TABLE OF CONTENT

Chapter One - An Overview of International Marketing

1.1. Introduction
1.2. Domestic Vs International Marketing
1.3. From Domestic marketing to Global Marketing
1.4. EPRG orientations
1.5. Stages/levels of International Marketing
1.6. International Marketing tasks
1.7. Importance of International Marketing
1.8. Foreign Trade Theories
Chapter Two- International Marketing Environment
2.1. Introduction
2.2. Social/cultural environment
2.3. Economic Environment
2.4. Political/legal environment
2.5. Technological Environment
Chapter Three - Entry Modes in International Marketing
3.1. Introduction
3.2.1 Exporting
3.2.2 Licensing
3.3 Selecting entry modes
Chapter Four - Barriers In International Marketing
4.1. Tariff and non-tariff restrictions
4.2. Export documents
4.3. Terms of sale (Incoterms)/International Contract Terms or Incoterms/
4.4. Terms of payment in International Marketing
Chapter Five - International Marketing Mix Elements
5.1. International Product Decisions
5.1.1. Adaptation Vs standardization
5.1.2. Degree of adaptation and standardization
5.1.3. THEORY OF INTERNATIONAL PRODUCT LIFE CYCLE (IPLC)
5.1.4. Packaging
5.2. International Pricing Decisions
5.2.1. Pricing Policies and Strategies
5.2.2. Establishing International Prices
5.2.3. Global Pricing Approaches
5.2.4. Countertrade
5.2.5. Dumping
5.3. International Distribution Decisions
5.3.1. Channel structure
Chapter One 1

An Overview of International Marketing

1.1. Introduction

Whether an organization markets its goods and services domestically or internationally, the definition
of marketing still applies. However, the scope of marketing is broadened when the organization
decides to sell across international boundaries, this being primarily due to the numerous other
dimensions which the organization has to account for. When a company becomes a global marketer,
it views the world as one market and creates products that will only require weeks to fit into any
regional marketplace. Marketing decisions are made by consulting with marketers in all the countries
that will be affected. The goal is to sell the same thing the same way everywhere.

Let us, firstly define "Marketing" and then see how, by doing marketing across multinational
boundaries, differences, where existing, have to be accounted for.

S. Carter defines marketing as:

"The process of building lasting relationships through planning, executing

and controlling the conception, pricing, promotion and distribution of ideas,
goods and services to create mutual exchange that satisfy individual and
organizational needs and objectives".
Philip Kotler and Armstrong define marketing as:

Marketing is about identifying and meeting human and social needs. One of the
shortest good definitions of marketing is “meeting needs profitably.”
AMA defines marketing as:

Marketing is a social and managerial process by which individuals and groups

obtain what they need and want through creating and exchanging products and
value with others.
Let‘s now consider the definition of international marketing by different scholars:

The American Marketing Association (AMA) defines the term international marketing as
follows:
“International Marketing is the multinational process of planning and executing
the conception, pricing, promotion and distribution of ideas, goods, and services to
create an exchange that satisfy individual and organizational objectives. “

Wikipedia defines marketing as:

 International marketing (IM) or global marketing refers to marketing carried
out by companies overseas or across national borderlines.
Cateora (1997) defines international marketing as:

“performance of business activities that direct the flow of company’s goods and
services to consumers in more than one nation for profit.”

Keegan (1997) comprehends that international marketing as:

“going beyond the export marketing and becoming more involved in the
marketing environment in which it is doing business.”

1.2. Domestic Vs International Marketing

Domestic marketing and International marketing are same when it comes to the fundamental principle
of marketing. Though, fundamentally international business operations look like domestic business
operations, yet some important distinctions can be perceived following an in-depth insight. The
firms having an experience of domestic business can probably have an edge while diversifying into
international operations. Keeping this in mind, a leading management guru, Micheal E. Porter has
observed that firms aspiring to be successful globally must attempt at being successful in the
domestic market first. Most firms like IBM, Coca Cola, Unilever, Proctor and Gamble, Suzuki, Sony
operating globally in fact started initially as domestic companies. As the magnitude of their operations
grew, they found it profitable to venture abroad by setting up manufacturing and distribution centers
in other countries. Some of the points of difference between international and domestic marketing
are:

Domestic Marketing

The marketing strategies that are employed to attract and influence customers within the
political boundaries of a country are known as Domestic marketing. When a company caters
only to local markets, even though it may be competing against foreign companies operating within
the country, it is said to be involved in domestic marketing. The focus of companies is on the local
customer and market only and no thought is given to overseas markets. All the product and services
are produced keeping in mind local customers only.

