usually used when negotiating contracts that can last for
long periods of time (sometimes decades). This being the case, there are
some aspects negotiators have to take into account:
The deliberate type requires co-operation and relationship building in an

effort to reach an agreement;
It does not develop without a lot of time and hard work;

It means moving forwards, sideways, backwards and back again!
Many deliberate negotiations can turn into a quick negotiation and then back
again in a number of hours. This process continues until agreement is finally
reached. Just because one decides to adopt a deliberate style does not mean
the other side will see it the same way.
The decision about which style to use is in direct connection to the desired
outcome of the negotiation. If one faces a negotiation with the approach
I know what I want and Im going to get it at all costs then the expected
outcome will reflect such lack of planning and consideration.
Outcomes
Outcomes vary with each type of negotiation and preparation is the key.
The question of the desired outcomes is ultimately as serious as the choice
of a negotiating style. Without realizing that the different outcomes exist, it
is difficult to know:
where to start a negotiation, and
if one has achieved the best outcome.
One should also know when is the time to leave a negotiation. Sometimes
the outcome is simply not going to be worth the effort involved to close the
deal. It is helpful to have a model against which to measure the resulting
outcome. Negotiators who have a number of predetermined possibilities as
outcomes have a better chance of getting what they want than negotiators
who aim only for the right result. Aim high, yes but spend time in
preparing more than one desired outcome.
Realistic Outcomes
This is the best result both parties are satisfied by the transaction. This
could result from the quick, compromise or the deliberate approach. These
outcomes offer the classic satisfaction of mutual benefits: both sides feel
they would like to do business again. This is the outcome for which one
should strive in every situation.
Although it can and does happen that both sides have that success feeling
after a quick negotiation, usually this kind of outcome is the result of the
deliberate approach, where both sides are working together in a creative
manner to achieve a realistic result.
Acceptable Outcomes
As we move down the scale, the outcomes start to represent more closely
the quick approach of negotiating. In the case of the acceptable outcome,
one will get to the end of the negotiation and feel that, while the deal might
be acceptable, one could have had a better outcome. If this is the case, one
should not accept the other sides position as given and should always ask
for a better deal.
Worst possible outcome
One can be faced with the worst possible outcome in all negotiation types,
but it is a far more common outcome of the quick type. This is a lose-lose
situation.
If one uses the deliberate negotiation style and still comes to the worst
possible outcome, it is usually because someone becomes emotionally
involved in the process. Many times companies have lost thousands of
dollars due to managerial ego standing in the way of a good deal. Creative
problem solving does not have a chance because someone is standing
there stubbornly with only one thought paramount:
I'm absolutely right and youre definitely wrong.

If the worst possible outcome is considered as an option, then it is far easier

to make a decision and look for creative solutions. Many negotiators invite
the worst possible outcome because of their method of planning or more
accurately their lack of planning. The worst possible outcome is vital in the
planning process because after going past this point, the negotiation should
stop. The worst possible outcome should still be one the parties involved
should be able to live with.
Negotiating across cultures is far more complex than negotiating within a

culture because foreign negotiators have to deal with differing negotiating
styles and cultural variables simultaneously. In other words, the negotiating
styles that work at home generally do not work in other cultures. Thus,
cross-cultural business negotiators have one of the most complicated
business roles to play in organizations. They are often thrust into a foreign
society consisting of what appears to be hostile strangers. They are put in
the position of negotiating profitable business relationship with these people
or suffering the negative consequences of failure. And quite often they find
themselves at a loss as to why their best efforts and intentions have failed
them.
Negotiators in a foreign country often fail because the local counterparts

have taken more time to learn how to overcome the obstacles normally
associated with international/cross-cultural negotiations. Failure may occur
because of time and/or cost constraints. For example, a negotiator may be
given a short period of time to attempt to obtain better contract terms to in
country A, where negotiations typically take a long time, than the terms to
which country B agreed. A negotiator may simply feel that what works in
the home country is good enough for the rest of the world, which is far
from the truth. In fact, strategies that fail to take into account cultural factors
are usually nave or misconceived. Typically, the obstacles to overcome
include:
Learning the local language, or at least being able to select and use an
effective language translator;
Learning the local culture, including learning how the culture handles
conflict, its business practices, and its business ethics, or at least being able
to select and use an effective cultural translator;
Becoming well prepared for the negotiations, that is, the negotiator must
have a thorough knowledge of the subjective matter being negotiated.
Thus, effective cross-cultural negotiators understand the cultural differences

existing between all parties involved; and they understand clearly that not
understanding the differences serves only to destroy potential business
success.
Realistically, it is nearly impossible to learn everything about another

culture. This is because each culture has developed, over time, multifaceted
structures that are much to complex for any foreigner to understand totally.
Therefore, foreign negotiators need not require total awareness of the
foreign culture, they do not need to know as much about that culture as the
locals. However, they will need to know enough about the culture and about
the locals negotiation styles so as not to feel uncomfortable during (and
after) negotiations. Besides knowing enough not to fail, they also need to
know enough to win. For example, in negotiations between Japanese and
American business people, Japanese negotiators have sometimes used their
knowledge that Americans have a low tolerance for silence to their
advantage.
In order to succeed in international negotiation, business people have to

develop a cross-cultural process. This usually includes both strategy and
tactics. Strategy refers to a long-term plan, and tactics refers to the actual
means used to implement the strategy.
Strategic Planning for International Negotiations
Strategic planning for international negotiations involves several stages:

preparations for face-to-face meetings, determining settlement range,
selecting the form of negotiations, determining where negotiation should
take place, deciding whether to use an individual or a group of individuals
in the negotiations, and learning about the countrys views on
agreements/contracts.
Preparation for Face-to-Face Negotiations
Generally, at the preparation stage, the issues to be identified are common

interests, desired outcomes, possible conflicts (and tactics for handling
them), participants abilities and limitations, business markets, financial
status, participants reputation and similar products/services. Typically, the
negotiating strategy that is effective in the home market will have to be
modified for negotiating with foreign businesses, as cultural factors,

business customs and ethical standards of the foreign country must be
considered. For instance, in negotiating with the Chinese, Americans want
to agree on specific terms first while the Chinese want to determine general
principles (the spirit of the contract) and then discuss specifics. In other
words, Americans tend to be concerned with short-term goals, such as
profits, while the Chinese are more concerned with long-term interests, such
as the procurement of American technology and business techniques.
Determining a Settlement Range
At this phase, a negotiation or settlement range 1 must be established. The

least acceptable result (LAR) and a maximum supportable position
(MPS) must be identified. In this respect, the Japanese have a saying:
Banana no tataki uri, which would translate into ask outrageous prices
and lower them when fared with buyer objections. Establishing a range
provides negotiators with the ability to make concessions, and therefore
more flexibility in the negotiations. Some cultures, Russians, for example,
view concessions as a sign of weakness, not gestures of goodwill or
flexibility. To be able to establish a reasonable negotiating range, an
accurate analysis on the nature of all relevant markets must be conducted. If
there are other options, that is, if either the seller or the buyer has other
forms of leverage or enticement, he or she may not need to make as many
concessions, or may not need to make any at all.
Form of Negotiations
International negotiations can take place via telephone, telex, or fax, face-to-
face video conferencing, face-to-face in-person meetings, and use of third
parties. Using a telephone, telex or fax is relatively inexpensive, but because
it lacks personal presence, it is usually not a viable approach on important
negotiations.
Global video conferencing can bean effective negotiating form. There is

face-to-face communication, yet, unlike face-to-face in-person negotiations,
negotiators do not have to travel to strange physical environments and the
costs of airfaire and lodging are saved. However, the development of global
1
Settlement range all possible settlements a negotiator would be willing to make
(Carl Rodrigues, International Management A Cultural Approach, West Publishing
Company, 1996)
video conferencing technologies is still at an early stage. It is not yet widely

used by negotiators, but as technological advancements are made, its use is
more likely. Also, video conferencing are not a viable form for all face-to-
face negotiations. In many cultures, carrying out certain rituals and
ceremonies are an important part of negotiations, and in many negotiating
situations in-person presence is needed. Thus, in important negotiations, the
face-to-face in-person form is the most widely used and it is likely to
continue to be. Using a third party in face-to-face in-person negotiations
sometimes works best, especially when one or both of the parties involved
are not knowledgeable about cross-cultural negotiations, and when there is
much political and/or social hostility between the two countries involved in
the process.
Where Should Negotiations Take Place?
Negotiations can take place in the home country, in the counterparts home
country, or at a neutral site. Most negotiators would prefer that negotiations
take place on their home turf. Familiar surroundings and easy access to
information provide more leverage; fatigue and stress associated with travel
to the foreign country are not experienced; and, of course, lower travel costs
are incurred. On the other hand, negotiating in the foreign country does have
its advantages, such as sometimes receiving certain concessions because one
has endured the burdens of travelling. And quite often it is a good idea to
base decisions on site observations for example, it is a good idea to see the
plant where the product is going to be manufactured.
A neutral site that s equally advantageous to both parties is often ideal. For
example, an American executive from Park Avenue in New York City may
not adapt well in a village in the Amazons, Brazil, and an executive from
this village may not adapt well in New York City. Thus a negotiating site
that falls between the two extremes may be the most viable.
Individual or Team Negotiations?
An organization can assign one individual or a group of individuals to

conduct the negotiations. The obvious advantages of using one person are
that it is cheaper and a decision can be made quickly. An obvious
disadvantage is that one person may not have sufficient ability to deal with
the other side, which typically consists of a group of experts and negotiating
specialists an advantage of the group approach. Furthermore, in some

cultures, Japan, for example, not using a group may be interpreted to mean a
lack of interest in the negotiation. Also, the individual negotiator often finds
himself or herself pressed to make a decision when it is not the right time to
do so. In a group, the members can always take a break to confer, therefore
buying time to assess the situation and develop new strategies and tactics
(the Japanese typically use this method because their decision usually
require group consensus). Thus, in negotiating situations where cost and
speed of a decision are more important than the other factors, one should use
only one negotiator; otherwise use a group of experts and negotiating
specialists.
To help speed up decision making a bit and still have access to expert input,
a team of negotiators can be used, but one member is given full negotiating
authority (Americans usually use this approach). Of course, the other side
may know this. And in the negotiation game, for tactical reasons, both
parties try to learn who the decision maker is. In this respect, American
decision-makers usually reveal themselves quickly because they tend to be
very active in the negotiation. On the other hand, Japanese decision-makers
are usually not very active in the negotiations they simply remain silent
and listen. The Japanese also tend to include several young executives in the
negotiation team simply for exposure and on-site development purposes.
What Are the Countrys Views on Agreements/Contracts?
Countries existing on a high commercial level have generally developed a

working base on which agreements can rest. The base may be on one or a
combination of three types:
Rules that are spelled out technically as laws or regulations.
Moral practices mutually agreed and taught to the young as a set of
principles.
Informal customs to which everyone conforms without being able to
state the exact rules.
Some cultures favor one, and some another. Americans, for example, rely
heavily on written contracts, and they tend to consider the negotiations
ended when the contract is signed. Many societies, however, do not place
much importance on written contracts; they rely more on the development
of a social relationship. And in many cultures, Greece, for instance, a signed

contract is simply a starting point for negotiations, which end only when the
project is completed the clauses in the contract are subject to
renegotiation. Thus, the international negotiator must understand the nature
of the other countrys views and practices relating to agreements and
contracts.
4.2 Tactical Planning for International Negotiation
Tactical planning for international negotiation involve determining how to

obtain leverage, use delay, and deal with emotions.
Leverage
In negotiations, it is usually accepted that the more options one has the more
leverage one has and the more concessions ones opponents may be willing
to make. For example, when negotiating with an Argentinean government to
establish a manufacture subsidiary in Argentina, and the government
representatives know that their site is the only viable one, they will not
make any concessions, but they are likely to ask for some concessions.
However, if the Argentinean negotiators believe that one can as easily set up
subsidiary in Peru or Brazil, and they need the technology and most Third
World nations do they are likely to be willing to make concessions.
Third World countries appear to have leverage over multinational

companies. This is because they have control over access to their own
territory, including markets, the local labor supplies, investment
opportunities, sources of raw materials, and other resources that
multinationals corporations need and desire. China, for instance, had a
rather fast economical development. Its 1.3 billion prospective customers,
along with its relatively inexpensive cost of labor, make China an attractive
place for many foreign companies to establish operations. This, it seems,
would give Chinese negotiators considerable leverage, and concessions
would often have to be made by foreign negotiators. This may be true in
some cases, but in many instances, multinational corporations have
negotiating advantages because they possess the capital, technology,
managerial skills, access to global markets, and other resources that
governments in the Third World need for economic development.
Delay
Applying delay tactics is another form of leverage. If one walks away from
the negotiations and the opponents become overly anxious, they may be
willing to make some concessions. On the other hand, one may have to
make some concessions, if one becomes anxious before the opponent does.
Furthermore, the pause in the negotiations enables one to rest and
recuperate, assess progress, obtain other information, and reformulate
strategy. In this context, patience is generally recognized as being a key
personal attribute in negotiations. Americans tend to be low on patience,
while the Japanese tend to be high. As an illustration, refer to Exhibit 2.1.
Emotions
Even though behavior in negotiations is mainly intuitive, it should never be

judgmental. To be able to listen to other negotiators, one should exclude his
or her subjective opinions, preconceptions, and emotional filters. By
becoming aware of ones emotions, one can learn to change the reactions
and avoid being manipulated by others or by the emotions themselves one
can prevent emotions from controlling a negotiation. On the other hand, if
one negotiates solely on the basis of logic, one will miss emotional signals
sent out by the other negotiator. Thus, the key to negotiations is to be
perceptive of feelings without being reactive. As an illustration, refer again
to Exhibit 2.1.
Exhibit 4.1 Dont Just Sit There Do Something!
In the opinion of a Japanese executive: You Americans are fond of the

expression Dont just sit there do something! once in a while you
should reverse that advice. We Japanese would prefer to say Dont just do
something sit there!. Contemplation may be more productive than
action. It is true that U.S. businessmen have always been action-oriented.
Only when rushing to an endless series of appointments and conferences
do they feel productive. For many, to be in perpetual motion seems to be
their ultimate goal. It was Santayana who once observed that Americans
are possessed by an obscure compulsion that will not let them rest, that
drives them on faster and faster. The greatest compliment that can be paid
to an U.S. executive is to call him dynamic. Furthermore, foreign visitors
are startled by Americans typically low tolerance of silence. Most Asians,
in contrast, can endure long periods during which nobody says anything.
They feel that these opportunities for organizing and evaluating ones
thoughts may be the most productive in any conference or negotiation.
Their relative inability to tolerate long periods of silence has gotten many
Americans negotiators into serious trouble when the other side feels no
comparable frustration and tension.
The international vice president of a large U.S. corporation confessed to

his own experience with the consequences of failing to understand foreign
negotiating patterns. He said, In one of my companys deals overseas, our
buyer was sitting across the table from the Japanese manufacturers
representative for the purpose of bidding on an item in which we were
interested. Following the usual niceties, our man offered $150,000 per
batch. On hearing the bid, the Japanese sat back and relaxed in his chair to
meditate. Our buyer, interpreting this silence to be disapproval, instantly
pushed his offer higher. It was only after the session was over he realized
he had paid too much.
It is true that Americans are considered an outspoken lot. Madaaki Imai

contrasts this with the behavior of his own countrymen in saying, Sitting
mute is clearly a minus at the Western conference, while silence is still
silver, if not golden, in the Japanese mind-set. Many Japanese sit silent
throughout the conference. Nobody thinks the worse of them for that. They
are like oxygen: their views may not be visible, but they are making a
positive contribution nonetheless.
Unless and until American business leaders can learn to live more
comfortably with silence, and to value thinking and listening as highly as
mere physical activity, foreign executives will enjoy an easy advantage. It
has been suggested that top U.S. executives keep a tiny replica of the giant
Buddha of Kmakura, Japan, on their desk at all times. Its typical posture of
quiet and peaceful meditation should serve as a constant reminder that
great leaders are remembered for their thoughts as well as their deeds.

p. 328 2
2
The exhibit is an excerpt from Arthur M. Whitehill, American Executives Through
Foreign Eyes, Business Horizons (May-June 1989), p. 44
4.3 International Negotiator Profiles
4.3.1 Relationship-Focused, Formal, Polychronic and Reserved
The Chinese Negotiator
The Language of Business: Today more and more Chinese negotiators speak
foreign languages, especially English. Nevertheless it is advisable to employ
an interpreter. When working on a major deal it is also recommendable to
hire ones own interpreter rather than relying on one supplied by the other
party.
Make Initial Contact Indirectly: A major dynamic of Chinese society is

Guanxi, which refers to the special relationship two people have with each
other. The two individuals who share this relationship assume that each is
fully committed to the other; that they have agreed to exchange favors, even
when official commands mandate that they act neutrally. The guanxi
relationship, even though it is preferred, does not have to be between
friends. In the relationship, an individual who refuses to return a favor loses
face and becomes known as untrustworthy. Foreigners wishing to do
business in China who have not established a guanxi relationship may very
well have to deal with uninterested officials 3 . That is why, Chinese
companies usually do not do business with strangers. A good way to make
contact is at a trade show or with an official trade mission. Another way is
to be introduced through an intermediary, preferably a person or
organization that knows both companies. The bank or a trading company,
law firm or embassy official could also introduce ones company.
Build a Relationship before Talking Business: In China, developing rapport

is a critical and time-consuming part of the overall negotiating process. It is
important to get to know ones counterparts well before starting to discuss
business. Socializing over drinks and dinner is a good way to build rapport.
Orientation on Time: The Chinese generally value punctuality and

adherence to schedules. They expect the same of their foreign counterparts
especially potential suppliers.
3
Carl Rodrigues, International Management A Cultural Approach, West Publishing
Company, 1996, p. 310
Hierarchy and Status in China: Younger, subordinate individuals are

expected to defer to older, higher-ranking persons. Young marketers for
example must be careful to show respect to older, more senior Chinese
buyers.
Maintaining Surface Harmony: Open displays of anger or impatience are

seen as infantile and offensive behavior. The Chinese quickly lose respect
for people who cannot retain a calm exterior under stress. Foreign
negotiators are advised to stay cool and to avoid open confrontation at all
cost. A false smile is preferable to an honest scowl.
Concern with Face: Face has to do with self-respect, dignity, and

reputation. One can lose face by appearing childish or lacking in self-
control for example by losing ones temper. One can cause the
counterparts to lose face by expressing sharp disagreement, embarrassing
them, criticizing them in public or by showing disrespect. Causing serious
loss of face can completely disrupt a promising business negotiation. One
can give the counterpart face by using polite forms of address and observing
local customs and traditions. Giving face is an effective way to build a solid
relationship. If one makes a mistake he/she may be able to save face with a
humble apology. And one can save the other partys face for example by
allowing him a graceful exit from a difficult negotiating position.
Formality: Chinese negotiators tend to behave rather formally and are more
comfortable with visitors who do likewise.
Verbal Communication: Reserved and formal. Less reliance on written and

telephone communication, more emphasis on meeting face-to-face. The
Chinese at times employ indirect, vague, oblique language wherein the
meaning is deliberately ambiguous and implicit rather than clear and
explicit. They may use circumlocutions and evasive language to avoid
offending the other party. For example, many Chinese consider it offending
to reply to a request with a blunt no. So a negotiator might answer That
will require further study or That will be difficult instead. The result is
that politeness is sometimes confusing for the foreigners. The Chinese tend
to rely as much on paraverbal and non-verbal as on verbal communication.
Paraverbal Communication: Chinese speak more softly than people of some

other cultures. They also try to avoid interrupting the other party, since this
would be very rude. A laugh or a giggle sometimes signals stress,
nervousness or embarrassment rather then amusement. Foreign negotiators
should avoid loud talking and carefully wait until their Chinese counterpart
has finished speaking before saying their piece.
Non-verbal Communication: When meeting and greeting, expect a gentle

handshake and moderate eye contact. Strong, direct eye contact may be
misinterpreted as an attempt to intimidate or indicate of outright hostility.
China is a low-contact culture, with little touching. Body language is
restrained, with small gestures. Avoid arm waving and wide, expansive
gestures. If the Chinese partner raises his or her eyebrows it could indicate
disagreement. Touching thumb and forefinger together while raising the
third, fourth and fifth fingers signals the number 3. Since gesture closely
resembles the A-OK sign, it can lead to confusion. Taboo gestures include
arm grabbing, backslapping and striking palm of hand with fist.
Sales Presentation: Avoid opening with a joke or humorous anecdote. This

would show inappropriate informality. Speak clearly and simply. Avoid
using double negatives and convoluted sentences, jargon, slang or unusual
words. Take care not to over-praise the product or company. Instead offer
testimonials or articles written about the firm. Likewise, avoid making
negative comments about the competitors. Let others criticize the
competitors and their products.
Determining Your Bargaining Range: Chinese negotiators often bargain

vigorously and expect their counterparts to grant major concessions on price
and terms during the course of the negotiation. They may measure their
success at the bargaining table by how far they are able to move their
counterpart from his/her opening offer. So wise negotiators build some
margin into their opening offer so as to leave themselves room for
bargaining.
Concession Behavior: be prepared for bazaar haggling. Take care to make

any concession with great reluctance, and only on a strict ifthen
conditional basis, demanding something equivalent in return. Also be
prepared for pressure tactics. For example, at a critical point in the
negotiation you may spot your chief competitor seated in the reception area,
waiting to meet your Chinese counterpart after your session. A great way to
push you into a concession you do not want to make.
Plays and Counter-Plays: Although Chinese negotiators generally mask

negative emotions, they may on occasion display anger as a pressure tactic.
Government negotiators sometimes plead the poverty of their country to
obtain a lower price. They may also flatter you as an old friend. Be aware
that friends are expected to help China by offering better terms.
Decision-Making Behavior: negotiating in China tends to be a long, time-

consuming process requiring patience and a calm disposition. This is
especially true when doing business with a government entity or a public
sector company. Decisions take time.
Role of the Contract: Chinese may regard the final written agreement as less
important than the strength of the relationship with you and your company.
This does not mean that you should not get everything in writing too. The
Chinese may expect to renegotiate the contract if circumstances change. For
them, a contract is more an expression of intent.
Business Protocol: Dress code: suit, white shirt, conservative tie for men.
Conservative suit or dress for women.
Meeting and Greeting: expect as oft handshake and moderate eye contact.
Avoid a bone-crashing handshake or an overly direct gaze.
Forms of Address: use the persons family name or organizational title.

Thus, Lee Er Peng is Mr. Lee, not Mr. Peng. Avoid calling a Chinese person
by his or her given name unless specifically asked to do so. On business
cards printed in Chinese the family name comes first, followed by two given
names. But on cards printed in Western languages some Chinese reverse the
order. When in doubt, ask which is the family name.
Exchange of Business Cards: the exchange of name cards is done using both
hands. When one receives the counterparts card, one reads it and puts it
away in a leather card case or places it on the table. By no means one should
write on someones name card in the presence of the giver.
Gift Giving and Receiving: Exchanging gifts is an important part of the

business culture, contributing to relationship building and the development
of guanxi. One should be prepared with appropriate gifts for ones
counterparts. A good choice would be an expensive cognac, other ideas are
items typical of ones own country or tasteful logo gifts. The gift should be
presented with both hands. The recipient will probably put it aside and open
it after the meeting. The gift should also be received with both hands and
opened later.
Wining and Dining: Entertaining and being entertained is an essential part of

building a close relationship with ones counterpart. In China one may be
incited to one or more formal banquets, depending on the length of ones stay.
One should always reciprocate with an appropriate banquet. In ones
homeland or a third country, a restaurant offering local specialties is usually a
good choice, however, business people travelling abroad will often appreciate
a good Chinese meal as well. To show ones commitment to Chinese
customs, one should master the fine arts of eating with chopsticks and
toasting ones counterparts appropriately. Women are not expected to keep up
with the rounds of banquet toasts and they are definitely not expected to get
drunk. Males who prefer not to drink alcohol can legitimately excuse
themselves on the grounds of religious objection or ill health.
Maintaining the Relationship: Between visits one should stay in contact

with ones Chinese counterpart by phone and correspondence.
Exhibit 4.2 Negotiating with the Chinese
Foreign business people often complain about the length of the negotiation
process in China. Efficiency needs to be improved and the process speeded
up, but foreigners also have to keep in mind that the pace of life in China is
slower than in, for example, the U.S. After all, Americans have a reputation
for the quickest pace of life in the world. They move in a hurry and are
result oriented. To ensure a smooth negotiation process, it is important that
foreign negotiators know about their counterparts. They should know, for
example, whether their Chinese partners have the legal capacity or authority
to negotiate or conclude a deal, whether they fully understand all aspects of
the transaction, and so on.
Foreigners also need to realize that they cannot deal with a government
entity in China in the same way they might deal with a home-country
government entity or company. In addition, to differentiate between big,
fundamental issues Chinese have their own way of doing business. For
example, in a negotiation between an American and a Chinese party, the
Chinese insisted that the contract be based on the chinese format, while
the Americans thought that their format was more sophisticated. A seesaw
battle ensued. The American side finally took to China a draft based on
the chinese format but marked with additions and changes. On looking
back, the question of which format to use seems a minor issue. But the
underlying point is that negotiations will not work if one party tries to
over-power the other. For many Chinese companies, doing business with
the West is a new experience. Lacking experience and confidence they

want to hold on to something familiar. Once they gain experience, they
will relax more. One more point: foreign companies can help shorten the
negotiation process by doing their homework before making the journey
to China. They should consult their legal counsel before they bring up
issues for discussion with the Chinese.

p. 319 4
The Indian Negotiator
In the Hindi language, kal means both yesterday and tomorrow. That
makes kal (pronounced cull) an apt symbol for India a land of the future
hamstrung by the red tape of its bureaucratic past.
Bureaucratic Red Tape: Regulatory obstructionism provides the toughest

obstacle for foreigners trying to do business in the worlds second most
populous country. With a population of over 1 billion the Indian market is a
powerful magnet for exporters and investors. Unfortunately, the unprepared
business visitor is liable to get snarled up in the ubiquitous red tape.
Any Old India Hand will tell one that there are three keys to success in this
enormous market. One is patience. Another is the right local partner. And
the third is a basic grasp of the business customs and practices.
Patience will serve one especially well when dealing with officialdom. Time
has a different meaning in India, taking the above linguistic example a step
further: kal-kal means both the day before yesterday and the day after
tomorrow. Minutes just do not count for much in this highly polychronic,
fluid-time culture.
Meeting with a senior government official? Prepare to be kept waiting half

an hour to an hour without the courtesy of an apology. Nor should one be
surprised if the important meeting is interrupted every few minutes while
the harried official across the desk takes phone calls, signs piles of
documents and receives impromptu visitors. With a little bit of luck, a one-
hour meeting will take half the day. It would be a mistake to interpret this
4
The source of the quoted article is Jia Zhao, Doing Business with China, East Asian
Executive reports, January 1991, p. 10
behavior as rude or reflective of sloppy work habits. Clocks in South Asia

simply tick to a slower beat. It is a question of culture and climate.
The right local partner will have the connections to reduce but not
eliminate those frustrating delays. But avoid setting ones hopes too high.
While finding the right partner is an essential condition for success in India,
it is hardly a sufficient one.
Some knowledge of local business customs and practices will help one find
the right partner. That same cross-cultural knowledge will also help one
work effectively with this partner, client, customer or supplier. One should
always have in mind the following aspects:
Communication: India is a linguistic mosaic with over 300 different
languages and that does not include dialects. While Hindi is the most
widely spoken, 14 other major tongues are official languages. Luckily,
English is the language used for international business. However, Indian
English is sprinkled with local terms that sometimes confuse foreign
visitors. For instance, if ones partner refers to a lack of rupees he may be
talking about a lakh of rupees meaning 100,000 of them.
Indian business culture of course reflects the basic values of the society.
One such value is the importance of family, which explains the structure of
most small and medium businesses from Chandigar to Calcutta. Indians also
value respect for age and authority. Youngsters are expected to defer to
elders; white hair confers status. The concept of status leads logically to a
discussion of caste. Hindus belong to whatever caste they are born into.
They cannot move up the caste ladder by getting a Ph.D., by getting elected
to high office or by becoming a millionaire. Some 14% of Hindus fail to
qualify for even the bottom rung of the caste ladder. These are untouchables,
currently known as dalits.
Europeans and North Americans also need to be aware that Indians are
strongly relationship-focused. One should budget plenty of time to get to
know ones counterpart before launching into the sales pitch. In India one
should first make a friend before one can make a deal.
Greeting: When meeting and greeting people, many Indian women prefer to
give the graceful namaste gesture (namaskar in the South) rather than shake
hands. One should return this greeting by placing both hands together just
below the chin, finger tips up, while inclining the head in a slight nod.
Another charming South Asian custom is the garlanding of important
visitors. Business visitors often wonder what to do with the garland after it
has been draped around their neck. The appropriate response is to smile in
thanks, remove it and carry it in hand until the host relieves one of the
fragrant burden.
Wining and Dining: When entertaining Indian guests, one should remember
that most Hindus are serious vegetarians. And because of the importance of
the family one can expect some of the invitees to bring along a few relatives
to the dinner. For both those reasons one should throw buffet dinners. The
buffet format not only provides flexible seating for unexpected guests, it
also allows the food to be displayed on two tables at opposite ends of the
room one for vegetarians and the other for the meat eaters. Another
important aspect is that Hindus (80% of the population) do not eat beef and
that neither Muslims (12%) nor Hindus eat pork. Hindus revere the cow
while both religious groups consider the pig unclean.
When a guest in a traditional Indian home, politely decline food or
refreshments the first time they are offered. To accept immediately signifies
greediness and poor breeding. By the same token, one could expect the
Indian guests to similarly refuse. The gracious host or hostess responds by
repeating the offer at least twice.
Negotiating Behavior: Once a comfortable relationship with the local
counterpart has been built, the negotiation process can begin. Indian
business people are often real experts at bazaar haggling, so one should be
prepared for a tough, drawn-out bargaining session. At some point in the
bargaining process the counterpart could play the poverty card, assessing
that one should be willing to pay the higher prices of Indian products to help
India develop. The reason behind these prices, usually much higher than the
world market levels, are the decades of protectionism and over-regulation,
which have made India a high-cost economy despite low labor costs.
4.3.2 Relationship-Focused, Formal, Monochronic and Reserved
The Japanese Negotiator
The Language of Business: Today more and more Japanese negotiators

speak foreign languages, especially English. Nevertheless, because so many
Japanese executives read English better than they speak or understand it, it
would be better considering employing an interpreter. When working on a
major deal it might be better hiring an interpreter than relying on one
supplied by the other party.
Make Initial Contact Indirectly: Japanese do not like to do business with

strangers. A good way to make initial contact is at a trade show or on an
official trade mission. Or one could arrange for an introduction by a
respected third party of high status, ideally someone known to both
companies involved in the deal. Ones bank trading firm, law firm,
consulting firm, embassy or JETRO could introduce ones company to the
Japanese counterpart.
Build a Relationship Before Talking Business: The Japanese concept of wa

necessitates that members of a group, be it a work team, a company, or a
nation, cooperate with and trust each other. Thus, the Japanese usually
prefer, or even demand, that business dealings occur among friends, and not
like to deal with strangers. Therefore, proper introductions are crucial when
business relationships are launched. Before business transactions can begin,
the Japanese must first place the foreigner within some group context (a wa
relationship must be established) 5. That is why developing rapport is the
most important and often the most time-consuming component of the
overall negotiating process. It is essential to get to know the counterpart
before starting to discuss business. Socializing over drinks and dinner is a
good way to build rapport. One should not be offended if the Japanese tend
to inquire about ones religious or political beliefs. These are common
questions used in Japan because they are interested in knowing as much
about their partners and their companies, it is a confidence builder.
Orientation on Time: Japanese value punctuality and strict adherence to

schedules. And they expect the same of their foreign counterparts, especially
potential suppliers. However rude it may be considered being late for a
business meeting, it is quite acceptable to be late for a social occasion.
Hierarchy, Status and Gender in Japan: Younger, subordinate individuals

are expected to defer to older, higher-ranking persons. Since few women
have reached positions of authority in Japanese companies, most Japanese
men are not used to dealing with females on the basis of equality in a
business context. In Japan, buyers automatically enjoy higher status than
sellers and expect to be treated with great respect. Hence young foreigners
especially if they are women tend to face significant cultural obstacles
when trying to sell to Japanese customers.
5
Carl Rodrigues, International Management A Cultural Approach, West Publishing
Company, 1996, p. 314
Four ways to overcome age and gender barriers are 6 :
Be introduced by the eldest, most senior male colleague available. Status is

a transferable asset.
As a seller, learn the verbal, paraverbal and nonverbal ways of showing

proper respect and deference to your customer. Showing respect gains you
respect.
Gradually establish your professional or technical credentials being

careful not to appear cocky or boastful. Expertise confers status.
Many women are more skilled than their male counterparts in reading body
language. This ability is very valuable when dealing with Japanese, who
employ a great deal of nonverbal communication. Learn to read body
language.
Maintaining Surface Harmony: Japanese regard open displays of anger or

impatience as infantile and offensive. They quickly lose respect for people
who cannot retain a calm exterior under stress. Foreign negotiators are
advised to stay cool and to avoid open confrontation at all cost. A false
smile is preferable to an honest scowl.
Concern with Face: Face has to do with self-respect, dignity, and

reputation. One can lose face by appearing childish or lacking in self-
control for example by losing ones temper. One can cause the
counterparts to lose face by expressing sharp disagreement, embarrassing
them, criticizing them in public or by showing disrespect. Causing serious
loss of face can completely disrupt a promising business negotiation. One
can give the counterpart face by using polite forms of address and observing
local customs and traditions. Giving face is an effective way to build a solid
relationship. If one makes a mistake he/she may be able to save face with a
humble apology. And one can save the other partys face for example by
allowing him a graceful exit from a difficult negotiating position.
Formality and Rituals: To help maintain surface harmony and prevent loss
of face, Japanese rely on a number of ritualized codes of behavior.
Examples are the tea ceremony and the exchange of business cards.
Japanese negotiators tend to dress and behave rather formally and are more
6
Richard R. Gesteland, Cross-Cultural Business Behavior, Copenhagen Business School
Press, 1997, p. 150
comfortable with visitors who do likewise. One should try to be formal.

Do not ask if it would be O.K. to call them by their first names or if
everyone can take off their suit coats to relax. This type of atmosphere or
approach tends to give the Japanese a feeling of a lack of sincerity.
Communication Style: Reticent and formal. Less reliance on written and

telephone communication, more emphasis on meeting face-to-face.
Verbal Communication: The Japanese frequently employ indirect, vague,

oblique language wherein the meaning is deliberately ambiguous and
implicit rather than clear and explicit. They may use circumlocutions and
evasive language to avoid offending the other party. For example, many
Japanese consider it offending to reply to a request with a blunt no. So a
negotiator might answer, That will require further study or That will be
difficult instead. The result is that politeness is sometimes confusing for
the foreigners. Surface harmony has been maintained at the cost of clarity.
Japanese distrust glibness. They use fewer words than many Westerners and
tend to rely more on paraverbal and non-verbal communication.
Paraverbal Communication: Japanese tend to speak softly and hesitantly

and employ frequent silences. They may pause at considerable length before
answering a question or responding to a request and try to avoid interrupting
the other party, since this would be very rude. A laugh or a giggle
sometimes signals stress, nervousness or embarrassment rather then
amusement. Foreign negotiators should avoid loud talking and carefully
wait until their Japanese counterpart has finished speaking before saying
their piece.
Non-verbal Communication: When meeting and greeting, expect a gentle

handshake and moderate eye contact. Strong, direct eye contact may be
misinterpreted as an attempt to intimidate or indicate of outright hostility.
A smile may mask disapproval or anger. Body language is very restrained,
formal with small gestures. Avoid arm waving and other vigorous gestures.
Japan is a low-contact culture. The Japanese, like the Chinese, avoid
physical contact as much as possible, and they require even more space than
Americans.
Making a Presentation: Avoid opening with a joke or humorous anecdote.

This would show inappropriate informality. Speak clearly and simply.
Avoid using double negatives and convoluted sentences, jargon, slang or
unusual words. Do not rattle off numbers to indicate the knowledge of the
project. Japanese can study Numbers in detail at a later date. Always bring
as much information as possible about the company and its plans. Also, take
care not to over-praise the product or company. Instead offer testimonials or
articles written about the firm. Likewise, avoid making negative comments
about the competitors. Let others criticize the competitors and their
products. Be prepared for misunderstandings and clarify the points with
sincerity and willingness to assist.
Determining the Bargaining Range: In some business cultures, starting off

with a high price so as to leave room for bargaining is an effective strategy.
This approach may backfire with the Japanese. One should have a cogent
reason for any major concession on price or terms.
Concession Behavior: Japanese often find it difficult to grant concessions

during a negotiation. This is because their bargaining position was usually
arrived at via long, drawn out process within their company. Any change in
the package may require a lengthy internal discussion.
Decision-Making Behavior: Although things are changing, many Japanese

companies still make decisions by consensus. Do not demand an immediate
decision on points covered in the meetings. As most decisions are made in
groups, the Japanese team needs time to compare notes and discuss matters.
This is a time-consuming process, another reason to bring patience to the
negotiation table.
Role of the Contract: The final written agreement is less important than the
strength of the relationship with the counterpart. However, it is better to put
everything in writing anyway. The Japanese side may expect to renegotiate
the contract if circumstances change. For them, the contract is an expression
of intent.
Some Westerners like to hand the other side a draft contract to be used as
the outline for negotiation, and proceed to discuss each item point by point.
With the Japanese it is better to keep the draft to oneself. Look for areas of
agreement before discussing the difficult items. And call in the lawyers only
at the end of the negotiating process, after agreement has been reached.
Business Protocol: Dress code: suit, white shirt, conservative tie for men.
Conservative suit or dress for women.
Meeting and Greeting: One should hand over the business card using both
hands, holding it between thumb and forefinger with a slight bow and state
ones name and ones companys name. Receive the counterparts business
card with both hands, study it for several seconds and then place it
respectfully on the conference table or in a leather (not plastic) cardholder.
Expect a bow and a soft handshake. Avoid an excessively firm handshake or
overly direct eye contact.
Form of Address: Address ones counterpart with his or her family name
plus the suffix san, as in Watanabe-san. In Japan the family name comes
first, followed by given names. But on business cards meant for foreigners
the order may be reversed.
Gift Giving and Receiving: Exchanging gifts is an important part of the

business culture, contributing to relationship building and the development
of guanxi. One should be prepared with appropriate gifts for ones
counterparts. A good choice would be an expensive cognac, a good single
malt whisky or a tasteful item that is typical of ones city, region or country.
Note that the wrapping and presentation of the gift are more important than
the content. The gift should be wrapped in Japan or by someone
knowledgeable of Japanese customs. It should be presented with both hands.
The recipient will probably put it aside and open it after the meeting.
The gift should also be received with both hands and opened later.
Wining and Dining: Entertaining and being entertained is an essential part of

building a close relationship with ones counterpart. In Japan one may wish
to reciprocate with an invitation to a Western style restaurant serving for
example French or Italian cuisine. In ones homeland or a third country, a
restaurant offering local specialties is usually a good choice. To show ones
commitment to Chinese customs, one should master the fine arts of eating
with chopsticks and toasting ones counterparts appropriately.
For males, ritual drinking is a traditional way to get to know ones

counterpart. It is sometimes appropriate to drink heavily, even get drunk.
Alcohol seems to dissolve the stiffness and formality one may encounter
during business meetings.
Japanese rely heavily on tatemae or surface communication, telling one

what they think one wants to hear. After a few drinks many Japanese
businessmen let their hair down and indulge in honne communication,
telling what they really think. So alcohol can be a good lubricant to a sticky
negotiation.
Women are not expected to keep up with the rounds of banquet toasts and
they are definitely not expected to get drunk. Not being able to take part in
the male drinking ritual could represent a slight handicap for women trying
to do business with the Japanese. Males who prefer not to drink alcohol can
legitimately excuse themselves on the grounds of religious objection or ill
health. They may however thereby miss out on some opportunities to
deepen the relationship and to learn more about their Japanese partners.
Maintaining the Relationship: it is advisable to stay in close contact with the

Japanese customers and partners. Between visits one should stay in regular
contact by phone and correspondence.
4.3.3 Relationship-Focused, Formal, Polychronic and Expressive
The Arab Negotiator
The Language of Business: Many Arabs speak English fluently.

Nevertheless, one should be prepared to employ an interpreter in case of
need. When working on a major deal it might be better hiring an interpreter
than relying on one supplied by the other party.
Making the Initial Contact: In all Arab countries one is required by law to
do business through a local agent. The success will depend largely on the
choice of agent and the working relationship with this agent. The agent
should have good contacts, with access to the right people and channels of
distribution. While agent commissions vary, it usually lays around 5 to 8
percent.
Build a Solid Relationship before Talking Business: Developing a strong

personal relationship is the real key to doing business with Arabs. Personal
contacts make things happen. It is very important to get to know ones
counterpart before starting to discuss business. Socializing is a good way to
build and maintain good rapport.
Exchanging Favors: The exchange of mutual favors is the cornerstone of

any relationship with an Arab. If one is asked for a favor, one should agree
to do it even if one thinks one may not be able or willing to do it. The Arab
will understand that circumstances later make it impossible to fulfill his

request and will appreciate the fact that one agreed to try to help.
Orientation to Time: Arabs look at time differently than people from

monochronic cultures. People and relationship are more important than the
clock. So one may be kept waiting while the Arab partner deals with
unexpected visitors or family emergencies. He may be late for any number
of pressing reasons. Once the meeting starts, it may be frequently
interrupted by phone calls, papers to sign and drop-in visits by old friends
and relatives.
As to deadlines, only God knows the future so it is unwise to push hard for
something to be done by a specific date. Schedule flexibility is
recommendable, so that a few days or weeks delay will not cause serious
problems. Patience is a major virtue in Saudi Arabia and the Gulf.
Hierarchy, Status and Gender: An Arabs status is determined primarily by

his or her social class and family background. Saudis and many other Arabs
are not used to seeing women in business. For this reason they may have
difficulty in relating to female executives. As a women doing business in the
Arab world, one should be introduced by an older, high-ranking male and
gradually establish ones professional or technical credentials, without
appearing cocky or boastfull 7 . With luck one may be regarded as a foreigner
who happens to be a female.
The Role of Islam: The Arab world is a conservative, traditional society

strongly influenced by Islam, which pervades every aspect of life. Visitors
are advised to learn as much as possible about Arab customs, practices and
taboos before arriving.
Honor and the Family: An Arabs honor, dignity and reputation are precious
to him and must be protected at all cost. Loyalty to the family is a
paramount value. Family needs often come before individual needs.
Expressive, Indirect Communication Style: Arabs readily express emotion

and use elaborate verbal language marked by frequent exaggeration for
effect. Because Arab negotiators try to avoid confrontation they usually
7
Richard R. Gesteland, Cross-Cultural Business Behavior, Copenhagen Business School
Press, 1997
avoid saying no to ones face. A similar style should be adopted when doing
business in the Arab world.
Nonverbal Communication: When meeting and greeting expect a gentle

handshake and strong, direct eye contact. Arabs of the same sex like to stand
or sit very close to each other, closer than many foreigners are accustomed
to. One should not move away, since this would signal coldness to the Arab
counterpart.
As an expressive culture Arabs engage in frequent touching among friends

but the amount of physical contact between business acquaintances varies
within the Arab world. The right hand should always be used for eating or
passing something to an Arab, as the left hand it is considered unclean. The
left-handed should train themselves to use the right hand as much as
possible. When seated avoid showing the soles of the shoes to an Arab. The
feet and shoes are considered unclean.
Determining the Bargaining Range: Arab negotiators tend to be enthusiastic

bargainers and may expect their counterparts to grant major concessions on
the price and terms during the course of the negotiation. Some Arab
businessmen measure their success at the bargaining table by how far they
are able to change ones opening offer. They think of negotiating as a
challenging contest, a competition sport. Hence it is wise to build plenty of
margins into the initial offer so as to leave room for maneuver during
lengthy negotiating process.
Concession Behavior: One should be prepared for some bazaar haggling and
take care to make each concession with great reluctance and only on a strict
ifthen conditional basis. Always something equivalent should be
demanded in return for each concession in price, terms or other issues.
Decision-Making Behavior: Negotiating in the Arab world tends to proceed

at a leisurely pace. It would be a tactical error to press hard for a quick
decision. Decisions take time, so one should adjust ones time and
expectations accordingly.
Contractual Behavior: It is a good idea to get everything in writing to avoid

future misunderstandings.
Business Protocol: Dress code suit and tie.