International Marketing

When there are no boundaries for a company and it targets customers overseas or in another
country, it is said to be engaged in international marketing. As such, and in a simplified way, it is
nothing but application of marketing principles across countries. It is very complex and requires a
huge amount of financial resources.
To summarize the difference between domestic and international
marketing

Domestic marketing is the production, promotion, distribution, and sale of goods and services in a
local market while international market is the production, promotion, distribution, and sale of goods
and services in a global market.

 Domestic marketing is less risky and easier to conduct while international marketing is more
risky and more complex.
 Domestic marketing requires lesser financial resources while international marketing requires
huge financial resources.
 Domestic marketing deals with only a single market while international marketing deals with
several different countries and markets.
 Although both use all the basic marketing principles, international marketing is more
challenging and requires more commitment from the company because of the uncertainty and
differences in laws and regulations in the global market while domestic marketing deals only
with the laws and regulations of one country.
 Domestic marketing deals only with one set of consumers while international marketing deals
with different types of consumers with different tastes.
 In domestic marketing, the company can have the same policies and strategies while
international marketing requires different strategies in the promotion of their products.
 In domestic marketing there are no barriers but in international marketing there are many
barriers such as cross cultural differences, language, currency, traditions and customs.

1.3.From Domestic marketing to Global Marketing

1. Domestic marketing
Marketing that is aimed at a single market, the firm‘s domestic market, is referred to as domestic
marketing. In domestic marketing, the firm faces only one set of competitive, economic, and
market issues and, essentially, must deal with only one set of customers, although the company may
serve several segments in this one market. Domestic marketing is concerned with the marketing
practices with in a marketer‘s home country.

2. Export marketing
The field of export marketing covers all those marketing activities involved when a firm markets its
products outside its main (domestic) base of operation and when products are physically shipped
from one market or country to another. Under export marketing, the domestic marketing operation
remains of primary importance.

3. International marketing
When practicing international marketing, a company goes beyond exporting and becomes much more
directly involved in the local marketing environment within a given country or market. The
international marketer is likely to have its own sales subsidiaries and will participate in and develop
entire marketing strategies for foreign markets.

International marketing involves:

 Identifying needs and wants of customers in international markets
 Taking marketing mix decisions related to product, pricing, distribution and communication
keeping in view the diverse consumer and market behavior across different countries on one
hand and firm‘s goals towards globalization on the other hand
 Penetrating into international markets using various mode of entry and taking decisions in
view of dynamic international marketing environment.

4. Multinational marketing
Once a company establishes its manufacturing and marketing operations in multiple markets, it begins
to consolidate its operations on regional basis so as to take advantage of economies of scale
in manufacturing and marketing mix decisions. Various markets are divided into regional sub-
segments on the basis of their similarity to respond to marketing mix decisions. It is known
as multinational marketing.
5. Global Marketing
A global marketing strategy involves the creation of a single strategy for a product, service, or
company, for the entire global market, that encompasses many markets or countries simultaneously
and is aimed at leveraging the commonalties across many markets. Rather than tailor a strategy
perfectly to any individual market, the company aims at settling on one general strategy that will guide
itself through the world market. The management challenge is to design marketing strategies that work
well across many markets.

1.4. EPRG orientations

The key assumption of EPRG is the degree of internationalization to which the management
is committed or willing to move affects the specific international strategies and decision rule of the
firm.

a. Ethnocentric Orientation

The companies guided by this are casual players in overseas markets. For them the overseas
markets serve as conduits for directing surplus production. They use overseas markets as a buffer for
checking the demand fluctuations in the domestic market. The main focus of the company remains
domestic markets. This concept is usually preferred by small companies, or even by large
companies operating in a competitive industry. The overseas operations of such companies are
usually restricted to exports in certain niches such approach is also known as ethnocentric in the
EPRG schema.

This orientation assumes that:

 Domestic strategies, techniques, and personnel are perceived as superior

 International customers are considered as secondary
 Guided by domestic market extension concept
  International markets are regarded primarily as outlets for surplus domestic production
 International marketing plans are developed in-house by the international division
 try to market those product in other countries which have demand equal to domestic market

b. Polycentric Orientation

As the overseas operations of the companies grow, they recognize the need for a different approach
to international marketing. The operations of companies can acquire forms of overseas joint
ventures, licensing agreements, overseas manufacturing and marketing. The subsidiaries operating
in overseas markets are recognized as independent business units with autonomy to operate in their
markets. Within their respective markets, the subsidiaries behave as domestic companies, deriving only
strategic guidelines from their head offices. The companies usually become multinational
corporations at this stage. The controls are decentralized to facilitate local operations under the
EPRG schema, such firms are classified as polycentric.
 Guided by the multi-domestic market concept
 Focuses on the importance and uniqueness of each international market
 Likely to establish businesses in each target country
 Fully decentralized, minimal coordination with headquarters
 Marketing strategies are specific to each country
 in the effort to satisfy local customer needs and wants, full product modification is
implemented or separate product lines are developed
c. Regiocentric Orientation

 Guided by the global marketing concept:

 World regions that share economic, political, and/or cultural traits are perceived as distinct
markets
 Divisions are organized based on location
 Regional offices coordinate marketing activities
d. Geocentric Orientation

As the companies direct their approach to become a global company, they acquire a global perspective
in their operations. Such companies look for lucrative business and investment opportunities on
global basis. They derive synergy by sourcing the resources from across the globe by selecting
those markets which can provide the inputs to business in most cost-effective manner. Such
companies do not treat the SBU‘s operating in different markets as totally independent entities, but as
the SBU‘s which are contributing towards the growth of the company as a whole. Certain degree of
the controls and policy matters may extend to all the SBUs, although allowances may be made
to accommodate regional diversities. Under the EPRG schema, global companies are often classified
as regiocentric or geocentric companies.
 Guided by the global marketing concept
 The world is perceived as a total market with identifiable, homogenous segments
 Targeted marketing strategies aimed at market segments, rather than geographic locations
 Achieve position as low-cost manufacturer and marketer of product line
 Provides standardized product or service throughout the world
 analyze and manage the marketing strategies with integrated global marketing program
 The objective of a geocentric company is to achieve a position as a low-cost manufacturer
and marketer of its product line. Such firms achieve competitive advantage by developing
manufacturing processes that add more value per unit cost to the final product than do their
rivals.

1.5.Stages/levels of International Marketing

Organizations begin to develop and run operations in the targeted country or countries outside of the
domestic one. The four stages are as follows:

Stage one: domestic in focus, with all activity concentrated in the home market. Whilst many
organizations can survive like this, for example raw milk marketing, solely domestically oriented
organizations are probably doomed to long term failure.

Stage two: home focus, but with exports (ethnocentric). Probably believes only in home values, but
creates an export division; usually ripe for the taking by stage four organizations.

Stage three: stage two organizations which realize that they must adapt their marketing mixes to
overseas operations. The focus switches to multinational (polycentric) and adaption becomes
paramount.

Stage four: Global organizations which create value by extending products and programs and focus
on serving emerging global markets (geocentric). This involves recognizing that markets around the
world consist of similarities and differences and that it is possible to develop a global strategy based
on similarities to obtain scale economies, but also recognizes and responds to cost effective
differences. Its strategies are a combination of extension, adaptation and creation. It is unpredictable
in behavior and always alert to opportunities.
1.6. International Marketing tasks

International marketing tasks include deciding about the foreign ratio to total sales the company
would want to achieve, the decision to market in few or more countries, the type of countries to
consider, ranking and screening the identified countries, deciding how to enter the market and
deciding the overall marketing program.