Meeting and greeting Arabs usually give a gentle handshake, but prefer
intense eye contact.
Forms of address address the Arab counterpart by the first name of his
three names, preceded by Mr.. The Arab will use the same manner of
addressing, for example Mr. Bob. Titles are important, widely used in
Arabic than in English. Sheikh is a title of respect for a wealthy,
influential or elderly man. Government ministers should be addressed by
Excellency. It is a good idea to find out any titles a person may have and
use them.
Exchanging business cards the business card should only be presented

with the right (clean) hand. It should be received in the same way.
Refreshments the Arabs will offer their partners tea or coffee. This is an
important feature of Arab hospitality; it is impolite not to accept.
Gift Giving: Gifts are always welcome but not expected. Something for
which ones country is well-known is a good idea, but alcohol or any other
item forbidden to Muslims should be avoided. Be careful about admiring
any of the counterparts possessions. He might present you with the object
of your admiration and feel insulted if you decline.
Entertaining: Entertaining and being entertained is an essential part of

building a close relationship with your counterpart. If invited to dinner at an
Arab businessmans home expect to eat a great deal as a way of showing
your appreciation. The host will press you to eat more than you really want.
Eat as much as you can. When you have reached your limit, you may have
to decline further helpings three times, emphatically, in order to make the
point.
Similarly, when hosting Arabs you must keep pushing them to eat and
drink. But remember that alcoholic beverages and pork products are
forbidden to Muslims.
Maintaining the Relationship: it is important to stay in close contact with

your Arab customers and partners. Between visits make sure to stay in touch
by phone and fax. In the Arab world personal connections are the key to
business success.
The Greek Negotiator
It is said there are two keys to successful business in Greece: the first is
having the right contacts, the second is developing close relationship with
those contacts. But how should one get started without these right
contacts?
Getting Started: One proven method of making initial contact is to attend

specialized trade shows where one can meet potential customers,
distributors, agents or partners. Although in principle Greeks do not like
doing business with strangers, trade fairs provide an acceptable way to get
in touch with them. Another effective option, when available, is to join an
official trade mission organized by the government, chamber of commerce
or private organizations. A third option is to arrange for an intermediary to
introduce you to Greek prospects. For instance, a mutual friend, business
associate, bank, chamber of commerce or trade association can make a call
on your behalf or write a letter of introduction.
Business people lacking existing contacts really need to employ one of these
contact strategies, because cold calls do not work in Greece.
Building Relationship: Having made initial contact, the next step is to build
a personal relationship, a process that takes time and patience. Fortunately
one can usually expect the Greek counterpart to either speak English or
provide a fluent English speaker for the meeting. However, one should not
expect to talk business at the first meeting. This is the time to relax, sip
coffee and get to know each other a little. Ask questions about Greek food,
wine, sightseeing attractions and the like, and respond with similar
information about ones own country. The Greek counterparts will signal
their readiness to talk business by asking detailed questions about the
company and product or service.
Sharing a meal is a great way to learn about each other, to develop a

relationship. And Greeks are very generous hosts. Forget about power
breakfasts, though think lunch instead. In Athens most business people get
to the office early, say between 7:00 and 7:30, and except for a mid-morning
break work straight through until around 3:00 or 3:30. An invitation to lunch
means good progress in getting to know the local partner.
Wining and Dining: Dinnertime is usually around 9 pm or later. Greeks

normally entertain business visitors in restaurants, so if you are honored
with an invitation to dinner at home be sure to accept. In such cases suitable

hostess gifts are chocolates, pastries or fine cognac. A potted plant also
makes an excellent gift, but remember that it should be wrapped when it is
presented to the hostess.
During the meal expect the host to insist that you sample everything and
take second helpings. Be sure to keep both wrists on the table Greeks
would wonder what you are doing with the hand in your lap. To signal that
you really had enough to eat, place the napkin on the table. It is polite to
stay at least until 11 pm.
When it is your turn to host a lunch or a dinner it is a good idea to ask your
Greek partners to select the restaurant. And be sure to urge them repeatedly
to eat and drink. Whereas North Americans may feel uncomfortable with
such pushing, in the Near East this comes across as the ultimate good
manners.
Wining and dinning is an important feature for building a close relationship

in Mediterranean cultures. Ones counterpart wants to get to know one
personally as well as from a business point of view, which is why face-to-
face contact is so important. In the more task-focused markets of northern
Europe one can conduct a lot of business by fax, E-mail and telephone. But
in Greece, a strongly relationship-focused culture, one needs to visit ones
customers and business partners more frequently.
Business Protocol: Doing business in Greece calls for a certain level of

formality. Men should wear a suit and tie, women a dress or suit, even if the
local counterpart is dressed more casually. During the hot summer months
men will be invited to doff jackets and loosen ties and women can wear
lighter weight business attire.
As in the rest of Europe, do address Greeks by their family name until they
suggest moving to a first-name basis. However, in contrast with many other
European cultures one can normally dispense with formal academic and
professional titles.
Male visitors being introduced to a Greek male should give a very firm
handshake and look the other party in the eye. Shake hands whenever you
meet and again when you take leave.
Punctuality and meeting agendas are other interesting aspects of Greek

business protocol and etiquette. While locals often turn up half an hour or so
late, visitors are expected to be on time. Nor should you be offended if your
meeting is frequently interrupted with phone calls and casuals drop-ins.
Greeks are clever enough to conduct several meetings simultaneously and
are usually quick to pick up the thread of your conversation after each
interruption.
Expressive communication Style: Like others Mediterranean most Greeks

too are masters of what academics call conversational overlap. By the
time you are halfway through your statement a Greek has already figured
out what you are going to say next, so he exuberantly breaks in to agree,
disagree or change the subject. While many North Americans and northern
Europeans find this behavior rude, it is simply an example of the outgoing,
expressive Hellenic communication style.
Body Language: Greeks also tend to speak loudly and communicate with
lots of facial expression and gestures other signs of expressiveness.
Unfortunately, business visitors sometimes misunderstand the local body
language. For example, to signify no many Greeks tip their head back
without saying a word, a movement which foreigners may misinterpret as a
nod of the head meaning yes.
And for Greeks, lifting ones eyebrows is another nonverbal way of saying
no. to make things even more interesting, should one hear a word that
sounds like nay, one should be aware that it could be the Greek word for
yes.
Hellenes also sometimes misinterpret foreigners body language. As an

example, the familiar thumbs up sign is an obscene sexual gesture in
northern Greece. And a friendly wave with palm showing and fingers
extended is a serious nonverbal insult to a Greek.
Another source of misunderstanding is gaze behavior. When negotiating

with Greeks, be sure to maintain strong eye contact whenever you are
speaking or being spoken to. Letting your gaze wander during a discussion
is rude, indicating lack of interest on your part.
Varying Space Bubbles: A very subtle problem in nonverbal communication

is often caused by the north/south difference in European space behavior.
Northern Europeans move around with larger space bubble 8 than southern
Europeans. For example, most Germans feel comfortable at an arms length
distance from other people in a business or social setting. Greeks in contrast
display their friendliness and warmth by standing or sitting much closer. If
one unconsciously steps back Greeks may read this retreat as a sign of
unfriendliness, while one tends to see them as pushy, aggressive.
Women in business: Older Greeks executives may have trouble relating to

female business visitors. Even so there are some things a businesswoman
could take into consideration to get accepted by the Greek business world:
Get introduced by an older, high-ranking male.
Be a true expert in your line of business. Expertise gives you status,
even in a male-dominated business culture.
Learn the nuances of how to communicate respect. For example, greet
the oldest person in a group first, pay him special attention throughout
the meeting, and when hosting a meal keep urging him to eat. 9
There are also some things all businesspersons should pay attention when
dealing with Greeks. For example, one should budget plenty of time and
patience. The negotiation process may take longer than expected, and
decision-making also takes time. One should avoid showing irritation or
impatience. Greeks enjoy vigorous bargaining, sometimes to the point of
bazaar haggling. They are usually reluctant to accept an initial quotation as
final. Therefore it is wise to build some bargaining room into the opening
offer so as to leave room for concessions. Any concession should be granted
with a show of great reluctance, even pain, and should always be made
conditional (i.e. demand a quid pro quo each time).
One should try to keep smiling, even in the face of occasional

confrontational tactics.
8
Richard R. Geateland, Cross-Cultural Business Behavior, Copenhagen Business School
Press, 1997
9
Idem
4.3.4 Relationship-Focused, Formal, Polychronic and Expressive
The Brazilian Negotiator
The Language of Business: The national language is Portuguese. Only a

minority of Brazilian business people speaks fluent English. Spanish-
speaking visitors should be aware that using that language implies to some
Brazilians that Spanish is a more important language than Portuguese. One
should inquire about the possible need for an interpreter during the business
visit.
Initial Contact: In Brazil local contacts are essential. Potential buyers do not
react well to direct, cold approach. In order to meet interested parties, one
should try to attend a trade show or join a trade mission. A chamber of
commerce, trade association, government agency or bank could also
introduce one to Brazilian companies.
The initial written correspondence should be in Portuguese, stating that if

possible the future correspondence should be carried in English. An
appointment should be requested two weeks in advance. The meeting would
most likely take place in an office, rather than in a restaurant or bar. One
should not schedule more than two meetings per day: one between 10 and
11:30 am and the second starting at 3 pm.
Importance of Relationship: Before discussing business, a good rapport and

a pleasant, relaxed relationship should be developed. This requires a
considerable amount of time, but establishing an atmosphere of trust is a
precondition to a successful business relationship.
Good topics for small talk are football, Brazilian history, literature and
places to visit as well as information about one home town and region. Two
or three visit to Brazil may be needed before doing some serious business.
Like other Lain Americans, Brazilians value deep, long-lasting
relationships.
Orientation on Time: In the southern part of Brazil business people

increasingly value firm schedules and punctuality particularly in Sao
Paulo, the commercial capital of the country. This is in marked contrast to
tropical Brazil. However, the clock ticks at a different speed for the fun-
loving Cariocas of the Rio de Janeiro, for example. There one may find
oneself waiting an hour or more for the local counterpart. But visitors
should always make it a point to be punctual.
Hierarchy, Status and Respect: In Brazil ones status depends more on

social class, education and family background than on personal
achievement. Business visitors can enhance their status by displaying a
lively interest in intellectual pursuits, dressing elegantly and staying in top
hotels.
Expressive Communication Style: A warm and friendly people, Brazilians

tend to be very talkative, nonverbally expressive and open about showing
emotions in public. Conversational over-lap is not rude in Brazil and often
mid-sentence interruptions may occur. However, direct confrontation during
the negotiation should be avoided.
Indirect Language: Brazilians need some time to get to know their

counterparts, so one should not expect to get down to business quickly.
Nonverbal Behavior: Men and women shake hands warmly when

introduced and again when departing. Visiting men should expect to shake
hands with another man for a considerable length of time one should not
withdraw the hand prematurely.
Brazil is definitely a high-contact culture. After they get to know each other
two men will shake hands and touch each other on the elbow or forearm,
perhaps slap each other on the back or shoulder. Male friends will exchange
the abrao or embrace while women friends brush cheeks with a kissing
motion of the lips.
In another sign of friendliness Brazilians stand very close to each other

when talking and maintain strong eye contact with the person they are
conversing with. Both sexes use frequent gestures. Avoid using the A-OK
sign, a very rude gesture in Brazil. On the other hand the fig sign,
considered vulgar in some other Latin American countries, signifies good
luck. This gesture involves clenching the fist with the thumb pointing
upwards between the index and middle fingers.
Business Customs and Protocol: Although Brazilians interact fairly

informally, business visitors need to take note of certain customs. Address
the male counterpart as Senhor plus the family name. For women it is
Senhora and her family name. Medical doctor, lawyers and all university
graduates are addressed as Doutor (Doctor). One should expect to move to a

first-name basis fairly soon, but should wait until the Brazilian party starts
using the given name.
Male executives tend to wear fashionable three-piece suits. Office workers

wear the two-piece version. Male visitors should note that proper business
attire always includes long-sleeved shirts, even in hot weather. Women in
business wear elegant suits or dresses as well as blouses and skirts. Blouses
and jackets may have short sleeves. Both sexes should avoid wearing green
and yellow the colors of the Brazilian flag.
One should expect frequent interruptions during business meetings,

especially in government offices. This is not regarded as rude or improper
behavior.
Wining and Dining: Women drink wine, spirits and liqueurs beer is
considered a mans drink. Brazilians normally eat a light breakfast between
7 and 9 A.M. and a substantial lunch between noon and 2 P.M.. Dinner
usually starts after 7 P.M. but dinner parties do not normally get underway
until after 10 P.M..
Avoid using the side of the fork to cut anything and do not pick up food of
any kind with the hands. Although they are a very expressive people,
Brazilians do not like a lot of conversation during meals. Wait until coffee is
served before talking business.
Wise negotiators should include plenty of time for socializing during the
drawn-out negotiation sessions. When wishing to entertain a high-level
executive, one should ask his secretary to recommend a restaurant. It is
important to host the dinners only in elegant, prestigious establishments.
Similarly, business visitors should only stay in top hotels while in Brazil.
Gift Giving: Good gifts to bring from abroad for men are music tapes and
small electronic gadgets such as good quality calculators. For women,
perfume. If invited to dinner at home bring chocolates, champagne or a
container of fresh strawberries. Avoid purple flowers, which are associated
with funerals.
Women in Business: Female business visitors who dress and act

professionally encounter no great barriers to getting things done in Brazil.
Unwanted male attention should be politely but firmly ignored.
Exchanging Favors: Brazilians frequently ask friends and business

acquaintances for small and large favors and expect these requests to be
granted. Be very careful of asking favors of Brazilians however. They might
very well agree to do what one asks even if they would much rather not,
since refusing would be rude.
Negotiation Style: Brazilians are widely known as tough bargainers, not

afraid to turn down offers rather bluntly. Such frankness is however not
intended to be rude or confrontational. They simply want one to know
where they stand. The negotiation process is usually a long one; the opening
offer should include substantial margins so as to leave room for
concessions. One should expect very few silences during the negotiations
sessions: Brazilians seem to talk constantly.
The Mexican Negotiator
The Language of Business: Fluency in Spanish is a great asset to doing

business, though today more Mexican businessmen speak English. This is
especially the case in Monterrey, along the northern border and to a lesser
extent in Mexico City and Guadalajara. It would be wise to look into the
possible need for an interpreter during the visit. Remember to have the
company and product literature translated into Spanish before arriving in
Mexico.
Making Contact: A local connection is very important. Avoid a cold

approach to a prospective business partner. Instead plan to attend a trade
show or join a trade mission to meet interested parties, or arrange for a
chamber of commerce, trade association, government agency or bank to
introduce you to Mexican firms.
Start at the top: approach the most senior person in the company. The first
letter or fax should be in Spanish, but specify that, if possible
correspondence in English would be preferable from then on. Request an
appointment about two weeks in advance; let the Mexican party decide the
time and place to meet.
Build a Relationship before Talking Business: One should budget enough

time to get to know the counterpart before starting to talk business. Good
topics for small talk are Mexican art and literature as well as information
about ones hometown. Lots of face time 10 will be needed. Two or three
meetings may be needed to establish trust, after which serious business
discussions can begin. Mexicans value deep, long-lasting relationships.
Personal contacts and relationships are major factors in business success.
One needs a palanca pull or clout to get things done quickly. It is
very often whom one knows that counts.
Orientation on Time: Although things are a changing in the northern part of

the country, one should not expect absolute punctuality in Mexico. Local
business people may be half an hour late without causing offence. Visitors
however should always be punctual.
One should avoid scheduling multiple meetings in any one day. One
meeting at 10 am and another in the late afternoon is about right. If someone
schedules a meeting at a certain hour and adds a la gringa, he/she should be
roughly on time. On the other hand, a la mexicana would indicate a more
relaxed approach to scheduling.
Formality, Hierarchy and Status: Mexicans value formality more than most
North Americans. Until one gets to know the counterpart the title and family
name should be used, e.g. Doctor Morales, Director Reyes, Profesor
Santana. Later one can switch to just the title without family name. For
example, Licenciado can be used to refer to someone with a university
degree. First names should not be used until the Mexican party suggests it.
In Mexico, a persons middle name is part of his/her family name.
Dress Code: Men should wear dark suit and black shoes, women a good
dress or suit with heels, makeup and jewelry. Staying at a top hotel gives
one status as do age, level of education, position in the company and a
basic knowledge of Mexican history, geography and culture.
Expressive Communication Style: Mexicans are expressive, both verbally

and nonverbally. During a lively discussion they may start talking before
one has quite finished. This is not considered rude behavior.
Indirect Language: They often communicate in an indirect way. For

example, during a negotiation they may avoid a direct answer to a question.
One may have to rephrase the question or ask in a different way.
10
Richard R. Gesteland, Cross-Cultural business Behavior, Copenhagen Business School
Press, 1997
Nonverbal Behavior: Shake hands with men both when meeting and
departing, using a moderate grip. Avoid further physical contact until one
knows the person very well. Give women a slight bow and wait for them to
extend their hand.
Like other Latinos, Mexicans tend to stand and sit closer to others than
northern Europeans and North Americans are accustomed to, and to use
frequent hand and arm gestures. Try to maintain steady eye contact with the
person one is conversing with.
It is impolite to appear in public with hands in pockets. And putting hands on

hips signifies a challenge or threat to others. If someone shakes his hand from
side to side with forefinger extended, he is saying no. In contrast, the
thumbs up sign indicates yes or approval of what has just been referred to.
Business Customs and Protocol: Even if one does not speak Spanish,
learning the principal greetings will be appreciated. During meetings one
can expect frequent interruptions: phone calls as well as visitors dropping in
without an appointment. These interruptions are not considered impolite.
Rather, Mexicans would consider it rude to turn away drop-in visitors or to
refuse to take phone calls.
Refer to an office secretary as Seniorita whether she is young or not and

whether she is single or married. On the second trip to Mexico, one should
bring a small gift such as perfume for the secretaries of important people.
Tell her your wife bought it for her.
Good business gifts are premium cognacs and Scotches, cocktail table
books, desk clocks and gold pens or lighters. Silver objects are only for
tourists. Ones business contacts should receive gold items.
Women in Business: women business visitors may not be treated with the
same respect they are used at home, since Mexicans men are not used to
dealing with female executives. Women are advised to dress conservatively
and to behave professionally at all times.
Negotiating Style: The negotiation process can be long and vigorous, and
Mexicans tend to be hard bargainers. They also may be optimistic with
deadlines and schedules, so it is wise to mentally add a few days or weeks to
any target date they may suggest.
One should always take time to think over any proposal made by the
Mexican counterpart. Quick acceptance makes the other party think they
may have conceded too much. One should ask for some time to consider the
idea. Similarly, Mexicans take their time coming to a decision about any
proposal.
Wining and Dining: Any Mexican business partner should be entertained

only at top restaurants. One should suggest several and let the guests choose
the one they prefer. Breakfast and lunch are good opportunities to talk
business, while dinner should be reserved strictly for socializing. Breakfast
can be as early as 8 A.M., lunch normally starts around 2 P.M. and dinner
begins after 9 P.M. All meal invitations should be reciprocated.
If accompanied by ones spouse it is ok to invite the counterparts spouse as

well. Foreign businesswomen should always include the wives of their
Mexican male customers or contacts in any dinner invitation. When
entertaining male guests, women should also make prior arrangements with
the headwaiter for payment, since otherwise Mexican men will absolutely
insist on picking up the check.
4.3.5 Moderately Deal-Focused, Formal, Polychronic and Expressive
The Italian Negotiator
Everybody knows the old saying: When in Rome, do as the Romans do.
But for business people a variation on that seems to be more appropriately.
When in Rome, observe how the Romans are doing things and then act
appropriately. This seems to be true especially when confronted with the
very different approach Italians have on time and schedules. If the Italian
counterpart shows up half an hour late for a major meeting offering a big
smile and no excuse, one should not be offended. Almost certainly he meant
no offence by that. Instead, one could use the time to catch up with some
over-due paper work. But, by no means should one match this casual
attitude towards punctuality, especially if one is the seller. All over the
world today the customer is king. If one comes from a clock worshiping
culture such as North America, turning up late would show disrespect for
the prospective buyer. And Italians tend to be very sensitive to issues of
rispetto and honore.
Spatial Behavior: When there are only two passengers in an Italian elevator
they stand close to each other. In fact in both social and business situations
Italians like to stand relatively close to others, which can be disconcerting
for visitors with big space bubbles. As friendly, expressive people they do
not feel comfortable at arms length.
The Importance of Face-to-Face Contact: The Italians prefer to conduct

important business face-to-face rather than by phone, fax or E-mail.
Whether buying, selling or negotiating a joint venture the results will be
better by honoring this preference.
Building a Relationship: It is the same with relationship-building. While

Americans and many northern Europeans expect to get right down to
business, Italians prefer to build a personal relationship first. And it takes
more than just a few minutes of small talk for that though a plate of good
pasta and a couple glasses of wine can certainly accelerate the process.
Wining and dining is a key part of the business scene in this part of the
world. So one should take ones time, not rushing things. One may even
discover that it is actually fun to do as the locals do.
Dress Code: The way one dresses for business meetings should also be
influenced by the way Italians do things. Italian businessmen and women
dress with style and elegance, setting great store by the concept of la bella
figura. Milan and Florence are among the fashion capitals of Europe. Ones
outward appearance reflects ones inner values. So proper respect for ones
business counterparts is shown by dressing appropriately.
Forms of Address: another occasion to defer to the local custom is in forms

of address. Some informal Americans for instance are mislead by the
warmth and friendliness of Italians into moving to quickly to a first-name
basis. But in a business setting it is customary to start off using any
applicable academic title or honorific, followed by the persons last name.
One should start calling Italian acquaintances by their first name only after
they invite one.
Paraverbal Communication: There are other instances where it is safer to

just take note of the local customs while sticking to ones own rules of
behavior. One good example is what scholars call conversational over-lap.
A business discussion in Rome or Naples frequently evolves into what
appears to be a verbal free-for-all. Italians are exuberant, enthusiastic
talkers. They are also quick thinkers who can figure out what one is going to
say long before one finishes saying it. So they often jump in with their
response while one is still talking. This kind of behavior is especially
puzzling for North Americans who polite behavior is conversational turn-
talking. In any case, one should not try to outshoot the locals, since things
could quickly get out of hand.
Nonverbal Communication: Another example of contrasting behavior is the

use of eye contact. In Italy, direct eye contact shows interest in what the
other person is saying while lack of steady eye contact indicates lack of
interest.
Campanilismo Local Patriotism: One complication of trying to decide
which local customs one should adopt is that one will encounter major
cultural variations within the peninsula. People sometimes say, There are
57 million people in this country, but not a single Italian. This exaggeration
points up the important fact that many inhabitants think of themselves first
of as Florentines, Milanese, Venetians, Romans, Calabresi, Sicilians et
cetera and secondarily as Italians.
4.3.6 Moderately Deal-Focused, Formal, Moderately Monochronic,

Expressive
The French Negotiator
French negotiators belong to a class by themselves. A product of Teutonic

influences from the north of Europe and Latin infusions from the south,
Frances business culture is unique. For example, while the French are
relationship-focused they are at the same time a nation of individualists.
Moreover though they dislike getting straight to the point and often employ
indirect, high-context communication, they are also quick to argue and
bluntly disagree across the negotiation table. And despite the fact that the
word egalitarian is derived from egalit France remains one of Europes
most hierarchical societies today.
In other words, French business executives tend to be relationship-focused,

high-context, highly status-conscious individualists an unusual combination
of cultural traits.
The Language of Business: It is definitely French, even if so many French

business people speak English well. While foreign buyers can get by with
English or German, export marketers are usually expected to speak French.
Parisians especially seem to find it physically painful to hear their language
spoken poorly. Written correspondence should likewise be in French and the

key parts of the product literature should be translated as well.
Good interpreters are easy to find in Paris or Lyon, but marketers who do
not speak the language are likely to find themselves at a disadvantage.
Despite the local sensitivity to the language, it is better to try to use the
French language even if one makes mistakes or has a foreign accent.
Making the Initial Contact: Connections count heavily in this market. Trade
shows and official trade promotion missions are good ways to make initial
contact. The alternative is to arrange for a formal introduction to potential
customers, distributors or partners; the embassy could introduce one, for
example. Other useful intermediaries are chambers of commerce, trade
associations and international banks, law and accounting firms.
The letter requesting a meeting should be in a flawless business French. As

in other hierarchical cultures, it is wise to start at the top. The letter should
be addressed to the President/Directeur General and if one is a senior person
in the company, one could request a meeting with him.
Importance of Relationship: France is definitely a country of personal

networks. One gets things done more quickly by working through inside
contacts than by going through channels.
The French want to know a good deal about their business counterparts
before discussing business, but building rapport involves less small talk than
in some other cultures. Showing good knowledge of French history,
literature, art and philosophy is a good way to build rapport. Discussing
French cuisine and wine over meal is another good way.
Orientation to Time: Visitors are expected to be roughly on time for

business meetings, particularly if they are selling. Outside of Paris and Lyon
however, it is not unusual for the local counterpart to appear a few minutes
late. Nor do meetings always follow a fixed agenda as they commonly do
across the border in Germany. Instead one can expect free-form discussions
with everyone present having his say.
Hierarchy and Status: Level of education along with family background and
wealth determine status in France. Graduates of the select Grandes coles hold
high positions in government and industry. Three out of four top managers of
the 200 largest French companies come from wealthy families, whereas in
Germany the figure is one out of four and in the U.S.A. one out of ten.
French bosses tend to run their companies in an authoritarian style. They are
expected to be highly competent and to know the answer to virtually every
question that arises. Executives are often reluctant to delegate authority.
Fraternization with the rank and file is not common.
Communication Style: The French are verbally and nonverbally expressive.

They love to argue, often engaging in spirited debate during business
meetings. Negotiators from less confrontational cultures such as East Asia
should not mistake this love of debate for hostility.
Verbal Communication: While they relish verbal conflict the French dislike
getting straight to the point. They tend to favor subtle, indirect language and
like to present their point of view with Cartesian logic, elegant phrasing and
verbal flourishes. This is one reason Gaelic business people prefer to
negotiate in French: their verbal pyrotechnics are lost when expressed in
another language.
Nonverbal Communication: Among friends and relatives the French display

high-contact behavior, including in public. A study of comparative touch
behavior at cafes in Paris and London showed that within the space of an
hour French couples touched each other more than one hundred times while
the British couples did not touch each other at all.
Always shake hands both when meeting and when leaving someone
The French use many more hand and arm gestures than Asians and Anglo-
Saxons. The thumb-and-forefinger circle signifies zero in France. To
indicate A-OK they flash the thumb-up sign instead. Taboos include
standing or speaking with hands in ones pockets and slapping the palm of
one hand over a closed fist.
Making a Sales Presentation: One should avoid hard-sell tactics, hyperbole

and flippant humor. The presentation should be sober, with a logical
sequence of arguments. Forceful disagreement on some points can be
responded with factual counter-arguments. Vigorous disagreement with
specific issues does not necessarily signal lack of interest in the overall
proposal.
Bargaining Style: The negotiation sessions are long relatively unstructured,

punctuated frequently with verbal confrontation. The French counterpart
may attack the thought behind ones bargaining position. The French pride
themselves on their logical thinking and often seem to relish faulting the
logic of others.
Although the senior member of the French team is likely to make most of
the decisions, that does not mean those decisions will be made quickly. The
decision-making process takes longer than in Anglo-Saxon countries.
Business Protocol: As might be expected in a hierarchical, status-conscious

society the French dress and behave formally in a business setting. And of
course being French they dress with style, panache and elegance. Male
business visitors should wear a dark suit; women should choose tasteful,
somewhat conservative clothing and accessories.
Meeting and Greeting: Handshake with moderate pressure and steady eye
contact. Among males the older or higher status person should initiate the
handshake. Women of any rank can decide whether or not to offer their
hand.
Forms of Address: The local counterpart should be greeted with Monsieur,

Madame or Mademoiselle without the persons name. One should always
use the vous (formal) pronoun rather than the informal tu.
Being a foreigner, once a relationship has been built it is possible that the
French counterpart may suggest using first names. However, it is better to
wait for the local person to take this step. But even when on a first-name
basis the vous-pronoun will continue being used.
Women in Business: Because relatively few women have reached high

positions in French companies, female business visitors may feel somewhat
out of place. Businesswomen should dress and act professionally at all times
and should avoid negotiating behavior that could be interpreted as overly
aggressive.
Wining and Dining: entertaining and being entertained is an important way

to build rapport. According to a recent study two out of three French
business people regularly lunch in restaurants while more than eight out of
ten of their Dutch and British colleagues wolf a sandwich at their desks.
And while almost half of the Brits and Germans surveyed felt business
lunches were a waste of time, 70% of the French think they are an important
part of doing business.
There is a certain ceremonial aspect to dining in France. Many Western

ideas of proper table manners originated in France, so visitors are advised to
observe some key rules of etiquette.
Breakfast usually consists of coffee and a roll, but the American custom of
the power breakfast is being adopted by an increasing number of
Frenchmen. Business lunches often last two to three hours over at least that
many glasses of wine. In some cultures it is a sign of generosity to fill a
wine glass to the brim. In France as elsewhere in Europe and North
America when pouring wine for ones neighbour at table the glass should
be filled only two-thirds full. Business should not be discussed at least until
dessert is served unless the host broaches the subject earlier.
Invitations to Dinner at home are more common in the provinces than in

Paris. Always accept such an invitation and plan to arrive about 15 minutes
after the appointed time. Selecting a gift for the hostess may turn out a very
difficult thing. Flowers are not the best choice: the hostess may not
appreciate having to search for the right size vase in the midst of all her
other duties. And then one should remember to bring an uneven number (but
never 13), to avoid chrysanthemums (funerals only), red roses (they signify
having an affair with the hostess) and yellow flowers (they imply the host is
having an affair with someone else).
Nor is wine a better choice. A bottle of undistinguished plunk brands one as

ignorant or cheap while with a good stuff one runs the risk of insulting the
host by insinuating that his cellar is inadequate. The best solution therefore
is usually a box of the very best chocolates one can find.
One should wait at the door until the host or hostess invites one in. Men
should not take off their jackets unless encouraged to do so by the host.
Wait for the host or hostess to start eating. If one is accustomed to keeping
one hand in the lap, one should leave this custom behind. The table
companions are liable to roll their eyes and ask each other what one is doing
under the table.
When the salad arrives, do not cut the lettuce with a knife. Instead fold it
into small pieces with the fork. Peel the fruit with a knife and eat it with a
fork. It is impolite to take two servings of cheese, and extremely gauche to
slice the tip from a wedge of cheese.
4.3.7 Deal-Focused, Moderately Formal, Monochronic and Reserved
The German Negotiator
Like many other northern Europeans, Germans tend to take a deal-focused,

low context and monochronic approach to doing business. North Americans
and Australians find Germans relatively formal, southern Europeans often
describe them as reserved and Asians consider them very direct. Of course
there are important north/south and east/west differences in German
business customs, not to mention significant individual variations. There
are, however, some general tendencies that describe the profile of a
businessperson be he/she from Hamburg, Munich, Leipzig or Cologne.
Language of Business: Many German managers are comfortable conducting

business in foreign languages, especially English. Larger companies usually
have competent English speakers on staff. However, since the language of
business is the language of the customer, a professional export sales team
should include a fluent speaker of German. If the purpose of the meeting is
to negotiate a purchase, a joint venture or strategic alliance, the possibility
of using an interpreter should be discussed.
Making Initial Contact: Banks play a powerful role in the German business
world. That is why it would be better to arrange an introduction with an
international bank. However, in contrast with more relationship-oriented
business cultures such as Japan, Korea, Brazil or Saudi Arabia, making
direct contact is also a viable option in Germany.
The basic information about the company and the purpose of the meeting
should be sent in a letter written in good business German. An appointment
should be required with two or three weeks advance notice. In case of a
cold approach it would be appropriate to address the correspondence to
the department concerned rather than to a specific individual.
Avoid asking for a meeting during the months of July, August and
December as well as during the Easter holidays. Also avoid Friday
afternoons and late afternoons appointments on any day.
Deal-Focused: Most Germans tend to be deal-focused in business. That

means they are generally ready to negotiate based on the perceived merits of
the deal and do not feel the need to develop a close personal relationship
with the other party before talking business. Rather, rapport building takes
place while the two sides are discussing the deal. Visiting negotiators can
usually expect to get down to business after just a few minutes of general
conversation.
Orientation on Time: Germany is a strongly monochronic culture. That is,

pnktlichkeit is very important, schedules and meeting agendas are rigidly
adhered to and business meetings are rarely interrupted. Being on time may
actually mean arriving a few minutes early: tardiness signals unreliability. If
one is a half an hour late for a meeting, one is likely to be a half a month late
with a delivery. Therefore, should one be unavoidably detained one should
be sure to phone the counterpart as soon as possible to reschedule the
meeting.
In Frankfurt or Dsseldorf one can expect to follow a prepared meeting

agenda whereas in Paris or Lyon business discussions are usually less
structured. Business meetings are rarely if ever interrupted by phone calls or
unscheduled visitors.
Formality, Hierarchy and Status: German society retains a certain level of

social formality which is reflected in business protocol. Formal behavior is a
way to show appropriate respect to people with high rank, professional titles
and higher academic qualifications, especially in southern Germany. This
can be very important since more German managers have PhDs than
anywhere else in the world. About 40% of the board members of the 100
largest corporations have a doctors degree.
One should address Dr. Wilhelm Schmidt as Dr. Schmidt or Herr

Doktor. His female colleague with Ph.D. would be Frau Doktor. It is
polite to address less exalted business contacts with Herr, Frau or
Frulein followed by their last mane. This includes secretaries. Whereas
in the U.S. for example female secretaries are usually addressed by their
first name, in Germany it is accustomed to address them with Frau
followed by their last name. Also remember that women about 20 or older
should be addressed as Frau whether married or not.
As is the case with most other European tongues, the German language
employs two different personal pronouns for you. Sie is the formal
pronoun appropriate for business relationships while the informal Du is
reserved for close friends, small children and pets. One should use titles,
family names and the Sie-pronoun unless and until the counterpart
suggests moving to a less formal mode of address. One can expect to work
with German business counterparts for many years without shifting to first
names.
German formality is also expressed in meeting and greeting protocol.

Handshakes are expected whenever meeting or leaving someone and this
greeting is not always accompanied with a broad smile many Germans save
their smiles for family and friends, regarding smiling at strangers as a silly,
even false mannerism.
Business Communication Style: Relatively reserved, not given to

enthusiastic public displays of emotion although southern Germans are
somewhat more expressive. As opposed to Latin Europeans and Latin
Americans, most Germans eschew wide gestures, animated facial
expressions and conversational overlap. Interrupting another speaker is
regarded as very rude.
Verbal Communication: Germans pride themselves on speaking their mind.

Clarity of understanding is the prime goal of communication. Whereas
relationship-focused negotiators often use indirect, oblique communication,
Germans value direct, frank, explicit, low-context language. They
sometimes suspect Arabs, Asian and Latin Americans negotiators of trying
to mislead them with vague, ambiguous responses when in reality these
high-context people are simply trying to maintain harmony and avoid giving
offence. Conversely, business visitors from cultures that favor indirect
verbal language should realize that Teutonic bluntness is not meant to
offend them.
These days many German executives responsible for international business

are aware that Japanese, Thais, Arabs and others value indirect, roundabout
ways of saying things. But they may be less aware of such differences
within northern Europe. Research 11 conducted by Dr. Malene Djuraa of the
Copenhagen Business School shows that German negotiators are more low-
context (direct) than the Danes and considerably more direct than the
English. This means that negotiators from even closely-related northern
European cultures may not be fully prepared for Germanic abruptness and
readiness to get to the point. Expect Germans to answer the telephone by
giving their last name rather than saying hello.
11
Research results are presented in Richard R. Gastelands work, Cross-Cultural Business
Behavior, Copenhagen Business School Press, 1997
Nonverbal Communication: when meeting and departing expect a firm

handshake (one or two pumps) with direct eye contact. Since some Germans
believe that a soft handshake reflects weakness and that lack of eye contact
indicates shiftiness, unreliability or even dishonesty, East and Southeast
Asians accustomed to a gentler grip and less intense gaze behavior should
prepare themselves accordingly.
The normal interpersonal distance in a business context is about an arms

length. Germans tend to stand and sit further apart than Arabs and Latinos
and may feel ill at ease when their space bubble is invaded. Germany is
also a low-contact culture, so expect little physical contact beyond the
obligatory handshake.
Hand and arm gestures are restrained. It is rude (as well as against the law)
to tap ones forehead while looking at another person. This is a potential
problem for business visitors from the U.K. and Spain where the same
gesture means I am very clever rather than You are an idiot.
If a German suddenly raises his eyebrows during a business meeting he is

probably complimenting his counterpart for having come up with a good
idea or a clever remark. This could confuse Britons to whom raised
eyebrows signify skepticism as well as Arabs to whom raised eyebrows is
often a nonverbal way of saying no.
Making a Sales Presentation: Germans respond best to thorough, detailed

presentations supported by copious facts. They look for plenty of history
and background information rather than fancy visuals. Use references and
testimonials whenever possible. Be wary of including jokes into the
presentation. Humor rarely translates well and sales presentations are a
serious business in Germany.
Determining the Bargaining Range: Most Germans respond better to

realistic initial quotations than to the classic high-low tactic. They may
react negatively to what they perceive as bazaar haggling. One should
consider building a small margin into the opening bid to cover unexpected
developments, but should also take care not to over-inflate this initial offer.
Negotiation Style: Like the Japanese, German negotiators are known for
very thorough preparation. They are also well known for sticking steadfastly
to their negotiating positions in the face of pressure tactics.
Decision-Making Process: Germans take their time to deliberate and to

confer with responsible colleagues before making an important decision.
Expect them to take more time than Americans but perhaps less than
Japanese and most other Asians.
Contractual Behavior: Germans place heavy emphasis on the legal aspects

and the fine points of the written agreements and they tend to depend more
on the wording of the contract than on the relationship with their counterpart
to solve any problems and disagreements that may develop. Contract terms
are considered cast in concrete, so attempts to renegotiate the contract
soon after it has been signed may not be welcomed.
Business Protocol: The dress code is a dark suit and a conservative tie for
men, suit or dress for women. The exchange of business cards is less formal
than in East and Southeast Asia but less casual than in North America. The
card should be presented after greeting the counterpart and shaking hands.
Business Gifts: This is a definitely not a gift-giving culture. German

negotiators are likely to feel uncomfortable if presented with an expensive
gift. If one wishes to bring something small, a good idea would be a tasteful
logo gift or an item ones country or region is famous for.
Wining and Dining: Many Germans prefer to maintain a clear separation

between their professional and private lives. Although they can be excellent
hosts, Germans tend to place less emphasis on business entertainment than
do visitors from many relationship-focused cultures.
Do not expect to talk business over Frhstuck: the power breakfast has yet
to make an impact in the Federal Republic. When out to lunch or dinner,
expect to talk business before or after rather than during the meal, unless the
German partner takes the initiative.
A German host may well consider it impolite to repeatedly urge guests to

eat or drink, so one should be sure to speak up if one wishes to have
something that is offered. Do not wait to be asked twice or thrice, as is often
the custom in the Middle East, Brazil and other traditional cultures.
Dinner at Home: If invited to a German home for dinner, be sure to accept.

Avoid arriving early, but do show up within 10 or 15 minutes of the given
time.
A hostess gift is appropriate, but avoid bringing wine unless it is a good

vintage from a top wine-producing area. Flowers make a good Mitgringsel
but avoid red roses (for lovers only) and canna lilies or chrysanthemums
(for funerals only). Bring an uneven number, except for 6 or 12, but never
13 and remember to unwrap the bouquet before presenting it to the hostess.
A box of high quality chocolates is always an excellent alternative.
Social Etiquette: A man precedes a woman when entering a bar, restaurants

or other public place and walks to the ladys left when outdoors. It is polite
to stand when a woman, older person or an individual of high rank enters
the room.
Germans tend to be uncomfortable with the effusive compliments that are

common in some cultures. Similarly, foreigners are unlikely to be
overwhelmed with flattery with one exception: Germans are quick to show
appreciation for visitors efforts to speak their language.
Germans take business very seriously and expect their counterparts to do the
same. Competence more than connections is the key to business success in
Germany.
The Dutch Negotiator
The Netherlands is an attractive market for three main reasons. First, its
15 million inhabitants enjoy a high per capita income. Second, its central
location within Europe makes the country a good entry point to the
Continent as well as an excellent distribution center for the European Union.
Third, the Dutch have been world traders for centuries, so they really know
how to do business.
Most foreign visitors find it relatively easy to get around there because the
Dutch are among the best English speakers on the Continent and their
business customs and practices are similar to those of the Anglo-Saxon area.
However, the very ease of communication may cause visitors to overlook
certain key differences that can get in the way of closing a deal. The Dutch
mindset may differ just enough to cause an occasional problem.
Language of Business: Even though most Dutch business people speak

English fluently it is polite to offer to bring an interpreter to the first
meeting, just in case. Most of the times the Dutch business people will
decline the offer.
Making the Initial Contact: Like Americans, the Dutch are quite open to
doing business with strangers, including foreigners. This means that one
only needs a name in order to make direct contact with the potential
customer or partner rather than being introduced by someone else.
One may phone for an appointment and then confirm the arrangement in
writing. The letter should be addressed to the person one wishes to see and
include all the information that person may need to prepare for the meeting.
It should be also formal, using the addressees correct title.
One should give the counterpart several weeks notice impromptu meetings
are not popular with the well-organized Dutch. Avoid July and August as
well as the Christmas holiday season.
Meeting Protocol: Perhaps the most important rule of Dutch business

protocol is to be on time for meetings. If one cannot arrive on time, it would
be better to telephone the counterpart, explaining the problem.
Men should wear a suit or a blazer and slacks, women neat business attire.
When introduced, repeat ones name while shaking hands. At gathering,

when introducing oneself, just give the last name. It is not necessary to say
Hello or How are you? One should shake hands again when departing.
Men wait for women to offer their hand. At a social gathering one should
also shake hands with the children one meets. Avoid using first names until
the counterpart suggests it.
This is a low-contact culture. Until becoming good friends avoid slapping a

Dutchman on the back or seizing his upper arm to display friendliness. In
fact, it is a good idea to avoid any physical contact beyond the handshake.
Although very few local women have reached senior positions in Dutch
companies, businesswomen should encounter no particular problems doing
business in the Low Countries. One should remember that Holland refers to
only a part of the country; the correct name is The Netherlands.
Verbal Communication: The Dutch value direct, straightforward language.

They like to get right to the point, avoiding polite circumlocution. When
they mix directness with assertiveness it can be misunderstood. In some
cases, even the Americans, who also value frankness, were offended by the
Dutch bluntness.
Dutch distrust flowery language and empty rhetoric. They expect one to say
what one means and mean what one says. In contrast with some other
cultures, a Dutch yes can be taken as a commitment. And when they mean
no they will say it quite plainly rather than mincing words to spare ones
feelings.
Despite their facility with English the Dutch occasionally get their numbers
turned around. For example, they may quote $53,000 but really mean
$35,000. All discussions involving numbers and quantities should be
carefully confirmed in writing to avoid confusion.
Business Communication Style: Expect a sober, somewhat reserved

approach until one gets to know the counterpart. The Dutch sometimes
accuse Americans of superficial friendliness. They are less likely to smile at
people they have just met.
Nonverbal Communication: The handshake should be firm and

accompanied with strong eye contact. Avoid chewing gum in public and
keep the hands out of the pockets when talking to people, even in a fairly
relaxed situation.
In France, Italy or Germany tapping ones head while looking at someone

means one thinks they are crazy or stupid (in Germany this gesture is also
illegal). So it is important to know that when a Dutch taps the right side of
his head while looking his counterparts way it actually has the opposite
meaning: he is complimenting him/her on his/her intelligence. Had he want
to impugn the sanity of his counterpart, he would have pointed his finger at
the middle of his forehead. Or perhaps grabbed at an imaginary fly in front
of his face.
Making a Sales Presentation: Like many other European business people,

the Dutch are putt off by hard sell tactics and hype. The presentation should
be straightforward, and every claim made in it should be fully supported by
the facts. On the other hand, there is no need to understate or to downplay
the benefits of a proposal. One just has to be as factual as possible, even at
the risk of being slightly boring. To the Dutch business is inherently
interesting. There is no need to put on a dog and pony show to hold the
audiences attention.
Negotiation Style: The Dutch are usually tough, shrewd negotiators. One
should not insult their intelligence by heavily padding the opening offer in
the expectation of granting generous concessions later. Just as most Dutch

negotiators want to get down to business quickly and avoid lengthily
preliminaries, they also value a realistic bargaining range.
Within Europe the Dutch are known to be tenacious and persistent, at times
perhaps even a little bit stubborn. When things get tense at the negotiating
table raising the voice would certainly be counter-productive.
Decision-Making: Dutch negotiators rarely make snap judgments but neither

do they agonize unnecessarily over business decisions.
Business Gifts: The Netherlands is not a gift-giving business culture. If one

wishes to bring something small, a good idea would be a tasteful logo gift or
an item ones country or region is famous for. The gift should be presented
at the end of the meeting.
Wining and Dining: Remember that the expression going Dutch reflects
an important local custom. Unless one has been unambiguously invited as a
guest, one should be prepared to pay for ones share of the meal. If the
counterpart has treated one to lunch or dinner, one has to reciprocate as soon
as it is practical. A female business visitor entertaining her local male
counterpart normally encounters little serious resistance when she insists on
picking up the check, especially if she pays with a credit card.
The Dutch normally drink wine with lunch and dinner unless eating
Chinese, Indian or Indonesian food, when beer is usually the beverage of
choice.
Social Etiquette: When outdoors it is polite for men to walk on the street
side. This custom arose as way of protecting the lady from the mud splashed
up by passing carriages.
Since business entertainment in the Netherlands usually takes place at

restaurants, an invitation to dinner at home is a very friendly gesture. Do
send or bring flowers for the hostess, remembering that red roses are for
lovers and white lilies for funerals. Unwrap the bouquet before presenting it
to the hostess.
Avoid bringing a bottle of wine for the host. Some men would take it as a
comment on the inadequacy of their cellar.
Men stand until ladies are seated, and everyone waits for the hostess to start
eating. Keep both hands above the table. Plan to stay for an hour and a half
or so after dinner.
4.3.8 Deal-Focused, Moderately Informal, Monochronic and Reserved
The Danish Negotiator
To negotiators from deal-focused cultures, doing business in Denmark looks

deceptively easy. The Danish business culture is deal-focused more so
than the British, though a bit less than the Germans and distinctly less than
Americans. Danes negotiators also tend to be moderately informal,
relatively monochronic and quite reserved.
Language of Business: Most Danish people speak and read English fluently.
Visiting negotiators who do not command English should have no problem
arranging for a competent interpreter.
Making Contact: as with other deal-oriented cultures, an introduction can be

helpful but is not necessary. Danes are relatively open to dealing with
foreigners.
Time and Scheduling: Visitors are expected to be on time for meetings,

which often follow a written agenda and are unlikely to be interrupted.
A Reserved Culture: At sales training seminars in the U.S., Americans are

typically taught to move in close to a male prospect, grab his upper arm
while shaking hands and perhaps add a hearty slap on the back at the end of
the meeting.
This approach works well in the relatively expressive U.S. culture but can
be a real turnoff in Denmark. Visitors from expressive cultures should take
note: Danes tend to be reserved, especially at first contact.
Sales Presentation: As for the verbal part of the presentation, many Danish
managers are irritated by hard selling tactics. They react better to a well-
documented, straightforward approach with no exaggerated claims.
Social Behavior: During the first meeting it is a good ideas to try to

maintain about an arms length distance between one and ones counterpart.
And avoid physical contact other than the handshake. Of course, a couple of
glasses of beer after the business meeting help shrink that space bubble.
Conversational Turn-taking: Negotiators from more expressive cultures

sometimes cause offense by interrupting their Danish counterparts in mid-
sentence. While conversational overlap is common practice in Athens,
Rio de Janeiro and New York, interrupting people is considered very rude
behavior in Copenhagen.
Negotiation Style: Many Danes dislike that common international

negotiating tactic, the high-low gambit starting off with a highly inflated
initial offer. Business visitors fresh from negotiating in the Middle East,
China or Brazil where negotiators expect this tactic will do better opening
with a more realistic offer in Denmark. Equally irritating to Danes is the use
of artificial deadlines as a pressure tactic.
Management Style: The Scandinavian Model: today more and more foreign
companies are forming joint ventures in Denmark to help them access
emerging markets in the Baltic states, Poland and Russia.
Although expatriate managers generally enjoy their stint in Copenhagen,

many encounter unexpected problems in dealing with the Scandinavian
model of management. For instance, Danish managing directors may
completely ignore the corporate chain of command to talk directly with a
junior executive on a project. This is normal behavior in many Danish
companies, but it can be unsettling to a middle manager from a more
hierarchical culture. Many U.S. executives for example are used to a more
formal leadership style.
Expatriate managers newly arrived from more expressive cultures also tend
to come on too strong. Americans in particular are criticized for being too
aggressive, being boastful of past accomplishments and blowing their own
horn.
Egalitarism: what provokes this particular criticism? The answer is simple:

Danes tend to be governed to some extent by the Nordic egalitarian code of
conduct called Janteloven. This Law of Jante ordains that no one should
set himself or herself up as better, smarter or richer than anyone else.
Modesty: Danes are so self-effacing and modest that they usually mumble
their name when introducing themselves. Moreover they typically
understate their achievements and make a lot of self-depreciating remarks.
Indeed, it would be fair to say that modesty is a national characteristic of
Danes who may in turn be put off by the breezy self-confidence and self-
promotion they see in people from certain other cultures. Foreign visitors
will make a far more favorable impression by letting the Danes find out for
themselves how smart they are.
Regional Differences: of course there are cultural contrasts between

different regions of Denmark, just as there are within other countries. For
example, Danes observe that the people of Jutland are relatively taciturn
compared to their more loquacious Copenhagen compatriots. And Jutlanders
also tend to say things more directly straight to the point.
But despite some minor variations in cross-cultural behavior Danes

obviously get along quite well together. Just as business visitors get along
very well in Denmark, one of Europes friendliest and most hospitable
countries.
4.3.9 Deal-Focused, Informal, Monochronic and Moderately Expressive
The American 12 Negotiator
The USA is a complex multi-ethnic, multiracial, multicultural society.

Because of this diversity it is not possible to predict in detail the negotiating
behavior of any individual American. That said, there is such a thing as a
mainstream U.S. business culture. For example, most American negotiators
tend to be time-conscious (Time is money), deal-focused (Lets get down
to business) and informal (Whats your first name?)
The Language of Business: Is the American English. Very few Americans

speak a foreign language well enough to handle a complex business
negotiation. In order to avoid any misunderstandings, consider hiring an
interpreter or ask the counterpart to do so.
12
Properly speaking all citizens of North and South American countries are Americans.
However, since there is no other convenient way of referring to U.S. citizens, for the use of
this profile the term American will be used to refer to people from the United States.
Making Contact: Perhaps because the USA is an immigrant society with a

high degree of geographical mobility, most Americans are used to doing
business with strangers. That means that while a referral or introduction is
always helpful, in most cases a prospective counterpart can be approached
directly, without going through an intermediary.
The initial contact should be made through a letter, a fax or E-mail with the
basic information about the company and the product, also stating the
interest in a future appointment. The meeting should be requested two or
three weeks in advance, eventually by phone. The counterpart will suggest a
time and a place.
Deal-Focused: Americans are usually ready to get down to brass tasks

shortly after meeting a potential business partner for the first time. It is not
that the US negotiators are unaware of the importance of getting to know
their counterpart, of building relationship. It is simply that the deal-focused
American prefers to build trust and rapport while the business discussions
are proceeding. They tend to regard extended small talk and preliminaries as
a waste of precious time.
Orientation on Time: Americans are as obsessed with time as many other

cultures are with relationship-building. Famously monochronic, they treat
time as a tangible asset that can be saved, spent, lost, found, invested and
wasted.
If US business people have an appointment in someones office at 9:00 they

expect their counterpart to see them right on the dot. They regard a person
who keeps them waiting for longer than 10 minutes as either hopelessly
undisciplined, intolerably rude or both.
Similarly, once the meeting starts Americans expect discussions to proceed

to conclusion without interruption. When doing business in polychronic
cultures they become easily upset when discussions are interrupted by
phone calls, drop-in visitors or secretaries bringing in papers to be signed.
This means that visiting negotiators should take care to be on time for all
meetings in the USA and can expect an apology if they are kept waiting for
more than a few minutes.
Informality: A key American value is egalitarianism. They tend to feel

uncomfortable in the face of overt status distinctions. Women and young
men face relatively few obstacles to doing business in the US, where
individual achievement is generally regarded as more important than ones
social class, family background or gender.
The relative lack of class distinction is reflected in the breezy informality for
which Americans are famous. They want to get on a first name basis
quickly, even with people they have just met. This informality is meant to
show friendliness and warmth. Business visitors from more formal cultures
should realize that easy familiarity is not intended to show disrespect to
persons of high status.
The casual way Americans greet people and exchange business cards is
another reflection of egalitarian values. The East Asian who politely offers
his business card with both hands should not be offended if his US
counterpart stuffs the card in his pocket without reading it.
Communication Style: Depending on their ethnic background as well as

their individual personality, US negotiators show great variations in the way
they communicate. Also, compared with northern Europeans and East
Asians Americans may appear more expressive, more extroverted. But when
compared with southern Europeans and Latin Americans they usually seem
bland and introverted.
Direct Verbal Communication: The low-context Americans tend to say it

like it is. They value frank, straightforward exchange of information and
are usually unaware that East and Southeast Asians might be offended by
their directness. They may even be suspicious of negotiators who prefer
indirect, oblique, ambiguous communication.
Paraverbal Communication: US negotiators tend to speak louder at the

bargaining table than people from more reserved cultures. Uncomfortable
with silence, they may also feel compelled to quickly fill in any gaps in the
conversation a behavior that many Japanese for example find offensive.
Americans also know it is rude to interrupt others in mid-sentence; if they
do this anyway in the course of a lively discussion no offence is intended.
Nonverbal Communication: When meeting and greeting expect a firm

handshake and direct eye contact. Some Americans believe that a soft
handshake reflects weakness and that lack of direct gaze indicates
unreliability or dishonesty. They shake hands much less often than most
Europeans and their handshakes are quite brief compared to those of most
South and Central Americans.
The normal interpersonal distance in a business context is about an arms

length. Americans generally stand and sit further apart than Arabs, southern
Europeans and Latin Americans. Touch behavior is moderate. Some
Americans slap each other on the back and grab one another by the elbow or
upper arm to express friendliness.
Making a Presentation: Americans respond best to brisk, factual presentations

delivered by a competent speaker of English and enlivened by visual aids
where appropriate. They may interrupt with questions rather than hold their
questions until the end.
Bargaining Range: US negotiators experienced in international business are

used to a wide variation in bargaining ranges. Expect them to test the
opening offer for flexibility. They may respond better to realistic quotations
than to the overused high-low tactic. Build a safety margin into the opening
bid to cover unexpected developments but avoid over-inflating the offer.
Concession Behavior: Americans are tough negotiators. Each concession

should be carefully made and only on a strict ifthen conditional basis
and something of equivalent value should be demanded in return.
Ploys and Counter Ploys: A favorite American bargaining tactic is time

pressure: Next week our prices go up seven percent. The best way to
counter this ploy is to simply ignore it.
Another favorite ploy is to ask quotation on sliding scale by quantity. For

example, if the quoted prices are based on 1000, 10,000 and 50,000 units,
the American counterpart is likely to ask for 12,500 units but at a lower
price than quoted for 50,000 units. Counter this ploy by smiling and
repeating that the lower price is valid only for orders of the indicated
quantity.
The Trial order gambit is another tactic Americans negotiators use. They
may demand the lowest price even for a small test order. If one is tempted to
buy a customers business with a low introductory offer, one may face
some difficulties when trying to move him up to the normal price.
Decision-Making Behavior: American negotiators are probably the fastest

decision-makers in the world sometimes perhaps to their own detriment.
Some US executives live by the motto, Right or wrong, but never in
doubt. Expect expressions of impatience if the decision-making process
seems to be taking too much time.
Role of the Contract: Americans emphases the legal aspects and the fine
points of the written agreement. Many US negotiators include lawyers in the
discussion from the start until the signing ceremony. They often bring a
draft agreement to the bargaining table and proceed to negotiate clause by
clause.
Should a dispute or disagreement arise later the American side may rely
strictly on the terms of the contract and could become suspicious if their
counterpart invokes non-contract issues as the importance of the long-term
relationship.
Business Protocol: While the dress code varies somewhat according to

location and type of business, visitors are well advised to wear a suit and tie
to the first meeting with a new contact. Americans may not initiate the
exchange of business cards and they may offer their card at the end of the
meeting rather than at the beginning.
Forms of Address: start out with Mr., Mrs., Miss. or Ms. but do not be
surprised if the counterpart suggests switching to a first-name basis soon
after meeting. If such informality is uncomfortable, one should make it quite
clear which form of address one prefers. Titles are likely to be ignored
except in formal meetings exceptions are the medical doctors and high
government officials. Most Americans are uncomfortable using honorifics
and titles.
Gift Giving: The US business world is not a gift-giving culture. Many

American negotiators feel unease if presented with an expensive gift. If one
wishes to bring something small, a good idea would be a tasteful logo gift or
an item ones country or region is famous for. The counterpart may unwrap
the gift after receiving it. This is the American custom.
Wining and Dining: Many American negotiators prefer to maintain a

separation between their professional and private lives as well as between
business and pleasure. They may not always value entertaining as a way of
building a close personal relationship with their business partners.
If invited to that quintessentially American invention, the cocktail party,

expect to mix informally with a large number of complete strangers.
According to American custom it is considered rude to push food or drink
on a reluctant guest. So one should respond quickly in the affirmative if one
wishes to have something that is offered.
As one can see, the literature on international negotiation is rich in

intercultural approaches outlining cultural characteristics or cultural
typologies of the negotiators. They go as far as prescribing recipes about
dealing with Americans, Japanese, Arabs, etc. The utility of these
approaches is, however, limited. Usually they are based on opinions,
common observations, instead of scientific analysis (which is very difficult
to make). Since many of these models are created by authors coming from
Western schools, they present only one side of the story: the Western
perspective. The styles presented in these models are not static. They are
complex and dynamic, evolving and continuously changing. Furthermore,
most of these models do not take into consideration the fact that some
cultural dimensions are becoming more homogenous due to the
globalization process.
However, knowing these different styles can be useful for the negotiator as
they provide him with an image of the cultural differences throughout the
world and some general guiding lines for understanding and dealing with
cultures. The professional negotiator will go beyond these stereotypes and
will be careful about using some recipes in intercultural negotiations.
These models also show that every culture, drawing on its special talents,
has its own contribution to make to international negotiation. The American
genius is using plentiful resources to promote ingenious technical fixes. In
the Middle East tahkim, formal arbitration, and wasata, informal mediation-
arbitration, are proven methods of conflict resolution, sensitive to issues of
standing and exploiting symbolic and ceremonial assets. The afu custom of
begging pardon can be more helpful in some circumstances than the Anglo-
Saxon concept of apologizing. In the Far East relationships and consensus
are cherished and it is recognized that painstaking groundwork and sure and
steady implementation may be preferable to impatient negotiating and
rushed decision-making. In Europe, the source of modern diplomacy,
linguistic skills of drafting have been honed to a fine art. Tactical gimmicks
and dramatic stunts are less valued than the insight that negotiation is
mostly about the careful, unhurried joint formulations of texts and finding
the mot juste. The time has arrived for everyone to learn from everyone,
recognizing that no one has a monopoly on wisdom.
5
INTERNATIONAL
BUSINESS OPERATIONS
Most companies develop their first steps in international business through

reacting to export orders. These orders could come from anywhere in the
world. Once the company becomes more interested, it will become more
proactive. It will try to make things happen. It usually does this in markets
that do not seem to be too difficult quite often markets that it perceives to
be like its domestic market.
The less difficult markets are those that are either geographically close
(sometimes called geographical proximity) or psychologically close
(sometimes called psychological proximity).
Many US companies gain their export experience by exporting to the

bordering countries of Canada and Mexico. A similar pattern will occur in
most parts of the world.
Psychological Proximity
Sometimes countries that are geographically distant will seem to be very

familiar. This usually happens because of a common language and a similar
culture for example, it is quite common for a UK company to export to
Australia or New Zealand, or a Spanish company might feel closer to some
of the South American countries than Central Europe.
For instance, until quite recently, main countries in continental Europe,

although geographic close, have seemed psychologically distant. The result
of this was that UK companies developed markets based on Commonwealth
countries. It is only since Britain joined EFTA (European Free Trade
Association) and then the European Community that UK companies have
learned more about other European countries. As knowledge increases, the
psychological distance begins to diminish. The process has, of course, been

helped by the abolition of tariff barriers within the EC (now called the
European Union (EU) since the formal approval of the Maastricht Treaty in
1993) and large amounts of information from the European Commission and
the Department of Trade and Industry (DTI).
Consider the case of a US food manufacturer seeking new markets.

Geographical and psychological proximity suggest that Canada and the UK
would be appropriate. The similarities in terms of a common language and
similar cultural patterns serve to reduce the apparent risks of entering new
markets. On the other hand, there are differences. Canada has two official
languages French and English and packaging will need to be adapted to
cam both languages. Similar adaptations will be necessary to take account of
the fact that UK English has some differences from US English. Further, the
evolution of the US food market might be in advance of the UK and
Canada. Thus, not all US food products will be successful in these markets
and some might need considerable adaptation.
The early experience in international business gained from expanding into

proximate markets can be used as away of preparing for markets that are
more different.
Export Mode
Indirect Direct
Confirming Houses Distributors
Piggybacking Local sales offices
Trading Houses Agents
Direct Export Selling
5.1 Direct Export Selling
The export selling stage is the typical starting point in international business.
As its title implies, this is not a focused international approach and the
company orientation will be ethnocentric.
The initial reactive approach to unsolicited orders received is likely to

change to one where the company seeks to sell, but the company will seek
to sell its domestic offering. There will be little or no modification to
customer requirements.
International Business Operations
The differences in approach between its domestic and its export business
will be driven by legal and administrative requirements. So, for example, the
marketing mix changes:
Product this will be modified only to meet legal and technical
standards within the country exported to.
Price this will be dictated by currency conversion, by the extra
physical distribution management (PDM) costs, by distribution channel
cost margin requirements and by local tax requirements.
Distribution this will have to change as new distribution channel
members have to be found and PDM decisions are made to transport the
product, hold inventory (stock), invoice, insure, provide customs
documentation, etc.
Promotion the only element that is usually used is selling, so sales
literature might be changed and translated, but sales promotion,
publicity and advertising are rarely used.
The export selling approach is essentially casual and does not involve
anything more than minimal interaction with the international market. It
does not, therefore, integrate the marketing concept into its business
activities having little knowledge of its customers and not considering the
overall business environment, and making only minimal attempts to adjust
its marketing mix offering to customer requirements.
However, this approach can be profitable. Because of low costs of

adjustment and adaptation and a limited use of extra marketing mix
resources (i.e. little or no spending on marketing research or on the
promotional mix, with the exception of selling), the company incurs few
extra costs. Those costs are usually direct costs and are included in the price
quoted. At a tactical level, export selling can provide a useful profit addition
to the company. The difficulty with this approach is that it is essentially
short-term. This approach is more likely to be followed by smaller
companies. It restricts their risks, allowing them flexibility to drop in or
drop out of markets.
At this level the company is beginning to undertake business and marketing

planning for various markets. It is, by definition, taking account of customer
needs and wants. It will make various adaptations to customer requirements,
seek out market opportunities and develop appropriate marketing mix
solutions in an attempt to achieve profitable sales.
If the firm chooses to do its own exporting, it has four basic types of
overseas middlemen from which to choose: (A) manufacturers agents,
(B) distributors, (C) retailers, and (D) trading companies (indirect
exporting). These may be serviced by sales personnel who either travel to
the market or are based in it. If the sales volume is sufficient, a foreign sales
company may be established to take the place of the wholesale importer.
The manufacturing affiliates of most worldwide companies also import from
home country plants or from other subsidiaries products that they
themselves do not produce.
A. Manufacturers agents are residents of the country or region in which
they are conducting business for the firm. They represent various no
competing foreign suppliers, and they take orders in those firms names.
Manufacturers agents usually work on a commission basis, pay their
own expenses, and do not assume any financial responsibility. They
often stock the products of some of their suppliers, thus combining the
functions of agent and wholesale distributor.
B. Distributors or wholesale importers are independent merchants that buy
for their own account. They import and stock for resale. Distributors are
usually specialists in a particular field, such as farm equipment or
pharmaceuticals. They may be given exclusive representation and, in
return, agree not to handle competing brands. Distributors may buy
through manufacturers' agents when the exporter employs them, or they
may send their orders directly to the exporting firm. Instead of
manufacturers agents, exporters may employ their own salespeople to
cover the territory and assist the distributors. For years, worldwide
companies such as Caterpillar and Goodyear have utilized field
representatives in export territories.
C. Retailers, especially of consumer products that require little after-sales
servicing, are frequently direct importers. Contact on behalf of the
exporter is maintained either by a manufacturers' agent or by the
exporters sales representative based in the territory or travelling from
the home office.
D. Trading companies are relatively extremely important importers in
other parts of the world. They are included in indirect exporting.
However, the production company could have a proactive attitude
towards exporting. The number of African nations, trading companies
not only is the principal importers of goods ranging from consumer
products to capital equipment but also export such raw materials as ore,
palm oil, and coffee. The addition, they operate department stores,
grocery stores, and agencies for automobiles and farm machinery.

Although many trading companies are large, they are in no way
comparable in either size or diversification (products and functions
performed) to the sogo shosha.
Trading companies in Brazil, Korea, Taiwan, and Malaysia are a recent

development. They are of little use to exporters to those countries inasmuch
as their primary function is to promote their own countrys exports. On the
other hand, the English importer/factor, which performs some of the
functions of a trading company, is of value to exporters. It will, on be half of
foreign manufacturers, warehouse goods, price them for the local market,
deliver anywhere in the country, and factor (buy the sellers accounts
receivable). The exporter must still develop the sales, however.
Another form of trading company is owned by the state. State trading

companies handle all exports and imports in Vietnam, North Korea, and
Cuba, and in noncommunist nations where an industry is a government
monopoly, such as petroleum in Mexico, exporters or their agents must deal
with these government-owned entities.
Foreign Production
When a firm is selling products produced in the local market, whether they
are manufactured by a wholly owned subsidiary, a joint venture, or a
contract manufacturer, management is concerned only with the local
channels of distribution. Generally, the same types of middlemen are
available as in the home country, although the established channels and their
manner of operating may differ appreciably from those to which
management is accustomed. Differences between the foreign and domestic
environmental forces are responsible for this situation.
Wholesale Institutions
In other developed nations, as in the United States, the marketer will be able
to select wholesalers that take title to the goods (merchant wholesalers, rack
jobbers, drop shippers, cash-and-carry wholesalers, truck jobbers) and those
that do not (agents, brokers). However, just as in the United States, as
retailers have become larger, they have sought to bypass wholesalers and
purchase directly from local manufacturers and foreign suppliers.
Diversity of Wholesaling Structures. Generally, wholesaling and retailing

structures vary with the stage of economic development. In less developed
countries (LDC) that depend on imports to supply the market, the importing
wholesalers are large and few in number and the Channels are long.
Historically, many of the importers were trading companies formed by
international companies to import the machinery and supplies required by
their local operation and to export raw materials for use in the home country
plants. To obtain distributor prices, they were required by their suppliers to
sell to other customers as well.
Some of these operations became extremely diversified, owning automobile

and industrial machinery agencies, grocery stores, and department stores.
They literally could and did supply a complete city and an industry with all
of its requirements.
As colonies became nations, the new governments began applying pressure

to convert these trading companies to local ownership. Furthermore, these
countries were industrializing, which meant more goods were being
produced locally and fewer goods were being imported. Many of the local
manufacturers were able to take control of the channels from the import
jobber. To obtain more extensive market coverage, they canceled the
importing wholesaler's exclusivity and gave their product lines to new
wholesalers, many of which were formed by ex-employees of the importer.
As economic development continued, markets broadened, permitting greater
specialization by more and smaller wholesalers.
Parallel Importers and Gray Market Goods. Parallel importers are

wholesalers that import products independently of the manufacturer-
authorized importer or that buy products for export and then sell them in the
domestic market. Four transactions are possible:
An importer buys from an overseas dealer in the home country. This occurs
u hen authorized dealers in the importer's country charge more for the
import than do the home country dealers.
An unauthorized dealer imports from the foreign subsidiary and competes in

the home country against locally made products. Honda and other Japanese
manufacturers are legitimately reverse exporting: exporting American-made
products to Japan.
An unauthorized importer buys products overseas from the home office and
competes with the local subsidiary. Most international companies can price
lower for the export market than for the domestic market because they have
less promotional expense. The subsidiarys price may be higher than the
home offices price because of lower production volume, higher raw
material costs, and so forth.
Goods are bought for export but are sold on the domestic market instead,
creating parallel trading, or a gray market.1 Gray market goods are not
counterfeits, although differences may exist between these export-oriented
goods and goods intended for domestic markets (for example, differences
may involve warranty coverage or compliance with regulations such as
environmental standards for automobile emissions). Gray markets may
occur when a manufacturers export prices are lower than its domestic
prices. For example, Quality King Distributors in New York annually sells
millions of dollars worth of fragrances, health and beauty aids, and
prescription drug items such as Pampers, Tylenol, and Johnson & Johnson
toothbrushes to dealers at prices 30 percent lower than domestic whole
sellers can. The firm typically buys such products from exporters that sell to
it rather than sell them in export markets. In some cases the merchandise
never physically leaves the domestic market, while at other times the items
are actually sent to a foreign port, where they may be repackaged and
shipped back to the United States as American goods returned. The false
exporter then sells it to an American retailer at a price lower than the usual
wholesaler price in the United States but higher than the export price.
Although American manufacturers have gone to court to try to stop these
gray market operations, they have had only limited success. In 1998,
regarding a lawsuit brought against Quality King Distributors, the U.S.
Supreme Court unanimously found that U.S. manufacturers cannot bar the
import and sale of authentic (not counterfeit or pirated) products that were
sold overseas, since the manufacturer has no further right to control 48 the
products distribution once the item has been sold. There are gray markets in
numerous products, including perfume, photographic equipment, cigarettes,
electronic.
Proactive exporting will be undertaken by various types of company:
Small and medium-sized enterprises (SMEs) export to various countries.
Multi-national enterprises (MNEs) have various subsidiaries in different
countries and some subsidiaries will export to smaller or more risky
markets.
It is useful to balance the key markets or market concentration approach

with the opposite approach of market spreading, under which the aim is to
sell to markets in many different countries. The market spreading argument,
based partly on the justification developed under export selling, is that of
low cost, low commitment but a useful profit return. The company has to
spread its resources thinly and does not learn much in terms of in-depth
information about each countrys market. Its sales are small in each country
but equally its costs are low. Another part of the argument is to do with the
wisdom of spreading risk. A key market approach which had all its eggs
in the market basket of Kuwait and Iraq in 1990 would have suffered
catastrophic losses with the invasion of Kuwait and the subsequent
breakdown in trading.
Many companies find a compromise as the best solution. They identify a

number of key markets, usually less than 10 countries, and concentrate long-
term efforts on these markets. However, in addition they will export to a
number of other countries following the market spreading principles of low
cost, low risks, but some profit return.
Most firms began their involvement in overseas business by exporting that

is, selling some of their regular production overseas. This method requires
little investment and is relatively free of risks. It is an excellent means of
getting a feel for international business without committing any great
amount of human or financial resources.
If management does decide to export, it must choose between direct and

indirect exporting.
To engage in direct exporting, management must assign the job of handling

the export business to someone within the firm. The simplest arrangement is
to give someone, usually the sales manager, the responsibility for
developing the export business. Domestic employees may handle the billing,
credit, and shipping initially, and if the business expands, a separate export
department may be set up. A firm that has been exporting to wholesale
importers in an area and servicing them with visits from either home office
personnel or foreign-based sales representatives frequently finds that sales
have grown to a point that will support a complete marketing organization.
Management may then decide to set up a sales company in the area. The
sales company will import in its own name from the parent and will invoice
in local currency. It may employ the same channels of distribution, though
the new organization may permit the use of a more profitable arrangement.
This type of organization can grow quite large, often invoicing several
millions of dollars annually.
Many firms that began with local repair facilities later expanded to produce
simple components. Gradually, they produced more of the product locally
until, after a period of time, they were manufacturing all the components in
the country.
A firm's foreign business may evolve sequentially over the path just traced,
or a company may move directly to foreign production (nonsequentially) for
any of the reasons discussed previously in the section Why Enter Foreign
Markets?
Before examining foreign manufacturing, we want to describe briefly the

turnkey project, which is an export of technology, management expertise,
and in some cases capital equipment. The contractor agrees to design and
erect a plant, supply the process technology, provide the necessary suppliers
of raw materials and other production inputs, and then train the operating
personnel. After a trial ran, the facility is turned over to the purchaser.
The exporter may be a contractor that specializes in designing and erecting

plants in a particular industry, such as petroleum refining or steel
production. It may also be a company in the industry that wishes to earn
money from its expertise by delivering a plant ready to run I rather than
merely selling its technology. Chemical companies sold numerous turnkey
projects to the communist countries, for example. Another kind of supplier
of turnkey projects is the producer of a key input that sells a complete plant
in order to obtain a contract to provide its product to the finished factory.
Strategies Require to Maximizing a Firms Chances of Successfully

Exporting
The key issues in maximizing a firms chances of successfully exporting are

finding the right distributors, a commitment to export, to learn through
doing, carefully selecting markets, undertaking a financial investment,
having a long term horizon, having confidence, having respect for
customers, using intermediaries, having fast communications structures,
understanding the higher credit risk involved with exporting; having a clear
understanding of export documentation and procedures; understanding the
needs of export pricing; understanding the needs to recruit export staff,
understanding technical standards and legal standards; giving sufficient

resources to organizing the export function, understanding that handled
properly, payment delays can be minimized to domestic levels.
Firstly, the company should assess the possibility of exporting, using a

checklist to check that an export strategy would benefit the company.
Firms should then consult the various bodies which can help at the various
stages. Government provides a range of services, directly and through
sponsored agencies. Additionally, trade associations, chambers of
commerce, banks etc also give aid.
Thirdly, the countries and markets to be exported to should be carefully

analyzed and selected, as then should the issues of the extent to which exports
should be concentrated or spread in and between countries and markets.
Once the market has been decided upon, the decision then needs to be made
as to how to serve that markets / markets. In other words, whether agents,
sales subsidiaries should be used.
An export strategy should then be formulated, including the objectives to be

reached, and a timetable in which to reach them. More specifically, the
plans for the foreign market and why this market has been chosen should be
clearly established, as well as clear analysis of the market opportunity,
segments to be targeted, the degree of competition, product potential,
market entry mode, strengths and weaknesses of the firm's operations, and
the resources to be allocated.
Additionally, a marketing plan for the foreign market should be prepared,

identifying goals, warranties and service requirements, pricing, distribution
channels, transportation methods, warehousing and logistics, market
information required, and methods of advertising and promotion. From this,
a budget should be made available, along with a timetable and a procedure
for auditing progress.
In the export operations, a clear delivery and payment system should then be
developed, with the decisions made as to the way in which exports should
be administered. The way competitors undertake similar transactions should
also be investigated, in order to determine the best strategy to follow. From
this, the correct way to quote for business can be developed, and the best
way in which delivery can be organized, and payment made and checked.
Lastly, of course, the whole process needs to be evaluated and controlled.
There are a number of types of export house but the most commonly
understood is the organization that buys from a firm and sells abroad on its
own account Act on behalf of foreign buyers who pay them on a
commission basis. The confirming house guarantees payment to the exporter
on shipment of the goods. Acting on behalf of clients like foreign
department stores, buying houses purchase from domestic manufacturers.
The firm sells its goods abroad through the overseas sales distribution
facilities of another, usually larger firm.
There are several types of agents: some will sell only one companys
products; other agents will sell products from a number of companies, some
of which maybe competing. An agent does not take title to the goods, is
usually a national of the country concerned and is paid on a commission
basis.
The distributor takes title to the goods and therefore earns his revenue from
his mark up on the product rather than commission.
Sales representatives operating from the home country may be used in

foreign sales territories.
These may be staffed either by representatives from the home market or

from the foreign market.
Advantages
May handle all aspects of the export operation.

As above but also guarantees payment.
As above, but the domestic manufacturer is approached by the buying
house and need have no involvement in exporting other than supplying
the order.
The domestic firm has access to resources of an experienced exporter,
who in rum has the benefit of a wider product range and increased sales.
More market control and information than with channels mentioned
above. Permanent presence in the market. Costs of agency are related to
sales.
Like the agent, know the local market. Able to provide after-sales
service. More control of the market.
Detailed knowledge of the company and its products. High level of
market control and information.
Perceived as a commitment to the market. Easier for local companies to
deal with the exporter. Flexible and can accommodate growth.
Disadvantages
Little market control or information. Limited sales.

Finding a suitable partner. The domestic companys product may take
second priority growth may be impeded by existing arrangements.
May sell more than one companys products. Agency agreements can
be difficult and expensive to terminate.
Costs of termination arc high should exporters market development
plans require new channels.
Suffer from a lack of market knowledge, increased travelling time and,
depending upon the country, language problems.
Problems of choosing appropriate personnel for the sales force.
5.2 Indirect Exporting
Indirect exporting is simpler than direct exporting because it requires neither

special expertise nor large cash outlays. Exporters based in the home
country will do the work. Management merely follows instructions. Among
the exporters available are (1) manufacturers export agents, who sell for the
manufacturer, (2) export commission agents, who buy for their overseas
customers, (3) export merchants, who purchase and sell for their own
accounts, and (4) international firms, which use the goods overseas (mining,
construction, and petroleum companies are examples).
Indirect exporters, however, pay a price for such service: (1) They will pay a
commission to the first three kinds of exporters, (2) foreign business can be
lost if exporters decide to change their sources of supply, and (3) firms gain
little experience from these transactions. This is why many companies that
begin in this manner generally change to direct exporting.
For indirect exporting, a number of U.S.-based exporters (A) sell for the
manufacturer, (B) buy for their overseas customers, (C) buy and sell for
their own account, or (D) purchase on behalf of foreign middlemen or users.
Although each type of exporter usually operates in the following manner,
any given company may actually perform one or more of these functions.
A. Exporters that sell for the manufacturer
Manufacturers export agents act as the international representatives for

various non-competing domestic manufacturers. They usually direct
promotion, consummate sales, invoice, ship, and handle the financing. They
commonly are paid a commission for carrying out these functions in the
name of the manufacturer.
Export management companies (EMCs), formerly known as combination

export managers (CEMs), act as the export department for several
noncompeting manufacturers. They also will transact business in the name
of the manufacturer and handle the routine details of shipping and
promotion. When the EMC works on a commission basis, the manufacturer
invoices the customer directly and carries any financing required by the
foreign buyer. However, most EMCs work on a buy-and-sell arrangement
under which they pay the manufacturer, resell the product abroad, and
invoice the customer directly. Depending on the arrangement, the EMC may
act in the name of the firm it represents or in its own name.
International trading companies are similar to EMCs in that they also act as
agents for some companies and as merchant wholesalers for others.
This, however, is only part of their activities. They frequently export as well
as import, own their own transportation facilities, and provide financing.
W. R. Grace was at one time a major trading company that operated on the
Pacific coast of South America. It owned sugar mills, large import houses,
various manufacturing plants, a steamship company, and an airline.
Although a number of European and American international trading
companies have been in operation for centuries, certainly the most
diversified and the largest are the Japanese sogo shosha (general trading
companies).
a. Sogo shosha. The general trading companies were originally established

by the zaibatsu centralized, family-dominated economic groups, such
as Mitsui, Mitsubishi, and Sumitomo to be the heart of their
commercial operations. The general trading companies obtained export
markets, raw materials, and technical assistance for other companies of
the zaibatsu and also imported goods for resale. Included in the zaibatsu
in addition to banks and general trading companies were transportation,
insurance, and real estate companies and various manufacturing firms.
Although the zaibatsu were forced to dissolve after World War TI, the
companies that had been their major components survived. Although
unified ownership and management ceased after World War II, cross-
shareholdings and collaborative relationships resulted in the close
coordination of many business activities among the affiliated
companies. In recent years, the level of cross-shareholdings and
coordination has evidenced some decline, a development promoted by
liberalization of financial markets, pressures for improved performance
and corporate governance, and other factors.
b. Export trading companies. For USA, in the Reagan administration, the

president, impressed by the success of the Japanese, Taiwanese, and
Korean general trading companies, validated the Export Trading
Company Act. The measure provided the mechanism for creating a new
indirect export channel, the export trading company (ETC). For the first
time in U.S. history, businesses were permitted to join together to
export goods and services or offer export-facilitating services without
fear of violating antitrust legislation. Bank holding companies were also
permitted to participate in ETCs. This not only increases the ability of
trading companies to finance export transactions but also gives them
access to the banks extensive international information systems.
Furthermore, because ETCs can import as well as export, they can
engage in countertrade by selling their customers' products in other
markets. Concerns raised within the World Trade Organization
regarding the ETC Act has led to a revocation in 2002 of many of the
aspects of this act. Any potential exporter may apply to the Department
of Commerce for a certificate of review, a legal document that provides
immunity from state and federal antitrust prosecution and significant
protection from certain private antitrust law suits. The certificate allows
firms and associations to engage in joint price setting and joint bidding
and gives them the freedom to divide up export markets among
companies and jointly own warranty, service, and training centers in
various over seas markets. Note that the benefits of the ETC Act are
available to all exporters, not just export trading companies.
B. Exporters that buy for their overseas customers
1. Export commission agents represent overseas purchasers, such as

import firms and large industrial users. They are paid a commission by
the purchaser for acting as resident buyers in industrialized nations.
C. Exporters that buy and sell for their own account
Export merchants purchase products directly from the manufacturer and

then sell, invoice, and ship them in their own names so that foreign
customers have no direct dealings with the manufacturer, as they do in the
case of an export agent. If export merchants have an exclusive right to sell
the manufacturer's products in an overseas territory, they are generally
called export distributors. Some EMCs may actually be export distributors
for a number of their clients.
Sometimes called piggyback or mother hen exporters, cooperative exporters

are established international manufacturers that sell the products of other
companies in foreign markets along with their own. Carriers (exporters)
may purchase and resell in their own name, or they may work on a
commission basis. Gamers, like EMCs, serve as the export departments for
the firms they represent. Large companies, such as General Electric and
Borg-Warner, have been acting as piggyback exporters for years. A single
carrier usually represents between 10 and 20 suppliers, although there is one
large manufacturer of industrial machinery that has more than 1,000.
D. Exporters that purchase for foreign users and middlemen
Large foreign users, such as mining, petroleum, and international

construction companies, buy for their own use overseas. The purchasing
departments of all the worldwide companies are continually buying for their
foreign affiliates, and both foreign governments and foreign firms maintain
purchasing offices in industrialized countries.
Export resident buyers perform essentially the same functions as export

commission agents. However, they are generally more closely associated
with a foreign firm. They may be appointed as the official buying
representatives and paid a retainer, or they may even be employees. This is
in contrast to the export commission agent. who usually represents a number
of overseas buyers and works on a transaction-by-transaction basis.
Foreign Manufacturing
When management does decide to become involved in foreign

manufacturing, it generally has five distinct alternatives available, though
not all of them may be feasible in a particular country. They are
Wholly owned subsidiary
Joint venture
Licensing agreement
Franchising
Contract manufacturing
A sixth arrangement: the management contract is utilized by both
manufacturing and service companies to earn income by providing
management expertise for a fee.
Foreign Direct Investment
Once a company has made the decision to internationalize its operations by

the use of foreign direct investment (FDI), it still has the choice as to what
form that FDI should take. The two basic types are joint ventures and
wholly owned ventures (either in greenfield sites or via takeovers and
mergers). However, FDI can take many forms. These are outlined below:
Turnkey operations
Joint venture
Merger / acquisition
Greenfield operation
The Strategic Decisions
These all have their advantages and disadvantages and we shall examine
these in turn However, whatever type of FDI method is chosen, a whole
range of decisions must be made, which do not have a domestic counterpart.
These include:
The raising of funds in one market for investment in another country.
Complexities of exchange rate changes on the value of assets.
The possibility that a successful project will run into difficulties if the
host country government does not have sufficient foreign exchange to
permit remittances of capital, dividends, interest fees or royalties.
There are complexities of assessing the economic and political framework
of the host country and the possibility of changes in that environment.
There are potential dangers of expropriation of assets by the host country

government.
There are the problems associated with managing businesses that are a
considerable distance from head office, including the degree of autonomy to
allow local management.
There may be problems associated with taxation, such as possible

discrimination against cross border transactions Such transactions may be
designated 'not tax free' or the transactions may not be optimal from a global
point of view, even though they may be for the subsidiary.
Different national accounting regimes may make assessing financial

information on a global basis difficult.
If a potential host country has substantial government control over foreign

investment, or strict anti-trust or monopoly authorities this may cause
problems.
Exchange control regulations in a host country may constrain cross border

transactions.
Problems of language, customs and communications may exist.
Legal differences between the home and host country may also cause
problems of integrating potential subsidiaries into the world-wide company
structure.
Capital market differences mean choices about where investment funds are
to be raised.
Debt / equity rates may be imposed by foreign governments.

These points help outline the importance of a full and detailed, analysis, not
only of the methods of FDI but also of the host country and its suitability for
each of the methods. There is, therefore, an obvious interaction between the
two. Thus, the two issues we shall examine are:
A. The suitability of countries for FDI
B. The suitability of different types of FDI strategy
Investing overseas poses additional risks to a home country investment

decision.
We can classify these as transfer risk and generalized country risk.

Transfer risk is the risk that, despite an overseas project generating cash
flows, the host country government does not have sufficient foreign
exchange to permit remittance of capital, dividends, interest fees or
royalties. However, the risk is not usually catastrophic for a multinational
enterprise, because investments are usually long term enough to allow time
for restrictions to be terminated and remittances to resume.
Generalized country risk is of paramount importance, however, because

economic and political factors can fundamentally alter the basis upon which
the investment was made. Country risk is vital in assessing the rules of the
game and to establish the probability that the 'goal posts might be moved
during the game. Thus, whereas firm risk and industry analysis are integral
parts of analysis, regardless of whether the potential investment is in the home
country or abroad, country risk analysis is an additional function of
international investment, of great importance in MNEs investment appraisal.
5.3 The Mechanics of Generalized Country Risk Analysis
Initial sources of information for preliminary investigation include

publications by organizations such as the International Monetary Fund
(IMF) and the Organization of Economic Co-operation and Development
(OECD). However, much of the available information from such sources is
biased towards bank lending.
In order to undertake a proper country risk analysis for non financial

MNEs, economic and political factors, including potential political reaction
to economic downturns, specific tax changes and other changes in the rules
of the game.
A number of approaches can be adopted to analyze generalized country risk:
Checklists can be prepared and reviewed regularly.
Scoring systems can be developed, which aim to provide a figure which

incorporates economic and political risk.
Econometric and statistical analysis Econometric models aim to provide a

model of an overseas economy, whereas some statistical techniques have
been utilized in an attempt to predict whether a country is likely to meet its
debts as they fall due.
The political risk index is drawn up, based on the views of political
scientists on the present, as well as the next five and ten years, with scores
of 0-7 assigned to each of 8 factors in each country, 7 denoting no problem
for international corporation investment, the eight factors considered are:
1. Fractionalization and fictionalization of the political spectrum and the
power of each faction.
2. Internal fractionalization by language, ethnic and / or religious groups
and their relative power.
3. Restrictive, coercive, measures required to retain power.
4. Mentality of the host nation's population, in terms of xenophobia,
nationalism, corruption, nepotism and willingness to compromise.
5. Social conditions of the country, such as population density and wealth
distribution.
6. Organization and strength of forces for a radical left government.
7. Dependence on and / or importance to a hostile major power
8. Negative influences of regional political forces.
The following two symptoms are also given a similar range of scores:
Potential and actual societal conflict, such as demonstrations, strikes

and street violence.
Potential instability in terms of non constitutional changes,
assassinations and guerrilla war.
Up to 30 discretionary points are then added, with 20-30 to a low risk

country and 10-20 to a moderate risk country. The scores are then
interpreted as follows:
70-100: Low risk to business from socio-political factors.
55-69: Moderate risk to business from socio-political factors.
Previously, changes adverse to business have occurred but present
government is unlikely to introduce more such changes, though some
disturbances are likely to take place.
40-54: High risk to business from socio-political factors, which already
exist or from developments which could occur imminently.
0-39: Prohibitive risk to business from socio-political factors, which
severely risk business operations, including potential loss of assets and
daily disturbances.
The second index assesses operations risk for the business operations
environment, for day to day business. A permanent panel of 105 experts
around the world assesses this via 15 weighted criteria (weighted 1-3),
experts scoring 0-4, where 0 = unacceptable conditions and 4 = very good
conditions. The weights are given in the table below.
Criteria - Weighting :
1 Political continuity 3.0
2 Attitude : foreign investors and profits 1.5
3 Nationalization 1-5
4 Monetary inflation 1.5
5 Balance of payments 1.5
6 Bureaucratic delays 1.0
7 Economic growth 2.5
8 Currency convertibility 2.5
9 Enforceability of contracts 1.5
10 Labor cost / productivity 2.0
11 Professional services and contractors 0.5
12 Communications and transportation 1.0
13 Local management and partners 1.0
14 short term credit 2.0
15 Long term loans and venture capital 2.0
25.0
Again, the maximum score is 100, where :

70-100 = Stable environment, typically an advanced, industrialized
economy.
55-69 = Moderate risk country, though day to day operations are unlikely to
be seriously disrupted
40-54 = High risk country for foreign owned businesses, meaning that only
vital situations should be considered.
0-39 = Unacceptable business conditions
The third index is called factor R and concentrates on the ability of foreign
companies to convert and transfer local currency into hard currency to remit
and repatriate capital. Four sub indices are then produced. The legal
framework is assigned 20% of R, the following, the following factors given
weights and assigned 0-5 scores, 0 in the worst case, 5 in the best.
Law as written : Weighting:
Profit / dividend remittances 4
Royalties / fees / remuneration for non dividend 3
cash flow services
Repatriation of capital 3
Sub Total 10
Actual practices : Weighting:
Practices on dividends / royalties / other periodic 4
compensation
Practices on repatriation of capital 3
Hedging opportunities against a devaluing currency 3
Sub Total 10
The foreign exchange generation sub index accounts for 30% of R and is
based on IMF statistics, 50 points given to current account performance and
50 points for capital flows. The accumulated international reserves sub
index is also given 30 % of R, a range of points allocated, with 50 to a
country with the most months hard currency coverage of imports and zero
for the fewest. In addition, international reserves are added to the London
gold holdings valuation to give a complete reserves total, on which a ratio
compared with total public foreign debt is calculated.
A foreign debt assessment sub index is assigned 20% of R, calculating a

ration of public foreign debt to gross domestic product (converted to $),
with 40 points allocated to creditor nations. In addition, the capacity to
service debt, measured by the ratio of annual public foreign loan obligations
to foreign exchange earned, with 40 points again allocated to creditor
nations. Finally, a saturation factor is calculated, equal to 20% of R, where
debt service plus imports or petroleum ~ foreign exchange earned If such a
situation occurs, no points are allocated but 5 points or less is critical
The three main indexes are then combined, provided a Profit Opportunity
Recommendation (POR), based on five year forecast given the large lead
times between feasibility study and actual operation PORs in excess of 180
reflect conditions conducive to foreign direct investment, such as currency
convertibility and dividend remittances conditions.
Scores of between 160 and 180 reflect conditions conducive only to

minimum resource commitment but with possibilities of earning fees via
management of operations, shared technology, training and sales of other
services.
FOR Score
2A 180+
2B 160-179
2C 160-179
Scores of between 120 and 160 would reflect conditions conducive at best,
to trade only.
FOR Score
3A 140-159
3B 120-139
Scores lower than this would suggest that no transactions at all should be
undertaken with such countries.
FOR Score
4A 0-120
However, whilst country risks should be taken very seriously, it is also
important to consider the type of investment in relation to the country risk.
For most countries in Europe, the risk for firms considering FDI, is low,
giving them relative freedom over the type of FDI strategy they adopt. The
different ownership strategies are outlined below.
5.4 Ownership Strategies
A. No ownership: Turnkey Operations; Subcontracting components

B. Joint ventures: Private partner; Public sector; other holding organizations
C. Wholly owned: Merger / Acquisition; Greenfield site
Turnkey Operations
In some cases a turnkey operation is simply an expert of capital

equipment. For a fee, the MNE commits to construct an entire facility and
perhaps also provide the supplies, equipment, technical and engineering
skills and training for local managers and workforce A down payment is
usually made when the project gets under way, another during construction
and the final payment when the project has been completed and the plant is
transferred to the host country owner.
However, if the turnkey operation is planned and carried out by a company

which manufactures and sells the products, rather than the plant which
manufactures the products, then the situation is different, e.g. Fiat selling
vehicle plants to USSR and Poland, (Rover in the 1990s Maestro plant to
East European country). The result is products derived from an MNE, a de
facto transfer of technology, over whose distribution, marketing and sale the
MNE has no control.
Subcontracting Components
International enterprises increasingly transfer production facilities from high

labor cost to low labor cost plants abroad. However, such policies often
attract adverse publicity, due to jobs lost at home and criticism
of'exploiting1 the developing world. A solution is to sub contract assembly
work of the finished component to a local supplier, who may then put their
own brand on the product and sell in the local market and / or back to the
MNE supplying the sub components.
Such a policy may also be exploited where the potential host country may
be politically hostile and a 'no ownership policy most sensible. This may
apply to Communist countries, or even to Western countries in certain
sensitive sectors. Indeed, both the no ownership policies described apply to
countries where generalized country risk analysis points to the country being
a high risk for setting up, owned facilities.
5.5 Joint Venture Strategy
Generally speaking, there are two different types of joint ventures, contractual
joint ventures and joint equity ventures. Contractual joint ventures are risk
sharing ventures in which no joint venture with a separate personality is
formed. It is a partnership in which two or more companies, or a company
and government agency, share the cost, risks and profit of the investment.
Contractual joint ventures may be formed for a particular project of limited
duration, or may be of longer duration. Joint equity ventures involve a capital
commitment and a sharing of ownership between two or more partners,
establishing a separate legal entity, sharing management control and ownership.
Advantages of Joint Ventures
There are a number advantages associated with joint ventures. A joint

venture may be another viable option, where the potential host country
presents possible problems from a generalized country risk point of view. In
such cases the joint venture may involve the foreign MNE having one or
more local partners in a subsidiary company. The foreign MNE normally
supplies technology and know how, the local partner(s) local market
knowledge and political contacts.
The partner may be a financial institution or a nationalized industry, which

may be subject to political manipulation in terms of defending employment
The third type of local partner is the private sector company, which may
seek technological and financial aid from the foreign MNE For the foreign
MNE a joint venture has the advantage over a go it alone strategy, of
giving easier access to the host country market and more local goodwill
Joint ventures may allow foreign market expansion with reduced capital
outlay, which is attractive for small firms with limited financial resources,
or for firms wishing to internationalize quickly across a range of markets.
Joint ventures may also allow substantial cost savings and greater efficiency
through the sharing of resources, such as manufacturing, technology,
marketing, distribution etc.
Disadvantages of Joint Ventures
However, joint ventures have a very high failure rate, of between 30% and
60%. The main reason for this seems to be the potential for conflict between
the partners. The disadvantages are that local interests may prevent the JV
following a global strategy, or being integrated into the foreign MNEs
strategy, if this conflict with the interests of the local partner. Since neither
partner has complete control over operations, joint ventures create the risk
of losing capital assets or intellectual property as a result of the joint venture
partner. There is, therefore, the possibility of conflict among the partners in
terms of; reinvestment / distribution of profits1 issues, product line /
marketing decisions; product design / quality and standardization decisions;
transfer pricing decisions; labour relations / personal decisions.
Joint Ventures and Subsidiaries Less than 100 Percent Owned
A joint venture may be a corporate entity between an International Business

Company and local owners or a corporate entity between two or more
companies that are foreign to the area where the joint venture is located, or
it may involve one company working on a project of limited duration
(constructing a dam, for example) in cooperation with one or more other
companies. The other companies may be subsidiaries or affiliates, but they
may also be entirely independent entities.
All the reasons for making decisions at International Business Company

headquarters, at subsidiary headquarters, or cooperatively apply equally in
joint venture situations. However, headquarters will almost never have as
much freedom of action and flexibility in a joint venture as it has with
subsidiaries that are 100 percent owned.
Loss of Freedom and Flexibility
The reasons for that loss of freedom and flexibility are easy to see. If
shareholders outside the International Business Company own control of the
affiliate, they can block efforts of International Business Company
headquarters to move production factors away, fill an export order from
another affiliate or subsidiary, and so forth. Even if outside shareholders are
a minority and cannot directly control the affiliate, they can bring legal or
political pressures on the International Business Company to prevent it from
diminishing the affiliate's profitability for the enterprise's benefit. Likewise,
the local partner in a joint venture is highly unlikely to agree with measures
that penalize the joint venture for the IC's benefit.
With less than 50 percent of the voting stock and even with no voting stock,
an International Business Company can have control. Some methods to
maintain control are:
A management contract.
Control of the finances.
Control of the technology.

Putting people from the International Business Company in important
executive positions.
As might be expected, TCs have encountered resistance to putting
International Business Company personnel in the important executive
positions from their joint venture partners or from host governments.
The natural desire of these partners and governments is that their own
nationals have at least equality in the important positions and that they get
training and experience in the technology and management.
Reporting
For controls to be effective, all operating units of an International Business

Company must provide headquarters with timely, accurate, and complete
reports. There are many uses for the information reported. Among the types
of reporting required are (1) financial, (2) technological. (3) market
opportunity, and (4) political and economic.
Financial
A surplus of funds in one subsidiary should perhaps be retained there for

investment or contingencies. On the other hand, such a surplus might be
more useful at the parent company, in which case payment of a dividend is
indicated. Or perhaps another subsidiary or affiliate needs capita), and the
surplus could be lent or invested there. Obviously, parent headquarters must
know the existence and size of a surplus to determine its best use.
Technological
New technology should be reported. New technology is constantly being

developed in different countries, and the subsidiary or affiliated company
operating in such a country is likely to learn about it before International
Business Company headquarters hundreds or thousands of miles away does.
If headquarters finds the new technology potentially valuable, it can gain
competitive advantage by being the first to contact the developer for a
license to use it.
Market Opportunities
The affiliates in various countries may spot new or growing markets for
some product of the enterprise. This could be profitable all around, as the
International Company (IC) sells more of the product while the affiliate
earns sales commissions. Of course, if the new market is sufficiently large,

the affiliate may begin to assemble or produce the product under license
from the parent company or from another affiliate.
Other market-related information that should be reported to IC headquarters

includes competitors' activities, price developments, and new products of
potential interest to the IC group. Also of importance is information on the
subsidiarys market share and whether it is growing or shrinking, together
with explanations.
Political and Economic
Not surprisingly, reports on political and economic conditions have multiplied

mightily in number and importance over the past 15 or so years as revolutions
some bloody have toppled and changed governments."1 Democracies have
replaced dictatorships, one dictator has replaced another, countries have broken
apart or reunited changes have been occurring on almost every continent.
Strategies to Maximize the Likelihood of a Successful Joint Venture
Because of the spiralling costs of R & D, contractual joint ventures of

various types are common in aerospace and the automobile industries. The
question for firms which do wish to use the joint venture route to
internationalization is how to maximize the likelihood of the success of such
a strategy. Firms should firstly list the potential costs and benefits of the
venture. Care should then be taken in the negotiation of the joint venture
agreement, in terms of things such as determining outputs, inputs, control
mechanisms, and the duration of the agreement.
Successful joint ventures therefore, need to establish the strategic objectives

to be met and the timescale in which to meet them. A cost / benefit analysis
then needs to be undertaken of the joint venture strategy, and then a detailed
analysis of potential partners. A joint business plan then needs to be negotiated
and agreed across all aspects of the joint venture. These agreements then need
to be incorporated in the final contract. Finally, control systems need to be
established for measuring the performance of the joint venture.
Wholly Owned Foreign Subsidiaries (FDD)
Wholly owned foreign subsidiaries, represent the last stage of international-

lizetion. Mergers and Acquisitions.
A wholly owned foreign direct investment is still the most popular strategy
for most companies undertaking FDI in manufacturing. This is because of
issues of control and ability to integrate the host country firm into the global
operations structure of the MNE, especially if the industry is a global one.
Where speedy internationalization of production is required (if markets are
threatened), then the acquisition of/ merger with a company already
established in the host country may be the preferred option. The advantages
are similar to those of a JV with a local firm, namely speedy market access
and market knowledge. It may also allow the MNE to build up large market
share quickly Dublin (1975), has also argued that an acquisition / merger is
more common where the acquired firm is in and industry different to that of
the MNE buyer. Wholly Owned Subsidiary.
A company that wishes to own a foreign subsidiary outright may (1) start
from the ground up by building a new plant, (2) acquire a going concern, or
(3) purchase its distributor, thus obtaining a distribution network familiar
with its products. In this last case, of course, production facilities will
typically have to be built.
Historically, American companies generally have preferred wholly owned

subsidiaries, but they have not had a marked preference for any of the three
means of obtaining them. However, this has not been the case for foreign
investors in the United States, who have demonstrated a general preference
for acquiring going concerns for the instant access to the market they
provide. Moreover, they also have one less competitor after the purchase.
Sometimes it is not possible to have a wholly owned foreign subsidiary.