Fig 1.1. Major international marketing decisions/tasks

i. Deciding Whether to Go Abroad

Most companies would prefer to remain domestic if their domestic market were large enough.
Managers would not need to learn other languages and laws, deal with volatile currencies, face
political and legal uncertainties, or redesign their products to suit different customer needs and
expectations. Business would be easier and safer. Yet several factors can draw companies into the
international arena:

 Some international markets present better profit opportunities than the domestic market.
 The company needs a larger customer base to achieve economies of scale.
 The company wants to reduce its dependence on any one market.
 The company decides to counterattack global competitors in their home markets.
 Customers are going abroad and require international service.

For example, Coca-Cola has emphasized international growth in recent years to offset stagnant or
declining U.S. Soft drink sales.
ii. Deciding Which Markets to Enter

In deciding to go abroad, the company needs to define its marketing objectives and policies. What
proportion of international to total sales will it seek? Most companies start small when they venture
abroad. Some plan to stay small; others have bigger plans. The company also needs to choose in how
many countries it wants to market. Typical entry strategies are the waterfall approach, gradually
entering countries in sequence, and the sprinkler/shower/ approach, entering many countries
simultaneously. Increasingly, firms-especially technology intensive firms-are born global and market
to the entire world from the outset. The company must also choose the countries to consider
based on the product and on geography, income and population and political climate.

iii. Deciding How to Enter the Market

Once a company decides to target a particular country, it must determine the best mode of entry.
Its broad choices are indirect exporting, direct exporting, licensing, joint ventures, and direct
investment, shown in Figure 1.2. Each succeeding strategy entails more commitment, risk, control,
and profit potential.

Fig 1.2. Five modes of entry to international market

iv. Deciding on the Marketing Program

Companies that operate in one or more foreign markets must decide how much, if at all, to adapt
their marketing strategies and programs to local conditions. At one extreme are global companies
that use standardized international marketing, essentially using the same marketing strategy
approaches and marketing mix worldwide. At the other extreme is adapted international
marketing. In this case, the producer adjusts the marketing strategy and mix elements to each target
market, bearing more costs but hoping for a larger market share and return.

The question of whether to adapt or standardize the marketing strategy and program has been much
debated over the years. On the one hand, some global marketers believe that technology is making
the world a smaller place, and consumer needs around the world are becoming more similar. This
paves the way for ―global brands‖ and standardized global marketing. Global branding and
standardization, in turn, result in greater brand power and reduced costs from economies of scale.

On the other hand, the marketing concept holds that marketing programs will be more effective
if tailored to the unique needs of each targeted customer group. If this concept applies within a
country, it should apply even more across international markets. Despite global convergence,
consumers in different countries still have widely varied cultural backgrounds .They still differ
significantly in their needs and wants, spending power, product preferences, and shopping patterns.
Because these differences are hard to change, most marketers today adapt their products, prices,
channels, and promotions to fit consumer desires in each country.

For example there are five international product and communication strategies that is depicted on the
following diagram:

Fig 1.3. Five international product and communication strategies

v. Deciding on the Marketing Organization

Companies manage their international marketing activities in three ways: through export departments,
international divisions, or a global organization.

Export Department: A firm normally gets into international marketing by simply shipping out its
goods.

International Division: Sooner or later, companies that engage in several international markets and
ventures create an international division to handle all this activity. The unit is headed by a division
president who sets goals and budgets and is responsible for the company‘s international growth.

Global Organization: their top corporate management and staff plan worldwide manufacturing
facilities, marketing policies, financial flows, and logistical systems. The global operating units report
directly to the chief executive or executive committee, not to the head of an international division.
The firm trains its executives in worldwide operations, recruits management from many countries,
purchases components and supplies where it can obtain them at least cost, and makes investments
where anticipated returns are greatest.