The host government may not permit it, the firm may lack either capital or
expertise to undertake the investment alone, or there may be tax and other
advantages that favor another form of investment, such as a joint venture.
However, the acquisition of a local firm may be regarded as an anti

competitive move, designed to suppress competition in the domestic market.
This will depend, of course, on the competitive state of the acquired firm.
If it would otherwise have gone out of business, the acquisition may actually
increase competition.
The acquisition / merger strategy allows speedy internationalization of

production because the acquired firm already has, at the host country level,
production, HRM, marketing and a logistics supply chain established.
This is of obvious short term benefit to the firm beginning the

internationalization process. In the longer term, however, if the MNE wishes
to pursue a global strategy, coordinating its world-wide operations, an
acquisition / merger may pose problems. This is because the acquired firm
may have been established under a totally different corporate ethos which
may mean that it's marketing, HRM, and logistics / supply chain
management are incompatible with the global MNE and may need to be
changed, which may be expensive.
Greenfield Site
In such cases, the transaction costs (retraining or changing the workforce,

injecting the management with a new philosophy, altering the supplier base
/relations with it) associated with an International acquisition / merger may
be perceived to be higher than the set up costs of a greenfield venture. A
Greenfield operation is politically more acceptable. In addition, it allows the
possibility for optimum sitting of the production plant, according to the
overall global strategy of the MNE.
This may then be affected by economic variables (labor availability / skills /

costs / attitudes, taxes and incentives, land and construction costs), Business
variables (accessibility to markets, availability of materials and components,
transportation systems, levels of industrialization) and Employee variables
(living conditions, health care, educational operations) The relative strengths
of these variables will in turn depend upon the importance of economies of
scale in production, the strength of global logistics management and the
global marketing strategy.
The disadvantages of a greenfield venture are the relative slowness with

which production may be built up and the strains this may put on the HRM,
logistics and marketing functions of an MNE, especially if these were not
part of its Net Ownership Advantages and thus a completely integrated
globalization strategy is not its optimum one. at least in the short run.
Management Strategy and its effects of FDI Strategy
However, the timing of foreign direct investment decisions and the type of
production function placed in locations as the result of such decisions will
depend the strategy adopted by the firm. Porter distinguishes between multi
domestic industries in which the firm operates a number of essentially
autonomous subsidiaries serving national markets. He contrasts this with

firms with truly global strategies, integrating their production sites with
functions located to optimize cost or differentiation.
How could explain the timing of FDI and why certain parts of the
production location are located in certain locations. These are known,
respectively, as the International Product Life Cycle (Vernon), the New
International Division of Labor and global localization. These are outlined
below.
International Product Life Cycle
The factors required for a good vary through its lifetime. Initially, as new
goods are developed and sold uncertainty exists in production and
marketing, requiring flexibility, skilled labor and proximity to the market to
allow market information to be utilized as swiftly as possible. These same
factors stimulate innovation, leading to a location link between the
innovation and production of new goods, which will be produced and
exported by rich and large economies, (e.g. cars) USA, Germany.
As the product matures its basic technology and functional specification

becomes more standardized (though peripheral product differentiation may
still be rife). This makes total flexibility of the whole production process
less important. As world demand grows, large scale production becomes
more feasible, absolute production costs increase in importance, especially
if other countries, similarly endowed with the requisite factors of
production, can imitate the innovation at lower cost.
This shifts comparative advantage from innovating countries, normally high

cost, towards other relatively wealthy, capital abundant countries and the
innovating country may switch from exporting to importing the good. The
final stage occurs when and if technology and specifications become
standardized, allowing production to be broken up into tasks requiring lower
amounts of skill, stimulating further downward pressure on costs. This tends
to give low wage, labor abundant countries a comparative advantage, which
may mean that eventually such nation may become net exporters. This
theory has been used to explain USA investment in the 1950s and 1960s and
the later stages of the cycle correspond closely to the Heckscher Ohlin
theory. In the absence of innovation, trade would settle down to a Heckscher
Ohlin pattern.
The New International Division of Labor
Schoenbergers (1988) theory is characterized by a three level strategy in

which knowledge intensive control engineering and advanced technical
functions are retained at 'home' locations High level skilled production
activities are then diffused among industrialized nations, in response to local
labor market conditions and market opportunities. Finally, low skilled,
standardized production operations will be located in developing countries
with a ready supply of semi-skilled, compliant, low cost workers.
Global Localization
The most recent theory concerning the FDI of MNEs is that of global
localization (Morris 1991). This theory has been developed, in the light of
the recent FDI activities of Japanese MNEs into the US and EC. Morris
(1991) argues that globalization, or FDI in separate markets is just the first
step to global localization. Globalization for the Japanese has involved
setting up basic, final assembly, manufacturing operations overseas, many
components and research and development operations being sourced outside
the host country (Ibid. p. 2-3). This pattern follows the theory of
Schoenberger (1988). Global localization involves deepening the
investment, transferring sourcing and R & D to the host economy to become
insiders in the market, as US MNEs have done in Europe. The rationale
for this is, according to Morris (1991), market driven: Japanese corporations
are increasingly seeing a need to produce in the markets they are selling in
and the only effective way to compete is by following a global localization
strategy and opting for full manufacture. In this way these companies can be
flexible to meet local market demands without having to wait for months
for orders to appear from Japan or to wait for design changes from the
corporate R & D centers based in Japan.
This strategy obviously differs from those of the product life cycle and
International division of labor, at least superficially. However, two points
need to be made here Firstly, the theory refers mainly to Japanese
investments, which have been made overwhelmingly in the automotive and
electronic industries, which may not be fully mature yet and may still
require geographically integrated production processes. Secondly, when
talking of locating within host markets, these markets are defined as the
triad markets of North America, the EC and South East Asia. Thus the new
international division of labor solution for deciding where to site each
production function within these 'markets' may still be applied.
The type of FDI strategy adopted will obviously be determined by the aims
for the FDI, determined on a global basis and the strengths and weaknesses
of the options available vis--vis those aims. For a foreign multinational
enterprise, a joint venture with an indigenous competitor has the advantage
over a go it alone strategy, of giving easier access to the host country
market and more local goodwill. The disadvantages are that local interests
may prevent the joint venture following a globally integrated strategy,
producing potential conflict over reinvestment, marketing, product design
and standardization, as well as risking the loss of competitive advantage to
the joint venture partner. However, the high costs of research and
development, access to complementary technologies, spreading of risk and
co-opting of competition also make joint ventures an increasingly popular
strategy within a global strategy.
Merger / Acquisition is an alternative to the joint venture strategy, offering

the similar advantages of speedy market access and market knowledge as
well as the ability to gain a large domestic market share quickly. The
acquisition / merger strategy obviously allows speedy internationalization of
production (which may be important if competitive drivers force
globalization), because the acquired firm already has production, HRM,
marketing and logistics functions established at the local level.
This is of short term benefit but. if the company wishes to pursue a global
strategy, this may pose problems because the acquired firm may have been
established under a totally different corporate ethos, which may mean that
it's production, marketing.
Joint Venture
A joint venture may be (1) a corporate entity formed by an international

company and local owners, (2) a corporate entity formed by two international
companies for the purpose of doing business in a third market, (3) a corporate
entity formed by a government agency (usually in the country of investment)
and an international firm, or (4) a cooperative undertaking between two or
more firms of a limited-duration project. Large construction jobs such as a
dam or an airport are frequently handled by this last form.
Several years ago, Ford and Volkswagen formed a novel joint venture in
which their operations in Argentina and Brazil were merged into a holding
company, Autolatina, in an effort to eliminate the losses suffered by both.
The joint venture, owned 51 percent by Volkswagen and 49 percent by

Ford, assembled products based on VW and Ford designs, but both
companies marketed the vehicles through their own distribution channels.
Although sales subsequently reached $7.58 billion, the companies decided
to terminate the operation. One industry expert says that Ford wanted to
leave because Autolatina did not fit its new global strategy of having global
vehicles. In a news release, the companies said the termination of the joint
venture reflected "the necessity of the companies to make better use of the
force and resources of their worldwide organizations."
When the government of a host country requires companies to have some

local participation, foreign firms must engage in joint ventures with local
owners to do business in that country. In some situations, however, a foreign
firm will seek local partners even when there is no local requirement to do so.
Strong Nationalism. Strong nationalistic sentiment may cause the foreign

firm to try to lose its identity by joining with local investors. Care must be
taken with this strategy, however. Although a large number of people in
many developing countries dislike multinationals for exploiting them,
they still believe, often with good reason, that the products of the foreign
companies are superior to those of purely national firms. One solution to
this ambivalence has been to form a joint venture in which the local partners
are highly visible, give it an indigenous name, and then advertise that a
foreign firm (actually the partner) is supplying the technology. Even wholly
owned subsidiaries have followed this strategy.
Disadvantages. Although a joint venture arrangement offers the advantage

of a smaller commitment of financial and managerial resources and thus less
risk, there are some disadvantages for the foreign firm. One, obviously, is
that profits must be shared. Furthermore, if the law allows the foreign
investors to have no more than a 49 percent participation (common in
developing countries), they may not have control. This is because the stock
markets in these countries are either small or nonexistent, and so it is
generally impossible to distribute the shares widely enough to permit the
foreign firm with its 49 percent to be the largest stockholder.
Lack of control over the joint venture is the reason why many companies
resist making such arrangements. They feel that they must have tight control
of their foreign subsidiaries to obtain an efficient allocation of investments
and production and to maintain a coordinated marketing plan worldwide.
For example, local partners might wish to export to markets that the global
company serves from its own plants, or they might want to make the
complete product locally when the global companys strategy is to produce
only certain components there and import the rest from other subsidiaries.
In recent years, numerous governments of developing nations have passed

laws requiring local majority ownership for the purpose of giving control of
firms within their borders to their own citizens. Despite these laws, control
with a minority ownership may still be feasible.
Control with Minority Ownership
There have been occasions when the foreign partner has been able to
circumvent the spirit of the law and ensure its control by taking 49 percent
of the shares and giving 2 percent or more to its local law firm or another
trusted national.
Another method is to take in a local majority partner, such as a government

agency, an insurance company, or a financial institution, that is content to
invest merely for a return while leaving the ventures management to the
foreign partner. If neither arrangement can be made; the foreign company
may still control the joint venture, at least in the areas of major concern, by
means of non-ownership-based control mechanisms such as a management
contract.
5.6 Licensing
Frequently, worldwide companies are called on to furnish technical

assistance to firms that have sufficient capital and management strength.
By means of a licensing agreement, one firm (the licensor) will grant to
another firm (the licensee) the right to use any kind of expertise, such as
manufacturing processes (patented or unpatented), marketing procedures,
and trademarks for one or more of the licensors products.
The licensee generally pays a fixed sum when signing the licensing
agreement and then pays a royalty of 2 to 5 percent of sales over the life of
the contract (five to seven years with an option for renewal is one common
way to structure such agreements). The exact amount of the royalty will
depend on the amount of assistance given and the relative bargaining power
of the two parties.
Advantages of licensing
We should examine the basic advantages of licensing in the manufacturing
industry, since that are where most licensing arrangements are found.
For example a company that manufactures computers, and use traditional
original equipment manufacturing (OEM) channels, that deliver high returns
on investment, but they also require a substantial amount of money can
easily improve its cost to profit ratio by licensing these responsibilities to
another company.
Licensing also gives a company the opportunity to utilize additional
marketing and distribution channels in new geographic locations.
Determine the Market
Before a licensor can land a licensing deal, he has to have a product or
technology or at least a solid idea or plan for one. Licensees will be
interested in his core product/technology if it either complements their
existing offerings or represents a new growth market for their company.
He needs to ask himself questions like:
1. What companies need the functionality his product/technology offers?
2. Do these companies already have a product that fills complementary
market needs?
3. Is anyone else licensing this functionality?
4. Which of his competitors could benefit from this functionality?
5. Can he license this functionality to them and still keep marketing core
products to his existing customers?
6. What do prospects see as the potential use of his product?
The answers to these questions should help a company better understand

what type of market potential your product has for licensing.
This forced foreign companies to obtain licenses instead of making illegal

copies. Texas Instruments (TI), for example, sued nine Japanese electronics
manufacturers for using its patented processes without paying licensing fees.
Despite the opportunity to obtain a sizable income from licensing, many
firms, especially those that produce high-tech products, will not grant
licenses. They fear that a licensee will become a competitor upon expiration
of the agreement or that it will aggressively seek to market the products
outside of its territory. At one time, licensors routinely inserted a clause in
the licensing agreement that prohibited exports, but most governments will
not accept such a prohibition.
5.7 Franchising
Franchising works as a contractual agreement by which the franchisor who

owns the business idea and brand, sells (franchises) the right to operate the
business in a specified area, subject to compliance with prescribed modus
operandi. The franchisee then pays a fee to the franchisor in return for
access to the business, and the fee is usually made up of a fixed charge on
signing the agreement, plus regular payments of royalties-based on sales.
In many cases, the terms of operation of the franchise also require that
inputs are purchased from the central franchisor. For example, in the case of
a pizza chain, the franchisor will require the owner of an outlet to buy all of
the pizza base and toppings from them. This requirement is a way of both
ensuring consistency of product quality, and also increasing the franchisors
profits via markups on the ingredients sold on.
The role of the franchisor is to provide guidance, training and support to the
franchisees, who often see this as a low risk route into running a small
business. In return, the franchisor receives the fee and commission income,
together with the potential to gain rapid expansion of a business at very low
risk. The biggest potential difficulty for the franchisor is that of successful co-
ordination of a wide network of businesses, all with different managers. The
brand needs to be protected if the overall business is to grow by attracting
more franchisees, but there can be a tendency for managers to want to go
their way if tight controls are not imposed from the centre. In the case of
international franchising the risk is increased because cultural variations in
management styles may greatly impede the use of a common approach.
Like franchising, licensing enables a business to reach customers that it

normally wouldnt be able to on its own. It also enables businesses to defer
the costs of production and distribution to someone else while still reaping
substantial financial benefits.
Although franchising involves licensing rights, a business can take
advantage of licensing strategies without entering into franchise agreements.
When a company license a product or technology instead of franchising it, it

minimize the expenses involved with expanding its marketing and selling.
In addition, in licensing arrangements, the licensor may be selling the rights
to an idea for a product or technology rather than the finished product
itself which is a major contrast to the franchising concept.
The distinction between a simple license and a license that has crossed the
barrier and become a franchise can be summed up as following:
1. The licensee is given the right to distribute goods and services that bear
the licensors trademark, service mark, trade name, advertising or other
commercial symbols;
2. The licensor exercises significant control over, or provides the licensee
with significant assistance and, the licensees method of operations; and
3. The licensee is required to make a payment of $500.00 or more to the
licensor or a person affiliated with the franchiser at any time before or
within six months after the licensee commences business operations.
When these three elements are in place, the license is generally considered a
franchise and the franchiser must abide by certain rules generally focused on
how they offer their opportunity to the public.
The Advantages of the Franchising System
First, the franchise has a great importance upon a countrys economy

because it stimulates international trade and the macroeconomic
development, by offering support to small and medium entrepreneurs, it
favors specific different social groups (women, young people, minorities),
offers managerial coaching, it reduces the risk and the uncertainty for the
consumer, it creates new jobs, it supports the new habits and ideas in the
economy, it helps the commercialization of a greater number of goods and
services, it contributes to the initiative and creativity development and to the
language enrichment by implementing new specific terms.
Second, it allows the rapid expansion of the franchisors business with low
risks compared to the risks to which the franchisee is exposed. Also, the
franchisor has the possibility to save the capital costs, because the
beneficiary is the one that pays for the investment.
The franchise offers the possibility of additional training for the merchants
through special assistance and preparation programs which are provided by
the owner of the franchise, representing a great support for the ones who
lack experience in the business field. They also benefit from the promotional
activity the franchisor carries on, which exceeds by far the promotional
campaigns of small private entrepreneurs, of the latest technical assistance,
of methods of access to special sources of supply and of course they have
the benefit as well to use a brand or a name that are commercially known
(the franchisors).
Third, the franchisors purchasing power can impose smaller costs and can
generate higher profits for the franchisee.
Fourth, the franchisor can help solving some special problems as the
companys location, the obtaining of the registers, of the taxes and of other
commitments.
And fifth, the possibility of a rapid expansion without reducing the

companys capital.
The Disadvantages of the Franchising System
The system does not have only advantages, there are also disadvantages for
both of the contracting parties.
The disadvantages of the franchising, from the franchisee point of view are
related to the financial side of the contract. Some of them admit that they
have to pay too much for the raw materials or for taxes, they do not have
enough flexibility in the decision making process, because all the operations
are undertaken centrally, and this lack of flexibility can have negative
results for the ones who have to face unusual or different market conditions.
This too strict control from the franchisor part results in a reduced initiative
and creativity from the franchisee part.
There can appear difficulties in prolonging the contract or in taking

advantage of the accumulated experience at the end of the contract.
The assistance provided by the owner of the franchise is insufficient.
At the macroeconomic level, the franchise has on short-term, a negative

effect upon the balance of payments. By imposing a certain level of
standardization of the economy, it contributes to creativity reduction of the
ones who start a business on their own.
Also, the franchise is considered to be perishable. Success can inevitably
attract other economic agents and the competition is impending.
From the franchisor point of view, the disadvantages associated to this kind
of system can be the risk that the beneficiary may not fulfill the contracting
obligations, by not respecting the quality standard, by not maintaining the
brand image, the difficulties that can be encountered in exerting control and
also the possible competition attempts from the franchisees part.
In recent years, American firms have gone overseas with a new kind of
licensing, franchising. Franchising permits the franchisee to sell products or
services under a highly publicized brand name and a well-proven set of
procedures with a carefully developed and controlled marketing strategy.
Franchising is one of three business strategies a company may use in

capturing market share. The others are company owned units or a
combination of company owned and franchised units. Franchising is a
business strategy for getting and keeping customers. It is a marketing system
for creating an image in the minds of current and future customers about
how the companys products and services can help them. It is a method for
distributing products and services that satisfy customer needs. Franchising is
a network of interdependent business relationships that allows a number of
people to share:
A brand identification
A successful method of doing business
A proven marketing and distribution system
In short, franchising is a strategic alliance between groups of people who
have specific relationships and responsibilities with a common goal to
dominate markets, i.e., to get and keep more customers than their
competitors.
There are many misconceptions about franchising, but probably the most
widely held is that you as a franchisee are buying a franchise. In reality
you are investing your assets in a system to utilize the brand name,
operating system and ongoing support. You and everyone in the system are
licensed to use the brand name and operating system.
The business relationship is a joint commitment by all franchisees to get and

keep customers. Legally you are bound to get and keep them using the
prescribed marketing and operating systems of the franchisor. To be
successful in franchising you must understand the business and legal

ramifications of your relationship with the franchisor and all the franchisees.
Your focus must be on working with other franchisees and company
managers to market the brand, and fully use the operating system to get and
keep customers.
Other franchisees and company operated units are not your competition.
The opposite is true. They and you share the task of establishing the brand
as the dominant brand in all markets entered and reinforcing the customers
familiarity with and trust in the brand. So in this respect you are working as
a team with others in the system.
Other franchisees share with you the responsibility for quality, consistency,
convenience, and other factors that define your franchise and insures repeat
business for everyone. Increasing the value of the brand name is a shared
responsibility of the franchisor and franchisee.
An ownership mentality destroys the reason franchised and company-

operated units are successful. Think about it. If you think you bought a
franchise, you become an owner and begin to think and act like an owner.
You will want to change the system because of your needs, you will wonder
what you are paying the royalty for, and you will begin thinking of other
franchisees as your competitors. For these and many other reasons you do
not want to think of yourself as an independent owner.
As a franchisee you own the assets of your company, which you have
chosen to invest in someone elses brand and operating system and ongoing
support. You own the assets of your company, but you are licensed to
operate someone elses business system.
Finally, your desire to become a franchisee must be grounded in your belief

that you can be more successful using someone elses brand and operating
according to their systems and methods, than you could if you opened up
your own independent business and competed against them. You want to
look for a franchisor who is building a system of interdependent franchisees
who are committed to getting and keeping customers, to growing faster than
the market, to growing faster than the competitors, and to do all of that with
high margins. When you discover a franchisor who understands this
relationship, you have a franchisor worth your consideration.
The Strength of Franchising
Franchising is the most popular system for growing a business in the United
States today. According to every government survey, franchising has
experienced explosive growth since the mid-70s and is expected to be the
leading method of doing business in the new century. Franchising
advantages over going into business for yourself include; opening quicker,
experiencing success sooner, developing a customer base faster, having less
risk and being more profitable. The success of a franchisee is based on the
proven success of the franchisor to operate company units and upon the
success of existing franchisees. It should be able to show that the business
can be successful in various markets and in different conditions.
A company franchises because it wants to quickly and in great numbers

replicate its successful company operations without significantly increasing
its debt. Because it has been successful at teaching its own employees to
operate the business, the company believes it can repeat the same success by
teaching others to do it.
In franchising, the operating system becomes identified with the brand or

trade name that you license as a franchisee. Each franchise system uses
precise methods to service and satisfy the customer. By documenting these
practices, the franchisor institutionalizes the buying experience. Because
customers dont like surprises this consistency in operations, unit to unit,
builds customer loyalty to the brand.
Franchising is best thought of as a contractual arrangement usually, though

not invariably in the field of service industries rather than manufacturing
industry, and which bundles together a wide variety of types of intellectual
property right. Thus, while licensing generally is of a single right, for
example a patent or (less often a trade mark or design), franchising
arrangements are essentially those of enabling the copying of a business.
Copying a complete business clearly requires clearance to copy all of the

aspects of that business and, in particular, the intellectual property rights
associated with the business. Thus, a franchising arrangement may include
license components for trade marks the name of the business for
copyright the paperwork, business forms, publicity or marketing materials
and for know how in terms of the detailed knowledge and experience of
how to run such a business successfully. Additional components, though
they tend to occur less frequently in franchising arrangements, can cover the
use of particular designs, or the use of patented methods or processes.
In one sense, franchising arrangements can be thought of as a particular sub-

category of technology transfer arrangements, albeit one where the
technology content may be relatively small as a proportion of the entire
body of information as to how to run such a business. The concept of
franchising, however, embracing as it does the replication of an entire
business, acts in a very specific way to promote the formation and
development of small businesses.
Someone develops a successful business and rather than grow that business
organically as a monolithic organization, chooses to exploit the success of
their own business model by effectively cloning that model, i.e. reproducing
fairly exact copies of it in different geographical locations. This has proved
a particularly successful approach to growing worldwide businesses in the
service sector, but it is by no means confined effectively to that sector.
For example, the manufacture, bottling and distribution of a popular
beverage may effectively be franchised to local producers, rather than the
original manufacturer having to set up subsidiaries, or operating divisions,
on a widespread geographical basis. This additionally has the very
substantial benefit of involving local investment which, because the
investors wish to see a return on their investment, acts as a substantial
incentive to successful operation.
Management Contract
The management contract is an arrangement under which a company provides

managerial know-how in some or all functional areas to another party for a
fee that typically ranges from 2 to 5 percent of sales. International companies
make such contracts with (1) firms in which they have no ownership
(examples: Hilton Hotel provides management for non owned overseas hotels
that use the Hilton name, and Delta provides management assistance to
foreign airlines), (2) joint venture partners, and (3) wholly owned
subsidiaries. The last arrangement is made solely for (he purpose of allowing
the parent to siphon off some of the subsidiary's profits. This becomes
extremely important when, as in many foreign exchange-poor nations, the
parent firm is limited in the amount of profits it can repatriate. Moreover,
because the fee is an expense, the subsidiary receives a tax benefit.
Management contracts can enable the global partner to control many aspects
of a joint venture even when holding only a minority position. If it supplies
key personnel, such as the production and technical managers, the global
company can be assured of the product quality with which its name may be
associated as well as be able to earn additional income by selling the joint
venture inputs manufactured in the home plant. This is possible because the
larger global company is more vertically integrated. A local paint factory,
for example, might have to import certain semiprocessed pigments and
driers that the foreign partner produces in its home country for domestic
operations. If these can be purchased elsewhere at a lower price, the local
majority could insist on other sources of supply. This rarely happens,
because the production and technical managers can argue that only inputs
from their employer will produce a satisfactory product. They are the
experts, and they generally have the final word.
There is another source of income that a global or multinational company

derives not only from firms with which it has a management contract but
also from joint ventures and wholly owned subsidiaries. That source is a
commission for acting as a purchasing agent of imported raw materials and
equipment. This relieves the affiliates of having to establish credit lines with
foreign suppliers and assures them that they will receive the same materials
used by the home company. The commission received for this service
averages about 5 percent of invoice value and is in addition to the
management contract fee.
5.8 Strategic Alliances
Faced with (1) expanding global competition, (2) the growing cost of
research, product development, and marketing, and (3) the need to move
faster in carrying out their global strategies, many firms are forming
strategic alliances with customers, suppliers, and competitors (these are
referred to as competitive alliances, competitive collaborations, or
competition to reflect the simultaneous existence of collaborative and
competitive forces in the relationship among the partners). Their aim is to
achieve faster market entry and start-up; gain access to new products,
technologies, and markets; and share costs, resources, and risks.
The term strategic alliance can mean many things. In its broadest sense, it
can apply to virtually any form of collaboration between two or more firms,
including one or more of the following activities:
Design contracts
Technology transfer agreements
Joint product development

Purchasing agreements
Distribution agreements
Marketing and promotional collaboration
Intellectual advice
A strategic alliance might be entered into for a one-off activity, or it might
focus on just one part of a business, or its objective might be new products
jointly developed for a particular market.
Generally, each company involved in the strategic alliance will benefit by

working together. The arrangement they enter into may not be as formal as a
joint venture agreement. Alliances are usually consummated with a written
contract, often with agreed termination points, and do not result in the
creation of an independent business organization. The objective of a
strategic alliance is to gain a competitive advantage to a companys strategic
position. When you are a small company, a strategic alliance can allow you
to graft your whole business onto the superior manufacturing, marketing and
distribution structures of an established international company.
Characteristics of a Strategic Alliance

Compared to other types of company-to-company relationship, strategic
alliances often have the following characteristics:
Usually a non-equity, loosely structured relationship
Each partner retains its business independence
One Company will take a lead role in any contract or marketing and the
others will be partners in the work. They could work as sub
contractors or suppliers to the main company
The alliance can be struck between companies which would normally
be considered competitors
The relative size of the partners is not a significant factor
Each partner must contribute distinctive core strengths e.g.
technology, manufacturing capacity, access to distribution
Strategic alliances can be combined with other agreements, such as
licensing of technology.
Four key benefits can be expected from a strategic alliance:
1. Increased leverage Strategic alliances allow you to gain greater

results from your companys core strengths.
2. Risk sharing A strategic alliance with an international company will
help to offset your market exposure and allow you to jointly exploit
new opportunities.
3. Opportunities for growth Strategic alliances can create the means by
which small companies can grow. By marrying your companys
product to somebody elses distribution, or your R&D to a partners
production skills, you may be able to expand your business overseas
more quickly and more cheaply than by other means.
4. Greater responsiveness By allowing you to focus on developing your
core strengths, strategic alliances provide the ability to respond more
quickly to change and opportunity.
Disadvantages of a Strategic Alliance
High commitment time, money, people

Difficulty of identifying a compatible partner
Potential for conflict
A small company risks being subsumed by a larger partner
Strategic priorities change over time
Payment difficulties
Political risk in the country where the strategic alliance is based
If the relationship breaks down, the cost/ownership of market
information, market intelligence and jointly developed products can be
an issue.
Entering into a strategic alliance requires commitment above all else in
hours as much as dollars. It also takes time to build a strong alliance.
Identifying and reaching agreement with the right company can be very time
consuming, and developing a strong relationship can take years.
When to Consider Strategic Alliance

Strategic alliance are particularly relevant for small to medium-size US
companies in the information technology, electronics, service and
component supply industries. As opposed to a joint venture or other
marketing methods, a strategic alliance may be an appropriate option for
your company when:
You do not have the resource (financial, human, production) to develop
associated hardware forms of your product, or to market the
components of software directly.
You have a strong technology-based software or component-type
product you need to get your product onto the market quickly because
the sector is developing so rapidly, and/or you have limited
manufacturing capability.
You are able to identify major international suppliers of associated
products who can provide you with a suitable production or distribution
channel, as well as an established reputation.
You have the time to commit to the relationship.
Whats Involved in Establishing a Strategic Alliance?
Determine your companys strategic direction Before even
considering a strategic alliance, you must have a clear idea of your
companys strategic direction
o Understand your environment, the markets in which you hope to
compete, and your industry
o Understand your firms strengths and weaknesses and decide which
will be the ones to build on
o Have a clear focus of which products and services you can provide,
your audience, and distribution method
Know what you are looking for from a strategic partner and how these
fit into your overall strategic direction, e.g:
o Market access
o Manufacturing capabilities
o Distribution channels
Know what you have to offer
o Your core strengths
o How these can add value to a prospective partner?
o Technology alone may not be a sufficient contribution.
o Technology or products in a value-added form may be required so

they can be immediately incorporated into a partners product range.
Choose your Partner Carefully
Once youve decided a strategic alliance will best serve your business
objectives, you are in a position to start shopping for a suitable partner.
Careful research and evaluation of candidates is crucial. The chances for
mutual success are likely to be greater where the following elements are
present:
Compatibility
While it is quite common for strategic alliances to be struck between partners

of unequal size, compatibility remains one of the most important ingredients.
A good first step when looking for a compatible partner is to examine your
existing relationships and personal ties. It is often easier to strengthen a
relationship with a known supplier, distributor etc. than to start anew.
You should spend some time evaluating the key points of similarity which
will allow a relationship to evolve over time, as well as potential areas of
conflict -for example, in operating styles, company cultures and whether
key people can get along.
Capability
Does your prospective partner offer the complementary strengths you
are looking for? A sample list of questions might include:
Does the partner have a sales force that is dedicated to your target
market?
Do they have a presence or potential advantage in other markets?
Would any agreement or partnership include access to an overseas sales
force?
How willing will the partner be to devote additional resources capital,

human, technologies, time to the alliance?
Does your product fit in with their marketing strategy and product mix?
and ask yourself.
Steps for Success
Joining forces with an international company may be something you
need to work at over time.
Once the agreement has been signed, your strategy should be to achieve
the agreed objective as quickly and successfully as possible (this may
mean running a quick pilot project).
The first area of cooperation will set the tone for the ensuing
relationship. Your performance is critical missed deadlines, non-
compliance with specifications, poor project management and an
unprofessional approach can doom your relationship from the start.
Once the first results have been achieved, you can begin to take steps to
add more value, e.g. increased service or sophistication of service.
Each enhancement should be worked through carefully and
implemented in steps.
Alliances include various types of partnerships. Companies wanting to share

technology may cross-license their technology (each will license its
technology to the other). If their aim is to pool research and design
resources, they may form an R&D partnership.
Strategic alliances are opportunities for small businesses to accomplish

things that would otherwise take much more money or staff time. Given the
current state of business today, competitive pressures are forcing companies
to come-up with imaginative ways to enhance brand identity, connect with
customers and attract top-notch employees. Companies, both big and small,
are teaming up more today than ever before to enhance their
competitiveness in the marketplace and keep pace with the rapid changes of
technological innovation. More than 20,000 corporate alliances have been
formed worldwide over the past two years. According to studies by Booz,
Allen & Hamilton, the number of alliances in the United States has grown
by 25 percent each year since 1987.
A strategic alliance is an arrangement between two companies that combine

resources to gain additional business. Strategic alliances are formed when
one company alone cannot fill the gap in serving the needs of the
marketplace. It involves two companies that pool together expertise and
resources to enter new markets, share financial risks and get products and
services to market faster.
Some strategic alliances are formal written agreements; others are informal as
a handshake. With the Internet, some alliances are entered into after several
email exchanges, even without the physical meeting of the parties concerned.
Some alliances involve sharing of resources and an exchange of funds; or
sharing of traffic between two dot comps; others are as simple as a
cooperative marketing arrangement. Whatever their structure, one goal
prevails: strategic alliances are opportunities for small businesses to
accomplish things that would otherwise take much more money or staff time.
Small business owners, with their limited resources and marketing reach,
could benefit from cooperative arrangements with other organization and
business entities. Joining forces with another organization can allow a
business to finance certain services or production functions by sharing
expertise, assets, expenses, and risk without necessarily incurring cash debt
or trading equity. For small businesses, strategic alliances often consist of
simple bartering with customers, suppliers, and even competitors.
Here are several ways that you can collaborate with another person or
company to bring added value, revenue, traffic and/or expertise into a
business.
Partner with a key customer.
If the business is selling a substantial amount of its product to one company,
it is best to explore opportunities for strategic alliances between the two
organizations. Its goal is to preserve the relationship - imagine the possible
devastating effects of losing your single biggest account. Cementing the
relationship into a long-term formal alliance will help mitigate the risk of
losing its biggest customer and market.
Partner with a brand leader
When considering strategic partners, most small businesses will benefit
from alliances that add value and prestige, not just money, through sheer
association alone. Its networking ability plays a major role in locating and
investigating strategic partnering opportunities. Business association with a
well-recognized industry name can generate immediate credibility for it. It

can be likened to receiving a stamp of approval from the best in the
industry. Even if the partnership does not offer direct financial
remuneration, the company can leverage its formal association with the
brand leader in the advertising and marketing.
Cross-sector Partnerships.
While strategic alliances are often formed with businesses, a company

should consider the possibility of joining forces with the non-profit
organizations such as trade associations, nonprofit groups, local community
organizations, etc. Cross-sector partnerships may offer great opportunities
for financing some advertising and distribution expenses. Moreover, the
company may be able to work out arrangements with some groups that
target a very specific, and important, consumer audience.
Partner with former employer.
Many entrepreneurs start their own companies after seeing potential

partnership opportunities with their employers. For example, you may
develop a product or service that provides your employer with a solution to
a major problem. You make arrangements to go into your own business
selling this product or service, and your former employer offers you a long-
term contract with his or her company. The bonus: you end up with great
cash flow, and the long-term contract with a creditworthy company means
you can go to other lenders and possibly get other financing you need.
Partner with a competitor.
The competitors, if handled properly, can be a very good alliance partners.

By understanding the capacity and capabilities of a competitor, a company
may be able to tap into their unique strengths for its own advantages. It may
work hand-in-hand with a competitor over contracts that may be too large
for a company to handle by itself. It may also refer customers and projects
to its competitors if its manpower resources are tightly squeezed. If a
company cultivates a good harmonious relationship with its competitor, they
may also reciprocate and pass on to it projects and contracts that they feel it
can do much better.
Partner for cross marketing.
Cross marketing calls for two distinct businesses to pool their resources and
collectively market to a target customer base. The strategic alliance will
provide additional leverage for their product offerings and generate greater
marketing impact. The potential to save money for both companies is the
greatest benefit to both companies. An online magazine targeting small
business entrepreneurs, for example, can partner with a site that offers
assistance to entrepreneurs in securing government loans. The online
magazine will be able to increase its business tools offering to its readers,
while the government loans site can widen its reach.
Alliances May Be Joint Ventures. Other companies carry the cooperation

further by forming joint ventures in manufacturing and marketing.
Westinghouse and Toshiba formed an equity joint venture to produce color
display tubes for computer terminals and picture tubes for TV sets.
Westinghouse, which was making monochrome tubes, formed the alliance
to get the technology to produce color tubes. The joint venture gave Toshiba
an opportunity to be involved in a manufacturing facility that could supply
tubes to its TV plant in Tennessee. The Japanese also expected that another
U.S.-based venture would help deflect protectionist pressure from Toshiba.
Toshiba provided the technology, and Westinghouse provided a factory
building and helped arrange financing, including $46 million in low-cost
public loans. However, within just two years, Westinghouse had sold its
interest to Toshiba, which then became the sole owner of the facility.41.
Alliances Can Be Mergers and Acquisitions. Future of Alliances. Many

alliances fail or are taken over by one of the partners. The existence of two
or more partners, which are often competitors as well as partners and
typically have differences in strategies, operating practices, and
organizational cultures, often causes alliances to be difficult to manage,
particularly in rapidly changing international competitive environments.
42 They can also allow a partner to acquire the firm's technological or other
competencies, and thereby raise important competitive concerns.
The management consulting firm McKinsey & Co. surveyed 150 companies
whose alliances with Japanese partners had been terminated. It found that
three-quarters of the alliances had been taken over by Japanese partners.
Despite the challenges involved with forming and managing alliances

successfully, there is no question that some alliances have accomplished
what they set out to accomplish. CFM International, the alliance between
General Electric and Frances Snecma, has been producing jet engines for
more than two decades. Airbus Industrie, an alliance among British, French,
German, and Spanish aircraft manufacturers, is now the world's second-
largest commercial aircraft producer. It seems that alliances in their various
forms will continue to be used as important strategic and tactical weapons,
particularly given the financial, technological, political, and other challenges
facing companies involved in increasingly competitive international
marketplaces.
Conclusions
Many large global and multidomestic firms with numerous manufacturing

subsidiaries all over the world began their foreign operations by exporting.
Once they succeeded at this stage, they often established sales companies
overseas to market their exports. Where sales companies were able to
develop sufficiently large markets, their firms set up plants to assemble
imported parts. Finally, complete products were produced locally. However,
this sequence of foreign trade to foreign direct investment does not represent
the only way firms have entered foreign markets. In some countries, if a
company was entering a new market because its competitor was already in
production there, it too would have to establish a production facility.
The World Environment Is Changing
While this linear relationship still holds, changes in the world environment
that affect trade and foreign investment are occurring: (1) Governments
generally have liberalized the flows of capital, technology, people, and
goods, and (2) improvements in information technology enable managers to
direct company activities in diverse areas over long distances. As a result,
global competition has increased, forcing companies to strive for better
quality and lower-cost products. To reduce costs, they have moved some
production activities to lower-cost countries and, through acquisitions and
mergers, have increased company size to achieve economies of scale.
Increasing sales by opening up new markets also will provide more
economies of scale for the manufacturing system, especially if the firm sells
the same products in all markets.
The afore mentioned increased global competition will drive companies to

open up new markets either to take market share from their competitors or
to go to markets where there is less competition. It is evident that numerous
conditions are forcing companies to enter foreign markets. Which strategy
will management follow multidomestic or global?
In other words, what can the company standardize worldwide?
Seven Global Dimensions
There are at least seven dimensions along which management can globalize
(standardize): (1) product, (2) markets, (3) promotion, (4) where value is
added to the product, (5) competitive strategy, (6) use of non-home-country
personnel, and (7) extent of global ownership in the firm. The possibilities
range from zero standardization (multidomestic) to standardization along all
seven dimensions (completely global). The challenge for company
managers is to determine how far the firm should go with each one. Usually
the amount of globalization will vary among the dimensions. For example,
the promotion for washing machines might be standardized to a great extent:
People use them to get their clothes clean, but for economic reasons, in
poorer countries the machines must be simpler and less costly. Therefore,
the product is not standardized worldwide.
Whether a firm attempts to enter a foreign market through exporting or

direct investment, a critical issue facing managers is how to distribute the
firm's products or services in that market. Achieving the potential benefits
of foreign market entry as described earlier in this chapter often depends on
the firm's ability to understand and effectively operate within the channels
of distribution in the nation or nations being entered.
Channels of Distribution
Channels of distribution systems of agencies through which a product and

its title pass from the producer to the user involve both controllable and
uncontrollable variables.
How can a channel of distribution be both controllable and uncontrollable?

It is controllable to the extent that the channel captain is free to choose from
the available channel members those that will enable the firm to reach its
target market, perform the functions it requires at a reasonable cost, and
permit it the amount of control it desires. If the company considers that the
established channels are inadequate, it may assemble a different network.
The distributive structure the agencies themselves is generally beyond

the marketer's control, and so it must use the agencies that are available.
Yet new agencies are occasionally created when the established institutions
do not fulfill the channel captain's requirements.
International Channel of Distribution Members
The selection of channel of distribution members to link the producer with

the foreign user will depend first of all on the method of entry into the
market. As was discussed earlier in this chapter, to supply a foreign market,
a firm must either export to a foreign country or manufacture in it. If the
decision is to export, the firm may do so directly or indirectly. Figure 2.3
shows that management has considerable latitude in forming the channels.
Review Questions
What options are open to a firm contemplating a FDI strategy?

What factors determine the suitability of a country for FDI?
What types of joint venture are there?
What are the advantages and disadvantages of joint ventures?
What strategies may be required in order to maximize a firms chances
of a successful joint venture?
What are the advantages and disadvantages of mergers/acquisitions?
What are the advantages and disadvantages of Greenfield sites?
How can the stage of the product in its life cycle affect FDI?
If a firm decides to adopt a New International Division of labor
strategy, how does this affect FDI?
How may a global localization strategy alter a firms FDI strategies, if it
was previously undertaking a new international division of labor
strategy?
What is global strategy and how can it affect the FDI strategy adopted.
6
SALES CONTRACT
AND EXPORT LOGISTICS
6.1 Framework for a Sales Contract
During the export operation, the exporter may be involved, to differing

degrees, in different types of contract: sales, carriage, finance and insurance.
Each contract needs to be explicit in regard to what is paid, to whom and
what obligations each party is to fulfil.
The INCOTERMS is one of the most important contract clauses, after

parties, good and price. They constitute a contract of supply and all
additions or alterations made to them need to be laid out clearly and
explicitly, to be agreed by all parties. Although verbal agreements are
binding in theory, in court they will be difficult to uphold.
Each sales contract may differ between markets, countries and even
individual customers, but as a guideline it should include the following: the
purpose of the contract (e.g. the exchange of specified merchandise); the
price and the currency to be used; terms of delivery (INCOTERMS) and
payment; methods of shipment, packing, etc and insurance terms; details of
the export licence and any freight/ documentary requirements; general
contract conditions (e.g. performance/ quality of the goods, arbitration, etc.);
signatures and details of both parties.
With such a detailed document, it is important that each clause is in writing

and is clearly understood by all. The sales contract will also have
implications for the related contracts, e.g. terms of carriage, insurance and
finance, and any problems can be costly in terms of litigation and loss of
trade. The language that the contract will use is very important, as this will
help to narrow down areas of confusion between differing translations.
A traditional export contract therefore includes: parties involved,

description of the goods, price, a point or destination at which the ownership
of goods passes from the seller to the buyer (or INCOTERMS),
responsibilities for carriage and insurance; the method by which goods will
be despatched; the documents required by the buyer; bonds and guarantees;
the method, period and currency of payment; the sellers bank through
which payment is to be conducted; the name of the arbiter should there be a
dispute over a contract; details of which party is to be responsible for bank
charges and so forth.
The contract will, therefore, encompass the movement of goods,

documentation and a financial transaction. The way the contract is formed
will affect the benefits, risks and often the relative levels of duty rose on the
transaction. It is, therefore, critical to: study the pros and cons of each
element of the contract; understand the effects different contracts may have
on customs duties and procedures; ensure risks to both buyer and seller are
minimised.
Generally, the obligations of the parties involved are the following: the
seller has to deliver the merchandise according to the clauses of the contract,
to issue the delivery documents; the buyer has to pay the agreed price and to
take the merchandise from the delivery place.
Basically, the price is considered the central element of the sales contract. It
is defined as the amount expressed in currency which a partner pays to the
other partner in exchange for the commodity 1 . It is also referred to as tariff,
commission, fee, remuneration. In certain international transactions, the
price may be expressed in quantities of merchandise (for example, offsets).
6.2 Covering the Risks Involved in an Export Operation
The risks of the exporter include: defaults on payment by the importer;

failure of the importer to obtain foreign exchange; fluctuations in exchange
rates.
The exporter has to find ways of reducing these risks. It is important

therefore to consider them at the contract stage. There are a number of
choices which are appropriate under different market conditions.
1
Turcu, Ion; Pop, Liviu; Contractele comerciale, Bucureti, Editura Lumina Lex, volumul 1,
1997, p. 140
Sales Contract and Export Logistics
The basic market research and customer credit status information will help
the exporter to estimate the risks involved with the customers status and
prevailing foreign exchange controls in the customers market. The
exporters bank may be able to help him asses his foreign exchange risks,
but in a turbulent world this is considerably more difficult. The dynamics of
the world money market can make rapid and unexpected short-term shifts in
relative currency values. The following aspects have to be evaluated in
order to create a set of options most likely to reduce risks and the costs of
insuring against them: methods of payment, methods of managing foreign
exchange risk, credit insurance, cargo insurance.
The Non-Payment Risk
There are three basic methods of payment: advance payment, documentary

credits and open account (they are listed in order of increasing risk).
All these methods will be treated in the next chapter of this paper. However,
here it is a brief presentation.
Advance payment is often quoted as the best method for the exporter. It is a
method often used for unsolicited business from unknown buyers, yet the
advantages to the exporter outweigh the disadvantages to the buyer who will
have to tie up funds in advance of delivery. Furthermore, advance payment
provides no guarantee as to the final destination of the goods purchased.
Other methods, at least ensure that goods are cleared into the country to
which they are destined. Where advance payments are made guarantees or
bonds may be required by the importer. In practice, only a very small
proportion of export sales are conducted in this way.
The next most secure method of payment is through a Documentary Letter

of Credit, which in simple terms can be defined as: a written undertaking
given by a bank on behalf of the buyer, to pay the seller an amount of
money within a specific time, provided the seller presents documents
strictly in accordance with the terms laid down in the letter of credit. In
effect, the buyer provides the seller with guarantee of payment in return for
an assurance from a bank that the required export documents have been
delivered to the banks satisfaction.
Where an established buyer-seller relationship exists and where foreign

exchange availability is not a problem, then business can be conducted on
an open account basis. Competitive pressures frequently make this a
necessity. This method of payment is naturally the highest in terms of risk.
It is therefore essential that the exporter trust customers whom he intends to

trade with on open account and mark credit limits very carefully both in
terms of exposure and time period allowed.
The Foreign Exchange Risk
Whilst many financial experts will argue for and against different foreign
exchange policies the two issues that the exporter need to be especially
aware of are: the impact of price fluctuations on his market and the effect of
exchange fluctuations on his own companys profitability. The danger, of
course, is in being overly concerned with the second of these- the impact of
currency movements on individual transactions where the real problem is
ensuring the development of the exporters market. Whilst the ups and
downs of exchange rates tend to balance themselves out over time,
fluctuating market prices may have an extremely weakening effect on the
market on long term. The overriding aim as always is to worry about the
market and its development rather than the short-term effects of currency
movements. While the exporter may lose some margin in the short term it is
vital not to lose his markets and the investments he has made in them.
It is essential in planning export contracts to have a knowledge of how

foreign currency deals work. Yet it is also important for the exporter to take
expert advice from his bankers on how to cover against risks.
The problem of transactions involving two currencies is that their relative

conversion rate changes. Thus a price agreed, say, six months ago based on
the rate prevailing for the conversion between a foreign currency and the
exporters currency may be quite different when it is converted back on
receipt of payment. Sometimes it will be more than expected, or other times
less. So how can the exporter guard against losses? There are basically three
approaches he might evaluate for suitability for his own business. These
will depend to a certain extent on the exporters spread of markets and
frequency of transactions, his own in house expertise in international
financial transactions and the level of risk he is prepared to take.
Frequent transactions across a number of markets enable the exporter to

provide a range of markets against which to reduce risks. In effect, he will
have a basket of currencies against which to average his own currency
gains and losses. A sophisticated approach would be to apply the moving
average exchange rate to each of his markets, thus enabling him to make
planned price adjustments. However, where a disproportionate amount of
sales or where risks are especially severe in an individual market, he may be

better advised to isolate the transactions and protect them using forward
exchange contracts.
If the exporter has frequent transactions in very few markets, again the
frequency of transactions may average out his currency gains and losses.
However, the exporter may wish to forecast an average moving exchange
rate against which to make adjustments to the price he charges his customer,
the aim being to smooth price adjustments so as not to upset his prices in the
foreign market concerned. However, where risks are forecast, the safest
route is to make forward exchange contracts.
When the exporter makes infrequent or seasonal transactions it is difficult to

balance risk. One way, of course, would be to operate currency accounts
where he would buy an equal value of materials from the market. If this
were possible he would balance his risks exactly. It is certainly a technique
used by larger, sophisticated organisations with a regular two-way flow in a
given currency and if applicable to his company would be worth evaluating.
The other option would be to make forward exchange contracts. This,
however, involves a premium on the exporters exchange rate quotation. It
pre-empts the fall in relative values of currencies. It may provide windfall
profits, but this is not the point of the exercise, for what he in fact is doing is
passing the exchange risk to the bank for a predetermined cost.
Forward exchange rate contracts are legally binding agreements between a

bank and its customers. The contract ensures that the currency is exchanged
at some future time at a predetermined value. The exporter is protected from
an adverse currency movement for once a contact is entered into it does not
matter how much the current spot rate of exchange may vary between the
time of entering the contract and its maturity. This is because he has
negotiated a fixed rate with his bank. Covering currency risk on a forward
basis thus provides a form of insurance and is a prudent step where currency
exposure could threaten the profitability of transactions.
A forward exchange contract can take two forms. It either specifies a fixed
future date or provides an option for the customer to deliver or take delivery
of the agreed currency within an agreed time. The option in a forward
exchange contract, unlike a stock exchange option, is not one offering a
choice as to whether to exercise it or not. It is an option which concerns
only the timing of the delivery when one currency is exchanged for another.
The way in which banks arrive at forward rates is to take the current spot
rate and add a premium or discount. The calculation is based on interest
rates. Thus, if the exporter enters a forward exchange contract for his
currency against a foreign currency with a lower interest rate than his, he
would expect it to be at a premium against his own currency. Conversely,
one with a higher interest rate against his own currency will be at a discount.
Premiums are deducted from the spot rate and discounts are added.
Cargo Insurance
The two essential points to remember about cargo insurance are: the
exporter must ensure that goods are insured at every point between the time
they leave his warehouse until they are safely delivered to his customer; he
must establish for which parts of the journey the responsibility for insurance
of the goods rests with him and which parts rest with his customer.
It is important, therefore, that the exporter and his customer reach an

agreement on the terms, methods of shipping and insurance.
The conditions clauses of a documentary credit will cover insurance. It is

absolutely vital that the insurance strictly complies with the conditions of
the documentary credit. Failure to do so will hinder the payment process.
The purpose of insurance is obviously to recover the value of the goods

should they be lost, damaged or destroyed. In most cases goods are insured
to cover their value (plus 10%) and the cost of freight. Should the exporter
need to make a claim then he will receive either the whole amount of the
value if goods are lost or damaged or a proportion only of the value if they
are damaged. If they are damaged beyond economic repair, then the goods
will be written off under the provision of total constructive loss. However,
when this occurs the underwriters have the right to whatever remains of the
original goods and the right to dispose of them.
The exporter can insure his goods for almost any risk provided that he is
prepared to pay the premiums demanded. The exceptions are, however: he
cannot insure against damage which is inherently probable because of the
nature or composition of the goods (e.g. propensity to go off or attract
odours); he cannot insure unlawful cargo. These exceptions come under the
heading of inherent vice. Insurance is listed in three clauses: A, B and C.
Clause A is an all risks clause, clauses B and C provide only basic

insurance for shipments which are relatively low risk. All cargo clauses
exclude war risk, damage due to strike, riots and civil commotions. It is
important for the exporter to examine the exclusion clauses for all cargo
insurance so that he knows exactly what he is covered for.
All carriers have a legal responsibility of custodianship. A body of common

law stipulates that carriers exercise a reasonable amount of care. The general
principles governing custodial care are subject to a number of treaties: for
road, CMR Convention conditions, for air Warsaw Convention, for sea
Hague Visby Rules.
The insurance certificate is an important document needed to complete the

full set of shipping documents. It is essential if the importer or anyone else
who has an insurable interest to whom the certificate can be endorsed, is to
make a claim. The claims process is advised by the insurer but usually
involves: obtaining a survey report from the insurers agent; forwarding the
survey report together with all relevant shipping documents (invoices, bills
of lading, or airway bill, and the certificate of insurance), plus a claim in
writing against the carrier or other party who is responsible for the loss.
6.3 Delivery Terms
Delivery terms are of major importance for international contracts, because

transport, insurance and taxes expenditures may represent a significant
percentage of the price. Therefore, any confusion about delivery terms may
lead to very costly disputes.
The delivery terms follow international rules, so that their meaning is

commonly interpreted all over the world. The principal delivery terms are
set out in INCOTERMS. 2 Essentially, each delivery term refers to the
moment when the risks of loss or deterioration and the responsibility for
costs are transferred from the seller to the buyer. In all INCOTERMS, the
transfer takes place in the delivery point. The contract clauses regarding the
delivery terms imposes deciding on the following aspects very important in
any export-import operation: where the risks of loss or deterioration of
goods are transferred from the seller to the buyer; which part is held
responsible for customs formalities (both in the exporting and importing
country); who is in charge of goods transport in the exporting country; who
will pay for goods transport; who will take out and pay the insurance.
2
INCOTERMS is the abbreviation for International Commercial Terms which are
published by International Chamber of Commerce, last revision year 2000
INCOTERMS are classified in four groups:

the group of delivery terms whose name starts with letter E includes
only one delivery term (EXW) which states that the importer takes the
goods from the exporters place (factory, warehouse);
the group of delivery terms whose names start with letter F (FCA,
FAS, FOB) state that the seller has to transport the goods to a certain
place (generally a port) for delivery;
the group of delivery terms whose names start with letter C (CFR,
CIF, CPT, CIP) includes the terms that demand that the seller is
responsible for contacting and paying the transport of the goods. The
buyer takes on the risks of loss or deterioration of goods or the costs
caused by transit;
the group of delivery terms whose names start with letter D (DAF,
DES, DEQ, DDU, DDP) states that the seller has to deliver the goods to
a certain destination. The risks of loss or deterioration of goods are in
sellers charge until the goods reach the mentioned destination.
All INCOTERMS are followed by a specific place, clearly indicated

(Ex: EXW Bucharest, FOB Amsterdam, DDP Paris).
INCOTERMS Presentation:
EXW (Ex Works)
Under this term, the buyer takes costs and responsibility quite literally from
the factory gate. All the seller is expected to do is to pack the goods and
make them ready for collection, according to the indications of the buyer.
No costs of freight or insurance of cargo are necessary. The advantages for
the seller are great, as the cost and time required in preparing shipping and
insurance arrangements are saved.
Often EXW terms apply to customers who marshal goods from several
suppliers for onward shipment to their own markets. Well-organised buyers
using their own export houses will insist on this type of arrangement.
The costs saved can either be passed on by the importer for competitive
pricing or retained as additional contribution. The advantages to the buyer
are thus obvious.
Risks to the exporter do however arise, especially where the buyer is

relatively unknown. The reason being that it is not at all uncommon for
buyers to divert shipments to markets where the seller had no intention of
letting them go. A breed of export entrepreneurs from both home and abroad
have learned to buy in bulk at export discounts (especially with large cash
transactions) to ship goods to markets where they undercut the exporters
appointed representatives. The effect is to undermine prices in those
markets. There is one of the ways in which parallel traders operate. Not
all transactions are strictly legal where the buyer circumvents duty or VAT
in disposing of the goods. It is, however, difficult for sellers to avoid such
transactions, for the professional parallel trader is all to well acquainted
with European Community Law. This law, in effect, debars companies from
restricting the sale of goods to specific customers in an attempt to reduce
competition. It is also important to note that that the EC legal constraints
covering competition cover all transactions in the Community regardless of
whether the goods are to be shipped outside the Community.
FCA (Free Carrier)
Under this term, the seller complied with its selling obligation when he gave
the goods to the freighter indicated by the buyer in the agreed place, with
the export customs formalities accomplished. This delivery term is suitable
to all transportation modes.
The sellers obligations are: to supply the goods and the commercial invoice
according to the contract; as regards the transport he does not have any
obligation, however, he can conclude a transport contract on buyers risk and
expense; he does not have any obligation related to the insurance contract; he
has to deliver the goods to the freighter indicated by the buyer; he is
responsible for risks of loss or deterioration of the goods until they are
delivered to the freighter; he has to support all the expenses related to the
goods until they are delivered to the freighter and he also supports the
expenses with customs formalities and all the other taxes in export; he has to
notify to the buyer that the goods were delivered to the freighter; he pays the
cost of verifying operations such as quality control; he supplies on his
expense the packaging necessary for the transportation of the goods according
to the buyers indications; the packaging has to be marked properly.
The buyer has the following obligations: to pay the price according to the
sale contract: to conclude on his expense the transportation contract; to take
the goods; to take on the risks of loss or deterioration of goods from the
moment when they have been delivered to the freighter; to pay all the
expenses related to the goods from the moment they have been delivered to
the freighter; he pays all the taxes related to possible import customs
formalities and, where necessary, to transit of goods through a third country;
to inform the seller early enough about the freighters name, the
transportation mode and the date when the goods have to be delivered.
FAS Free Alongside Ship
FAS refers to terms which mean that the goods are transferred to the buyer
before the goods actually go over the side of the ship. It is suitable for sea
transport.
The seller has the following obligations:
he has to supply the goods and the commercial invoice according to the
contract; as regards transport and insurance he has no obligation; he has
to deliver the goods alongside the ship indicated by the buyer in the
forwarding port at a specified date; he takes the risks of loss or
deterioration of the goods until they are delivered alongside the ship; he
pay all the expenses related to the goods until they are delivered
alongside the ship, including any export customs formalities; he has to
inform the buyer that the goods have been delivered alongside the
indicated ship in real-time; he has to send to the buyer the necessary
documentation proving the delivery of the goods; he has to pay for any
necessary verifying operations such as control of quality, weight; he has
to supply the packaging according to the transportation conditions.
When this delivery term is specified in the contract, the buyer has the
following obligations: he has to pay the price settled in the sale contract; he
has to conclude on his own expense a transportation contract; he takes the
risk of loss or deterioration of the goods from the moment they have been
delivered by the buyer alongside ship; he pays all the expenses related to the
merchandise from the moment it has been delivered by the buyer; he
informs the seller in real-time about the name of the ship, the loading place
and date; he pays the inspection expenses before forwarding.
FOB (Free on Board)
Where goods are sold on FOB terms, the exporter is responsible for all costs
and responsibilities for goods until they are put on board a ship or aircraft.
In effect, the buyer takes possession of the goods once loaded.
The advantages of FOB terms to the exporter are the following:

it is quicker and easier to calculate an offer price to the customer
the buyer takes possession of the goods before actual shipment and is
thus contractually responsible for payment regardless of what happens
to the goods
it may suit the buyer
the exporter does not have to finance freight and insurance beyond the
point of embarkation.
The disadvantages to the exporter revolve around the problems of securing

insurance payments from the customer should the goods go astray or be
damaged.
The advantages for the buyer are the discretion he can exercise in selecting
shipping companies and insurers and the control over the shipment which
this entails.
The disadvantages to the buyer are:

he has to finance the cost of freight from time of shipment. Any delays
or demurrage fall automatically on to him;
he is entirely responsible for handling insurance claims which may tie
up working capital whilst claims are being settled;
any mistakes in documentation made by the seller (whilst reclaimable
later) have initially to be sorted out by the importer, as ownership rests
with the purchaser;
problems and disputes are left to the buyer to sort out. Whilst this may
be in theory an advantage to the exporter, the friction and costs may
damage the relationship between seller and buyer, to the sellers long-
term disadvantage.
CFR (Cost and Freight)
Cost and freight relates to the fact that the seller has to pay the cost and
freight necessary to bring the goods to the agreed destination port, but the
risk of loss or deterioration of goods and any other expenses are transferred
from the seller to the buyer as soon as the goods are on the board of the
ship. CFR is suitable for sea transport.
The seller has the following obligations: to supply the goods and the
commercial invoice according to the sale contract; to conclude on his own
expense a contract which ensures the transportation of the goods until the
destination port on a ship; he takes the risk for any deterioration or loss of
the goods until they are on the board of the ship; he pays the costs related to
the goods until they are delivered, including loading expenses; he has to
send to the buyer the transport document; he supplies the proper packaging.
The buyer is responsible for the following: he pays the price stipulated in
the sale contract; he has no obligation regarding the transport; he has to take
the goods from the freighter in the agreed destination port; he takes all the
risks regarding the goods from the moment they have been loaded on the
board; he pays all the expenses related to the goods from the moment they
are on the board of the ship including discharge expenses; he also pays the
import customs duties; he informs the seller about the destination port and
forwarding date.
CIF (Cost, Insurance and Freight)
Under CIF delivery term, the seller has the same obligations required by
CFR, plus the transport insurance against risks of loss or deterioration of the
goods. The seller takes out the insurance contract and pays the insurance
premium.
The buyer has to know that under this delivery term, the seller has to
provide insurance for a minimum coverage of risks.
CIF requests for the seller to be in charge of export customs formalities and
it is suitable for sea transport.
To sum up, the exporter has to:

conclude both an insurance and a transport contract; the minimum
insurance has to cover the price stipulated in the sale contract plus 10%
and is has to be issued in the currency of the contract;
pay all the expenses regarding the goods until they are delivered to the
destination port;
send the transport document to the importer.
On the other hand, the importer has to pay the price stipulated in the sale
contract, to take the merchandise from the freighter in the agreed destination
port, the risks and expenses related to the goods are in his charge from the
moment they are on the board of the ship in the forwarding port.
CPT (Carriage paid to)
CPT delivery term implies that the buyer pays the transport of the goods to a
named destination. Any risk of loss or deterioration of the goods or expense
related to the goods is transferred from the seller to the buyer when the goods
are delivered to the carrier. If there are more carriers in charge of transport of
the goods, the risk is transferred when the goods are delivered to the first
carrier. Under this term, the seller is in charge of export customs formalities.
CPT is suitable for any transport mode.
According to this delivery term, the seller has the following obligations: to
deliver the goods and the commercial invoice as stated in the contract; to
conclude on his own expense a transport contract until the named
destination (as regards the insurance, he has no obligation); to deliver the
goods to the carrier at a certain date; to pay all the expenses related to the
goods until they are delivered to the carrier; to inform the buyer that the
goods have been delivered and send him the transport document; to supply
the necessary package for the goods.
The buyer has the following obligations: to pay the price mentioned in the
sale contract (he has no obligation related to the transport); to take delivery
from the carrier; he is responsible for the risk of loss or damage of the goods
from the moment they have been delivered to the carrier; to pay all the
expenses related to the goods from the same moment, including the import
customs duties and other taxes where necessary.
CIP (Carriage and Insurance Paid to)
This delivery term is the same as CPT with the exception that the exporter is
responsible for insurance. He is responsible, therefore, for goods until they
arrive at a specific destination. This type of contract is not to be
recommended where the exporter has to take care of import procedures on
behalf of the customer. This delivery term is suitable for any transport
mode.
To sum up, the seller has to: deliver the merchandise ,the commercial
invoice and any other document requested by the contract; to conclude on
his own expense a transport contract until the named destination; to pay the
insurance premium (the minimum insurance has to cover the price stipulated
in the sale contract plus 10 % and has to be issued in the currency of the
contract); he is responsible for the risk of damage or loss of goods until they
are delivered to the carrier; he pays all the expenses related to the goods
(freight, loading cost), including the export customs duties and any other
taxes imposed when exporting; he supplies the necessary packaging and
marking and pays for the control of the goods before exported.
The seller has the following obligations: to pay the price; (he has no
obligation concerning the transport); to take delivery from the carrier in the
named destination; to bear all the risks of loss or damage of goods from the
moment they have been delivered to the carrier; to bear all the expenses
related to the goods from the moment they have been delivered to the carrier
(these expenses include also import customs duties and, where necessary,
transit duties).
DAF (Delivered at Frontier)
DAF delivery term shows that the seller fulfilled with his selling obligation
when the goods have been delivered to the frontier agreed by the parties, but
not to the destination. The term frontier may be used for any frontier
including that of the exporting country. According to INCOTERMS 2000,
this delivery term may be used only in case goods are transported by rail or
road.
According to this delivery term, the seller has the following obligations: to
deliver the goods to the buyer in the named frontier at a certain date; to
ensure on his expense the transport of goods to the agreed frontier even if
transit through a third country is necessary (he has no obligation related to
insurance); to bear the risk of loss or damage of the goods until they arrive
to the named frontier; to bear the expenses related to the goods until they are
taken by the buyer ( including export customs duties and any other taxes); to
send to the buyer the transport document which proves that the goods have
been delivered.
The buyer has the following obligations: to pay the price; to take delivery
from the frontier; to bear any risk related to the merchandise from the
moment it arrives at the frontier; to pay all the taxes concerning the goods
from the moment they are taken from the frontier.
DES (Delivered ex Ship)
DES delivery term states that the seller fulfilled the selling obligation when
the goods are at the board of the ship in the agreed port. The seller bears all
the expenses and risks implied by the transport of the goods to the agreed
destination port. This delivery term is suitable only for sea transport.
The seller has, therefore the following obligations: to deliver the

merchandise (without import duty-paid) at the board of the ship in the
named destination port at a certain date; to send to the buyer the commercial
invoice, the transport document and any other necessary documentation; to
conclude on his own expense a transport contract so as to ensure the
transport of the goods to the named destination port (as regards the
insurance, he has no obligation); to bear all the risks and expenses related to
the goods until they are delivered as mentioned above; to supply on his
expense the packaging of the merchandise and to mark it properly.
The buyer has the following obligations: to pay the agreed price; to take
delivery from the board of the ship; to bear the risk of damage or loss of the
goods from the moment they are at the board of the ship in the named port
of destination; to bear unloading costs and import customs duties.
DEQ (Delivered ex Quay)
DEQ delivery term shows that the seller fulfilled its selling obligation when
the goods reach the quay of the agreed destination port. The seller has to
bear all the risks and costs caused by the delivery of the goods. According to
INCOTERMS the buyer is in charge of the import customs duties and other
import taxes, but before that date, they were the sellers obligation. Anyway,
the parties may agree that these taxes be partially or totally the sellers
responsibility.
To sum up, the seller has the following obligations: to deliver the
merchandise on the quay of the named destination port; to supply the buyer
with the commercial invoice, the transport document and any other
necessary documentation; to conclude on his own expense the transport
contract (related to insurance, he has no obligation); to bear the risks and
expenses related to the merchandise until it arrives on the quay; to supply
the packaging of the goods and to mark it properly.
On the other hand, the buyer has to: pay the price agreed in the sale
contract; take the delivery from the quay; to bear all the risks and expenses
related to the goods from the moment they are on the quay.
DDU (Delivered Duty Unpaid)
DDU delivery term means that the seller has to deliver the merchandise at a
named place in the importing country. He has to bear all the risks and costs
implied in transporting the merchandise to the agreed place except for the
import duties and unloading costs. If the parties agree that the seller is in
charge of customs duties, this has to be specified in the contract.
Under this term ,the obligations of the seller are: to deliver the merchandise
in the importers country at a named place; to supply the necessary
documentation (commercial invoice, transport document and all the other
required documents); to conclude the transport contract on his own expense
(regarding the insurance he has no obligation); to bear all the risks and
expenses related to the merchandise until it arrives at the agreed place in the
importers country; to supply the packaging and to mark it properly.
The buyer has the usual obligations: pays the price; take delivery from the
named place in his country and from that moment bears all the risks and
costs related to the merchandise.
DDP (Delivered Duty Paid)
While EX WORKS implies minimum obligations to the seller, this delivery

term implies maximum obligations to the seller. He has to deliver the goods
in the importers country at a named place. Unlike DDU, he is in charge of
import customs duties too. The discharge of the goods at the destination
place is made on the buyers expense and risk.
The following table will summarise the obligations of the parties regarding
delivery according to INCOTERMS groups.
Table 6.1 INCOTERMS: Obligations of Parties Involved

in Export Operations 3
Group
E F C D
Obligations
Packing exporter exporter exporter exporter
Storage exporter exporter exporter exporter
Loading importer exporter exporter exporter
Export
importer exporter exporter exporter
customs
Main
importer importer exporter exporter
transport
Insurance For CIF
Unspecified
of main unspecified unspecified and CIP
(exporter)
transport exporter
Importer
Import
importer importer importer (DDP
customs
exporter)
Unloading importer importer importer importer
As regards the obligations of the parties concerning the delivery documents,

they are summarised in the table below 4 :
3
Popa Ioan, Tranzacii de comer exterior, Bucureti, Editura Economic, 2003, p. 230
4
D. Chevalier, Memo Guide MOCI, no 3/1999
Table 6.2 Obligation Summarised
Certificate
Inspection
Certifying
certificate
of origin
Insurance
Consular
Delivery
invoice
licence
licence
delivery
Packing
Invoice
Export
Import
Trans.
policy
Doc.
term
doc.
list
EXW S (S) B B (B) (B) B (B) (B) B
FCA S (S) S B (B) (B) S B (B) B
FAS S (S) S B (B) (B) S B (B) B
FOB S (S) S B (B) (B) S B (B) B
CFR S (S) S B (B) (B) - S (B) B
CIF S (S) S B (B) (B) - S S B
CPT S (S) S B (B) (B) - S (B) B
CIP S (S) S B (B) (B) - S S B
DAF S (S) S B (B) (B) S S (S) -(B) B
DES S (S) S B (B) (B) S S (S) B
DEQ S (S) S B (B) (B) S S (S) B
DDU S (S) S B (B) (B) S S (S) B
DDP S (S) S B (S) (S) S S (S) S
S= documents on sellers expense

B= documents on buyers expense
( ) = INCOTERMS do not specify on whose expense the document will be
obtained
= if it is the case
6.4 International Distribution
Delivery Preparation
Depending on the transport method, the physical processes of exporting can

be numerous, and can leave the products vulnerable to damage at various
points during their journey to the customer. As well as initial loading and
final unloading procedures, and potential hazards during transportation
itself, goods may be moved and reloaded at intermediate points in the
journey. Technological developments have made packing methods
increasingly sophisticated and wider use of vehicles such as fork lift trucks
means that manual handling of goods in transit has been reduced.
Unfortunately, this doesnt serve to eliminate risks altogether.
The strategy for export packing therefore should be to ensure that such
hazards are minimised, and that goods are protected as far as practicable
against even the most calamitous of handling incidents. Packing should

nonetheless be as simple as possible so that overheads are kept low, and
profitability high. In some cases, the letter of credit will specify packing
details.
Packing factors to consider include:

The nature of the goods-are they fragile, heavy, large? What will be
necessary to protect them from damage en route? Fragile goods will
require fairly extensive precautionary packaging. Awkwardly shaped
loads should be avoided where possible as these may incur additional
charges at ports.
The value of the goods- this means calculating not only the risks of high
value goods being damaged in transit, but also their vulnerability to
pilferage (this will be linked in to transport method).
They will be transported- the key factor is how much handling will be
required, whether goods will be loaded and unloaded during transit, or
will remain undisturbed throughout. Many modern containerisation
methods offer what are effectively door-to-door services, and goods
require little protection against mishandling incidents. Goods which are
to be transported on board ship may require quite sturdy, wooden
packaging, whilst air travel requirements are less. Some methods of
transport, e.g. long overland rail journeys, may expose goods to extreme
changes in temperature and this should be taken into account when
planning packing.
In some countries import duty is calculated on the weight of the goods
and their packing. The customer may therefore require the lightest
possible packing materials. These should always be investigated with
reference to other factors such as fragility or perishable nature of goods.
It is essential to remember that transport providers will be looking to make

the best possible use of the freight capacity they have. Developments in
containers for transporting of a wide range of goods including refrigerated
containers and those with open tops for awkwardly shaped machinery etc.
mean that this method is becoming increasingly widely used, and
corresponding advantages, such as advances in though documentation, are
growing accordingly. For smaller consignments, particularly those sent by
air, palletization is a fast-growing packing option. This involves the
attaching of the cargo to a pallet a wooden or metallic framework often
with a plastic wrapping, throughout the journey.
Palletisation has many of the same benefits of containerisation in reducing

packing and limitating handling-pallets are particularly compatible with fork
lift truck use. It may also reduce some shipping and port handling charges.
Another aspect that should be considered is the relevant legal requirements

of the export market for example, packing of dangerous cargo will usually
be tightly controlled, especially where there is a risk of leakage. And all
marking requirements must be adhered to. Food and other perishable
products are usually subject to temperature restrictions. In some countries
straw is an illegal method of packing for imported goods, because of the risk
of insects and bacteria being imported within it. Many countries are stricter
still, banning the use of wood, straw and any organic material.
The marking and labelling is another requirement that the exporter has to
accomplish. The exporter will write accurately, in letters and numbers, the
elements of identification of the goods, the consignee and the destination
place. The marking is also useful to identify the origin of the merchandise.
It is advisable that the marking should be made on three different sides of
the packing: up, down and lateral. Marking is not used for advertising
purposes. On the packing there can be also pictograms in order to stress
some features of the merchandise (for example fragile) or to offer handling
indications (up, down etc.).
Modes of Transportation
When faced with the decision of selecting a mode of transportation, the

exporter has six basic types available from which to choose, depending, of
course, upon the geographical proximity of the countries of export and
import: ocean, air, rail, road, inland water and containers. Another alternative
is pipeline which transports very specialized products. The choice between
available methods of transportation is usually determined by a combination
of cost, time and security.
Ocean transportation is the most dominant mode of international

transportation, and air transport is the most glamorous and fastest growing.
The significance of the other basic types of international transportation
varies depending upon the countries involved.
Ocean transportation is widely used because it is a relatively low cost way

to transport goods and it can easily handle large shipments. However, this
method has some disadvantages: the length of time involved; the shipments
have to be booked well in advance; the method is politically sensitive-

disputes frequently cause long delays at ports; there are frequent customs
delays en route. In addition, certain geographic conditions may make it
impossible to use overland transportation to some foreign markets and
infeasible to use it to others.
The exporter should keep two major factors in mind when selecting the
route of an ocean shipment. These are: (1) the route that will bring the
shipment to its port of destination in the shortest possible time and (2) the
route that will be the most economical. Frequently the quickest route is not
the most economical.
Frequency of sailings from a given port is more important than the actual
duration of the voyage. When a shippment just misses one sailing and has to
be held over for the next, several days or weeks later, demurrage (charges
for the use of the freight car or container in which sent)and storage charges
may accumulate. This is one of the reasons why , in spit of possible higher
port costs for individual shipments, major ports are usually the best to use
for shipment.
When the products to be exported are delivered to a railroad (or trucking

company) at an inland point, either a railroad bill of lading5 or a through bill
of lading is issued. If just a railroad bill of lading is issued, a second bill od
lading will have to be issued at the port for the ocean portion of the
shipment. Upon arrival of the merchandise at the port, a notice reffered to as
an arrival notice is sent by the railroad to the domestic consignee at port of
shipment. The representative of the exporter then accepts the merchandise
from the rail carrier and makes delivery to the ocean carrier. The
representative of the shipper then becomes responsible for all details
connected with starting the merchandise on its ocean journey.
Ocean freight rates may be obtained directly from shipping lines or through
the foreign freight forwarder. In some countries, the shipper is faced with
the question of whether to use independent carriers or ocean carriers
belonging to a conference. Shipping conferences are associations of ocean
transportation companies. They are organized by formal agreement, with
governmental sanction, primarily to set freight rates and sailing schedules
over specified routes. A shipper may take an annual contract with the
5
bill of lading is a transportation document whose functions will be explained further in
this chapter.
conference to ship all of the companys cargo to places served by the

conference on vessels operated by conference companies. By sisning such a
contact, the shipper gets a lower rate than shippers that do not have a
contract. Independent carriers may also offer discounted rates for shippers
who are willing to sign annual contracts. While both conference carriers and
independent carriers have government-approved schedules of rates (Tarrifs)
by which they must abide, the independent carriers are often lower. The
lower rates must be balanced against the possibly less frequent sailings
available from one or a few independent carriers as compared with the often
greater number of conference members.
Once the decision is reached as to the particular ocean transportation

company to use, the next task is to secure a freight space reservation on a
particular ship. An inland shipper may secure space by contacting the line or
its agent. However, as he usually does not know sailing schedules to the
destination, it may prove better to contact a foreign freight forwarder, who
will make the space reservation at no cost to the exporter.
All the merchandise that is not handled in bulk like petroleum or wheat, is
packed in large, standard-sized containers. Containers may be filled on the
dock before loading on the vessel, or they may be filled at the exporters
plant. Some ocean transport comppanies will provide containers to
producers within a reasonable distance at a lower charge than usual inland
freight rates. 6
Many diverse types of products are being transported to foreign markets by

air in large volume: electronic computers, office machines, electrical and
electronic equipment, automobile parts, television sets, pharmaceuticals,
certain metal manufactures, and wearing apparel to name but a few. Thus,
even with existing technology, it is evident that air cargo movements are no
longer confined to fast shipments of emergency suppliers, goods of high
value (for example, jewelry) and perishable products (for example, fresh cut
flowers), although it is widely used for such products. To conclude, on one
hand this method has important advantages such as speed, which means that
goods which are urgently required or perishable can be delivered rapidly to
most destinations, it advances the whole transaction, meaning that payment
is quicker and cash flow healthier and packing requirements are less than for
shipping. On the other hand, it is almost always the most expensive freight
method and air transport is usually impractical for heavy loads.
6
Hall, 1993, pp. 215-221
Rail transport has been rendered particularly effective in Europe by the

opening of the Channel Tunnel and the abolition of most border controls
within the single market. However, rail freight users are still faced with the
question of transporting goods to and from railway terminals (transhipment)
and the risks accompanying the increased handling involved.
The advantages of this transportation mode are: it is generally relatively

inexpensive, most markets have some form of rail network, it is a good
method for transporting bulk consignments. Despite these advantages, rail
transport has quite many disadvantages: it often exposes goods to extremes
of temperature and adverse weather conditions, it is often subject to delays
in more remote areas, not fast overall, gauges can vary between rail
networks, causing delays for remarshalling of wagons and transhipment will
be necessary unless you have access to a private siding at either/both ends of
the journey.
Road transportation across Europe is greatly improved by the dropping of

internal tariffs and bonding procedures for en route countries, as well as the
use of the TIR system (Transport International Routier) 7 . This allows
vehicles to be sealed in one country, which reduces customs procedures to a
minimum at the destination port or customs posts. The greatest advantage of
road transportation is that it avoids the repeated loading and unloading
associated with shipping, and minimises warehousing. It also involves less
chance of damage to, or loss of, stock and makes possible door to door
delivery. The method also has disadvantages such as: problems with
restrictions oh size of vehicle and load, limitations on drivers hours can
lengthen transit times, overland transport often exposes goods to extremes
of temperature and adverse weather conditions.
Containers are being used increasingly in export transportation.

Containerisation is an assemblage system whereby goods, either from one
exporter or a number of smaller manufacturers, are grouped together to fill a
container (usually steel or aluminium and varying in capacity) which can
then be transported via ship, road or rail to its final destination. In many
cases it is possible to have the container checked and sealed by Customs at
an Inland Clearance Depot before departure. As long as the seals remain
unbroken, the contents of the container will not usually be disturbed during
the journey. Containerisation is particularly useful where a number of
transport methods are being used, e.g. road/ship/road. The advantages of
7
TIR represents a convention signed in Geneva in 1949
this transportation method are: container transport usually means door-to-

door delivery, lessens risk of damage/theft of goods, usually faster transport
times than containerised methods, minimises packing requirements. Some
disadvantages may be: containerisation is not compatible with all cargoes
and not all ship-owners can afford to use it.
Small shipments may be sent by international parcel post, air parcel post, on
air courier service rather than pay the higher minimum bill of lading charges
for ocean freight or air shipments. While larger shipments are charged on
the basis of weight or measurement, very small shipments are charged a set
flat fee because of the costs involved in documentation and handling.
There are times when a combination of transportation methods is used. One

commonly used arrangement is air-sea, wherein cargo is transferred
between air and ocean carriers, usually without the same intermodal
container. Containers used by each of these types of carriers have
characteristics that are incompatible with the other. The intent in using such
an intermondal combination is to take advantage of the speed and cost
efficiencies of each. Products that are particularly well suited for the air-sea
arrangement are high-value, large-volume consumer electronics, automated
office equipment, and high-technology components that are less time
sensitive that other products using air freight.
The method of transportation is usually selected by the importer. The route

selected for the export shipment may be determined either by the exporter or
the importer.
Facilitating Organizations and Services
In addition to the transportation carriers, freight forwarders and public

warehouses are other types of organizations providing service to the
exporter. Most companies can benefit at one time or another from utilizing
the services of such facilitating organizations. This is particularly true for
those companies whose export marketing operations are small or irregular,
and for the firm located away from the main exit or entry ports of its
country. Functioning as integral parts of an export marketers physical
distribution system, these facilitating organizations often can be powerful
marketing tools in that their existence in a system can make the difference in
whether a particular transaction is consummated.
Freight Forwarders
Foreign (export) freight forwarders also known as consolidators, have two

principal classes of functions. One group is concerned with the forwarding
of an export shipment from the point of origin to the ultimate destination in
some foreign market; the other is concerned with the engaging of space on
transportation carriers.
The services that foreign freight forwarders perform in carrying out these
basic functions are many. Although a forwarder usually can perform every
necessary physical distribution service from the time an order is placed until
the shipment is delivered at the foreign destination, perhaps a forwarders
major contribution lies in the taking over of traffic (arrange for shipping to
the port, book space on the carrier, and arrange insurance) and
documentation work on international freight movements. In addition, by
being able to consolidate small shipments into larger ones, the forwarder is
in a better position to secure lower transportation rates than any single
shipper. Such saves in freight charges can then be passed on to the shipper.
Some freight forwarders also may offer advice on markets, government
regulations and potential problems.
More recently, forwarders have expended their activities to include

production planning, inventory management, parts assembly, distribution
warehousing, real-time tracking, wheels-up clearance and electronic reporting.
A forwarder can be designated as a non-vessel operating common carrier

(NVOCC). To the exporter an NVOCC is a transport carrier and to a carrier
it is a shipper. The NVOCC issues a bill of lading to the exporter and is the
responsible party to the exporter. The carrier, on the other hand, issues a bill
of lading to the NVOCC. Air freight consolidators work in a manner similar
to the ocean freight NVOCC.
Although all foreign freight forwarders will handle shipments by air

transportation as a routine service, some specialize in air cargo. In the same
way as regular forwarders, these special air freight forwarders provide
complete services from point of origin to point of destination.
Warehousing
When it is necessary and profitable for an exporter to maintain an inventory

in foreign markets a storage or warehousing branch can be established. Such
facilities may be part of a foreign sales branch. If so connected, the buyer is
afforded greater convenience. A potentially powerful marketing tool is

created in that a greater volume of business might be generated than would
be the case if storage facilities were absent. The same situation occurs when
the warehousing branch is a separate entity, set up to fill orders made by
overseas distributors or agents.
As an alternative to establishing branch warehouses in foreign markets, the

exporter can utilize the services of public warehouses. A branch warehouse
may not be practical because of irregular demand for warehouse space or if
such demand is regular its magnitude is not large enough to support the
investment required and the regular operating costs incurred. Many public
warehouses are being established in the various free areas of the world.
International public warehouses provide all the usual services of warehousing:

unloading, storing, packing and so on. Such warehouses in many foreign
markets may offer other services such as customer freight forwarding,
packaging, insurance, and transportation service. In addition, many such
warehouses are designated as customs bonded warehouses, which means that
the goods from abroad may be stored there, and certain manipulations
performed on the goods, without payment of duty until such time as they are
released from storage and delivered to a buyer. The manipulations may
include manufacturing activities, although such activities may be allowed
only if the finished products are exported. The activities carried on in bonded
warehouses are under strict supervision of customs authorities.
It is not necessary that a foreign storage or warehousing operation provide

stocks for a single market area. In fact, many exporters, as they increasingly
apply the total cost concept to their physical distribution or logistics
problems, are establishing such branches as central distribution centers to
serve a wide area. Where several market areas are to be served by a single
storage or warehousing branch, it may be best for these facilities to be
located in a free port or trade zone. By locating in a free area 8 , it is
relatively easy for a manufacturer to serve many markets since the usual
customs procedures and regulations of the country where the free area is
physically located do not apply. In addition to free areas, an exporter doing
business in Europe might have one or more warehouses to serve the entire
EU. These could be located in any member state.
8
A free trade zone is basically an enclosed, policed area without resident population in, in
adjacent to, or near a port of entry, into which foreign goods may be brought without
formal customs entry.
Two distinct types of free areas can be found throughout the world. They
are similar in that all are considered to be outside the customs area of a
country. Products may be brought into and exported from such areas easily.
In addition, other activities may be allowed, such as repacking and
manufacturing. A reason why many companies use a free trade zone facility
is for cash flow savings. Realized savings can be accrued on lower cost
items as well as high cost products.
A related type of area is an export processing zone, which is an area where

foreign manufacturers enjoy favored treatment on the import of intermediate
goods, taxes, provision of infrastructure, and freedom from industrial
regulations applying elsewhere in the country. Developing countries use
these areas as a means of stimulating exports.
Transportation Insurance
One of the most important risks involved in an export transaction is that of

loss or damage to goods during their physical movement from seller to
buyer. In most instances, full protection from this risk can be provided
through special transportation insurance, such as marine insurance.
Protection can be provided to cover all transport risks from the time the
goods leave the sellers warehouse or factory whether located inland or at
a port of exit from the exporters country until they reach the final
destination stipulated by the foreign buyer. In its most basic form, such
insurance provides the means to reimburse the owners of goods being
transported to overseas markets for any losses or damages incurred for
which the carriers cannot legally be called upon to make payment. In
addition to legal owners, no owners many times have an interest in seeing
that a shipment is adequately protected.
From the point of view of the parties involved in an international marketing

transaction the seller and the buyer a deciding factor in the question of
who needs transportation insurance, and then to insure, is insurable interest.
Generally speaking, insurable interest depends upon whether a company
will benefit from the safe arrival of the carrier and its cargo or whether the
firm will be injured by its loss, damage, or detention. This covers a wide
range of situations in that not only do the owners of the carrier and cargo
have such an interest, but so may certain no owners. For instance, in some
situations the seller can have an insurable interest as a nonowner even
though the buyer already has become the legal owner of the goods.
The liability of the transportation carrier in international trade is severely

limited. Additionally, the owner of cargo on board a vessel is a participant
in a joint venture and may become subject to a general-average 9 claim
which is liability for loss or destruction of merchandise of other persons
which is sacrificed to save the vessel. Therefore, shipments on ocean-going
vessels are invariably covered by marine insurance. Most frequently,
coverage is secured by the shipper or exporter; however, importers
customarily also maintain coverage to provide protection if for any reason it
is not provided by the exporter. So universally is marine insurance
necessary that most firms engaged regularly in export business maintain an
open policy with a reliable marine insurance company.
When a CIF price is quoted to a buyer the exporter must furnish marine
insurance. If no special coverages are requested by the buyer, the exporter
provides that which is customary and which has been found necessary or
desirable for that particular type of shipment.
Shippers by air may obtain insurance coverage for their shipments from the
initial air carrier or through the shippers insurance broker. Airlines provide
a limited amount of insurance coverage on shipments of selected products.
If insurance coverage is made by the airline concerned, it should be noted
that the insurance company usually imposes a maximum limit upon the
value of merchandise carried on any one flight. This fact sometimes
accounts for the refusal of an airline to carry some physically small, but
highly valuable shipment.
Insurance is also furnished by the air freight forwarder. Merchandise,

therefore, may be covered from the time of pickup to the time of delivery to
the air port.
The regular form of open or floating policy used for marine insurance is also
used for insurance of air cargo, but air insurance requires a special rider,
which is attached to the open policy. If the exporter makes regular
shipments by air, it is to his or her advantage to obtain an open policy
covering all shipments. Such a policy can be arranged to cover door-to-door
shipments from exporter to importer.
9
In insurance average refers to loss less than total.
A general average loss is one affecting all cargo interests on a particular vessel plus the
vessel itself.
Documents Required
The common export documents include: transportation documents (bill of

lading, dock receipt, air waybill, railway consignment notes, and insurance
certificate), banking documents (usually letter of credit), commercial
documents (commercial invoice, pro forma invoice, customs invoice),
government documents (export declaration, consular invoice, certificate of
origin). Getting the documentation right has only advantages: reduces
chances of delay in shipment and delivery, minimises customs clearance
problems, avoids potential fines and penalties, serves as evidence of the
ownership of goods, saving any dispute, reduces delay in obtaining payment
, ensures that the exporter provide a swift and professional service, and gain
a positive reputation which will secure further orders.
Export Licence and Export Declaration
In addition to the export licence 10 , the shipper may be required to complete

a shippers export declaration. Most countries require that shipments abroad
be accompanied by such a declaration. This document is prepared by the
exporter, given to the shipping company, and then filled with customs
officials at the port of export. In some countries the document can be filled
electronically with the proper government agency by the exporter or
forwarder.
The export declaration lists the descriptions, quantities, and values of the
various types of merchandise in the shipment. It also lists the name of the
shipper, the name of the agent of the shipper, and the destination and
consignee. It is a basic document used in the collection of statistical data on
exports and also used by governments for control over exports.
Commercial Invoice
In exporting, the bill that the exporter or consignor sends to the importer or
consignee is called a commercial invoice. This invoice lists particulars of
the shipment. The marks, the number of packages, an accurate packing list,
and a full description of the merchandise should appear on the commercial
invoice. It should state the name of the ship (if ocean transportation is used),
the name and address of the consignee, the contract number, the code word
10
The export licence document is discussed in the first chapter
for the contract if one is used, the price per unit of the merchandise, and the
total price of the shipment. The commercial invoice should also show the
nature of the price quotation- whether the merchandise is sold FOB factory,
FAS vessel, or CIF port of destination- and the terms of payment (that is,
letter of credit, sight draft, 60 or 120 days after sight, documents against
acceptance or documents against payment, or other terms).
Various countries differ widely in the number of copies of the commercial

invoice required with each shipment. The general practice is to send at least
two copies to the bank with the other shipping documents and with the draft
drown either against letters of credit or filled with the bank for collection
(drawn directly on the buyer). Many exporters send at least two copies of
the commercial invoice direct to the consignee by separate mail. Other
copies of the commercial invoice in large quantities are frequently required
by consular offices of the importers country.
In countries using common law, the commercial invoice generally carries no

legal title to the merchandise and is, therefore, not a negotiable instrument.
At best, it is evidence of the intentions of the parties and is a notification to
the consignee of all the facts and the amount to be paid. On those counties
where civil law is used, however, the commercial invoice is of much greater
importance in determining the passage of title. In such countries, it may
even become evidence of the fact that title has passed.
The commercial invoice is also important in connection with insurance

claims and is frequently filed with underwriters and surveyors when claims
for damages are made.
Consular Invoice
Another essential shipping document for shipments to some countries, but

not all, is the consular invoice, special customs invoice, or facture. This
is a document obtained by the exporter in his country from the
governmental representative of the importers country. Thus the exporter
must prepare and have certified before the foreign consul or representative a
document containing all essential details of the sale. After certification, the
document is forwarded to the buyer for presentation to customs with the
customs declaration, ostensibly for use in determining the amount of tariff
to be levied.
The fees charged to certify the document by the consul of the foreign
government vary widely from country to country. Some fees are nominal,
but a few countries, particularly some of the less developed countries, have
found that the consular invoice can be a good source of revenue.
According to INCOTERMS, the buyer has to pay to the seller the cost of the
consular invoice which the later procured on the behalf of the importer.
Where they are required, consular invoices must be filled out with
meticulous care. Some countries will not accept a form containing erasures
or corrections of errors. When errors are detected by the customs officials, a
substantial fine may be levied, or the shipment may be subject to
confiscation.
Packing List
The packing list is sometimes shown on the commercial invoice, or it may

be a separate document, depending on the number of packages and the
complexity of the list. It should contain, item by item, the contents of cases
or containers in a shipment. The items should be listed separately with their
weight and description set forth so as to make a complete check of the
contents of each package possible upon arrival at the port of destination of
the customs office. This information is also useful for the consignee. Any
variation in description from the commercial invoice or consular invoice
usually subjects the consignee to large fines, which are then passed on to the
exporter.
Certificates and other Documents
There are a number of other documents that may be necessary for a

complete set of shipping papers. Among the most important are certificates
of origin and special certificates.
Certificates of origin are documents certifying the place of origin of the

merchandise. They have different formats, but all ask for essentially the
same type of information. They are required by some countries for all
products and by other countries for only certain types of products or only for
products originating in certain countries. In addition to such general
certificates, special cover may be required for shipments between countries
having special arrangements.
In some countries, the certificate of origin is the only special document

required. In other countries, a combined consular invoice and certificate of
origin is required. In still others, a separate certificate of origin is required in
addition to the consular invoice.
The certificate of origin is not treated, generally with anything like the
formality of the consular invoice. The form is generally filed out by the
consignor or his agent, and is then certified by officers of a local
commercial organization, not consular officials. In some cases a consular
official has to authorise the signature of the person representing the local
commercial organization.
Special certificates include a wide variety of special inspection certificates

issued by various authorities and may be required by the importer to meet
his own or government requirements. These documents certify as to purity
and absence of disease, and are issued to cover food products, plants, seeds,
and live animals. Frequently, they must be vized or legalized by the
consular representative of the importing country. Food products are those
for which sanitary certificates are most often required.
Special certificates are also issued for certain types of merchandise, to

certify a required composition or the existence of specific ingredients. Some
types of steel, for example, are sold on analysis. Certain chemical mixtures
must be analysed and certified with respect to the presence of desired
constituents.
The importer can be expected to specify what special certificates may be

required, and the exporter must provide them. All required certificates
should be attached to the commercial invoice and forwarded to the importer
together with the other shipping documents.
The Ocean Bill of Lading
The bill of lading used in ocean transportation is a document serving three

distinct purposes:
1. it is a contract of carriage between the shipper and the transportation
company;
2. it is a receipt for the goods issued by the steamship company
3. it is evidence of title to the merchandise
The conditions under which the steamship company accepts goods for
conveyance are stated on the ocean bill of lading. Although the contract
between the ocean carrier and the shipper of the merchandise is set forth in
great detail, it is rare indeed that the shipper reads all of its conditions.
Every sentence has been interpreted in courts, and a great body of law now
surrounds and interprets this contract. The shippers rights are fully protected.
As a result of these years of litigation, ocean carriers are almost completely

exempt from the responsibility of loss of the shipment through theft or by
pilferage, or its damage by breakage, water or fire. The only responsibility
ordinarily assumed by ocean carriers is the damage rising out of their own
or their employees negligence or for failure to make sure that the vessel is
seaworthy before it leaves port.
Bills of lading (B/L) may be classified on several bases to title to the goods
and the type or receipt.
Signed and Unsigned B/Ls
Bills of lading are frequently prepared in as many as 25 copies. Sometimes

even more may be required. Only those signed by the master of the vessel or
his authorized agent are legally binding documents. In the case of a to-order
bill of lading, each of the signed copies carries with it the title to the
shipment. Any one may be used by the shipper, the consignee, or his agent,
or by some person or persons to whom the merchandise has been conveyed
for claiming ownership and taking delivery. However, when any of the
signed copies is presented the others automatically become void (Only one
copy can be presented to the carrier to claim shipment). Signed non-
negotiable copies, issued in the case of straight bills of lading, are used as
proof of shipment.
Unsigned copies of the bill of lading nave no legal status, yet they are
essential. Several are needed for the files of the shipper and the consignee; a
number are used by the steamship company for recording and billing
purposes; and others may be necessary for purposes such as preparing and
settling insurance claims, and by banks participating in the financing or
collection process.
Straight and Order B/Ls, and Data Freight Receipts
Ocean bills of lading may be either straight or order. A straight bill of lading
is made out to a specifically named consignee at the destination, who is the
only person authorized to take delivery. An order bill of lading may be
made out to the order of the shipper, a bank, an agent, or merely to order.
Whoever legally holds the document may take delivery of the shipment.
The straight bill of lading is non-negotiable. By its provisions the

transportation company accepts receipt of the freight and contracts to move
it from the point of shipment to the point of delivery. Anyone who holds the
arrival notice of a shipment and can establish the fact that he is the
consignee, or represents the consignee, may obtain possession of the
merchandise. This could be a bank, a customhouse broker, or an agent.
An order bill of lading is a negotiable instrument, and the surrender of the

original, properly endorsed, is required for delivery of the merchandise.
Title remains with the person to whose order it is made out if made out to
order, title remains with the shipper-until it is endorsed. The ultimate
recipient is usually shown as the person or organization to be notified of
arrival at the destination by the carrier.
Data freight receipts are often used in place of straight bills of lading. Under
this system, no original bills of lading are issued. The arrival information is
simply telexed tot he carriers agent at the port of discharge.
Received for Shipment and on-Board B/Ls
Unless the bill of lading specifically shows on the face that the cargo has
been loaded on board the vessel, it is no more than a received-for-shipment
bill of lading. This may be done when space on the vessel has not been
reserved in advance and the carrier agrees to load it only if space should be
available. Received-for-shipment bills of lading are only used when there is
no urgency in delivery of the shipment to its destination and when other
than letter-of-credit of draft financing is used.
On-board bills of lading carry with them the legal guarantee by the master
of the vessel, acting as agent for the carrier, that the goods have actually
been loaded on the vessel.
Clean or Foul B/Ls
Cargo checkers inspect shipments carefully when they are delivered to the
pier and when they are loaded on board the vessel. If any damage is
observed or if the quantity is less than that specified when the goods are
delivered to the pier, a notation is entered to the dock receipt, and the
shipper is usually given the opportunity to make repairs or complete the
quantity. If any exception to the apparent good order of the cargo is noted
when the cargo is loaded on the vessel a notation is made on the bill of
lading, which then becomes a foul bill of lading. If, however, the
merchandise is in apparent good order and there are thus no notations, it is
referred to as a clean bill of lading.
Special types of B/Ls
A special type of bill of lading, used more frequently than generally

supposed, is the accommodation bill of lading. If the shipper is well
(and favourably) known to the steamship company and wants a bill of
lading dated on a certain day and the merchandise has not yet been delivered
at the pier, the shipper may be issued a bill of lading in the regular form and
properly signed by the company. This is an accommodation bill of lading.
There is, however, no evidence on the face of it to indicate its character.
The shipper might want the bill of lading in order to meet the expiry date in
a letter of credit and may be willing to give such guarantees as the
steamship company may require.
Forwarders and NVOCC 11 B/ls
Another form of bill of lading that is sometimes used is the forwarders bill
of lading. The reason for the use of this particular form is the fact that most
steamship companies have a minimum bill-of-lading fee. This imposes a
heavy charge on the shipper who wishes to send a single box, crate, or small
lot of merchandise. The export freight forwarder can combine several small
shipments from individual shippers and send the lot under one bill of lading
to a destination. At the destination, the forwarders branch office or
correspondent breaks out the shipment and delivers the individual pieces to
the several consignees. At the time of shipment, the foreign freight
forwarder delivers a forwarders bill of lading to each of the original
11
NVOCC is the abbreviation for Non-Vessel Ocean Carrier Company, an entity
authorized to issue regular bills of lading
exporters. This consolidation function is now often performed by a