1.7. Importance of International Marketing

A. Macro level benefits in national perspective:

International trade results in macro-economic effects for each economy. The imports and
exports influence the employment, national income and technology. The direct and indirect benefits
emanating from international business are listed below:
i. Increase in national Income: A country‘s export activity promotes industrial and trade
activity that generates employment and income for various sections of society. The multiplier
effect of income increases the level of output and growth rate of economy. Especially the export
of wage-goods can help a developing country to break the vicious circle of poverty and raise the real
income of the country.
ii. Efficiency: While exporting, the countries try to attain specialization in production of goods.
In this process, there is optimum and efficient utilization of the resources. The limited domestic
market may act as a deterrent to the growth of industry and a resultant under-utilization of
resources. The international trade can help industry grow and achieve scale and experience
economies.
iii. Employment generation: Exports constitute a significant portion of different nations and
breed opportunities for more and gainful employment. In addition to reducing direct
unemployment, foreign trade reduces underemployment, e.g. exports of Swiss watches engages the
farmers in the watch industry during their free time resulting into gainful utilization of their skills.
iv. Increased linkages: The staple theory of economic growth recognizes that foreign trade
results into increased backward and forward linkages with other sectors of the economy. The
 industrial and trade linkages cause the development of new industries and enhance efficiency of
existing industries.
v. Optimal utilization of resources: International business makes possible the utilization of
agricultural resources as the farmers get a greater access to the overseas markets. This transforms
even the subsistence sector into monetized sector raising the standards of living of rural
populations.
vi. Educative effect: Exports and international business exposes the executives to overseas market
which develops greater skills in them. This removes a great hindrance, often acknowledged as
greater than scarcity of capital goods. The entrepreneurial and management expertise generally
helps an economy grow faster, and traditional factors of production can be used more effectively.
vii. Promotes Foreign Direct Investment: The level of international business of a country often
becomes a basis for the flow of foreign direct investment in a country. In today‘s economic
environment, it is difficult to grow in absence of FDI. Several economies have grown following the
heavy investments from other parts of the world.
viii. Stimulates Competition: International business fosters healthy competition and helps in
checking inefficient monopolies. It is established that growth of competitive economies is higher
than the growth rate of protective economies. In recent times, the nations have realized the
benefits of healthy competition. Several developing and erstwhile communist countries are
promoting the same. Switching over to market-led growth which invokes substantially international
operations in business, services and technology.
ix. Technology Sourcing: In today‘s rapidly changing world, it is important to keep pace with the
changing technology. This is possible only when there exist linkages with other national economies
through international trade and business. The technology driven industries such as information
technology telecommunications, automobiles derive immense synergy by their participation in trade
across the world.
B. Micro level effects of International Business:

An individual firm can reap several benefits by resorting to international marketing and
international business.
i. Growth: By all standards, domestic markets have a limitation of growth potential. After a particular
level, it is very difficult for a firm to achieve growth. So, it is left with the option of either product
innovation or extending operations to other markets. The latter option is a better way of sustaining
growth as the product life can increase significantly when it is sold into the world markets.
ii. Fighting Competition: As the protectionist measures by nations are being reduced, firms operating
in domestic market only are facing increased levels of competition. Instead of utilizing their resources in
fighting competitions, firms continue to look at markets in other countries to cope up with domestic
competition. Hence, international business operations provide avenues for both survival and growth.
iii. Increased efficiency: By operating on global scale, a firm can select for its expansion lucrative
opportunities. Also, it can reduce its product costs through global sourcing and utilise world level
technology and talent for business operations. All this makes the business operations more efficient and
 as a result it can realize higher return per unit investment. This boosts up shareholder‘s value and
the company image.
iv. Scale economics: Higher level operations on account of international operations produce benefits
of scale and thus enhance the profitability of firm.
v. Innovation: By operating in large markets, companies can afford to invest in research and
technology development. It is established that compared to traditional and mind set firms, innovation
driven firms can compete effectively
vi. Risk Cover: By operating on global scale, the fluctuations of demand levels in an individual country
does not make much difference on the aggregate sales. Consequently, the uncertainties arising out
of risk factors on the operations localized to a country are reduced. Even the financial risks,
physical risks, politico-legal risks etc. can be managed more effectively by virtue of global operations.

1.8. Foreign Trade Theories

Any theory of international or foreign trade must explain reasons for trade and gains for trade or why
international trade takes place for the same reasons for which inter-local, interstate or interregional
trade(trade between districts or regions within a country) takes place. Trade take place because by
trading, both parties gain and the gain consists of the advantages resulting from the division of labor.

There were a lots of evolutionary theories of international trade in the past centuries. Some of which
era of mercantilism, feudal society era of classical trade theory. Owing to the dynamism and the
shifting which focus from the country to the firm, from costs of production to the market as a
whole and from the perfect the imperfect, this course shall examine critically and extensively the
following theories:

a) The Theory of Absolute Advantage

Absolute advantage is the ability of a nation to produce a good more efficiently than any other nation
(produce a greater output using the same, or fewer, resources). Adam Smith reasoned that
international trade should not be burdened by tariffs and quotas, but should flow according to
market forces. A country should produce the goods in which it holds an absolute advantage and
trade with others to obtain the goods it needs but does not produce efficiently.

Example, Nigeria can produce one unit of cocoa with 10 labor hours and one unit of textile material
say lace with 20 labor hours while Ethiopia can produce one unit of cocoa with 20 labor hours and
one unit of lace textile material with 10 labor hours.
 One Unit of cocoa One unit of Textile

Ethiopia 20 labor hrs. 10 labor hrs.

Nigeria 10 labor hrs. 20 labor hrs.

Note that from the above given example, it would be to their mutual advantage. If Nigeria produces
only cocoa and Ethiopia produced only lace textile material with the former exporting her surplus
cocoa to Ethiopia while Ethiopia exported her surplus production of lace textile material to Nigeria.
This shows that there is absolute difference in terms of cost since each country can produce one
commodity (Nigeria cocoa and Ethiopia lace textile material) at an absolute lower cost than the other
country.

Gains from Specialization and Trade

i. Although each country now specializes and world output increases, both countries face a problem:
Nigeria consumes only its cocoa and Ethiopia consumes only its textile. The problem can be resolved
through trade.
ii. The theory of absolute advantage destroys the mercantilist idea that international trade is a zero-
sum game. However, because both countries gain, international trade is a positive-sum game.

b) The Theory of Comparative Advantage

This theory was first stated by Adam Smith and later developed by David Richardo and John Stuart
Mill. According to Adam Smith, ―it is the maximum of every prudent master of a family never to
attempt to make at home what it will cost him more to make than to buy‖.

Comparative advantage is the inability of a nation to produce a good more efficiently than
other nations, but an ability to produce that good more efficiently than it does any other goods. Thus
trade is still beneficial even if one country is less efficient in the production of two goods, as long as
it is less inefficient in the production of one of the goods.

If two countries, for instance Ethiopia and Togo are two countries of the world. Ethiopia
produces coffee better than Togo and Togo is better at producing fish. Ethiopia should
specialize in the production of coffee, while Togo concentrates its resources; on the production of

fish. They can trade their products. But even if Ethiopia is better than Togo in the production of
both coffee and fish, while Togo is at a disadvantage, both countries can still benefit by each one
specializing in the production of the goods where it has the greater comparative cost advantage or the
least comparative cost advantage. Suppose that Ethiopia now holds absolute advantages in the
production of both rice and tea. In Ethiopia, 1 resource unit produces a ton of rice but 2 are needed to
produce a ton of tea. In Togo, 6 resource units still produce a ton of rice, and 3 units are still needed
to produce a ton of tea. Thus Ethiopia has absolute advantages in producing both goods.

One ton of rice One ton of Tea

Ethiopia 1 labor hrs. 2 labor hrs.
Togo 6 labor hrs. 3 labor hrs.

Although Togo has absolute disadvantages in rice and tea, it has a comparative advantage in tea;
Togo produces tea more efficiently than it produces rice. By specializing and trading, Togo gets double
the rice than if it produced the rice itself, and Ethiopia gets twice as much tea than if it produced the tea
itself. Richardo took the application of the law to trade between two countries and conclude
that both countries will benefit if each of them concentrates on producing the commodity where it
can perform more efficiently and exchange the product with the one it can produce less efficiently.

c) The Theory of Mercantilism

States that nations should accumulate financial wealth, usually in the form of gold, by
encouraging exports and discouraging imports. Other measures of a nation‘s well-being, such as living
standards or human development, are irrelevant. Practiced from around 1500 to the late 1700‘s by
European nations, including Britain, France, the Netherlands, Portugal, and Spain.