NVOCC. The development of the NVOCC arose largely because of
containerization which makes consolidation into much larger amounts
desirable from the standpoints of cost, ease of handling and security.
In some places, the receiving clerk signs a dock receipt when the shipment
has been delivered to the pier. At the time the shipment is checked at the
pier, the packages are examined to determine if they are all in good
condition. Any that is not a re noted on the dock receipt. If any such notices
appear on the dock receipt, it is then described as a foul dock receipt and
these notes will, if not examined by the required repairs, appear later on the
bill of lading. Dock receipts for full containers show only the condition of
the container, which is not opened for inspection of contents.
Airway Bills
With the rapid expansion of international air freight, an ever growing

number of shippers are utilizing this means. Moreover, considering savings
in inland freight, packing, inventories, and working capital investment,
some shippers are finding that movement by air is actually cheaper even
though air freight rates are somewhat higher. In short, following a total cost
approach to physical distribution may lead an exporter to using air transport.
Up to the point of overseas movement, the procedures for an ocean

shipment and an air shipment are usually similar. One difference that may
prove significant is that some international air carriers serve inland points;
hence, no trans-shipment at an export point is necessary.
The major difference in procedure arises at the time the shipment is turned
over to the international air carrier. International air lines have been able to
eliminate some of the routine of the export procedure required of ocean
carriers. Most important, an airway bill 12 is used rather than a standard bill
of lading. In some cases, the airway bill may also replace the commercial
invoice, the consular invoice, the certificate of origin, and the insurance
certificate. These simplified procedures have been devised and promoted by
the International Air Transport Association (IATA), which has brought
about a high degree of uniformity in the international use of the airway bill.
12
the airway bill is variously designated as an airway bill, air waybill, international
airway bill, air consignment note
The application and use of the airway bill differs in different countries.
Usually the abbreviated procedure applies only to shipments of small value.
In some countries consular invoices and certificates of origin are still
required, whereas in others they are not. In certain cases the shipper may
elect to use his regular marine insurance coverage, especially where
warehouse-to-warehouse protection is desired; in other cases insurance
provided by the air lines is sufficient.
When foreign freight forwarders prepare the airway bill for the shipper, the
information usually includes a description of the merchandise conforming to
the export declaration and any other shipping documents, and whether or
not insurance coverage is desired. The shipper must also make a statement
of value for carriage and customs purposes. The value for carriage serves
three purposes:
1. It may be required for computing the transportation rates when a special
commodity rate is based on value.
2. It is the limit of liability of the carrier for loss or damage to the
shipment.
3. It is the amount on which the carriers valuation charge and insurance
premium will be computed.
As a general rule, the shipper uses the as value for carriage the amount
declared as value for customs, plus shipping charges, plus 10%. Although
the shipper may declare any value, the carriers maximum liability may be
limited to the actual value plus 10%.
The airway bill is not negotiable. It is not, therefore, a complete substitute

for an ocean bill of lading. Hence, international shipments made by air
cannot be financed in exactly the same way as the majority of shipments
made by surface carriers; modifications must be made. The elapsed time
between dispatch and delivery is so short that financing during the
transportation period normally is unnecessary. Generally, Air lines will not
deliver or change consignment without the original or shippers copy of the
airway bill. Finally, consignees always have the privilege of specifying that
the airway bill shall be acceptable as the document against which payment
will be made.
Since most air lines provide COD facilities as a service to shippers, this
method may be utilized if the shipper requires quick reimbursement. Also,
arrangement can usually be made for cable notification of collection to the
home office of the air line, which can then issue a check immediately to the
shipper. If the importer has a satisfactory reputation and it is desirable to
extend credit, a clean time or acceptance draft can be used. When used, the
draft would be forwarded for collection in the usual manner.
These methods, however, can only be used in sales to countries in which

there are no foreign-exchange restrictions. For those countries in which
exchange controls are still in effect, the letter of credit would still have to be
used with necessary modifications in document specifications so as to
permit utilization of the non-negotiable airway bill.
If the shipper believes that credit protection is necessary, the merchandise

may be consigned to a bank, an agent, or a foreign freight forwarder with
instructions regarding conditions of delivery to the buyer. This method is
similar to that used for surface shipments to those countries that do not
permit the use of the order bill of lading.
The Clearing of the Customs
The merchandise transported internationally has to receive a customs status

both in the country of origin and in the destination country, and if necessary,
in transit countries. The custom status refers basically to the origin of the
merchandise, its customs value and its position in the customs tariff. On this
basis, the customs procedure is followed. It consists of: presenting the
merchandise to the competent customs authority so as to be checked;
establishing the customs status of the merchandise in order to compute the
taxes that have to be paid; setting a detailed declaration about the
merchandise at the customs, the customs declaration; checking the
merchandise and, if necessary, paying the taxes, so as to declare the
merchandise as being customs-duty free.
The Customs Status
The customs status indicates on one hand, if and where the customs duties
will be paid and on the other hand, if and in what conditions the
merchandise will be checked.
As regards the export, generally the countries world-wide try to create

favourable conditions and stimulate the exports in order to support national
producers in the international market.
Therefore, the goods that leave the national territory are just formally
checked and the customs duties are either eliminated or applied just for
certain goods.
The customs status of the merchandise is determined, basically, by three

elements: the customs value; the tariff position; the origin of the
merchandise. These elements are in fact the content of the customs
declaration, the document which represents the support for the customs
formalities.
The customs value serves for three purposes: to compute the customs duties;
to establish the financial guarantee requested by the customs officers; to
apply, if the case, other measures of commercial policy.
In what concerns the export, the customs value of the exported goods is free
of duties at the customs of the national territory and it includes the transport
expenses till the frontier. Therefore, the VAT is reimbursed to the exporter.
The size of the customs value is computed according to the transport mode.
For example, for road transport we use Franco frontier of the exporting
country.
The tariff position represents the place allocated to each type of

merchandise in the customs tariff. This position influences the size of the
customs duties, the measures of non-tariff policy. It is also important for
statistics regarding international trade.
The origin of the merchandise is an important element of the customs policy

because according to it, the goods are treated differently (different sizes of
customs duties are applied). The origin of the merchandise has to be stated
on every customs declaration.
The determination of the origin of the merchandise is not always a simple

operation because the merchandise is not always totally produced in one
country. Therefore, the customs authorities established some criteria in
order to define the origin of this type of merchandise. These criteria are
commune to all countries in the EU.
The origin of the merchandise is proved by the documents provided by the

exporter according to the requirements of the customs authorities from the
importers country. The most used document is the certificate of origin
issued by authorised institutions from the exporters country (trade houses,
customs officers etc.). This document has to include the necessary elements
in order to identify the merchandise: the nature of the merchandise, the
weight, the number of packages, the mark and the name of the consigner.
The Customs Procedure
The merchandise that passes the customs frontier of a country are stored in
warehouses or customs areas in order to be placed under a customs status.
Before initiating the customs formalities, a customs file must be created. It
has to include the customs declaration and also other documents required by
the authorities in the country where the clearing of the customs takes place.
The customs declaration is a written document issued by the owner of the

merchandise in which there are stated the elements necessary for the
clearing of the customs. It has to be issued and handed to the customs
authorities by the customs declarant. This person may be: the exporter, the
importer, a legal representative, a customs commissioner. The authenticity
of the customs declaration is given by the signature of the customs
declarant. The original signature has to be on the declaration retained by the
customs authorities and it is reproduced on the other copies of the
declaration.
By handling the declaration to the customs authorities, the declarant:

requests for a customs status for the merchandise (export, import,
reexport etc.);
embarks upon complying with the obligations arising from the customs
status (for instance, to pay the customs duties);
delivers the necessary information in order to establish the fiscal duties
and also for statistic purposes.
Starting with January 1 1988, the countries of the EU have introduced an

unique administrative document. This document has some features: it is a
harmonised communitar form, used in the external trade of EU; it applies
for all customs status; it includes on the same form the declaration for
export, import and transit.
The main elements of the customs declaration are: the tariff position, the
origin of the merchandise and the customs value.
There are two types of documents enclosed to the customs declaration in

order to form the customs file: basic documents (requested in general by the
customs authorities world-wide) and those requested only by few countries.
The basic documents are: the commercial invoice, which represents the
support for computing the customs value of the merchandise; the packaging
list which serves for the physic control of the merchandise (the declared
number of packages is compared with the existing one); the transport
documents; the certificate of origin in order to apply preferential tariffs if
the case; healthy documents according to the nature of the merchandise and
the regulations of the importing country.
Other documents may be requested by the customs authorities from certain

countries: these may be the consular invoice or a certificate of inspection.
When handling the customs declaration, the authorities may decide to check
partially or totally the merchandise. This formality is made in the presence
of the declarant and on his spent, in the place where the merchandise is
located. If there are some differences between the declaration and the results
of the control, the merchandise may be rejected and also a fine is charged.
The clearings of customs may take place at the customs offices from the
frontier or at the offices inside the country.
The exporter may subcontract the customs activities to a specialised

intermediary: the customs commissioner. His role is to accomplish in the
name and on behalf of the exporter the customs formalities: to make the
customs declaration, to present the merchandise for control and to pay the
duties. The customs commissioner is usually a mandatory: he executes the
orders of his principal; he cannot subcontract and he is guilty only for his
own mistakes. In order to have this quality, the commissioner has to obtain
an authorisation from the customs officers. The customs commissioner may
also act in his own name. In this case he is responsible for the content of the
customs declaration and pays the customs duties crediting this way the
principal.
The customs procedure has more stages: verification of the customs

declaration; recording; control; duties payment; taking away the goods.
The verification of the customs declaration is made by the customs service

to which the document was handled. It checks if the declaration was handled
in the legal delay, and the integrity of the other documents enclosed.
The declaration may be rejected if mistakes are found. The declaration is

recorded if the customs file is correct. It receives a record number and also
the date of recording is mentioned in a register. The declaration is also
stamped by the customs authorities. From this date it starts the period within
which the customs duties have to be paid.
The control is made on the documents and sometimes on the merchandise.

The control of the quantity refers to weight, number of packages, cods and
marks, document figures (unit/total price, payment currency, exchange rate).
The qualitative control refers to tariff position, origin of the merchandise,
customs value. After the documents are verified, the customs inspector may
request for a partial or total control of the merchandise.
The payment of customs duties is made before taking away the goods.
However, in some countries, there are some payment facilities such as the
customs credit in France.
The customs duties represent the quotas indicated in the customs tariff
applied to the merchandise according to its tariff position. However, such
taxes do not apply to the exported goods.
After the controls are finished and the customs duties paid, the merchandise
is considered free of duties and it can be taken away.
Review Questions:
INCOTERMS group C versus group D.
Present the main types of Bills of Lading.

7
INTERNATIONAL
PAYMENT INSTRUMENTS
International payment instruments are defined by the whole of foreign

currency commercial documents that replace traditional payment means,
and with which international discounts can be made.
In the case of international transactions, the merchandise and the services

that make the objects of the international commercial contract may be paid
immediately (shipment for payment), before the shipment of the requisites
(advance payment) or on a certain date after the shipment day (postponed
payment).
The exporter may frequently give the importer the possibility of paying on a
certain date after the shipment of goods or the carrying out of services,
offering consequently a commercial credit to the buyer.
In international commercial practice, if the seller sells to the foreign buyer

on credit, the first has the following options:
To draw a draft upon the buyer, favoring another company to which he

is in debt with the same amount or to himself.
Ask his/her external partner to issue a promissory note to him and
deliver it.
Ask his/her client the return by cheque to be confirmed by the bank.
Negotiate with the external partner for the amount to be paid at
maturity by order of payment, transfer cheque or any other operable
way in his/her current bank account.
The bill, the promissory note, the cheque and the transfer order are payment
instruments by which the erasing of international payment obligations is
performed.
7.1 The Bill of Exchange
Payments that follow international economic exchanges may be done

immediately by international payment instruments, or by short-term bills.
The bill of exchange is the most frequently used credit instrument in

international economic transactions and may be defined as a complete
and formal cheque comprising an abstract and unconditioned commercial
and autonomous payment obligation.
According to the signification NBR (BNR) gave in 1994 to the bill of

exchange and the promissory note, the bill is the negotiable credit and
payment instrument consisting of the assumed obligation by the debtor to
pay, on spot or at maturity, to the beneficiary or at his demand a fixed
amount of money.
Consequently, the bill is an unconditioned written order, addressed by a

person to another person and signed by the issuer, asking the first to pay on
demand or at a later pre-settled or determinable date a certain sum of
money; the amount may also be paid following the demand of a person or of
the bearer.
It is presented under the form of the draft and of the promissory note.
The draft is a form of the bill that comprises the obligation for paying a
certain amount of money. According to other definitions, the draft is a
written unconditioned cheque addressed by a person to another person,
signed by the issuing party, through which the person it is addressed to is
asked to pay, on demand or at another date (settled or determined) a certain
sum of money (or following the demand of a mentioned person or of that of
the bearer).
The bill fulfills in the commercial circuit several roles:
Payment means the bill may serve for a payment by the drawer to
the beneficiary, thus replacing cash circulation.
International Payment Instruments
Guarantee means bill operations are characterized by a high

guarantee degree offered by the bill mechanism.
Creditably means a creditability relation is formed between the
moment when the payment obligation is issued (by the debtor) and the
moment of cashing in by the creditor of the equivalent value (the
exporter).
Who takes place in a billing relation
Initially, in a billing relation there are three persons involved: the drawer,
the drawn and the beneficiary.
The drawer is the person who orders the payment and who can, in
international payments, be: the exporter, the service provider, etc., while
also being importer and beneficiating from services carried out by a third
company.
The drawn is the person to whom the order is addressed to and who has
the exact obligation to pay; he is the importer, and the beneficiary of certain
services.
The beneficiary is the person to whom the payment has to be done and
who is also the holder of the draft; he is the exporter, the seller or the
drawers creditor.
The beneficiaries and the holders of the draft may successively become
persons who have no connection to the drawer, but who have obtained the
draft by endorsement, discount or rediscount. The beneficiary may also be a
bank taking over the cashing of the draft, thus retrieving the previously
offered credit to the drawer or, just augmenting the available funds the
drawer has in the bank.
Finally, the drawer himself or a third physical or judicial person to whom

the payment is done may be the beneficiary. Between these, the main
relation is that between the drawer and the beneficiary.
1. Companies X and Y sign a commercial contract on credit.

2. Companies X and Z sign a commercial contract on credit.
3. Company X draws a draft on company Y, assigning company Z as
beneficiary.
4. Company X delivers to company Z the draft drawn on company Y.

5. Company Y pays at maturity the sum of money for the draft to company
Z.
6. Following the payment of the bill, the debt of company X to company Y
is erased.
7. Following the payment of the draft, the debt of company Z to company
X is erased.
Figure 7.1 Participants to a Billing Relation
DRAWER
Company Y
Debt Company X
1 3 6 5
DRAWN 2
Company X BENEFICIARY
Creditor 4
Company Z
Company Y Credit Company X
Debt Company Z 7
Source: Nergrus Mariana, Mijloace i modaliti de plat internaional,

Editura Academiei, Bucureti, 1986
Content of Draft
To draw a draft means to fill in an already printed form in different

internationally used languages.
Judicially, the draft has the form of a judicial written document, its validity
being conditioned by the presence of certain elements contained by
international commercial law and by various international conventions.
The essential elements a draft has to contain in order to fulfill the

international payment instrument are:
1. The name draft in the text of the title and its expression in the language
used for the writing of the text.
2. The unconditioned order to pay a certain amount of money. This order is
expressed through the you pay or you will pay term, not linked to any
condition, aspect that confers the draft the certainty of its payment on
term.
3. The name of the person who has to pay the drawn, and who is the
drawers debtor.
4. The maturity, that is the payment term, may be indicated in various
ways in a draft:
a) maturity at site or at presentation; b) maturity at a certain date after
the presentation, when the payment at maturity starts from the day when
the beneficiary presents the draft to the drawn for validation (to endorse)
or to accept; c) maturity on a precise date.
5. The place the payment is to be done in. The holder of a draft payable at
a fixed date has to show it for payment at the place and address stated on
the draft.
6. The name of the beneficiary or of the person who orders the payment.
According to the way the person to be paid is presented, there are two
types of draft: a) nominative drafts where there is mentioned you will
pay to the companyin person or the clause not on order or the
reference is not negotiable; b) order drafts that, by their nature may be
transmitted by endorsement.
7. The time and date the draft was issued on help to identify the moment
chosen for the maturity, a certain number of days from the emission
date, as well as the law it is applied to.
8. The signature of the drawer (in original) or that of his/her legal
representative. The signatory must have the judicial authority to sign
commercial judicial documents or facts.
The Circuit of the Draft
Accepting the Draft. The holder of the draft or its holder may present to the
drawn, at his/her home, the draft for acceptance, until maturity. The
acceptance is the formality by which the drawn engages in paying the draft
at maturity, the operation consisting of signing the draft by the drawn (upper
left of the form) where there is usually mentioned the term accepted. It has
to be unconditioned; the drawn may restrict it to a portion of the amount.
Any other accepted adjustment to those included in the draft is considered
an acceptance refusal. Still, the acceptant remains in the limits of this
acceptance.
Endorsement on a Bill. Is the formality by which the payment of a draft may

be guaranteed by an endorsement on a bill for the whole amount or only a
part of it. A third party or even the signatory of the draft may offer this
guarantee. The endorsement on a bill is the outcome of the endorsers
signature on the bill. When the endorser pays the bill of exchange, he
obtains the rights against the one who is guaranteed. The same happens for
the ones who have made the same thing as the latter.
The Endorsement. Is the operation by which the initial beneficiary of the

draft transmits the right to cash at maturity the amount written on the draft
to another person. Transmitting a draft by endorsement presupposes written
notes on the back of the unconditioned and simple writing. The endorsement
transmits all rights given by the bill. If the it is a blank endorsement, the
holder may fill it in with his/her own name or that of another person, to
endorse the bill again in blank at the order of a certain person, to submit the
bill to a third person, without filling in the blank endorsement and without
endorse it. The endorsement must always be followed by the actual
submission of the draft to a new holder.
Discounting. If the holder of the draft wants to obtain before maturity the
amount written on the draft, he can discount it at a commercial bank. By
discount the holder of the draft obtains the nominal value of the bill except
the interest for the paid amount, calculated from the moment of the
discount until the term date, to which certain cashing of the bill on term are
added also. The discount is calculated after the following formula:
Vn Ts Nz
S=
360 100
and the real value of the bill is: Vr = Vn - S

where: S discount; Ts tax for discount; Nz the number of days from
the moment of discount until the term; Vr the real value of the bill;
Vn the nominal value of the bill.
Being accepted by the bank for this creditor operation, The fee for discount
is also placed at the general level of interests perceived by the commercial
banks in the country where the draft was discounted.
By discount, the bank in fact substitutes itself to the beneficiary, according

him a credit with a debt over the drawn.
In this way, the debt is transformed into cash capital before maturity.
Rediscount is the operation by which commercial banks re-sell the

obtained drafts from discount to the central bank. The rediscount is done by
paying discount fee also called the official discount fee.
Payment is the final stage of the bill by which all payment obligations of
all parties engaged in the billing relation are erased. The payment of the bill
is done at maturity, at the draws residence or that of the person designated
by him, in favor of the direct beneficiary of the bill; this beneficiary is
identified by the constant row of endorsements. In the moment of the
payment, in return of the paid amount, the drawn may ask the submitting of
the bill with the paid reference. A partial payment may be accepted, but in
this case the draft is not submitted to the drawer; the received amount is
stated on the bill that will be submitted at the moment of the entire payment.
Regress in case of unacceptance or un payment. The billing operation is

either direct or in regress. It is direct against the acceptant and his/her
endorser, and of regress against any other obliged. The holder of the draft
may exert the right to regress against endorsers, the drawer and against the
other obliged.
7.2 Promissory Note
It is a form of the bill that contains the obligation of paying a certain

amount.
Unlike the draft, the promissory note is a credit instrument under private
signature that in the emission process connects only two persons.
The promissory note is the writing by which a person, called the issuer,
engages to pay to another person, called the beneficiary, or at his/her order,
a certain sum of money at maturity.
Two parties intervene in the case of this billing rapport:

The Issuer, the drawer or the subscriber who engages to pay a preset
amount of money, on a certain maturity date or when another person
called beneficiary presents himself/herself. The subscriber as buyer,
debtor, importer or beneficiary of certain services issues the promissory
note.
The Beneficiary, also the holder is initially the exporter, the seller, the
service provider; he/she becomes creditor for that amount. Afterwards,
just in the case of the draft, following the circulation of the promissory
note by endorsement, discount or rediscount, other successive
beneficiaries, with whom the issuer had no previous connection, appear.
Just as in the case of the draft, the promissory note is judicially a written
document; regardless of the country of origin and the language used for
writing it, it has to contain certain essential elements. By omitting these
elements, the document no longer produces the judicial effects of the
promissory note but those of an ordinary engagement.
The following elements mustnt be omitted from the promissory note:
1. the promissory note term written in the title;
2. the unconditioned promise of paying a fixed amount by using the term
will pay.
3. the maturity, the moment of payment must be clear, unique and possible;
4. the place where the payment will be done at;
5. the name of the beneficiary, the person at whose order the payment must
be done;
6. the date and place of the emission;
7. the signature of the issuer.
7.3 The Cheque
While the Bill and the Promissory Note are primarily Credit Instruments,
the cheque is a payment instrument exclusively.
The Cheque is a document by which a person (drawer or issuer) orders a
bank (drawn) to pay a sum of money the drawer has to a third party
(beneficiary). Hereby three parties come together:
The Drawer orders the payment; he/she may be the importer, the buyer,
the beneficiary of a service.
The Drawn makes the payment out of the unconditional order of the
drawer; is usually a bank.
The Beneficiary it is to this person that the payment is made; may be

exporter or may carry-out services for the drawer of the cheque.
Although there are three parties involved, just as in the case of the bill, the
cheque differs mainly by:
1. The drawn can only be a bank where the drawer keeps the money in; this
bank pays an amount only after receiving the order to do so.
2. The emission of the cheque by the drawer (the banks client) implies on
the one hand, the existence of an understanding between the drawer and
the bank regarding the amount from which the payment may be done,
and on the other, the existence of a adequate availably big fund to cover
the value of the issued cheque.
Alongside its advantages (simple usage, operability), the cheque also

presents some risks: it does not offer guarantee against commercial risks, it
may not be covered.
Emission and Form of Cheque
The cheque must contain the following element:

a) The term cheque mentioned and written in the used language
b) The unconditioned order of paying a certain amount of money
c) The name of the drawn and of the bank that has to perform the payment
d) The place where the payment must be performed
e) The date and place of the emission
f) The signature of the person issuing the cheque (the drawer)
Any cheque that does not respect these rules will not be considered a
cheque.
The payment may be done: to a person, with or without the exact clause at
order; to a certain person, with the stipulation not on order or an equivalent
term; to bearer.
A cheque without the identification of the beneficiary is considered to be a

cheque payable to bearer.
Remitting a Cheque for Payment
The cheque is payable at spot and the maturity date is not mentioned on it.
Any maturity date written is considered not written (is not taken into
consideration). Still, the cheque must be remitted on payment on a date after
the date of the emission. The international law stipulates that the cheque
emitted in a country other than the one where it is cashed, is to be remitted
for payment, in 20 to 60 days; cheques emitted and payable in the same
country must be remitted for payment in 8 days. The cheque remitted for
payment before the emission date is payable in the remission day.
Sending the Cheque
The stipulated cheque payable to a certain person, with or without the on

order clause may be sent by endorsement. A cheque not containing the not
on order clause (or an equivalent clause) may be sent only in the form and
with the effects of an ordinary transfer. The endorsement may even be done
in the benefit of the drawer or of any other obliged. These are the persons
who can endorse the cheque again.
Endorser may guarantee the partial or the whole payment of a cheque. A

third party, other than the drawn, or even the signer of the cheque, may give
this guarantee. The endorser is considered to be the person for whom the
endorse was given; when the endorser pays the cheque, he/she gains the
rights that come with the cheque.
7.4 International Payment Methods: Documentary Letter of Credit
International payment instruments and banking settlements of accounts

mechanisms used for payment transmission (importer) to the beneficiary of
the payment (exporter). Payment methods include: the technical
organization of the commercial documents circulation (these documents are
at the basis of the relationship between the parties); the circulation of the
documents that make up the payment instructions involved in the end fund
transfer by banks that assist the payer and the beneficiary.
Documentary letter of credit is the payment method frequently used in

international transactions and is extremely used in the case of high value
contracts or when there are doubts about the partners solvency.
The main advantage of this payment method is the guarantee it offers to

those involved (exporter, importer, banks) regarding protecting their
interests in the payment process; its execution demands from the exporter a
rigorous administrative work, and from the importer the bearing of exact
costs.
The operation of the documentary letter of credit is done based on a

document issued by the Paris International Chamber and called Rules and
uniform usages regarding documentary letters of credit; this document is
also known as Publication 500. it was last revised in 1993 and was enforced
starting with January 1st 1994.
Content and Distinctive Elements
The documentary letter of credit is the firm engagement assumed by a bank

at the order and in the account of its client (the importer) to pay a certain
sum of money (the price of the export) for the documents attesting the
carrying out of the obligation (the shipping of the merchandise) which the
exporter engages to emit and present according to the terms and conditions
agreed by the person who ordered the letter of credit.
For the exporter, the letter of credit is an irrevocable payment commitment

of a bank, payment conditioned by the presentation of specific documents,
until a certain date, by he beneficiary.
For the importer, the letter of credit is an irrevocable payment order to the
exporter, given by the importer through a bank and conditioned by the
presentation of the documents proving the shipment of merchandise, by the
exporter, at the bank.
There are three main parties involved in the documentary letter of credit:
1. The Person who orders the Documentary Letter of Credit

according to contract he/she is the importer, the beneficiary of a service.
It is the person initiating the documentary letter of credit relation
through the instructions he/she gives his/her bank to pay the exporter.
The order for opening a letter of credit lists all terms and documents
needed and according to which the bank will perform the payment.
2. The Beneficiary of the documentary letter of credit according to

contract he/she is the exporter, the person performing services. It is
him/her the bank of the importer has engaged to pay for and who,
following the terms and documents stated in the text of the documentary
letter of credit, will cash the money.
3. The Issuing bank it is the bank that, at the importers demand

engages in written to the pay under certain terms and document
conditions in favor of the exporter (the beneficiary of the letter of
credit). It is the main party involved in the documentary letter of credit
relation. It is the party that can realize this payment engagement:
directly, meaning it can perform the payment, having both the role of
issuing and paying bank.
indirectly, meaning it may designate another bank to the payment

and thus being called paying or negotiating bank.
3.1 Another bank also called correspondent; usually located in the

country of the exporter, it is the bank by which the issuing bank sends
the text of the documentary letter of credit in order for it to be
communicated to the beneficiary (the exporter). According to the
payment type, this other designated bank may have the following
names:
Notifying bank having the role of a simple document intermediary,

the payment being performed at the issuing or at a third bank.
Paying bank it is the one operating the payment, being located in
the exporters country or in a third country.
Drawn or accepted bank. When the payment is to be performed by
bills drawn over a bank, at maturity, the bank in question will pay
them and will be called drawn bank.
Negotiating bank. The bills are drawn over the issuing bank and the
bank engaged in negotiations is authorized to take the documents
from the exporter and pay him/her for them for a negotiation fee and
send them back again to the issuing bank.
Confirming bank. Adds to the payment engagement of the issuing
bank its own engagement, equal in value and conditions.
As international payment technique, the documentary letter of credit has the

following characteristics:
formalism or the documentary characteristic. The exporter cannot

ask for the payment unless having the documents attesting the
fulfillment of the conditions imposed by the letter of credit; the bank
will decide the payment based exclusively on documents.
independence from the basic contract relation. The engagements
assumed by the parties are autonomous, even if having the commercial
contract as a basis.
firmness of banking engagement. The bank engages in performing the
payment and its engagement remains the same until other instructions.
adaptability. It is adaptable to different foreign trade operations.
safety. It assures the safety of all parties involved.
Figure 7.3 The Mechanism of the Documentary Letter of Credit
Exporter Importer
(Beneficiary) 6 (Order)
4 5 7 8 2 11
3
9
Exporters Bank 10 Importers Bank
Source: Dorel Paraschiv, Tehnica plilor internaionale, Bucureti, Editura

Economic, 2003
The Mechanism of the Documentary Letter of Credit
The operation of payment by documentary letter of credit implies several

stages:
1. Signing the international commercial contract and the inclusion of the

documentary letter of credit as payment method.
2. The importer orders his/her bank to open the letter of credit based on
the liquidities he/she already has in his/her account or based on a credit
the bank gives for this purpose.
3. Opening of the letter of credit and informing the expeditors bank.
4. Informing the exporter about the opening of the letter of credit.
5. The exporting bank confirms the concordance of the data contained in
the letter of credit and in the contract, as well as other clauses pointed
out by the importer but which do not contravene the contract.
6. Shipping of the merchandise according to the stipulations of the signed
commercial contract and the clauses agreed upon in the latter of credit.
7. Presenting by the exporter of the documents proving the shipment of
the merchandise, documents express mentioned, in the demanded
number of copies.
8. The payment of the merchandise based on the documents (if the letter
of credit is based in the exporters country).
9. The bank of the exporting company sends the documents to the importer
bank debiting it in the currency mentioned in the letter of credit.
10. The importers bank, based on the received and verified documents
(adequately to the conditions of the letter of credit) operates the
payment crediting the bank of the exporting company.
11. The bank of the importing company sends the documents to the
company; based on these documents the company will receive the
merchandise.
The good functioning of the documentary letter of credit is conditioned by

several specific elements:
The address the place where the payment of the letter of credit will take
place. In the contract, the partners may agree that the letter of credit be
based in the country of the exporter (an advantage for the exporter), in the
country of the importer of in a third country.
The value of the letter of credit. In the instructions the one who orders the
letter of credit gives to his/her bank, there is stated the value of the letter of
credit meaning the amount in foreign currency to be paid for the exporters
documents. According to stipulations of Publication 500, the value of the
letter of credit may be expressed as follows: indicating by approximation the
amount using the terms approximately, about; by indicating a superior
amount; until the limit of the amount; by a fixed amount.
The validity of the letter of credit is the deadline by which the exporter must
present the documents at the counters of the bank where the letter of credit
was issued. The validity may expire in two ways: a fixed date or a period
of time. If the letter of credit does not mention the term for handing the
documents at the bank, then the term is considered to be 21 days after the
emission of the transport document. The date refers to the documents
presented, not sent. The shipment date stipulated by contract must be written
in the transport document attesting the shipment of the merchandise.
Exceeding this validity term means not fulfilling the contract obligations and
consequently the ceasing of the payment obligation in the letter of credit.
The nature of the banking engagement, as it may be revocable,

irrevocable and irrevocably confirmed.
Time of the operation. There is a period of time between the agreement

regarding the payment by letter of credit and the moment when the exporter
receives the notification of the opening of the letter of credit. This term may
be extended thanks to certain situations such as: difficulties the importer
faces in finding banks that will accept the operation, the lack of convertible
currency in the importing country. Then, for operating the payment, the
bank has a reasonable term for document examination it may be under a
week for confirmed letters of credit, but it may be extended for those not
confirmed.
Complexity. Partners with a reduced experience in international transactions

may find the rules and procedures imposed (for usage of the letter of credit)
too complicated.
Cost. The letter of credit is the most expensive payment method. Banking
fees are applied to the value of the document and even if the percentage is
low, the absolute value may rise very high. If not otherwise stipulated by the
parties, the cost of the letter of credit will be considered the duty of the
importer. The letter of credit also means costs for the banks involved.
In Romania, the data demanded in the external currency payment order for
the documentary letter of credit must contain: name of the bank of the one
who orders the letter of credit; name, address and fiscal code of the on who
orders the letter of credit; amount of the letter of credit written in numbers
and letters; currency type of the payment amount; complete name, exact
address and number of the beneficiarys account; complete name and exact
address of the beneficiarys bank; name and date of the signing of the
external contract; mentioning the person engaged in paying fees and costs;
method of payment type; number and date of the external bill emission;
the method of communicating the documentary letter of credit to the
deciding bank; if it is a transferable letter of credit; who pays for the
insurance; mentioning the delivery conditions; mentioning the importance
of the confirmation; partial shipments and allowed and not-allowed
reshipment; naming the bank where the letter of credit is used and the type
of the letter of credit; the list of the requested documents; mentioning the
deadline for presenting the documents; mentioning whether it is a
merchandise import or a merchandise for import processing; country of the
seller; description of the merchandise; mentioning other instructions.
The Documents
The documents that may be usually demanded when using the letter of
credit are:
a) Commercial documents for quantitative, qualitative and value
identification of the shipped merchandise; the external bill issued by the
exporter, based on which the payment is operated; the consular bill
(stamped or legalized by the diplomatic representation of the importers
country in the exporters country) and the proforma bill (informative or
temporary, transmitted by the exporter to the importer before the
shipment of the merchandise) have different functions.
b) Transport documents: maritime or fluvial bill of landing , duplicate of
the railway bill de for railway transport , waybill for road transport, air
bill for aerial transport, proof or warrant of an international shipment
house, if the shipped merchandise do not have the required weight or
volume necessary for occupying wagon;
c) Insurance documents (when the shipment clause in the contract
stipulates that the exporter is obliged to insure the merchandise for the
international transport): the insurance certificate.
d) Documents attesting the quality, the quantity and the origin of the
merchandise, qualitative and quantitative reception of merchandise
report, analysis bulletin, phytosanitary certificate, sanitary veterinary
certificate, guarantee certificate, origin certificate.
The payment refusal of the bank is done by: presentation of certain

incomplete or incorrect documents, expiry of the letter of credit, late
presentation of documents, late shipment of merchandise.
Documentary Letter of Credit Types
The documentary letter of credit is the expression of its adaptable character

and of the foreign trade diversity. There are many types of letters of credit
in international operations.
According to the firmness of the banking engagement (the form of the letter
of credit):
revocable
irrevocable
According to the confirmation of irrevocable letters of credit:

confirmed
not confirmed
According to the moment of the payment operation or the payment type:

payment at maturity
payment by acceptance
payment by negotiation
According to the place of the emission:

in the exporters country
in the importers country
in a third country
According to the special clauses contained, with consequences on the usage

of the letter of credit:
transferable
revolving
red clause
According to its combined usage:

back-to-back
compensatory
The Form of the Documentary Letter of Credit:
The Revocable Letter of Credit may be modified or annulled by the

issuing bank at any time, without any beforehand notice of the beneficiary.
The Irrevocable Letter of Credit involves the firm engagement of the

issuing bank of operating the payment in favor of the beneficiary, if the
presented documents (by the beneficiary) fully respect the terms and
conditions of the documentary letter of credit. The irrevocable letter of
credit cannot be modified or annulled by the issuer without the permission
of the issuing bank, the confirming bank (if the documentary letter of credit
is confirmed) and that of the beneficiary of the documentary letter of credit.
The Irrevocably not-confirmed Documentary Letters of Credit

through the engagement assumed at the opening of the letter of credit, the
issuing bank assumes the whole responsibility of the payment; thus the
issuing bank becomes the only bank firmly engaged into paying, the other
banks involved acting as mandatory, in the name of the issuing bank and
following its instructions, without assuming any firm payment engagements.
The Irrevocably confirmed Documentary Letter of Credit alongside

the firm engagement of the issuing bank there is added a firm and
independent payment engagement of a third bank the confirming bank.
The irrevocably confirmed documentary letter of credit offers a plus of
security to the exporter regarding cashing the value of the merchandise.
Way of usage (the moment of the payment operation):
Documentary Letter of Credit with Payment in Sight it is immediately

paid when the documents of the exporter are presented to the paying bank.
Documentary Letter of Credit with Delayed Payment. The payment of

the documents is not done in the moment I presented at the bank, but at a
later date mentioned in the documentary letter of credit.
Documentary Letter of Credit with Payment by Acceptance. It is used in

the case of exports on credit. With the documents, the exporter also presents
to the bank a bill or a set of bills drawn on the bank mentioned in the
documentary letter of credit (it may be: the issuing bank, the accepting bank,
the drawn bank assigned expressly) with certain maturity terms. The bank
accepts the bills, thus becoming main billing debtor, restitutes them to the
exporter and the documents to the importer. At maturity, the exporter

presents the bills to the accepting bank who pays them.
Documentary Letter of Credit with Payment by Negotiation. According

to the Anglo-Saxon banking law, using a letter of credit implies the
presentation by the beneficiary of the documents and one or several bills
drawn over the issuing bank. The negotiation of the documents or the
payment by negotiation is the right of the issuing bank to buy the documents
(meaning to pay the exporter) and to send them to the issuing bank.
Special clauses
The Transferable Documentary Letter of Credit. The insertion of this

clause gives to the beneficiary of the documentary letter of credit the right to
ask the transferring bank to make the letter of credit payable partially or
totally for one or several second beneficiaries. This type of documentary
letter of credit is used in intermediate operations, the beneficiary of the
documentary letter of credit is an intermediary and the second beneficiary is
the real exporter.
The Revolving Documentary Letter of Credit. Its value is renewed

automatically according to the payments, until it reaches a certain price
ceiling, in proportion to each delivery. It is used for high value contracts
with spread out time deliveries. The value of the documentary letter of
credit is at the level of a delivery and consequently the fees and the banking
taxes are lower.
The Red Clause Documentary Letter of Credit. By inserting this clause

in the documentary letter of credit, the paying bank is authorized to perform
a payment in favor of the beneficiary, before he/she presents the documents
referring to the delivery of the merchandise. The payment may be an
advance, or may be equal with the value of the documentary letter of credit.
The amount thus obtained permits to the exporter to obtain the merchandise
or some of its components.
Combined usage of the documentary letter of credit
The Compensatory or Reciprocal Documentary Letter of Credit. It is

characterized by the insertion in the documentary letter of credit of a clause
allowing the usage of the export documentary letter of credit only in
correlation with an import documentary letter of credit. By combining two
letters of credit with such clauses, the partners who perform operations by
counter party compensation, make sure that one of them will not ship the
merchandise in compensation, will be paid by the issuing bank and will
receive the value of the merchandise not delivered in compensation.
The Back-to Back Documentary Letter of Credit. Although the name is

unique, it refers to two letters of credit: an import and an export one, value
and time correlated by an intermediary. This type of letter of credit is
opened by one of the partners, as importer, based on another letter of credit,
opened in his/her favor, as exporter. It may be used in intermediate
operations on the local market or in re-export operations. There are two
types of back-to back documentary letter of credit: the concordant letter of
credit, when the opening of the subsidiary letter of credit demands the same
documents as the original letter of credit; and the un-concordant letter of
credit, when the original letter of credit (after changing the invoice and, if
necessary of the bill) may not be used with the necessary documents for the
subsidiary letter of credit.
The Transferred Documentary Letter of Credit. The beneficiary of the

documentary letter of credit has the right to transfer to a third party (the
beneficiary of the transfer, most frequently the real exporter) a part of the
documentary letter of credit opened in his/her favor.
7.5 Commercial Letter of Credit
The letters of credit are alternatives to the letter of credit used mainly in the
countries with an Angle-Saxon influence.
The commercial letter of credit is a document by which the issuing bank

engages irrevocably to the exporter to pay the bills drawn over exporter by
the bank, by payment (if the drafts are on spot) or by acceptance (if the
drafts are on term) only if, together with the drafts there will also be
presented the documents mentioned in the credit.
Unlike the documentary letter of credit, the letter of credit is always issued
abroad, at the issuing bank of the importers country or in a third country;
the letter of credit does not involve covering with funds the payment
agreement in the moment of its emission. In order to be able to cash right
away the value of the shipped merchandise, the exporter has to discount the
bills, after their acceptance and that of the letter of credit by the issuing
bank; at maturity, the last owner of the bills has to show up for the cashing.
Payment by commercial letter of credit is safe for the exporter, who benefits
from the irrevocable engagement of the issuing bank, and for the importer,
as honoring the bills is done only by proving with documents the fulfilment
of the sellers obligations.
The stand-by letter of credit represents a guarantee issued by the importers

bank in favor of the exporter, for a certain amount agreed upon in the
international commercial contract; if the payment obligation is not
respected, the exporter may resort to payment by debtor. This instrument is
only used if the payment was nor performed.
The Payment upon Receipt of Documents
As payment method used in international exchanges, the payment upon

receipt of documents is regulated by the Rules and Usances for the payment
upon receipt of documents document, also known as Publication 522,
updated in 1995 and with applicability starting with January 1st 1996.
The payment upon receipt of documents consists of the order the exporter
gives to his/her bank to cash the value of a commercial transaction and to
transfer in his/her account; for this purpose he/she gives to the bank the
documents attesting the performance of his/her contractual obligations.
Unlike the payment by documentary letter of credit, the settlement by
payment upon receipt of documents is rather simple, low-priced, but not
bank established, being mainly based on the payment obligation of the
buyer, assumed in the international commercial contract, without any
payment engagement form the banks involved in the process.
Main elements of the payment upon receipt of documents mechanism:
a) The operation is a simple circulation of documents, the obligation of

the banks being thus reduced to the carrying out of a service under
certain circumstances imposed by the instructions received from the
exporter and the rules of the Publication 522.
b) The documents circulated by the banks may be:

commercial (the bill, the transport and property documents)
financial (bills, promissory notes, cheques, receipts used for
obtaining sums of money)
According to the circulated documents, the payment upon receipt of

documents may be:
simple it is an payment upon receipt of documents containing financial

documents and no commercial documents;
documentary it is an payment upon receipt of documents containing
commercial documents with or without financial documents;
c) the purpose of the operation is the transmission of the commercial or

financial documents, from the beneficiary of the payment to bearer,
against payment, acceptance or in other conditions.
The Mechanism Process by Payment upon Receipt of Documents:
Main stages in the payment process of a payment upon receipt of documents:
Figure 7.4 The Mechanism of the Documentary Payment

upon Receipt of Documents
1
Exporter Importer
Issuer 2 Draw
10 3 5 6.7
4
Exporters Bank Importers Bank
9
1. The international commercial contract through which the parties have

convened to pay by payment upon receipt of documents is the main
document for the exporter and the carrying out of his/her obligations.
2. Delivery of merchandise. This moment sets off all the other stages of the
payment upon receipt of documents. The delivery of the merchandise
needs to be done respecting the exact terms and conditions (stipulated in
contract) for the merchandise. Following the delivery of the merchandise,
the exporter enters in possession of the documents that certifies the

fulfillment of the contractual obligations.
3. The set of documents and the payment order for the payment upon
receipt of documents are presented at the exporters bank issuing bank.
Through the payment order of upon receipt of documents, the exporter
demands the payment upon receipt of documents and also clearly
presents the conditions under which the documents will be given to the
importer (contra payment/acceptance/other conditions), the name of the
documents and the number of copies to be given to the importer.
4. Acting on behalf of its client, the delivering bank issues its own
document payment upon receipt of documents in which he same
instructions received from the issuer are translated and written; the bank
gives this document to the importers bank together with the set of
documents through which the exporter attests the delivery of the
merchandise.
5. Notifying the importer. On arrival of documents, the presenting bank

notices the importer.
6-7. Documents against payment or acceptance. According to the instructions

contained by the payment upon receipt of documents, the presenting
bank issues the documents to the importer either against payment or
against acceptance of the bill (or under other conditions).
8. Once in possession of the documents, the importer can take the

merchandise.
9. After cashing the value of the documents from the exporter, the
importers bank sends the money (or in the case of documents contra
acceptance sends the cambia) to the delivering bank.
10. After receiving the money, the delivering bank notifies the exporter
about the cashing of the export. If among the given instructions there are
also documents against acceptances, the accepted bill is given.
In practice, one or even more third banks may intervene.

Parties Involved in the Payment upon Receipt of Documents Process
The names of the parties involved in the process of a payment upon receipt
of documents, regardless of its type, simple or documentary, are stated in
the Publication 522:
The issuer client that assigns his/her bank to operate the payment
upon receipt of documents; namely the exporter. After delivery in an
optimum period of time, the issuer gives to his/her bank the set of
documents that attest the delivery of the merchandise according to
contract conditions;
The delivering bank the bank to which the issuer assigns the payment
upon receipt of documents operation and which receives from the issuer
the documents and the instructions for the cashing; it has to re-send the
documents to another bank, also giving it directions according to the
issuers instructions and the banking procedures;
The bank assigned with the cashing any bank, other than the
delivering bank that intervenes in the payment upon receipt of
documents operation; it receives from the delivering bank the documents
with the cashing orders and has the job to assure the presentation of the
dawns documents and to obtain the cashing (the acceptance, the
fulfilment of other conditions); according to the received instructions, it
sends back the results of the payment upon receipt of documents (sums
of money, accepted commercial effects);
The presenting bank the bank assigned to present the documents to

the drawn, if the operation cannot be carried out by the bank assigned
with the cashing;
The drawn the person to whom the documents will be presented

according to the payment order; the buyer, the importer, the recipient of
the circulated documents in the payment upon receipt of documents
(according to the exporters instructions). The bank asks the drawn to
fulfill a certain condition in return of the release of the documents.
Risks of the Payment Process by Payment upon Receipt of Documents
The payment upon receipt of documents doesnt present any payment

guarantee besides the obligation assumed by the buyer in the commercial
contract; the payment upon receipt of documents is thus for the seller a
source of various risks:
a) The risk of late payment. It occurs when the document circuit has an
imprecise date, thus giving the importer the possibility to be late in
taking the documents against payment.
b) The risk of the importer not paying if the insecurity elements are very
high. In this case the importer finds a way to end the contractual
relations or assumes the risks of the non-execution of the contract (the
payment) in return of other advantages.
c) The risk of cashing diminishing emerges as a direct consequence of the
first two risk categories listed above (lateness or non-payment) and may
manifest itself by:
value and price loss, either as a result of value decrease in the
lateness period, or because the exporters acceptance of price
reduction for ending the transaction as soon as possible with
minimum costs.
performing extra expenses for the exporter for merchandise
manipulation, storage and protection of merchandise and stationing
of merchandise in transport means etc.
the exporter paying certain interests not contained in the efficiency
calculation of the exporter, if the operation is financed by a third
party until the cashing moment.
d) The risk of merchandise loss may intervene either if the merchandise is
sent directly to the address of a bad intentioned buyer who takes it, sells
it and refuses to pay or if the warehousing period in companies or the
transportation means is extended over the limit imposed by the customs
rules or if the stocking and protection costs surpass the merchandise
value.
In the case of the payment upon receipt of documents with payment

stipulated in portions according to performed deliveries, if the importer does
not pay for the afferent documents of a portion, the exporter may stop the
deliveries and may ask the importer the pay by documentary letter of credit
for the other deliveries, together with the payment of the non-paid payment
upon receipt of documents operation.
Through the payment upon receipt of documents process, the exporter, as

initiator of the operation, must monitor the merchandise until the moment of
its payment.
7.6 The Payment Order
The payment order is the payment order given by a person (issuer) to a

bank, in order to pay a certain amount to another person (beneficiary) for
erasing a money obligation resulted from a direct relation between the issuer
and the beneficiary.
The Payment Order is characterized by:
a) The payment relation begins following an assumed obligation or a

previous debt that will be erased once the payment order is performed;
b) The operation is stared at the initiative of the payer (issuer);
c) The cancelling procedure is the main characteristic of the payment
order. The issuer may withdraw or modify the payment instructions
given to the bank, if his/her initial order was not performed by payment
for the beneficiary;
d) The commission (banking deposit) is a must in the case of the payment
order. It involves the issuers obligation to provide the necessary banks
and funds once the payment order was issued;
e) According to the cashing methods the payment order may be: simple
(the cashing is not conditioned by the existence of a document or an
explanation regarding the intention of the payment); documentary (the
cashing is determined by the beneficiarys obligation to present certain
documents-bills, proof of rent payments and transportation fees
indicated by the issuer in payment order.
Parties Involved
The parties involved in the payment order process are:
the issuer, the one who starts the operation; the person who pays and
settles the payment conditions, makes-up the banking commission for
the payment; he/she may cancel the payment at any time until the actual
payment;
the beneficiary is the one to whom the payment is done; he/she must
conform to the conditions stipulated in the payment order; he/she doesnt
have the certainty of the payment until the cashing of the amount;
the banks that intervene in the process have the sole role of carrying out
services. The only responsibilities of the bank are related to the rightful
handling of the entrusted values. In practice, these banks are called: the
issuer bank, to which the issuer gives instructions regarding the payment
operation by payment order and where the deposit is placed; the paying
bank where the amount is paid to the beneficiary of the payment.
Figure 7.5 Payment Operation Mechanism of Payment Order
1
Exporter 5 Importer
4 6 8 2
7
Exporters Bank 3 Importers Bank
Source: Negu Mariana, Pli i garanii internaionale, 1996
1. Commercial contract containing the payment obligation of the importer

2. Issuing of payment order; the importer is obliged to make a deposit for
covering with funds the payment order;
3. Instructions for payment operation by payment order;
4. Notifying the payment beneficiary the exporter;
5. Merchandise shipment;
6. Presentation of documents / cashing of payment;
7. Covering the payment;
8. Notification and presentation of documents.
In Romania, in order to perform a payment by payment order, the issuer (the

importer) must fill in the external payment form. The information requested
for the payment order are: name of the issuers bank; full name; exact
address and fiscal code of the issuer; payment method (payment order);
amount to be paid-in numbers and letters; type of currency; full name, exact
address and number of the beneficiarys account; full name, exact address of
the beneficiarys bank; goods import or goods import for processing;
country of the buyer; number and date of the import customs certificate;
type of goods; extra instructions for the banks.
7.7 The Risk in International Payments
During the fulfillment of a commercial contract risks can appear both on

the part of the exporter and on the part of the importer.
In general, by risk we understand the possibility, statistically speaking, to

understand favorable or not so favorable results of a future action in the
international economic relations.
In a more narrow definition, the risk is connected only with exterior

events, which cannot be influence by the partners behavior. The risk
contains a future and probable event which, in the case of realization, can
bring about some losses. The event can be foreseen only if the factors
that are influencing the risk can be anticipated and unforeseen when we
talk about exceptional events.
By another definition we can understand by risk the possibility of a loss

for an international economical transaction (export, import, cooperation)
as a result of some unpredictable events.
The causes that are generating risk are numerous and can have
commercially or non-commercially nature. These causes are used for
commercially risks: buyers insolvability, no payment of the merchandise
or for the service, unacceptance of the merchandise by the buyer. The
non-commercially risks are determined by: the war situation, the
expropriation and the government intervention, the canceling of
import/export licenses, natural calamities.
The risks can be divided in internal risks which can be localized in the
human resource capacity, in the fixed capital, in the economic processes
for warehousing, manipulation and transportation of the merchandise of
commercial companies. The second category is the external risks which

arise between partners during the transactions.
The internal risk can be divided in:
a) Production risks
a. Innovation risk, the production development for export
b. Technological risk, the production of new products, the
possibility of not realizing partially or totally the product in due
time.
b) Production cooperation for complex exports or for export which
implies cooperation between 2 or more producers.
c) Informational risk the inefficiency in communication, no channels
of exchanging information between two units in an export
transaction.
d) Merchandise logistic risk it means possible losses that can appear
during the merchandise transportation or during the time the
merchandise is in the warehouse (maneuvering risks).
The external risks can be divided in:

a) Execution risk
b) Insolvability risk
c) Price risk
d) Foreign Exchange rate risk
The main risks that can appear during an international commercial

contract can be:
Partners related risks
1) Risks involving the production of the merchandise or the providing of

the service. This is a risk for the exporter because the importer can
cancel the order and not to take the merchandise. This is a risk also
for the importer because the exporter cannot realize the order due to
technically or financially motifs.
2) The failure to pay risk. For the exporter it represents the fact that the
importer does not pay the merchandise and for the importer the fact
that the exporter does not pay back the advance the importer has
already paid.
SocialPolitical Related Risks
1) Political risk.
For the exporter the political risk appears when the political events are
hindering the importer to fulfill its contractual conditions. For the
importer, risk appears when the political and social events are hindering
the exporter to fulfill its contractual conditions
2) The transfer risk
For the exporter the state refuses to make payments in the currency stated
in the contract. For the importer, the payments without guaranties cannot
be realized and the merchandise cannot be paid.
3) Foreign exchange risk
For the exporter it means de revalorisation of the currency stated in the

contract.
For the importer the valorisation of the currency stated in the contract.
The risk in the international payments is determined by the modality of

payment which influenced the movement of capital.
The settlement for exchanging goods between two partners, concluded by

the realization of a transaction, contains two components. The first is the
delivery of the good, service or the property transfer over a financial
asset. The second component is the transfer of the amount of money
necessary for the fist component to be fulfilled.
Associated with these two components of a transaction, there are at least

three risks that the partners and the intermediaries are taking into account.
a) The difference in time between the settlement of the transaction and

the moment the two components are realized.
b) No simulation between the fulfillments of the two components of the
transaction.
c) The possibility of failure to pay which is directed linked with the
method of payment.
From the variety of risks associated with the payment system, the most
important are the financial ones. There can be also risks related to the
legislation, human and operational errors given by the lack of security in
the payment system. The payment systems are confronted with a triple
financial risk.
The first types of risk the two partners have to take into account are,
usually, the credit risk and the liquidity risk
The credit risk consists in the danger that, during the period of the
transaction, one of the parties would suffer a loss in the payment from the
participants. These participants ca be the partner with which the contract
was signed, the intermediaries which are assuring or the payment,
intermediaries which are assuring or the transport. The credit risk appears
when one of the participants, in the time of the transaction, does not pay
its obligations. The most frequent this is because the participant enters in
a financial situation of insolvability.
For the intermediation activities, the credit risk of the buyer over the
seller appears when the transfer of financial capital is realized before the
merchandise is received. The credit risk of the seller over the buyer
appears when the merchandise is transferred before the receiving the
money. The buyers bank risk appears when the banks paid the amount
of money before receiving money from the buyer.
The liquidity risk represents the danger that the partners which owns
money in a transaction (contract) finds itself in the situation of
incapability of payment in due time. This situation affects directly and
negatively the liquidity of the one who should have received the money
in the first place.
The liquidity crises can appear unexpected and can be determined by

settlement regarding the money transfer and the technical ways of
realizing it.
The liquidity risk appears, in the intermediary payments, when the

buyers bank does not credit the buyer for that period of time. For the
sellers bank the risk appears when the buyers bank does not realize the
payment. For se seller the risk appears when its bank does not dispose of
his money immediately.
The systemic risk corresponds to the probability that the bankruptcy of

one or more participants to the system can determine liquidity or
solvability problems for other participants.
In international payments the risk that the importer and the exporter have
to face is the foreign exchange rate risk.
7.8 International Business Financing by Special Techniques
Factoring
A very important issue every business has to take into consideration is the
risk of becoming insolvent. Big companies ended up bankrupt just because
their lack of liquidities, their incapacity to pay their debts and manage their
day-to-day activity due to the lack of cash. There are several solutions to
this problem. Contracting short-term may appear to be the best choice. The
problem that arises is that a credit is difficult to obtain and special
conditions have to be met in order to be eligible. Usually, extra safety
measures are necessary form the part of the lenders in order to offer a short-
time credit.
When lenders require the short-term financing they offer to be backed-up, it

is usually because they are concerned about the size of a particular loan, the
borrowing firms poor credit rating, or the general prospects of repayment.
They analyze the overview of the firm in order to decide if the loan can or
cannot be repaid.
Thus, if a business cannot obtain enough capital through unsecured short-

term financing (financing that is not backed by collateral), it must put up
collateral to obtain additional financing it needs. Almost any asset can serve
as collateral, but inventories and accounts receivable are the assets most
commonly used for short-term financing.
Accounts receivable are amounts owed to a firm by its customers. They are
created when trade credit is given to customers and are usually due in less
than 60 days.
A firm can pledge its accounts receivable as collateral to obtain short-term

financing. For example, when using factoring, the accounts receivable are
sold to a factoring company, or factor. The factor buys the accounts
receivable for less than their face value, but it collects the full dollar amount
when each account is due.
The factors profit is thus the difference between the face value of the
accounts receivable and the amount the factor has paid for them. Even
though the selling firm gets less than the face value for its accounts
receivable, it does receive needed cash immediately. Moreover, it has
shifted both the task of collecting and the risk of nonpayment to the factor,
which now owns the receivables.
The factoring company buys all or some of the most important unsettled
invoices, for an advance of up to 80 - 90% of their value and repays the
contracting firm the remaining amount, minus a commission plus interest on
the advance when the accounts are settled.
The amount a factor is willing to advance will depend on the calibre of the
debtor. A higher percentage will be granted on money owed to the
contracting firm from a blue-chip company or household name than from a
sole trader.
The factor then administers the clients sales ledger, taking responsibility for
the debts, sending out account statements to their clients customers and
chasing up outstanding payments. It has to be taken into consideration that,
in some cases factors can still pass bad debts back to the clients if these are
incurred (in case of recourse factoring).
Good factoring companies will normally seek to work efficiently and

politely with their clients customers so that to ensure that the contracting
firms goodwill remains intact where possible.
Types of Factoring:
Domestic Factoring: cash advances of up to 8090% against any

companys domestic receivables.
Export-Import Factoring: cash advances of up to 8090% against
overseas invoices. The worldwide network of associated factor
companies enables it to offer a complete export service. This saves
valuable management time in dealing with different time zones,
cultures and legal systems facilitating companies to avoid unnecessary
obstacles and keep overseas transactions moving quickly.
IntFactor: factoring facilities via the Internet.

Non-Recourse Factoring: factoring with credit insurance against bad
debts. The factor bears in this case the risk of non-payment of their
clients debtors. The company can cover all of its customers bad debts
or select among them.
Recourse Factoring: factoring without credit insurance.
Confidential Factoring: any action (statements sent, calls to debtors) is
made in the companys name, not the factors. The customers do not
know of the factors involvement.
In addition to normal invoice factoring most factoring companies provide

additional business financing packages.
Single Invoice / Selective Factoring:
This option is ideal for companies dealing with large single orders or peak
seasonal trading conditions. The company can simply nominate the invoice
or invoices it wants to factor or the individual debtor(s) the company might
want to factor. Advance levels vary from 80% to 95% of invoice value and
the costs are higher than a standard factoring facility at 1% to 5% depending
on the size of the invoice
A form of factoring called forfaiting is an increasingly popular method of

financing international transactions. Literally translated from French, the
term a forfait means to forfeit. An exporter forfeits the right to a
receivable from an importer by selling it to a financial institution 1 . Thus,
forfaiting is a form of factoring, although, significant conceptual and
practical differences exist between the two techniques. Forfaiting involves
selling large, medium to long-term receivables to buyers (forfaiters) who are
willing and able to bear the costs and risks of credit and collections.
Forfaiting is non-recourse financing of receivables similar to factoring.

However, while a factor normally purchases a company's short-term
receivables, a forfait bank purchases notes that are long-term receivables
with maximum maturities of eight years. The forfaiting bank has no
recourse to the seller of the goods but gets the notes at a substantial discount
1
Forfaiting: What Finance and Accounting Managers Should Know, Kendall P. Hill and
Murat N. Tanju, p. 53
for cash. Forfaiting is used when government export credits or credit

guarantees are not available or when a seller does not extend long-term
credits to areas, such as Eastern Europe. Forfaiting is an important method
of financing for small and medium-sized companies because it enables them
to negotiate transactions that would normally exceed their financial
capabilities. By using forfaiting, small and medium-sized companies can
immediately sell their long-term receivables without recourse.
The table shown below will help distinguish the characteristics of factoring
enabling us to see the differences between the two financing methods 2 :
Factoring Forfaiting
Usually with Recourse Always without Recourse
Maturity of Six Months or Less

Maturity of Six Months to Ten Most Often Three to Five Years
Years
Often Requires a Large Portion of

On-going, Revolving Deals
Customers Business One-Time Deals
Works Mostly with Consumer Works with Capital Goods,

Goods Commodities, Large Projects
Avoids Developing Countries

Works Well in Developing Countries
Because of the Guarantee
Less Expensive More Expensive
Factoring is especially useful for generating working capital, i.e. when a

business needs cash immediately and is willing to pay a commission
normally in the region of 0.5% to 4.5% of the amount outstanding to
release it. The rates and deals available vary greatly from business to
business and its always best to get references from the factors other clients
before entering into a binding contract.
2
Forfaiting: What Finance and Accounting Managers Should Know, Kendall P. Hill and
Murat N. Tanju p. 54
As a positive effect, factoring allows the obtained income to grow in line

with sales since it reduces the period of the cash conversion cycle, i.e. the
time between buying the raw materials and receiving cash for the finished
product. It is also efficient as it protects the business from the time-
consuming and costly administration of customer account management and
liquidates the cash so that the company has access to it at need. Factoring is
particularly useful when a company is growing rapidly and may need more
funds than an overdraft can provide. It can also be useful for smaller
companies who dont want to have to spend time and money managing their
own sales ledger.
As a drawback, there used to be certain reluctance attached to using a factor

it used to be a sign that a company was in financial difficulties. These
days, however it is becoming increasingly common and is often viewed as a
viable cash management technique. Additionally, it can be quite an
expensive form of finance and sometimes there can be a minimum term of
contract with the factoring company, some as long as three years.
As more and more businesses realize the value of this service, factoring
industry, or its sister method of invoice discounting, is growing and more
providers are appearing in the market place.
Although some factors prefer a lengthy trading record, most will now
advance money to businesses which have been trading for less than twelve
months and many who specialize in start-ups. As a result factoring facilities
are available to sole traders, partnerships, limited companies, PLC's, new
start-ups.
The main difference between factoring and invoice discounting is who

collects the money from your customers. With a factoring arrangement, the
factor collects it, and so the customers of the company that contracts the
factoring service will know that the company is using a factor. With invoice
discounting, it is the company who collects the money, and so the customers
are not aware that the company borrowed money against their debt. For this
reason, invoice discounting is often referred to as a confidential service.
Unlike factoring the company maintains full control of its sales ledger, the
issuing of statements and collection of cash. As a result the service charge is
much lower.
Although the costs of using the factoring service are higher than those of
employing invoice discounting in order to compensate the factors for the
work they perform in administrating the sales ledger, this additional charge
can sometimes be more cost effective than employing own staff for
managing the sales ledger and track the settlement of the trade credit.
It may also be an effective way of canceling the problems encountered when

arguing with big businesses over timely payment. However, having in mind
these possible conveniences, every business must firstly check if it is its
case. It must consider the size of the annual minimum fee, the length of the
commitment period, and even the smallest issue on the factoring contract
and only after that see if it is truly efficient.
Another important way in which invoice discounting is different to factoring
is in the size of the turnover required. Factors usually accept to finance
companies that have a turnover much lower than discounters.
When choosing between factoring and invoice discounting the decision
should be carefully planned. If the company is already large enough to
afford the staff and information systems to efficiently manage and collect its
outstanding invoices, the administration may want to consider an invoice
discounting rather than factoring service.
In the case of invoice discounting there are also two costs that the manager
should take into consideration: an administration charge, either a flat fee or
a percentage of income and an interest charge for the cash advances.
How Factoring works?
The figure shown below describes the factoring mechanism, all the key
players involved and also the circuit between them. It is very important to
notice the role that each partner undertakes in this process:
Figure 7.6 Factoring financing scheme
Factoring vs. Bank Loans
So, why not simply go over to the friendly banker for a loan to get rid of any
cash flow problems? A loan can be difficult if not impossible to receive,
especially for a young, high-growth operation, because bankers are not
expected to decrease lending restrictions soon. The relationships between
businesses and their bankers are not as strong or as dependable as they used
to be.
The impact of a loan is much different than that of the factoring process on a
business. A loan places a debt on your business balance sheet, which costs
you interest. By contrast, factoring puts money in the bank without the
creation of any obligation. Frequently, the factoring discount will be less
than the current loan interest rate.
Loans are largely dependent on the borrowers financial soundness, whereas

factoring is more interested in the soundness of the client's customers and
not the client's business itself. This is a real plus for new businesses without
established track records.
There are many situations where factoring can help a business meet its cash
flow needs. It provides a continuing source of operating capital without
incurring debt, which can result in growth opportunities that dramatically
increase the bottom line. Virtually any business can benefit from factoring
as part of its overall operating philosophy
In conclusion, Factoring represents one of the best ways of financing big,

small or medium sized companies, and especially efficient for the fast
growing firms. This applies even better if the company is young and bank
loans do not represent a secure and viable option.
This process takes a short period of time to be completed which in turn

provides an almost continuous source of working capital.
It is a highly flexible source of money. It can be adapted to any

characteristics that the clients may demand.
Forfait Financing
Forfait financing is defined as the selling, at a discount, of medium-term

accounts receivable, bills of exchange or promissory notes of a foreign
buyer. The debt is normally associated with international trade of goods and
services. The debt obligation of the foreign buyer is commonly guaranteed
by the buyers bank, but may also carry the guarantee of the buyers
government. Forfait financiers characteristically purchase the debt
instruments from exporters without recourse. This means that in the event
that the borrower defaults on the debt, the exporter will not be held liable
How does it work in practice?
In a typical Forfait transaction, the sequence is as follows:
The exporter approaches a Forfaiter who confirms that he is willing to quote

on a prospective deal, covering the export in x months time bearing the aval
of XYZ Bank.
If the transaction is worth $1M, the Forfaiter will calculate the amount of
the bills/notes, so that after discounting the exporter will receive $1M, and
will quote a discount rate of n per cent. The Forfaiter will also charge for
x days grace and a fee for committing himself to the deal, worth y per
cent per annum computed only on the actual number of days between
commitment and discounting. The Forfaiter will stipulate an expiry date for
his commitment (that is, when the paper should be in his hands).
This period will allow the exporter to ship his goods and get his bills/notes
avalized and to present them for discounting. The exporter gets immediate
cash on presentation of relevant documents, and the importer is then liable
for the cost of the contract and receives credit for z years at n per cent
interest.
Many exporters prefer to work with Forfait brokers who, because they deal
with a large number of Forfait houses, can assure the exporter of
competitive rates on a timely and cost effective basis. Such brokers typically
charge a nominal 1% fee to arrange the commitment. This is a onetime fee
on the principal amount and frequently is added to the selling price by the
exporter. The broker frequently consults with the exporter to structure the
transaction to fit the Forfait market.
Characteristics of Forfait
Forfait financing may be structured creatively and adaptable to the needs

and cash flow characteristics of the borrower.
Forfait financing is most commonly related to international trade
transactions.
The exporter extends credit to his customer for some period of time
commonly from six months to 5 years but may reach 10 years.
The exporter must agree to stagger the repayment schedule of the
receivables.
The buyer agrees to the repayment of the debt.
Debt obligation is usually documented by bills of exchange or
promissory notes.
Bank guarantee normally required to secure the buyer's debt obligation.
Documentation is simple, and quick.
Exporter receives payment after shipment of goods and submission of
required documents.
Typically the debt will be evidenced by a series of notes (such as ten
notes due six-monthly over five years).
Payments structure is normally semi-annually in arrears.
Payment schedules are flexible and can be structured to accommodate
the buyers cash flow.
The size of forfaiting transactions varies from US $100,000 to US
$50 million.
Advantages to Exporter
Exporter can offer credit to buyer but receive cash payment.

Exporter receives cash immediately upon delivery of the goods or
services.
No country of origin restrictions as required by Sovereign Export
Promotion Agencies.
Up to 100% of sale can be financed.
Forfait financing is 100% non-recourse to the Exporter.
Eliminates the two key risks political and commercial credit risks.
Protects exporter from foreign exchange fluctuations, interest rate
increases.
Simple documentation, rapid, flexible deal structuring.

Improves competitive advantage by providing vendor financing.
Facilitates expansion of markets to riskier countries.
Commitments can be received within a few days depending on country
of import.
No credit administration, collection efforts with related costs.
No contingent liability, enhances balance sheet ratios.
Eliminates export credit insurance premiums and commercial banking
fees.
Financing is transacted confidentially, unlike commercial loans.
Disadvantages to Exporter
Forfait financing does not cover pre-delivery risks.
An export shipment is effectively open account until a commitment is
obtained from the forfaiter and exporter fulfills their obligations.
Exporter has the responsibility to ensure that the debt is legal and
enforceable.
Exporter must insure that the debt instrument is properly guaranteed.
The cost of forfait financing can be higher than commercial bank
financing.
Advantages to Importer
Importer gains access to extended term financing with fixed or floating

interest rates.
Forfait financing has simple documentation and is very flexible.
Can receive financing for up to 100% of cost of goods.
Provides access to major hard currency financing.
Repayment can be tailored to the buyers cash flow profile.
Goods from a variety of sources can be financed.
There is no acceleration clause in the case of non-payment of one bill,
which is traditionally featured in commercial loan agreements.
Disadvantages to Importer
The importer must pay for both forfait financing and the fee for banks
guarantee.
Cost for financing and bank guarantee can be more than direct credit
loan.
The bank aval or guarantee may be counted against and reduce
availability of Importers bank credit lines.
Importer may need to cover foreign exchange risk over repayment
period.
Advantages to Guarantor
Guarantor bank earns a fee for providing its guarantee or aval on debt
instrument.
Guarantor bank does not have to utilize own funds to finance its client.
The forfait guarantee transaction may appear as a contingent liability or
off balance sheet item.
Typical Applications and Tenors
Commodities (oil, coal, rice, grain, etc.) financed from 90 days to 18

months.
Services (engineering, design, maintenance, etc.) financed from 180
days to 3 years.
Technology (software, computers, communications, etc.) financed from
180 days to 5 years.
Construction Project (hospitals, airports, factories, etc) financed from 3
years to 7 years.
Capital equipment (machine tools, generators, tractors, etc.) financed
from 2 to 7 years.
Turn Key Plants (power generation, asphalt production, etc.) financed
from 3 years to 7 years.
Leasing
Leasing is a financial operation whereby any individual or company may

purchase an asset or piece of real estate for business or professional
purposes, the use of which is simultaneously transferred for a set period of
time at a price split up into regular payments. The contract also includes the
option of purchase by the client.
The Legal Regime of Leasing Operations
Legal background
Leasing operations carried out on Romanian territory, the types of leasing

operations as well as the authorizing and functioning of leasing companies,
are all regulated by Government Ordinance no. 51/1997, as republished.
Leasing companies
Leasing operations may be carried out in Romania by joint stock companies

Romanian legal entities established and functioning according to the
provisions of company Law no. 31/1990, as republished.
The leasing companies' object of activity must include carrying out leasing
activities and they must have a minimum share capital, fully subscribed and
paid in upon establishment, in a value of ROL 500 million.
Leasing operations: forms
The mechanism of leasing operations implies a tripartite structure: the

lessor/sponsor, the user and the supplier, representing an alternative to the
classical method of sale of goods with the payment of the price in
installments. Therefore, the lessor/sponsor transfers to the user, upon the
request of the same, for a definite period, the right of use upon a good the
owner of which the lessor/sponsor is, in exchange for a periodical payment
(leasing rate). Under a contract, the lessor/sponsor undertakes that at the end
of the leasing period, it shall comply with the user's right to opt for one of
the following:
the acquisition of the good;
the extension of the leasing contract;
the termination of the contractual relations.
In the event that the user should choose to acquire the good that was the
object of the leasing operation, upon the expiration of the leasing contract
the transfer of the right of ownership shall be made in exchange for a cash
amount called residual value.
A particular form of leasing is the leaseback or sale and leaseback method.

This leasing form implies the leasing by a company of industrial equipment
that it owns, to a leasing company, to use the same in a leasing system, with
the obligation to later redeem such equipment.
Leasing operations may have as their object immovable goods, as well as

movable goods for long-term use, including in the civil circuit, with the
exception of audio and video recordings, theatre plays, manuscripts, patents
and copyrights.
Ordinance no. 51/1997, as republished, regulates two categories of leasing

operations: financial leasing and operational leasing.
To be included in the category of financial leasing, a leasing operation must

meet the following requirements:
The risks and benefits related to the ownership right pass on to the user
at the conclusion of the leasing contract.
The parties expressly provide that upon expiration of the leasing
contract the right of ownership over the good shall be transferred to the
user.
The user may choose to purchase the good, and the purchase price shall
represent a maximum of 50 percent of the value of entrance (market)
that the same has as of the date when the option may be expressed.
The period of use of the good in a leasing system covers at least 75 percent
of the normal duration of use of the good, even if the right of ownership
over the good is not ultimately transferred.
By comparison, an operational leasing arrangement meets none of the

above-mentioned requirements.
Currency and fiscal aspects
Financial leasing operations concluded between residents and non-residents

must be notified to the National Bank of Romania, according to the
provisions of the currency Regulation no. 3/1997, with its subsequent
amendments.
Movable goods brought by users, that may be either Romanian individuals

or Romanian legal entities, into the country, on the basis of leasing contracts
concluded with leasing companies that are foreign legal entities, fit into the
framework of the customs regime of temporary admission for the entire
duration of the leasing contract, with total exoneration from payment of
amounts related to the import rights, including customs securities.
Movable goods that are brought into the country by leasing companies that
are Romanian legal entities, on the basis of contracts concluded with users
that are either Romanian individuals or Romanian legal entities fit into the
framework of the import customs regime, with an exemption from the
payment of the amounts related to all import rights.
In the event of the acquisition of goods brought into the country by one of
the two methods set forth above, the users are obligated to pay the customs
fee calculated at the residual value of the good at the time of conclusion of
the sale-purchase contract, which may not be less than 20 percent of the
good's value of entrance.
The subsystems and parts brought into the country by leasing companies for
purposes of manufacturing goods that are to be the object of leasing
contracts are exempted from the payment of customs fees and the value.
References:
Forfaiting: What Finance and Accounting Managers Should Know, Kendall

P. Hill and Murat N. Tanju
Leasing financing
Legal background
Leasing operations carried out on Romanian territory, the types of leasing

operations as well as the authorizing and functioning of leasing companies,
are all regulated by Government Ordinance no. 51/1997, as republished.
Leasing companies
Leasing operations may be carried out in Romania by joint stock companies

Romanian legal entities established and functioning according to the
provisions of company Law no. 31/1990, as republished.
The leasing companies object of activity must include carrying out leasing
activities and they must have a minimum share capital, fully subscribed and
paid in upon establishment, in a value of ROL 500 million.
Leasing operations: forms
The mechanism of leasing operations implies a tripartite structure: the

lessor/sponsor, the user and the supplier, representing an alternative to the
classical method of sale of goods with the payment of the price in
installments. Therefore, the lessor/sponsor transfers to the user, upon the
request of the same, for a definite period, the right of use upon a good the
owner of which the lessor/sponsor is, in exchange for a periodical payment
(leasing rate). Under a contract, the lessor/sponsor undertakes that at the end
of the leasing period, it shall comply with the user's right to opt for one of
the following:
the acquisition of the good;
the extension of the leasing contract;
the termination of the contractual relations.
In the event that the user should choose to acquire the good that was the
object of the leasing operation, upon the expiration of the leasing contract
the transfer of the right of ownership shall be made in exchange for a cash
amount called residual value.
A particular form of leasing is the leaseback or sale and leaseback method.

This leasing form implies the leasing by a company of industrial equipment
that it owns, to a leasing company, to use the same in a leasing system, with
the obligation to later redeem such equipment.
Leasing operations may have as their object immovable goods, as well as

movable goods for long-term use, including in the civil circuit, with the
exception of audio and video recordings, theatre plays, manuscripts, patents
and copyrights.
Ordinance no. 51/1997, as republished, regulates two categories of leasing

operations: financial leasing and operational leasing.
To be included in the category of financial leasing, a leasing operation must

meet the following requirements:
The risks and benefits related to the ownership right pass on to the user
at the conclusion of the leasing contract.
The parties expressly provide that upon expiration of the leasing

contract the right of ownership over the good shall be transferred to the
user.
The user may choose to purchase the good, and the purchase price shall
represent a maximum of 50 percent of the value of entrance (market)
that the same has as of the date when the option may be expressed.
The period of use of the good in a leasing system covers at least 75 percent
of the normal duration of use of the good, even if the right of ownership
over the good is not ultimately transferred.
By comparison, an operational leasing arrangement meets none of the

above-mentioned requirements.
Currency and fiscal aspects
Financial leasing operations concluded between residents and non-residents

must be notified to the National Bank of Romania, according to the
provisions of the currency Regulation no. 3/1997, with its subsequent
amendments.
Movable goods brought by users, that may be either Romanian individuals

or Romanian legal entities, into the country, on the basis of leasing contracts
concluded with leasing companies that are foreign legal entities, fit into the
framework of the customs regime of temporary admission for the entire
duration of the leasing contract, with total exoneration from payment of
amounts related to the import rights, including customs securities.
Movable goods that are brought into the country by leasing companies that
are Romanian legal entities, on the basis of contracts concluded with users
that are either Romanian individuals or Romanian legal entities fit into the
framework of the import customs regime, with an exemption from the
payment of the amounts related to all import rights.
In the event of the acquisition of goods brought into the country by one of
the two methods set forth above, the users are obligated to pay the customs
fee calculated at the residual value of the good at the time of conclusion of
the sale-purchase contract, which may not be less than 20 percent of the
goods value of entrance.
The subsystems and parts brought into the country by leasing companies for
purposes of manufacturing goods that are to be the object of leasing
contracts are exempted from the payment of customs fees and the value
Review Questions:
Present the Mechanism of Cheque Payment.

Analyze in parallel the Bill of Exchange and Cheque Payment
Mechanisms.
Present the advantages and disadvantages of using Letters of Credits in
Export Operations.
SELECTIVE BIBLIOGRAPHY
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3rd edition, Addison Wesley, 1998
2. Asheghian, P., International Business: Economics, Environment and
Strategies, XXVI, Harper & Row, Philadelphia, US, 1990
3. Ball, Donald A.; McCulloch, Wendell H., International Business:
The challenge of global competition, XXV, Irwin, Chicago, US, 1996
4. Beeth, G., Distributors finding and Keeping the Good Ones,
H. P. Thorelli, 1985
5. Bennett, Maureen, Managing Growth, Pitman, 1991
6. Bradley, F., International Marketing Strategy, Ed. Prentice, 1991.
7. Branch, Allan E., Export Practice and Management, Chapman & Hall,
1994
8. Branch, Allan E., Import/Export Documentation, Chapman & Hall,
1989
9. Bucklez, Peter J.; Ghauri Pervey, The Internalization of the Firm, 1994
10. Ciurel, Violeta, Asigurri i reasigurri: abordri teoretice i practice
internaionale, Bucureti, Editura All Beck, 2000
11. Cranswick, Dawn, Managing Quality for the First Time, Pitman, 1995
12. Daniels, J., International Business, Pearson Education, 2004
13. Deleanu, Sergiu, Contractul de comer internaional, Editura Lumina
Lex, Bucureti, 1996
14. DeWit, Bob; Mezer, Ron; Heugens, Pursey, Strategy: Process,
content, context and international perspective, XXVI, International
Thomson Business Press, London, GB, 1998
15. Diaconescu Mariana, Bnci, sisteme de pli, riscuri, 1999
16. Donath Liliana, eulean Victoria, Cerna Veronica, Operaiuni, instrumente
i riscuri n sistemele de pli, Editura Mirton, 1999
17. Dressler, David, and Carns, Donald, Sociology, the Study of Human
Interactions, Alfred A. Knopf, New York, 1969.
18. Dudley, J. W., How to Promote your Own Business, Kogan Page, 1989.
19. Dudley, J. W., Strategies for the Single Market, Chartered Institute of
Management accountants and Kogan Page, 1989
20. Dudley, J. W., Successful Exhibiting, Kogan Page, 1990
21. Dudley, James, Exporting, Pitman, 1989
22. Gesteland, Richard R., Cross Cultural Business Behavior, Copenhagen
Business School Press, 1996.
23. Gibson, Robert, Intercultural Business Communication, Cornelsen &
Oxford University Press GmbH & Co., Berlin, 2000.
24. Graham, Smith; Sampson, Paul, Exporting for the First Time, Pitman.
25. Grant, David; McLarty, Robert, Business Basics, Oxford University
Press, Oxford, 1995
26. Grimwade, Nigel, International Trade: New patterns of trade,
production and investment, Routledge, London, 2000
27. Harrison, Andrew; Dalkran, Ertuagrul; Elsey, Ena, Internatinal
Business: Global competition from a European perspective, Oxford
University Press, New York, 2000
28. Hill, C, International Business: Competing in the Global Marketplace,
Irwin, Boston; US, 1997
29. Hill, C., W. L.; Jones, Gareth R., Strategic Management Theory:
An Integrated Approach, XVIII, Houghton Mifflin Company, Boston,
US, 1989
30. Hinkelman, Erdwaed G., Pli internaionale, Editura Teora, Bucureti,
2000.
31. Hofstede, Geert, Cultural Consequences: Comparing Values, Behaviors,
Institutions, and Organizations Across Nations, 2nd edition, 2001.
32. Hofstede Geert, Motivation, Leadership, and Organization: Do American
Theories Apply Abroad?
33. Hood and Young, Management Strategy, 1984.
34. Irwin, David, Planning to Succeed in Business, Pitman, 1995
35. John N., Megatrends The New Directions Transforming Our Lives,
Warner Books, Copyright 1982
36. Lewis, Richard D., When Cultures Collide, Nicholas Brealey Publishing,
2000.
Selective Bibliography
37. McAuley,Andrew, International Marketing; Consuming Globally,

Thinking Locally, John Wiley & Sons, 2001
38. Negru Mariana, Pli i garanii internaionale, Editura tiinific,
Bucureti, 1996
39. Nistorescu, Nicolae, Ghidul importatorului i exportatorului romn,
Editura Tribuna Economica, Bucureti, 2000
40. Noonan, Chris, The CIM Handbook of Export Marketing: A practical
guide of opening and expanding markets overseas, Butterworth-
Heinemann, Oxford, 1999
41. Petrescu, Viorel; Srbu, Roxana; Tomoiosu, Nora, Export-Import
Commodity Expertise, Editura ASE, Bucureti, 2004
42. Phatak, Arvind V., International Dimensions of Management,
4-th edition, South-Western College Publishing, 1995.
43. Popa, Ioan; Filip, Radu, Management Internaional, Editura Economic,
Bucureti, 1999
44. Popa, Ioan, Tranzacii de comer exterior, Editura Economic, Bucureti,
2002
45. Porter, M.; Michael E. Porter, On Competition and Strategy, Harvard
Business Scholl Press, Boston, US, 1991
46. Porter, M., Competitive Advantage, Free Press, New York, NY, USA,
1985.
47. Porter, M.; Millar, V., How Information Gives You Competitive
Advantage, Harvard Business Review, July-August, 1985, pp. 149-160.
48. Rodrigues, Carl, International Management A Cultural Approach,
West Publishing Company, 1996.
49. Royce, David, Successful Exporting for Small Businesses, Letts, 1990
50. Stannack, Peter, Managing People for the First Time, Pitman, 1993
51. Tennent, John; Graham, Friend, Guide to Business Modelling,
Economist, London, 2001
52. Thayer, Nathaniel B. and Wisse, Stephen E., Japan: The Changing
Logic of a Former Minor Power
53. Thomas, D. J.; Derek, John, Commerce and Business, Edinburgh,
W & R Chambers, 1989
54. Tropmenas, Fons, Riding the Waves of Culture: Understanding

Cultural Diversity in Business, The Economist Books, London, 1993.
55. Warson, A., Finance of International Trade, Charter Institute of
Bankers, London,1992
56. Whitehill Arthur M., American Executives through Foreign Eyes,
Business Horizons (May-June 1989), p. 44.
CASE STUDY
ORGANIZATIONAL CHANGE AT ROYAL DUTCH-SHELL
The Anglo-Dutch company Royal Dutch-Shell is the world's largest no

state-owned oil company with activities in more than 130 countries and
1997 revenues of $128 billion. From the 1950s until 1994, Shell operated
with a matrix structure invented for it by McKinsey, a management-
consulting firm that specializes in organizational design. Under this matrix
structure, the head of each operating company reported to two bosses. One
boss was responsible for the geographical region or country in which the
operating company was based, while the other was responsible for the
business activity that the operating company was engaged in (Shells
business activities included oil exploration and production, oil products,
chemicals, gas, and coal). Thus, for example, the head of the local Shell
chemical company in Australia reported both to the head of Shell Australia
and to the head of Shell's entire chemical division, who was based in
London. Both bosses had equal influence and status within the organization.
This matrix structure had two very visible consequences at Shell. First,
because each operating company had two bosses to satisfy, decision making
typically followed a pattern of consensus building, with differences of
perspective between country (or regional) heads on the one hand and the
heads of business divisions on the other being worked out through debate.
Although this process could be slow and cumbersome, it was seen as a good
thing in the oil industry where most big decisions are long-term ones that
involve substantial capital expenditures and where informed debate between
different viewpoints can clarify the pros and cons of issues, rather than
hinder decision making. Second because the decision-making process was
slow, it was reserved for only the most important decisions (such as major
new capital investments). The result was substantial decentralization by
default to the heads of the individual operating companies, who were largely
left alone to run their own operations. This decentralization helped Shell
respond to local differences in government regulations, competitive
conditions, and consumer tastes. Thus, for example, the head of Shell's
Australian chemical company was given the freedom to determine pricing
practices and marketing strategy in the Australian market. Only if Shell
wished to undertake a major capital investment, such as building a new
chemical plant, would the consensus-building decision making system be
invoked.
As desirable as this matrix structure seemed to many, in 1995 Shell

announced a radical plan to dismantle it. The primary reason given by top
management for the shift was continuing slack demand for oil and weak oil
prices, which had put pressure on Shell's profit margins. Although Shell had
traditionally been among the most profitable oil companies in the world, in
the early 1990s its relative performance began to slip as other oil companies,
such as Exxon, adapted more rapidly to a world of low oil prices by sharply
cutting overhead costs and consolidating production in efficient facilities.
Consolidating production at these companies often involved serving the
world market from a smaller number of large-scale refining facilities and
shutting down smaller facilities. In contrast Shell still operated with a large
head office, which was required to effect coordination within Shell's matrix
structure, and substantial duplication of oil and chemical refining facilities
across operating companies, each of which typically developed the facilities
required to serve its own market.
In 1995, Shells senior management realized that lowering operating costs

required a sharp reduction in head office overhead and, where appropriate,
the elimination of unnecessary duplication of facilities across countries. To
achieve these goals, top executives decided to reorganize the company along
divisional lines. Shell now operates with five main global product divisions-
exploration and production, oil products, chemicals, gas, and coal. Each
operating company reports to whichever global division is the most relevant.
Thus, the head of the Australian chemical operation now reports directly to
the head of the global chemical division. The thinking is that this will
increase the power of the global chemical division and enable that division
to eliminate any unnecessary duplication of facilities across countries.
Eventually, production may be consolidated in larger facilities that serve an
entire region, rather than a single country, thereby enabling Shell to reap
greater scale economies.
The country (or regional) chiefs remain but their roles and responsibilities
are reduced. Now their primary responsibility is coordination between
operating companies within a country (or region) and relations with the
local government. There is a solid line of reporting and responsibility
between the heads of operating companies and the global divisions and only
a dotted line between the heads of operating companies and country chiefs.
Thus, for example, the ability of the head of Shell Australia to shape the
major capital investment decisions of Shell's Australian chemical operation
was substantially reduced as a result of these changes. Furthermore, the
simplified reporting system reduced the need for a large head office
Case Study
bureaucracy, and Shell trimmed the work force at its London head office by
1,170, driving down Shells cost structure.
2004 STRATEGY REVIEW
The Exploration and Production (EP) portfolio today generates significant

cash flow from core producing areas. Though the overall resource base
remains significant, proved reserve life is relatively low and it is essential to
convert existing resources into proved reserves and production. EP will
invest $10 billion a year (including exploration) in sustaining profitable core
areas, in growing integrated gas positions and large-scale oil projects, and in
maturing additional unconventional oil production. New investment and
business development will target areas with growth potential and exposure
to price upside.
Production in 2004 will be between 3.7 and 3.8 million barrels of oil
equivalent (boe) per day, and between 3.5 and 3.8 million boe per day in
2005 and 2006. Production is expected to grow to between 3.8 and
4.0 million boe per day by 2009.
Exploration will focus on big cat wells (with prospects greater than 100
million boe Shell share), with spending levels approaching $1.5 billion per
year. Over 260,000 km2 of acreage has been acquired with the potential to
deliver some 30 big cat prospects. Looking forward, 15-20 big cat wells per
year are planned.
Shell Gas & Power is the worlds largest supplier of liquefied natural gas
(LNG) and the second largest natural gas producer, with leading positions in
the worlds key markets. There is a strong track record in the delivery of
LNG projects and expect to increase capacity by 14 per cent per year
between 2003 and 2008. Leading the development of the potentially major
Gas to Liquids industry is in process.The strategy is to draw on a global
portfolio, market access, attractive customer propositions and leading
technology to monetise and add value to Shells upstream reserves and to
capitalise on the future growth in global gas demand.
More profitable downstream
The downstream businesses provide significant cash and earnings for the
Group and hope that success to generate future growth. A key priority will be
the integration of the oil Products and Chemicals businesses into a simplified
downstream business from 2005. Work will also continue to restructure the
portfolio and to divest underperforming assets. Improvements in operational
performance will be underpinned by simplifying and standardising business
processes in the new global structure.
Capital investment in the downstream will be targeted at markets where
strong growth in demand is expected. By 2010, about 40 per cent of Oil
Products assets and 35 per cent of Chemicals assets are expected to be in the
Asia Pacific/Middle East region.
RAISING THE PERFORMANCE BAR
Improved performance will underpin all of activities with the goal of

achieving top quartile performance in all our businesses. This will include a
particular emphasis on delivering projects on time, to specification and
within budget. That performance will also help to deliver competitive
returns with strong cash generation to fund growing dividends and
investment.
FINANCIAL FRAMEWORK
All this work will be carried out in the context of growing demand for
hydrocarbons around the world, accompanied by a structural shift to higher
oil prices. Increasing our capital investment to some $15 billion per year, of
which $11.5 billion will be spent in the upstream, while continuing to
manage our portfolio with divestments of $10-12 billion over the period
2004 to 2006 was a key point.
The company will continue to grow the dividend at least in line with local
inflation over time; invest in existing and new business growth; and
maintain a strong balance sheet. If additional cash is available, our strategy
will be to balance further high value capital investment opportunities with
returns to shareholders.
Shell Considers a New Structure 1
Industrial complex
Energy titan Royal Dutch/Shell Group operates under a complicated
structure that spans the Netherlands and Britain.
1
Wall Street Journal Europe, June, 2004
Case Study
740,000 shareholders 240,000 shareholders

Royal Dutch Petroleum Shell Transport & Trading Co.
Co. (Netherlands) (U.K.)
60% 40%
Royal Dutch/Shell Group of Cos.
Service Companies
Shell Petroleum NV Shell Petroleum Co.
Netherlands Advice and services U.K.
Operating companies
Exploration
Gas and Oil Other industry
and Chemicals
power products segments
production
This version would eliminate directors Special Shares; unified Board Is

Possible.
Many have called for deep changes at the Anglo-Dutch oil company after its
energy-reserve accounting scandal this year. Several executives said previously
that they had begun reviewing the companys structures for possible changes.
Royal Dutch Petroleum Co. of the Netherlands and London-based Shell

Transport & Trading Co. jointly own Shells operating companies 60-40,
respectively. The company is run by a committee of managing directors, a
group of executives who owned the groups top management body. The
committee answers to separate teams from each parent company.
The nearly century-old structure has already drawn complaints from

investors for being anachronistic and opaque.
The criticism intensified earlier this year after Shell disclosed it had greatly
overstated its reserves of oil and natural gas. Shell has since made minor
changes to its structure, including the naming of a no executive chairman to
its British parent.
In a statement Thursday, Shell said a steering committee of board members

is considering a number of alternative structures, including a chief executive
who would report to a unified board. Nothing is ruled out at this stage, the
statement said.
Still, it is unclear whether Shell will act fast enough to satisfy shareholders.
Shell said it would disclose the results of its structural review in November
and consult shareholders further about possible choices. Shell said it expects
to be able to begin implementing changes after its annual general meeting in
2005. Shell also said it would propose abolishing priority shares at that
meeting. Priority shares are controlled by Royal Dutch directors and give
holders disproportionate power in picking new board members.
In meetings with big investors in recent weeks, Shell declined to discuss its
overhaul review in any detail, refusing even to name executives who were
part of a steering committee looking at options. That position prompted a
public rebuke by two influential us. investors. Eric Knight, managing
director of Knight Vinke Asset Management, a corporate-governance
activist fund, and Ted White, director of corporate governance at the
California Public Employees' Retirement System, chastised Shell for a lack
of transparency in a letter published Wednesday in the Financial Times.
The two called on Shell to disclose the names of members of the steering
committee and to detail the groups scope. Shell said Thursday that the
group included Jeroen van der Veer, chairman of the committee of
managing directors, and four no executive board members.
Case Discussion Questions
1. What were the benefits of the matrix structure at Shell? What were the
drawbacks? Did the matrix structure fit the environment of the global
oil and chemical industries in the 1980s?
2. What shift occurred in Shells operating environment in the 1990s?
How did this shift affect the financial performance of the firm? What
does this suggest about the fit between strategy and architecture?
3. What kind of structure did Shell adopt in 1995? In what ways did the
architecture of Shell's organization after 1995, differ from that before
1995?
4. Comment on the fit between operating, environment, strategy, and
organizational architecture at Shell after the 1995 reorganization.
Did the change lead to enhanced fit?
Case Study
SC Duo Business Impex Ltd. was set up at the end of the year 1999,
according to art 39, Law 32/1990 republished, as well as to OUG 76/2001.
It has two founding members, equally sharing its social capital and the
rights and obligations arising from the administrative qualities.
The two associates decided to start the activity in the import-export field
because they both had prior experience in this domain. They also took into
consideration, from the very beginning, the possibility to extend their
activity in other fields as well, such that they insured a higher flexibility
from the legal point of view.
The Specific Activity of Duo Business Impex Ltd
CARACTERISTICS MANAGERIAL IMPLICATIONS

it is not necessary to use its own
financing resources for
investments in the merchandise
fund
it is not necessary that the working it is the result of the general and unitary
capital is distinctly emphasized in administration of the companys funds
the balance sheet without distinctly separating the
investment funds from the activity
financing funds
no operation on stocks is held the merchandises from suppliers are taken
over immediately at the moment the
respective lots are prepared for export *
it is not necessary to have an these are limited to the current needs such
acquisition department as: consumables, protocol, etc. The needs
of the company are quantified each week
or month, from case to case, and there is
usually taken into account the
quality/price equation.
the goods and services export is it is a recoverable expense from the state
added value tax exempted budget
the total turnover may be
approximated with the production
of the exercise or even with the
gross commercial margin
the company depends, imposes a very rigorous selection of the
considerably high, on the banks banks based on several criteria:
because all financial flows seriousness, rapidity, the level of charges,
generated by it are developed banking commissions, bureaucracy**
through the banking system.
* In extraordinary circumstances, when the merchandise cannot be taken over based on

the established terms, being the fault of the external client (e.g. Last winter the roof
of a deposit crumbled because of the snow) the partner was required to either send
the counter-value of the goods or to pay the storage expenses. Since the situation
lasted more than 1 month, the first solution was more appropriate.
** Here it should be remembered the unpleasant experience of the company in relation

with the Turkish- Romanian Bank, where it initially had the accounts opened and
where only the fast intervention of the associates by the external clients made
possible the suspension of payments in course and the limitation of losses.
General Considerations on Small and Medium Enterprises (SME)
The development of market economy systems in our country can only be

accomplished throughout specific structural modifications, qualitative
changes in economic activities organization and management, stressing on
the private sector which is considered as in integrated part, indispensable to
any developed market economy country, and without which neither the
society nor the market economy can function.
A SME, as a form of a dynamic business life which includes all social and
economic forms of life, is at the same time one of the progress and
development influencing factors in all developed countries. The
development of SMEs in Romania is rendered more difficult because of the
following factors:
Incomplete and sometimes contradictory legislation;
Lack of a clear state system to support the SMEs as well as its
infrastructure;
The ever going inter-connections process for different property forms;
Lack or insufficiency of financial and material resources needed as a
real support in the setting up of a SME;
Weak coordination in personnels training and professional
qualification; as a rule, an activity may become more efficient through
one of these two opportunities:
o New technology and capital infusion;
o Training of human resources capital
During its life, any company will face the need to invest in new
technologies but it is more economic and efficient, with faster
results, to invest in personnels training and improvement of
professional qualifications throughout the introduction of
modern management approaches.
Case Study
Among many other factors that insured the economic success of developed
countries throughout the world, the SME played an important role.
He main functions of enterprising activity can be considered as it follows:

New or better quality goods or services production;
New marketing;
Finding and use of renewable energy and raw materials;
Innovating production methods application and reorganization;
Financial Analysis of Duo Business Impex Ltd
1. Turnovers evolution of the company between 2001-2004 is the

following:
3000000
2500000
2.011.344
2000000
1.511.778
1500000
881.174 1.024.642
1000000
500000
2001 2002 2003 2004
Turnover's evolution in 000 lei
The turnover structure of the company is homogenous, the concentration

coefficient aiming to 1, because it only offered one type of services by now.
In accounting reports, the registrations were done at the level of commercial

margin, the value of the merchandises being recorded in the revenues and
expenses accounts.
2. Turnovers structure on years, comparing with the selling markets

is the following:
2001
Italy USA Belgium
668,329 thousand lei 179,225 thousand lei 33,620 thousand lei
In percentages, the situation is the following:
Turnover percentage on selling markets for the year 2001
4% 76%
20%
Italy USA Belgium
2002
Italy USA Belgium
In percentages, the average turnover in the year 2002 is the following:
Turnover percentage on selling

markets in the year 2002
11%
11% 78%
Italy USA Belgium

Case Study
2003
Italy USA Belgium
In percentages, the defalcation on markets is the following:
Turnover structure on selling markets in the year 2003
30%
56%
14%
Italy USA Belgium
2004
Italy USA Belgium
1.618.888 thousand lei 225,348 thousand lei 167,108 thousand lei
In percentages, the defalcation on markets is the following:
Turnover structure on selling markets in the year 2004
8%
11%
81%
Italy USA Belgium

It can be seen that the dynamic of each market is not revealing a spectacular
development of any of them, but only a constant evolution:
Demerom's Market's evolution
100
80
60 Italy
USA
40
Belgium
20
0
2001 2002 2003 2004
After analyzing the evolutions until now, the associates came to the
conclusion that the strategy initially adopted, meaning to exploit at
maximum a single market, should be reviewed, taking into account the
implementation of services offered on other markets, too. Although efforts
have been done in this direction, as it can be seen from the above graphs, the
situation is not yet satisfying. It is very important to create equilibrium in
this regard because so, the impact that could be caused by the decreasing of
a market can considerably be minimized. The experience of a competition
company should be remembered, Tehnoforestexport, which hardly
recovered after the loss of Russian market, immediately after the year 1990,
being known that this market represented more than 50% from the total
furniture sales of this enterprise. This aspect is however common for several
other economic fields in the post-December period.
Although there are already 4 years from the moment of setting up of the
company, period characterized by both increases and decreases, I consider
that it is still on an increasing trend, being relatively far from its maturity
phase.
Case Study
3. The Net Result of the year, also in the 2001-2004 period, expressed in
thousand lei, is the following:
The net result of the year in 000 lei
200000 177426
150000 112332
84094 105779
100000
50000
0
2001 2002 2003 2004
The net result of the year
4. The premises of accounting information for the analysis

of indicators in the period 2001-2003
Indicator 2001 2002 2003
Sold Production 888174 964382 1317233