The more gold and silver a nation had, the richer and more powerful it was. They argued
that government should do everything possible to maximize exports and minimize imports.
However, since all nations could not simultaneously have an export surplus and the amount of gold
and silver was limited at any particular point of time, one nation could gain only at the expense of
other nations. In other words, mercantilists believed that trade was a zero sum game (i.e. one‘s gain
is the loss of another).

d) Heckscher–Ohlin model

In the early 1900‘s, a theory of international trade was developed by two Swedish economists,
Eli Heckscher and Bertil Ohlin. This theory has subsequently been known as the Heckscher–Ohlin
model (H–O model). The results of the H–O model are that countries will produce and export goods
that require resources (factors) which are relatively abundant and import goods that require resources
which are in relatively short supply.

In the Heckscher–Ohlin model the pattern of international trade is determined by differences in

factor endowments. It predicts that countries will export those goods that make intensive use
of locally abundant factors and will import goods that make intensive use of factors that are locally
scarce.

The H–O model makes the following core assumptions:

 Labor and capital flow freely between sectors
 The amount of labor and capital in two countries differ (difference in endowments)
 Technology is the same among countries (a long-term assumption)
 Tastes are the same

The study showed that the United States was more abundant in capital compared to other countries,
therefore the United States would export capital-intensive goods and import labor-intensive goods.
Chapter Two

International Marketing Environment

2.1. Introduction

What make markets are the differences in the marketing environment. Such strategic decisions
as whether a company should enter a given foreign market or not, what market entry strategy should
it employ, what strategy it should adopt in respect of product, promotion, pricing and distribution,
etc. are based on two sets of factors, viz., the company related factors and the foreign
market related factors. The decision as to whether to go international or not is based, in addition
to the above two, on yet another set of factors, viz., the domestic marketing environment.

The company related factors refer to such factors as the company objectives, resources, and
international orientation. The domestic marketing environment consist of factors like growth
prospects including the competition, government policies etc.The foreign market related factors
which are relevant to the international business strategy formulation or which affect the
international business are often described as the international business environment.

What makes a business strategy which is successful in one market a failure in another market is often
the differences in the business environment. In other words, the differences in the business
environment may call for changes in the business strategies, i.e., there should be adaptation of the
business strategy to suit the environment of the market.

In short, it is the differences in the marketing environment which may make the
international business strategy different from the domestic one.

All marketers face the difficult task of identifying the important elements of the marketing
environment for their organization, assessing current and likely future relationships between these
factors, and developing effective strategies for a changing environment. This task has become
increasingly difficult in recent years as many elements of the marketing environment change
rapidly and unpredictably. The objective of this chapter is to help you understand the important
elements and relationships in the marketing environment.

The best way to understand the marketing environment is to place yourself in the middle of the
marketing circle. You are now a marketer for some organization and must make decisions about the
marketing exchanges, strategies, activities, positions, and institutions employed by your organization.
However, the decisions you can control depend on factors and trends in the marketing
environment that you cannot control. Thus, your task as a marketer is largely to identify
opportunities or threats in the marketing environment and then make marketing decisions that
capitalize on the opportunities and minimize the threats.

Fig 2.1. The Environmental scanning approach

The key difference between domestic marketing and marketing on an international scale is the
multidimensionality and complexity of the many foreign country markets a company may operate in.
An international manager needs a knowledge and awareness of these complexities and the
implications they have for international marketing management.

There are many environmental analysis models which the reader may have come across. For the
purposes of this textbook, we will use the SLEPT approach and examine the various aspects and
trends in the international marketing environment through the social/cultural, legal, economic,
political and technological dimensions, as depicted in Figure 2.2.