Acquisitions (61111) (71001) (92675)
Services (611903) (881542) (902554)
Other expenses (746) - (955)
Taxes (8647) (11839) (21772)
Added Value 205767 254885 299277
Salary expenses (71644) (102101) (158444)
Depreciation (8377) (8594) (8893)
Gross Profit 125746 144190 131940
Financial Revenues 47299 69277 85202
Financial Expenses (44937) (57171) (55332)
Extraordinary Revenues 42017 - -
Extraordinary Expenses (58000) - (18000)
Income tax (28031) (43964) (38031)
Net Profit 84094 112332 105779
Return on Social Capital: ROSC = Net Profit/Social Capital
ROSC 2001 ROSC 2002 ROSC 2003

42.04 56.16 52.88
Using the same initial social capital, the company succeeded to increase its
net profit within the analyzed period of time.
Return on Owners Equity: ROE = Net Profit /Owners Equity
ROE 2001 ROE 2002 ROE 2003

1.58 1.01 54.97
Although the net profit of the company increased each year, it was needed
the increase of owners equity too, and this is why this indicator has
descending results.
Profit Margin: PM = Net Profit/ Added Value
PM 2001 PM 2002 PM 2003

0.40 0.44 0.35
Gross Surplus from Operations: EBE = Added Value Salary Expenses
EBE 2001 EBE 2002 EBE 2003

134123 152784 140833
Total Gross Surplus:
EBG = EBE + Financial Revenues + Extraordinary Revenues

Extraordinary expenses
EBG 2001 EBG 2002 EBG 2003

165439 222061 208035
Auto-financing Capacity: CAF = EBG Financial Expenses. Income tax
CAF 2001 CAF 2002 CAF 2003

92471 120296 114672
Case Study
The company improved every year its auto-financing capacity.
As a rule, companys policy was to pay all its fiscal obligations in time, but
the owners did everything they could from the legal point of view to
minimize the amount of taxes owed to the state for the obtained profit.
(income tax)
The Commercial Analysis
Based on the economic opportunities, the associates decided the orientation

of companys activity on export-import area and more specific, on furniture
and wood products exports on the following main markets: Italy, Belgium
and USA. At the moment the company tries to enter the Northern markets.
Until the year 2002 the exports have been realized by the company having
the quality of COMMISSIONARY EXPORTER by the Romanian
producers. From this year on, it gave up this system and orientation on the
net export of services, including:
Finding of producers for foreign clients according to the requested
products (models, quantities, specific requirements).
Consultancy service for the foreign partners.
Supervising the contracts carrying on.
Assuring of the qualitative control of merchandises before the delivery.
Verification of documents that travel with the merchandise.
This change is more formal than it seems because no major changes have
been done but only in the form and circuit of documents. The most
significant aspect of this procedure is however the decreasing of risks such
as:
As an exporter, the company was directly responsible in front of the

financial-banking institutions with the repatriation of foreign currency
at a specific date; the delays facilitated the penalties and a whole series
of justifying documents had to be presented;
Non-payment risk caused by independent reasons form the companys

activity (non-payment caused by reclamations on merchandises that had
latent defects).
Developing plan for each range of products / country
2005
Case Study
2006
2007
Case Study
The company continues to carry on a marketing activity on external markets

in order to support and promote the furniture exports, for the identification
of potential clients and new markets and, in general, of new opportunities.
The marketing activity continues also on the internal market for the
identification of most competitive producers and sellers of services and/or
collateral products with the export activity and at the same time for the
awareness of services offered by the company.
The Analysis of Suppliers and Sub-Contractors of the Company
It must be specified from the very beginning that this is the most difficult
thing to be done and creates the biggest problems for the company.
Theoretically, all furniture producers are or may become the suppliers of the
company at a specific moment in time.
Each foreign client comes with a scale of new models/products for the
producer and this is the reason why the quality of a product already
manufactured by a producer is a relative criterion that does not guarantee the
quality of a future production at the level desired by the client. A supplier
will be chosen according to his technical possibilities, seriousness and level
of prices.
The choice of a supplier is based on the following criteria:
A producer with whom the company has already collaborated in the

past at a satisfying level will be chosen.
The choice is done based on the recommendations of a person from the
same field who knows very well the producer.
In case of more complicated products, the producer with the highest
level of technology will be chosen, even if it will be the first
collaboration with that supplier.
Randomly, when the foreign client is the one who chooses certain
products from the presentation catalogue of a certain supplier. These
cases are however very rare and almost all the clients of the company,
no matter the market they come from, require exclusive products.
The company acts in the following way in most of the cases, whishing the
best quality at the most competitive prices:
Offer requests are sent to several potential suppliers, sometimes up to

10-15 offers at once.
The received replies are analyzed, the main selection criteria in this
regard being the nearest prices to the offer request and the samples
manufacturing will then be ordered.
After the manufacturing of the samples the optimum supplier will be

chosen according to the quality offered and his productive capacity.
This system allows that, in cases when the deliveries from the chosen
supplier will no longer be performed for several reasons, this will be
substituted with another one, already knowing his quality level and the
potential contracting conditions required.
Many of the known suppliers pass through difficult periods of time from the
financial point of view because of the economic situation characterized by
major changes. This is the reason why a great importance is shown to the
choice of producer since, once the contract concluded, the producer must
have the necessary resources for its execution. Most of the time the
producers are classified on risk categories from the point of view of the
capacity to carry on the contract.
10% 10%
30% 50%
Reliable Suppliers Medium Risky Suppliers

Highly Risky Suppliers Unknown Suppliers
Case Study
The economic environment can also cause the bankruptcy of some very well
known suppliers and at the same time the appearance of some other new
producers. For this reason specialty reviews should always be monitored
and the information gathered from several sources must be correlated.
The travels of the associates on site have many times the purpose to visually
verify the existence and endowment of different suppliers and also to update
the information.
At this moment, due to the current economic situation, the competition is

low comparing to the number of suppliers and their capacity: several of
them are not covered with orders at a satisfying level.
The negotiation power of the company depends most of the time on the
negotiation power of the client it represents: his financial position, the
requested model-style, number of orders and also the length in time of these
orders are key-elements.
Once the contracts have been signed, the periodical payments are made
sometimes once a week, to each supplier in order to assure the observance
of the established conditions by all parties.
At each inspection a Finding Statement will be drawn up in which there will

be mentioned the number of products found, the manufacturing stage and
the products quality.
By analyzing these Finding Statements and correlating them it may be

assessed whether the delivery terms will be observed or the length in time of
the delay. The situation will be communicated in writing to the foreign
partner and this one, as the beneficiary of the merchandizes will take
appropriate measures. From own experience it was noticed that these
periodical inspections have also a preventive role. Usually, the qualitative
curve of the production shows that after the observations and analyzes of the
first samples, the quality level is high following then a decreasing period of
2-3 months and it ends by stabilizing after the first deliveries.
Any complain received from the foreign partner, either qualitative or

quantitative, is accompanied by proving documents (for eg. The
Merchandizes Reception Statement, photos, and eventually statements of
independent third parties) and it must be presented within the legal terms
stated in the external contracts. Trade usages stipulate a 30 days term for
furniture for the wording of quantitative and qualitative complains and a

90 days period for latent defects, the period being calculated from the
moment the goods have been received. Then it will be translated and handed
over to the producer who, in his turn, must present the official reply in
writing usually within 30 days.
Samples First First Series Series

deliveries deliveries
Quality curve from the launching into production of

samples until the series delivery
In cases when these complains cannot be solved by mail they will be settled
through direct negotiations between the parties involved.
Taking into consideration their importance in this field, the settlement of

complains are stipulated in several chapters in trade contracts.
E. Companys Activity Adaptation to Clients Specific Needs
In order to help the foreign clients, through offering a better level of

consultancy, the company tried to create a data base containing:
Massive and combined furniture producers, structured on products

ranges (eg. living-rooms, bedrooms, kitchens, small furniture,
upholstered furniture, gardening furniture, etc) and on wood essences
used. Observations regarding the technical endowments and flexibility
of managerial politics are specified for each producer.
The road transporters selected and grouped according to the quality of

transport means, prices and preferential destinations.
Producers of different materials used in the furniture industry: fabrics

and furniture materials; varnish, diluted solution, adhesives; extension
mechanisms; etc.
Case Study
The data base is permanently updated and adapted, containing a simple and
useful working instrument.
Not taking into consideration the specific of each market (for example the
Italians prefer the furniture with a very simple line, called Arte Povera,
manufactured from poplar or lime wood, with a great accent on the quality
of finishing workings, while the Belgians prefer the furniture from beech or
oak wood in classic style and the Americans commercialize huge quantities
of superposed beds which must integrate in some very strict norms) all
clients have the same requests: quality, observed delivery terms and
competitive prices.
If in the case of prices these are negotiated in the pre-contractual phase, for
the assurance of compliance with the desired level of quality there are in
each productive unit sample-witnesses approved and notified by the final
beneficiary for each manufactured product. For the observance of delivery
terms, these are not imposed by anyone, but they are communicated by the
producers who know or should know the best their internal possibilities. In
order to prevent unhappy surprises, in some cases the company takes into
consideration at least a few more days from the communication of delivery
terms.
Beside this, all contracts signed have stipulations regarding coercive and
punitive measures that- although seldom applied- have a preventive role.
However, from its own statistics, the majority of problems that appeared
during the carrying on of contracts are the subject of non-observance of the
imposed quality level:
Percentage of causes that generated problems in

the carrying on of the contracts
90
8 2 Reasons
Quality Delivery Terms Others

In order to assure the fluency and optimization of productive cycle, a

division of a program was tried on several producers (usually 2-3) but this
idea did not work because there are always big differences concerning the
accuracy of finishing workings execution which are not accepted in a
homogenous program.
When the range of products does not raise problems and the contract
stipulates serious orders which exceed the production capacity, it will be
proposed to the supplier to extend his productive capacity and if he does not
have the necessary own resources, then a counter-party will be negotiated
with the foreign client in the following manner: machines and equipment for
merchandizes.
There have been done investments in efficient automobiles that allow the
rapid access in territory, with low fuel consume and comfortable because
the activity of the company includes the need of traveling together with the
clients and thus the realization of the established purpose should be assured
at the destination (merchandize control, negotiations, etc).
At the same time, in order to assure a fast and efficient communication, a

good administration of data basis and the identification of new
opportunities, a high-technology computer was also purchased.
Although English was imposed as the official language mainly used in trade
contracts, for a better approach toward the foreign client, the associates try
to communicate in clients own language, and thus the two owners do a
considerable effort in learning new foreign languages and in improving the
already known ones.
The World Furniture Commerce (Circumstances Situation)
Furniture has a major weight in world commerce due to both its value and
volume. The main furniture producers, in descending order, are: USA,
Germany, Italy, England, France, Japan and Canada, countries which gather
around 60% of the world market. Other 20% are owed by the rest of
developed countries and only 20% from the world production is realized by
the developing countries. From this last category, 3 main countries are the
leaders: China, Mexico and Poland who develop in a sustaining rhythm,
with an export orientation.
Case Study
From the geographic point of view, the furniture production is divided as it

follows: 40% in West Europe, 6% in East Europe, including Russia, 24% in
Asia, 26% in North America and 4% in South America.
The main importing countries are: USA, Germany, France, England,

Canada and Japan and the main exporting countries are: Italy, Germany,
Canada, China, USA, France, Poland and Mexico.
European Furniture Market 2003
Almost all European countries registered negative trends during 2003.
Total European furniture production value should have decreased to 3.5%

during 2003 (76.8 billion Euros). This is the second consecutive decrease
(estimated at around 5% of the total volume).
This fact was determined by the slack demand in almost all European
countries and by the negative exports on the main traditional markets
outside EU.
EU Furniture production in billion Euros
82.2
90
81.5
79.5
78.2
76.8
75.7
73.5
80
71.6
70.1
69.2
68.9
67.8
67.8
65
70
59.6
54.3
60
48
44.1
41.9
50
40.4
40
30
20
10
0
19841985198619871988198919901991199219931994199519961997199819992000200120022003
Year (EST)
EST= estimates (EST )
Year
During the first half of the year 2003, furniture exports in countries outside
EU began to diminish although the situation may differ from country to
country. Norway, Russia, Japan and, at a lower level, the new member states
continued to remain markets of interest. However, exports to the Unites
States (a quarter of total exports) continued their decrease (15% as value
and 4% as volume).
Total export outside EU decreased by more than 4% in value, that amounts

to around 9 billion Euros.
Imports from Poland, China and Czech Republic increased by more than
10% while imports from other countries registered limited increases.
Imports from Poland increased by almost 13% as value (and volume) and
must have exceeded 2,700 billion Euros in 2003.
Imports from China exploded (+34% as value and +45% as volume). It must
have reached a 2 billion Euros level during 2003.
Furniture imports from outside EU countries. First half of the year 2003
Billion Euros
First First
First half
half % % half % Deviation
2002
2001 2003
POLAND 1,005.1 20.8 1,214.8 20.4 1,365.4 20.8 12.4

China 580.6 12.0 722.3 12.1 967.1 14.7 33.9
Czech Rep. 428.7 8.9 490.4 8.2 509.2 7.7 3.8
Indonesia 456.0 9.5 412.8 6.9 430.4 6.5 4.3
Slovenia 266.9 5.5 268.8 4.5 272.4 4.1 1.3
Romania 232.5 4.8 262.2 4.4 279.1 4.2 6.5
Others 2,628.2 54.5 2,588.7 43.4 2.751.2 41.8 6.3
Total
5,598.0 116.1 5,959.9 100.0 6,574.8 100.0 10.3
Euros
Total imports exceeded 13 billion Euros (+10% comparing to 2003).
The same as in the previous years, imports increase rate is positive while
exports trend is in a structural decline. This situation determined an
increasing deficit of commercial balance which exceeded in 2004 the
amount of 4 billion Euros.
Case Study
Furniture commerce of countries outside EU in billion Euros
13100
14000
11617
10842
10450
12000
9904
9829
9920
8950
8135
10000
7993
7499
7547
6854
6748
8000
6115
5842
5784
5185
4951
4927
5024
4872
4973
4276
6000
1071 3902
3935
3542
3157
2544
2708
2407
2316
4000
1927
2028
1907
1763
1839
1330
751
2000
Exports
0
-142
-530
-938
-2000
-1788
-4150
-4000
-6000
1989 1991 1993 1995 1997 1999 2001 2003
(EST)
Yea r s
Exports Im ports Balan ce
In 2003, furniture production industry value in Italy decreased by 4.1%

comparing to 2002, reaching 20.2 billion Euros. This situation was
influenced by an exports strong decline: they decreased by 5.1% at
10.7 billion Euros. At the same time, imports increased by 8.5% at around
1.7 billion Euros.
In Germany, furniture production industry value in the year 2003 decreased

by only 2.4% comparing to 2002. Upholstered furniture and mattresses
sector met increases (+2.3% & +5%), while kitchen and household furniture
production continued to decrease. Office furniture was still unfavorable
(12.8%).
Exports decreased by 5.4% at around 4,990 billion Euros while imports

remained slacked at the same level as in 2002 (6,830 billion Euros).
Furniture production in EU countries in billion Euros. Deviations: 03/02
20,2
25 5
19,8
3,0
'03 '03/02
2,5
20
1,5
1,3
1,2
1,0
0,0
-0,5
0
-1,0
-1,1
15
-2,4
8,6
8,5
8,0
-4,1
10
-5
-6,1
2,6
2,6
2,2
2,2
2,0
-7,5
5
1,3
1,2
0,8
0,5
0 -10
A
I
S
P
D
SF
ES
L
NL
R
UK
DK
IR
B+
G
I = Italy D = Germany F = France
ES = Spain UK = United Kingdom NL = Netherlands
DK = Denmark B + L = Belgium + Luxemburg
A = Austria S = Sweden P = Portugal
SF= Finland GR = Greece IRL = Ireland
In France, during the first 10 months of 2003, furniture production value

decreased by 6.1% comparing to the same period of the year 2002. Low
demand on both internal and external markets strongly affected all sub-
sectors except kitchen sector (+1.6%). Household furniture production
decreased by 6.7%, upholstered furniture by 4.4%, mattresses production by
4.8% and office market by 8.7%.
In United Kingdom, furniture production value increased by 1.1% for the

first half of the year 2003 comparing to the same period of the year 2002
(1% expressed in Euros). This slow increase was influenced by the
individual consumption (Great Britain seems to avoid decline although the
consumption decreases), as well as by exports. The increase of imports was
mainly influenced by imports increase from Italy and other non-EU
countries.
Case Study
In Spain, furniture production value slightly increased by 1.3% at around

8,492 billion Euros. Furniture export slacked for the first 10 month of 2003
(comparing to the same period of the year 2002, at 1,242 billion Euros).
The main countries receiving its exports were France (29% from total
exports), followed by Portugal (15%) and Great Britain (7%). Imports
registered almost the same values as exports (+25%), reaching an almost
zero commercial balance for the first time; strong imports from China
(13 from total imports) partially explain this new situation.
In Netherlands, furniture producers, with more than 20 employees,

turnover decreased by 7.5% in 2003. Exports increased by 5.1% at around
737 billion Euros, Belgium and Germany being the most important partners
(29% of total exports, respectively 24%).
Imports also increased by 5.9% at around 1,700 billion Euros: 29% of

imports came from Germany followed by Belgium with 13%.
In Belgium, furniture industry turnover decreased by 1.2% during the first

half of 2003, comparing to the same period of the year 2002; this decrease
was influenced by both the difficult situation of household and office
furniture sectors and by the decline of its traditional markets. A better
situation was registered for the upholstered furniture (+1%), kitchen
furniture (+3%) as well as for mattresses furniture (+6.2%). During the same
period of time, exports decreased by 7.2% and imports by 2.6% while
internal market demand slacked.
Danish furniture producers exported goods of around 2.3 billion Euros in

2003. This represents a 1.2% increase comparing to 2002, conforming the
ability of this industry to maintain its influence over exporting markets, in
spite of foreign trade difficult situation. Positive results in 2003 were mainly
due to the increase trend of discounted furniture sold. Production sold to its
neighboring Scandinavian markets continued its stabilization trend noticed
in the past years while Swedish market registered a particular increase by
13%. The estimates show a production increase by 1.5% in 2003 that
amounts to around 2, 6 billion Euros.
Figures of 2003 show a continuous increase of furniture exports out of

Austria. For the first 6 months of 2003, furniture value exported only
in EU countries amounted to around 574 billion Euros, increasing by 28%

comparing to the equivalent period of 2002. Germany and Italy remained
the main exporting countries. Exports increase may be explained by new
EU markets penetration as well as by the demand increase for Austrian
furniture in Ireland and Finland. More over, the Austrian market registered
impressive revenues of around 20% which indicate a good future evolution.
Most important exports were registered to Hungary (52 billion Euros) for
the first half of the year 2003, followed by Slovakia and Poland.
Imports slacked at around 730 billion Euros for the first half of the year
(imports from Germany amounted to 43%, while from Poland to 13%).
According to a study realized by the Austrian furniture industry during the

last trimester of the year 2003, most of the producers expected a
considerably improvement of the current situation for the year 2004.
In Sweden, furniture sales decreased by 3% during the first 8 months of the

year 2003. Both imports and exports faced decreases.
In Finland, production increased by 1.5% at around 1,150 billion Euros.

Exports have been maintained at the same levels as those of 2002
(275 billion Euros, with Sweden and Russia as main partners). Imports
registered 349 billion Euros (+1%), while Sweden and Estonia gathered haft
of total imports.
In Poland, furniture industry had a good evolution, mostly due to the

fact that Euros registered a 25% increase per zlot, which meant cheaper
exports in EU countries (representing three quarters form total production
and registered a12% increase). Production value increased by 12%
(3.3 billion Euros).
In Czech Republic, furniture production value reached 1.5 billion Euros

(+2.1% comparing to 2002). 73% of total production (1,100 billion Euros,
1, 8% comparing to 2002) was exported mostly I Germany and Belgium.
Imports decreased by 4.8% at around 400 billion Euros (35% from
Germany, 30% from Russia and CEI states and 20% from Poland).
Case Study
In Romania, production value registered one of the most increasing rates

(+7.3% at around 895 billion Euros), due to strong exports mostly in
EU countries (699 billion Euros, meaning 7.1% increase). Imports
continued their boom registered also in the past year, amounting to a total of
125 billion Euros (+19%, mostly from Italy, Poland and Germany).
Furniture Production in the other European Countries in billion Euros
3500 3300 45
41,0 40
3000 '03 '03/02 35
30
2500 25
22,0 20
2000 15,0 15
12,0 12,0 11,310
1510 7,3 5
1500 2,1 1,1 0
895 -5
1000 755 695 -10
430 398 -15
500 290 275
139 -20
-25,0 -25
0 -30
PL CZ ROM SLV SK BG HU LT EST LV
PL = Poland CZ = Rep. Czech Republic ROM = Romania

SLV = Slovenia SK = Slovakia BG=Bulgaria HU = Hungary
LT = Lithuania EST = Estonia LV = Leetonia
Furniture industry in Slovakia registered one of the fastest increases in the

world for this type of industry for the last three years. In 2003 its production
increased by 43%, at around 695 billion Euros. This situation is explained
by increases of exports (661 billion Euros in 2003) mostly in Czech
Republic and in the EU countries. Imports also increased by 35.6% at
around 266 billion Euros, mostly coming from Poland.
In Bulgaria, furniture industry situation was quite positive. Production

value increased by 22.6% during 2003, amounting to 429.5 billion Euros.
Exports amounted to 128.5 billion Euros (+48%).
In Hungary, furniture production value decreased by 25%, amounting

under 400 billion Euros. This was one of the worst years, especially after the
four years continuous increasing period. Imports were higher than exports
(216 billion Euros, comparing to 161 billion Euros).
In Lithuania, furniture industry should have registered a quite increased

rate (+15%). Exports increased by 17% for the first half of 2003, at around
142 billion Euros, while imports slacked at around 24 billion Euros.
Production value in Leetonia for furniture industry registered a 139 billion

Euros value, meaning 11.3% increase comparing to 2002. Exports
represented 80% of the total production (111 billion Euros) and were mainly
directed to Denmark, Germany and Great Britain. Imports registered an
amount of 36 billion Euros.
Romanian Place in The Furniture International Commerce
Wood processing and end products have been occupying a very important
place in Romanian national economy assembly. The producing capacity of
Romanian furniture factories is evaluated, at the current prices on the
international market, at around 1 milliard US$/year. At national level, the
Romanian furniture industry in the year 2000 realized 1.68% from the total
Romanian industrial production, 6.08% from export and 0.54% from imports.
Until the years 1980, Romania occupied the 6th place in Europe through the
furniture producers and the 12th place in what concerns the production
volume. At the end of the years 1980, the total furniture and wood export was
around 1 milliard US$, the production being at that time concentrated in 60 big
wood processing factories, that were practically situated all over the country.
After 1990, because of privatization programs, they were divided in several

furniture sections/factories focused on the realized production profile.
Because of that, but also because of moral and physical depreciation of used
equipment and technology, the furniture and wood products production
faced a significant decrease. Its straightening was felt after the 1998, once
the major factories privatization was over and new factories started to
appear on the market, endowed with the newest technology, suitable
dimensioned and therefore able to quickly adapt to the market demands.
The decrease in furniture production in the given period had as result both
the loss of traditional markets for Romanian furniture (ex CAER countries)
and the reduction in the internal market demand because of decreases in the
revenues of a significant part of Romanian population.
Case Study
Starting the year 2001, a slightly recover of Romanian furniture production

and export was noticed. The last mentioned one reached in the year 2002,
450 millions Euros, in 2002, 480 millions Euros, in 2003, 540 millions
Euros and in 2004, only 510 millions Euros.
Rom anian Furniture Export Evolution in the Last 3 Years,

expressed in Billion Euros
550 540
510
500 480
450
450
400
2001 2002 2003 2004
Romania only owes 1% of the world furniture commerce at the moment.
The year 2005 started unfavorably for Romanian producers who were
oriented on the external market (only 65% of total production), the reasons
being the decrease in the demand on the West traditional markets for
Romanian furniture (Germany, Italy, France, England, etc.) and the
exaggerated decrease of West Euros currency.
In these conditions, the Romanian producers are forced to look for new
outlets, to re-discover traditional markets (Russia, Ukraine, and other CSI
countries), which requires increased efforts taking into consideration the
external, extremely strong competition on these markets where all important
furniture producers/ exporters have entered.
Romanian industry and export have absolute developing perspectives for the
future, as the world economic situation improves, due its own raw material
capacity, qualified labor and the wish and ability of new managers/owners
to prove the possibilities and the availability to invest in this traditional
activity in Romania.
The structure of Romanian furniture production for 2004
PRODUCTION VALUE
DENOMINATION PERCENT %
(BILLION LEI)
Bedrooms 1762 14.3
Youth furniture 138 1.1
Children furniture 103 0.8
Dining rooms 1499 12.1
Bookcases 863 7
Office furniture 354 2.9
Small furniture 3560 12.5
Kitchens 623 5
Corner benches 534 4.3
Commercial furniture 19 0.2
School furniture 78 0.6
Hotel furniture 0,17 -
Garden furniture 0.04 -
Simple chairs 761 6.1
Bentwood chairs 393 3.2
Colonial chairs 142 1.1
Folding chairs 42 0.3
Ergonomically chairs 375 3.1
Upholstery furniture 1476 11.9
Mattresses 109 0.9
Cloakroom furniture 28 0.2
Toys 2 -
Shelves 0.02 -
Living rooms 243 2
Hospital furniture 3 -
Other furniture 1287 10.4
Total production 14394 100
The Competition and the Place of Duo Business Company

in the Furniture Export
Until the year 1990, Romania exported furniture and wood products which
valued around 1100 millions US$, the export being concentrated in the
hands of 3 important Commerce Houses: SC TEHNOFORESTEXPORT,
SC ILEXIM representing the local industry and ICECOOP representing
the co-operations. Among them, SC TEHNOFORESTEXPORT realized
around 80% of total exports, SC ILEXIM 14% and ICECOOP 6 %.
Case Study
After 1990, once the state monopole on the production, internal commerce
and export was broken, hundreds of exporters appeared who could be
classified in 3 main categories:
ex- important monopolists (or what was left of them);
Direct producers/exporters;
Several exporting companies focused on clients or markets or furniture
categories.
The ex-monopolists disappeared both because of the interior factors (a lot of
specialists/ commercial people left the company and, together with some
clients started businesses of their own) and of external factors.
After that, TEHNOFOREST, ILEXIM and ICECOOP started the privatization

process and became joint-stocks companies but their weight in Romanian
furniture export decreased continuously, such that, in the end of the year
2002 the 3 of them realized around 8-10% of a total of 600 mil $ (some data
show that the total amount of export at the end of 2002 was of 610 mil. $,
while some others registered 560 mil. $).
The producers were unpleased by the representation and monitoring by the

ex-monopole companies and because of that, as soon as the opportunity
appeared, they launched on their own businesses and the external clients
preferred, of course, to work directly with them, because they were more
flexible and accessible from the point of view of assortments and prices.
Therefore, the important furniture producers took over in their hands the
export, realizing deliveries for the traditional clients but also for new ones.
This was possible thanks to the direct contacts established in time with
external clients and to the producers desire to be present on the external
markets, to be closer to the customer and therefore to know directly the
demands and the desires on the market.
The need to apply new technologies was also of a big importance; this was
mostly realized by the use of external technical credits, because the
Romanian credit market was not offering the possibility to acquire
advantageous products. On one hand, the possibility to acquire these credits
was a benefic thing because it helped the producers to renew their
equipments and technologies for the furniture processing and on the other
hand, it forced them that, on the entire period of crediting and
reimbursement to deliver with priority only what the creditors asked for and
most of the times for prices bellow the market.
For the last years, the producers directly exported the furniture, realizing a
volume of around 50% form the total Romanian furniture export.
The rest of around 40% of the export belongs to some companies that
appeared after 1990 and which included the furniture export in their activity
domain.
According to the data obtained from the Ministry of Industry, 3000

economic agents having as object of activity the furniture
production/commercialization activate at the moment in Romania. A lot of
these companies are small and medium enterprises. Only 140 of the total
have more than 300 employees. The number of furniture producing
companies increased 1000 times between 1989 and 2001. The same sources
however identify among these around 100 active companies in the furniture
export domain, among which around 30 having a permanent export activity.
Furniture Export Allocation for the year 2003 (860,000 euro total)
DEMEROM
Other companies (0,86 billion
(240 billion euros)
euros) 0%
40% Furniture
producers
(300 billion
euros)
50%
Ex-monopole
Commerce
Houses before
1990:
Tehnoforest,
Ilexim, Icecoop
(60 billion euros)
10%
However, it should be admitted that Duo Business, having a total export

of around 1,000,000 , for the year 2003 only occupies 0.03 % from the
percentage allocated to Other companies and it is therefore negligible as
reported to the total volume of Romanian furniture export.
Case Study
Products Portfolio Analysis
This analysis objective is to describe the strategic position of each exported

product by the company in order to determine resource allocation. The
characterization of each product or group of products is done according to
the intrinsic attraction criteria of reference marketing segment to companys
competition level for each of the above analyzed products.
We shall draw a multi-criteria grid for exported products or range of

products by Duo Business and we shall consider a scoring from 1 to 5 for
each criterion taken into consideration using at the same time percentage
coefficients. We shall then add the obtained percentages horizontally and a
score matrix will afterwards be constructed.
Attractiveness Market Increasing Gross Margin Clients Competition Total

Indicators Attractiveness Indicator Potential Concentration
Score/Percent Score/Percent Score/Percent Score/Percent Score/Percent
Europe <5% <5% 3 Strong

Bedrooms
3 / 0.2 1 / 0.05 2 / 0.15 3 / 0.05 1 / 0.05 1.15
Europe
<5% <5% 3 Strong
Living rooms + USA
2 / 0.05 2 / 0.1 3 / 0.05 1 / 0.05 1.3
4 / 0.2
Strong
Small Europe 5 10 % 5 10 % 5
2 / 0.05
furniture 3 / 0.2 2 / 0.1 4 / 0.2 4 / 0.15 2.3
Europe
Upholstered 5 10 % <5% 1 Strong
+ USA
furniture 3 / 0.2 1 / 0.2 1 / 0.05 2 / 0.1 1.85
4 / 0,2
USA > 10 % 15 25 % 1 Strong

Bunk beds
4 / 0,3 4 / 0.2 4 / 0.15 1 / 0.05 1 / 0.01 2.66
Competitiveness Relative Market Share Price Construction Total

Indicator Difficulty
Score/Percent
Score/Percent Score/Percent
<1/3 benchmarking <,= than competition High

Bedrooms 2.3
2 / 0.2 3 / 0.5 1 / 0.4
<1/3 benchmarking <,= than competition High

Living rooms 2.5
2.5 / 0.2 3 / 0.5 1 / 0.5
<1/3 benchmarking <,= than competition Medium

Small furniture 4.3
3 / 0.2 3 / 0.9 2 / 0.5
<1/3 benchmarking <,= than competition Medium

Upholstered furniture 3.9
2.5 / 0.25 3 / 0.6 2.5 / 0.6
Overlapped children <1/3 benchmarking < than competition Low

4.5
beds 1 / 0.5 4 / 0.5 4 / 0.5
Obtained results interpretation will be done using a bi-dimensional system,

similar to BCG matrix, with the following values:
Overlapped
Living Small Upholstered
Bedrooms children
rooms furniture furniture
beds
Attractiveness 1.15 1.3 2.3 1.85 2.66
Competitiveness 2.3 2.5 4.3 3.9 4.5
It should be noticed that the attractiveness/competitiveness matrix has some

limitations, among which we can mention the followings:
Relative measures because of the subjectivity risk in indicators chosen

and mostly in chosen evaluation criteria.
The more criteria used and the more products or activities analyzed, the
more difficult the procedure.
Case Study
Products Portfolio Matrix
H 6
i
A g
t h
t 5
r M
a e
c d
t i 4
i u
v m
e
n S 3
e m
s a
s l
l 2
1
1 2 3 4 5 6
Small Medium High
Competitiveness
Legend
Bedrooms Small furniture Bunk Beds
Living rooms Upholstered furniture
However, this method offers an image quite clear on the developed

activities, products and their position on the market, allowing an overview
of results as well as a simple and expressive view.
It also determines society to think in market attractiveness terms and

competition ability which is essential for a foreign trade company; it
establishes both financial and human resource allocation priorities and, most
important, it suggests differential development strategies for activities and

group of activities.
Analyzing the products portfolio in the attractiveness/competitiveness

matrix, it can be noticed that there is no star product with a higher market
share and extremely competitive that could offer important financial
liquidities for the company.
Most of portfolio products maintain relatively low to medium market shares,

having similar characteristics to problem-children in BCG matrix. Their
objective should be concentrated either towards support and intense
promotion or renouncement in terms of resource allocation.
Because of the present situation on the furniture market which has had a
decreasing trend during the last period, the fact that the forecast is not very
optimistic or, in the best case, of a reserved optimism, and because the
competition is really strong, the associates decided the launching of a new
product on the international furniture market: wrought iron as an activity
input in order to assure the development and improvement of companys
financial results. The already existing activities will not be neglected and
new solutions will be sought in order to improve both exports and
traditional products market.
Why? Because we remain in a very well known furniture area and we also
come with a new product, whose market share is in a continuous increase.
Furniture market is subject to fashion and fashion brought this new slightly
dusty and romantic breath for wrought iron which can be used both outside
for garden furniture and inside as raw material for beds, bookshelves,
couches, tables, chairs, and so on.
Launching a New Range of Products on the International Furniture

Market: Wrought Iron Furniture
Market Selection And Auditorium Segmentation
European wood furniture market amounts to around 120 billion Euros

yearly, while wrought iron market hardly reaches 1% of this market, which
amounts to around 1, 2 billion Euros. However, for a small size company
and not only, holding a percent of this quota would represent an important
point in its activity development and financial result improvement.
Case Study
Most important consuming wrought iron furniture markets are the

followings:
Interior furniture Garden furniture Total
516 billion Euros

Italy 348 billion Euros (29 %) 168 billion Euros (14 %)
(43 %)
240 billion Euros

Germany 180 billion Euros (15 %) 60 billion Euros (5 %)
(20 %)
180 billion Euros

Netherlands 180 billion Euros (15 %) -
(15 %)
144 billion Euros

France 120 billion Euros (10 %) 24 billion Euros (2 %)
(12 %)
Other 120 billion Euros

countries (10 %)
European Wrought Furniture Consuming

Countries.
Percentage of Total Imported Furniture
Other countries
Netherlands
Italia
0 10 20 30 40 50
Wrought iron interior furniture

Wrought iron garden furniture
Auditorium segmentation requires consumers grouping according to

similar characteristics and needs, similar merchandise requirements, similar
buying reasons or similar acting ways. Some segments can bring
advantages; others can be fluctuant while others can bring disadvantages.
Analysis of specific indicators offers a clearer image on interest markets:
Italy Germany France

Population (thousand inhabitants) 58 82 59
Yearly income/ person (Euro) 25,600 25,900 27,300
Total furniture market (billion Euros) 29.7 25.2 9.15
Forecasted yearly increase 4.1 % 2.4 % 6.1 %
Internal consumption 590 920 540
Furniture stores (in 2003) 20,000 15,000 11,000
Average surface (sq m) 500 sq m 650 sq m 1500 sq m
Our purpose focuses on choosing and managing of only those segments

that can bring revenues and benefits, with minimum allocated
resources.
This is the reason why the managers decided that Italy should be the target
market, considering the followings:
It is a very well known market since most of companys up to date
exports have been directed towards Italy;
Buyers mentality is very well known and Italian language is accessible;
There have already been offer requests registered in companys data
base
Other potential markets will not be neglected but companys efforts and
resources will mainly be allocated towards this market.
Market segmentation policies can be very different depending on the

merchandise and they must be combined in order to adapt to each business
conditions. They can be grouped in two major categories:
Private buyers group, with sub-groups depending on the following:

o Geographical location (local, national, international)
o Demography (age, sex, social status, income, occupation, training
level, religion, race, nationality, etc.)
o Social position, way of living
Case Study
Corporate buyers group

Both practice and products special features lead to the conclusion that the
best segment is the one of en-gross buyers group. They can launch
important orders from quantitative point of view which optimize and render
profitable both production and exports.
Small buyers do not present interest because in most cases the orders do not
even cover a full transport.
Potential Markets Attractiveness Analysis
Companys export potential analysis is presented using a two variables
matrix, through the identification of key factors and their evaluation from
1 to 5, where 1 is the lowest level and 5 represents the maximum level.
The scores are expressed in percentages depending on the relative
importance of each factor assigned subjectively but still correlated with
indicators that characterize each of them. Percentage values are added for
each matrix dimension. We shall analyze export potential for the main
markets: Italy, Germany and France.
Percentage
Influence Factors Score Percentage
Value
I: 5 I: 0.3 I: 1.5
Market size G: 4 G: 0.2 G: 0.8
F: 4 F: 0.2 F: 0.8
I:4 I: 0.2 I: 0.8
Yearly increasing rate G: 4 G: 0.1 G: 0.4
F :3 F: 0.1 F: 0.3
I: 2 I: 0.15 I: 0.3
Competition intensity G: 2 G: 0.15 G: 0.3
F: 2 F: 0.15 F: 0.3
I: 3 I: 0.6 I: 1.8
Technical requirements G: 3 G: 0.5 G: 1.5
F: 3 F : 0.5 F: 1.5
I: 4 I: 0.5 I: 0.2
Inflation G: 4 G: 0.05 G: 0.2
F: 4 F: 0.05 F: 0.2
I: 4 I: 0.1 I: 0.4
Gross margin G: 4 G: 0.1 G: 0.4
F: 3 F: 0.08 F: 0.24
I: 4 I: 0.05 I: 0.2
Legislation G: 4 G: 0.05 G: 0.2
I: 4 F: 0.05 F: 0.2
Italy: 5.2
Total Germany: 3.8
France: 3.54
Markets attractiveness analysis confirm companys initial hypothesis

according to which Italy is the most attractive market for this new products
portfolio launching.
Companys Export Potential Analysis
Companys export potential analysis is expressed using the same matrix and
the same scoring system:
Percentage
Influence Factors Score Percentage
Value
Market share 1 0.15 0.15
Products quality 4 0.2 0.8
Selling network 3 0.1 0.3
Price competitiveness 4 0.2 0.8
Promotion 3 0.1 0.3
Unitary cost 4 0.1 0.4
Material resources 3 0.1 0.3
Total 3.05
Companys position results being good due to products quality and price
competitiveness but an intense promotion action should be carried on in
order to present the offered product and to determine the buying decision
making of consumers.
Consumers Behavior
Furniture market is mainly influenced by specific cultural features of each

country, by population living standards and by fashion trends. Present
market is characterized by a continuous change and value reorientation. As
a rule, we can classify consumers preferences as it follows:
Germany: prefers a solid, voluminous, regular geometric forms, with
sober but economic lines, practice and good taste furniture;
France: prefers a more subtle, sophisticated, clear and antique-type
colors furniture;
Italy: Italians look for a supple, dark colored furniture. Even if the
preferred style is arte povera, characterized by very simple, minimum
lines of light essences furniture or a more valuable style of noble
essences such as cherry tree or nut tree, Italians prove a lot of
imagination in combining pieces of furniture.
Case Study
No matter the analyzed segment, the modern consumer expects a furniture

product to respond to his needs which requires esthetics, functionality,
comfort and competitive price for a good quality.
Once gathered all data for different market segments, their systematization
should be thought of in order to place them in an adequate order. First,
potential consumers needs, priorities and characteristics must be identified.
This information is structured taken into consideration the initial purposes.
Consumers needs are expressed through their wishes, targets and purposes.
Needs are the definition of their household and office consumption
requirements. Consumers advantages and priorities represent the result
towards which it reaches to satisfy his needs.
Consumers characteristics indicate his behavior, requirements and

expectations. We must be aware and understand consumers needs before
determining the potential auditorium and we shall take into account the
followings:
Who are the questionnaire subjects?
How do we ask questions?
Why are we asking questions?
The representatives of identified market segments are the subjects of

questionnaire and the bigger their number, the more representative it will be
for the given segment.
There are three tools defining what should be identified throughout a

questionnaire:
Critical links analysis
Critical interactions analysis
Consumers characteristics
Critical links analysis:
Critical links represent the points of real contacts with consumers and
determine the behavior towards them.
The main issue is to determine what is really important for the consumer out
of the products the company can offer. Where the consumers consider
critical contact points they actually express their desires and expectations
that might be met by Duo Business.
Critical links graph in Duo Businesss case is presented bellow:
Figure 1
1. Merchandise quality
2. Specificity
Delivery
Distribution
Consumer
3. Suppliers
4. Complaints
Service
5. Price
Other problems
Why quality comes first? The buyer must be certain that the merchandise is
reliable and fully meets his demands, without causing future problems when
used. Duo Businesss advantage consists in the fact that a good quality
product improves buyers trust and finally leads to increased sales and
higher profits.
The second place is allocated to specificity, delivery and distribution since

they are very important for the company: the wider the products range, the
better the consumers needs met, therefore higher sales are expected.
Delivery is a critical issue because meeting the delivery terms is an essential
condition for contract obligations achievement.
Case Study
Merchandise suppliers are the 3rd element because, although up to a certain

point their and Duo Businesss interests are common, it is compulsory that
they also accomplish contractual obligations regarding orders, range of
products and delivery terms. These collaborations can be improved thorough
strengthening suppliers contacts and improvement of informational cycle.
The 4th point covers complaints solving, an adequate service as well as other
problems management. This point is strongly related to the 1st one
merchandise quality and is a strong condition for insuring buyers trust in
companys seriousness and potential.
Price is the 5th because is an essential contractual element, it is negotiated
and agreed upon and it usually remains unchanged for a certain period of
time. It reflects both products quality and partners seriousness and
availability in finding a real equilibrium among the factors that characterize
the merchandise and its usage value. Practice has shown many times that
price not necessarily reflects merchandises real value and in this case, it
either cannot be produced by the supplier or bought by clients.
Critical interactions graph for Duo Business:
Figure 2
1. Specificity
Delivery
Distribution
2. Sales:
exhibitions
SC Duo Business SRL offers
merchandise information
3. Payroll employees/collaborators
Contracts
Orders
44. General Manager Invoices
Delivery terms
The first point includes deliveries, specificity and distribution and it is very
important for Duo Business because specificity meeting and in time delivery
for the required range of products satisfy both contract partners demands
and companys needs thorough the increase of companys cash flow. The
higher this ration, the better the companys financial results.
The 2nd point, including sales, exhibitions, offers and merchandise

information also influence Duo Business results: the higher the sales, the
higher the demand and therefore the deliveries. Sales slack leads to
deliveries cease or delay and therefore at cash flow rotation slowing. This is
why sales must be continuously stimulated and supported using all
accessible means, including the attraction of new clients.
Payroll 3rd point is also a sensitive indicator, especially for a small

enterprise such as Duo Business. In case the companys deliveries and
therefore its encashment decrease, employees income and as a
consequence, their interest also decrease.
The general manager 4th point must involve in all already mentioned
steps through an uninterrupted control of deliveries, encashment and
payrolls since the very moment of contract signing, always searching
stimulating and accomplishable opportunities.
Products portfolio expressed as services panoply
Selling services
Packaging
Base service
Quality Design
Guaranty Delivery and credit conditions

Selling Prognostic
Case Study
The base service corresponds to the functional value of products range, in

this case the wrought iron furniture.
Secondary services are additional services if comparing to the base service

but they are also very important; they generate consumers satisfaction and
may become a choosing criteria for a certain brand instead of another.
Our company is extremely careful that its products are packaged according
to its clients requirements, accordingly marked, offer a 1 month guaranty
from the reception moment for perceptible defects and 1 year guaranty from
the reception moment for hidden defects or production vices.
It also offers commercial credits up to 60 days from the merchandise

clearance date.
Quantity Selling Prognostic Bunk beds
Wrought iron
20000 furniture
18000
16000 Small furniture
14000
12000 Upholstery
10000 furniture
8000 Living rooms
6000
4000
2000 Bedrooms
0
2004 2005 2006 2007
Value selling prognostic Bunk beds
3000000 Wrought iron

furniture
2500000
Small furniture
2000000
1500000 Upholstery
1000000 furniture
500000 Living rooms
0
Bedrooms
2004 2005 2006 2007
Case Study
Success Probability:
We can estimate success probability in launching of a new range of products

wrought iron furniture using an evaluation matrix built based on a
multi-criteria evaluation grid.
The horizontal dimension represents the attractiveness of this project for the
company and the index is determined through the multi-criteria matrix built
on relevant qualitative and quantitative elements for the enterprise.
The vertical dimension represents the technological and commercial success

probability.
The scores are between 1 and 5; 1 for the lower and 5 for the best
qualification.
Launching the wrought iron furniture on intl market:
ATTRACTIVENESS
ESTIMATES SCORS OBTAINED
INDICATORS
In formation Ascending Slack Negative
1. Market trend 4
x
> 5 years 3-5 years 2-3 years 1-2 years
2. Products life 4
x
Germany Italy Belgium - Germany Italy Belgium
3. Level of potential
market > 500,000 >200,000 >200,000 - 5 3 3
(quantity/pieces)
1.000.000 233.000 214.000 -
Germany Italy Belgium - Germany Italy Belgium
4. Level of potential
market (value in > 50,000 >25,000 >25,000 - 5 3 3
thousand Euros)
130,000 30,290 27,820 -
Very well Well known Not well Not known Germany Italy Belgium
5. Consumers needs known known
x x x 1 4 2
6. Receptivity of Enthusiastic Positive Neutral Reticent
3
distribution channels x
Germany Italy Belgium Others Germany Italy Belgium
7. Market accessibility Difficult Easy Relatively Very 1 4 2
easy difficult
Germany Italy Belgium
Average score obtained
3.28 3.57 3.00
COMPETITIVENESS SCORS
ESTIMATES
INDICATORS OBTAINED
1. Products Very high High Medium Low
attractiveness x
5
Very high High Medium Low
2. Competition
x
4
> 3 ani 1-3 ani < 1 an < 6 luni
3. Exclusivity duration
x
4
Relatively
Slightly lower Lower Bigger
4. Price equal 4
x
5. Client-seller Very high High Medium Low
compatibility x
3
6. Selling power
x
3
7. Quality level
x
3
Average score obtained 4
Success probability for wrought iron furniture launching graphic

representation based on the above calculated indicators analysis:
Competitiveness
Rice bean of new launched Pearls
products
4 Wrought
iron furniture
3
Attractiveness
2 for the company
1
1 2 3 4 5
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PREFACE

This book course in International Business is especially

This course provides the necessary prerequisite for the

The success of a business depends on how well trained

Many issues in international business are complex and thus

International business strategy and structure and international

As in all business situations, opportunities and threats stem from changes in

1.1 Environmental Factors of Globalization

Examples of some of the major changes in the international business

(1) The continued liberalization of international trade

This particular aspect of the international environment is of particular

(2) Cosmopolitan customers

A third factor in the growth in importance of international business is the

Today's consumer is much more widely travelled compared to even a decade

Clearly, consumers and their needs change,

(3) Improved communications

(4) Strategic networking and the international supply chain

Strategic networking is the formation of alliances and agreements

International supply chains refers to the increasingly international

Increasingly, organizational buyers, whether in manufacturing, services or

Some of the same factors underpinning the emergence of the more

A number of factors underpin this growth of strategic networking and

(5) Growth of global companies - multinationals and transnational

Factors already discussed which have served to underpin the growth of

(6) Global brands

A combination of increasingly cosmopolitan consumers and lifestyles,

International versus Domestic Business

Before considering the differences it might be useful, however, to consider

(a) The centrality of the marketing concept

(e) Key decision areas/planning frameworks

As with the marketing mix, there will be some differences in

With so many similarities between international and domestic business,

International business takes place across national boundaries.

(a) Different environment, culture and language

Operating across national boundaries means that the business

So, for example, in respect of marketing, research involves considering

In advanced countries, the wide range of available goods and services

In lesser developed countries, many customers have insufficient money

(c) Market information and forecasting

International markets often exhibit very different rates of growth which,

Businesses entering international markets, as already indicated,

(e) Environmental turbulence

Compared to domestic environments, the international environment

Types of International Business Involvement

There are a number of different types of involvement in international

The degree of involvement can be measured by the percentage of sales

Different Orientations, Different Management Culture

A widely used classification was developed by Howard Perlmutter to

The polycentric orientation is associated with multi-national enterprises

Increasing knowledge and the development of planning approaches.

Treats the world as an opportunity. The equidistant approach would be an

Note that the international business approach becomes more comprehensive,

The difference between simply exporting and international business arises

Fees earned from the sales of "know-how";

In addition, there will usually be sales revenues earned from exporting.

In general, international business is a more sophisticated process than

To fall into this category, a company needs to have made investments in

Until recently, most Multinationals followed approaches that were more

Promotion selling is fully adapted to the requirements of the

The connection between Multinationals and polycentric orientation is very

1.2 Reasons for Going International

All business is ultimately about identifying opportunities in markets and

Furthermore, there is substantial evidence to suggest that international

Examples of some of these reasons are shown below.