FIGURE 2.2 The environmental influences on international marketing

2.2. Social/cultural environment

The social and cultural influences on international marketing are immense. Differences in social
conditions, religion and material culture all affect consumers‘ perceptions and patterns of
buying behavior. It is this area that determines the extent to which consumers across the globe are
either similar or different and so determines the potential for global branding and standardization. A
failure to understand the social/cultural dimensions of a market are complex to manage, as McDonald‘s found
in India. It had to deal with a market that is 40 per cent vegetarian, had an aversion to either beef or pork
among meat-eaters and a hostility to frozen meat and fish, but with the general Indian fondness for spice with
everything. To satisfy such tastes, McDonald‘s discovered it needed to do more than provide the right
burgers. Customers buying vegetarian burgers wanted to be sure that these were cooked in a separate area in the
kitchen using separate utensils and sauces like McMasala and McImli were developed to satisfy the Indian taste
for spice. Interestingly however, these are now innovations they have introduced into other markets.

Culture, an inclusive term, may be conceptualized in many different ways. Not surprisingly, the concept
is often accompanied by numerous definitions. In any case, a good basic definition of the concept is
that culture is a set of traditional beliefs and values that are transmitted and shared in a given
society. Culture is also the total way of life and thinking patterns that are passed from generation to
generation. Culture means many things to many people because the concept encompasses norms,
values, customs, art, and mores.

Cultural differences and especially language differences have a significant impact on the way a
product may be used in a market, its brand name and the advertising campaign. Initially, Coca-Cola had
enormous problems in China as Coca-Cola sounded like ‗Kooke Koula‘ which translates into ‗A thirsty
mouthful of candle wax‘. They managed to find a new pronunciation ‗Kee Kou Keele‘ which means ‗joyful
tastes and happiness‘.

Other companies who have experienced problems are General Motors whose brand name ‗Nova‘ was
unsuccessful in Spain (‘no va’ in Spanish means ‘no go’). Pepsi Cola had to change its campaign ‘Come
Alive With Pepsi’ in Germany as, literally translated, it means ‘Come Alive Out of the Grave’. In Japan
McDonald‘s character Ronald McDonald failed because his white face was seen as a death mask.

Operating effectively in different countries requires recognition that there may be considerable
differences in the different regions. Consider northern Europe versus Latin Europe, the northwest of
the USA versus the south or Beijing and Taipei. At the stage of early internationalization it is not
unusual for Western firms to experience what appear to be cultural gaps with their counterparts in
Latin America and Asian countries as well as in different regions of those countries. A campaign by
Camay soap which showed a husband washing his wife‘s back in the bath was a huge success in
France but failed in Japan, not because it caused offence, but because Japanese women viewed the
prospect of a husband sharing such a time as a huge invasion of privacy.
On the other hand, some commentators argue there are visible signs that social and cultural
differences are becoming less of a barrier. The dominance of a number of world brands such as
Microsoft, Intel, Coca-Cola, McDonald‘s, Nike etc., all competing in global markets that transcend
national and political boundaries, are testimony to the convergence of consumer needs across the
globe. However, it is important not to confuse globalization of brands with the homogenization of
cultures. There are a large number of global brands but even these have to manage cultural differences
between and within national country boundaries.

Influence of Culture on Consumption

Consumption patterns, lifestyles, and the priority of needs are all dictated by culture. Culture prescribes
the manner in which people satisfy their desires. For example , Hindus and some Chinese do not
consume beef at all, believing that it is improper to eat cattle that work on farms, thus helping to provide
foods such as rice and vegetables.

Not only does culture influence what is to be consumed, but it also affects what should not be
purchased. For example , Jews require kosher (―pure‖) food. Kosher rules about food preparation prohibit
pork or shellfish, and there is no mixing of milk and meat products. Coca-Cola was declared kosher in 1935.
Likewise, Muslims do not eat pork, and foods cannot be processed with alcohol and non-halal animal products
(e.g., lard/fat). Muslims do not purchase chickens unless they are halal. They also do not smoke or use alcoholic
beverages, a rule shared by some strict Protestants.

The marketingchallenge is to create a product that fits the needs of a particular culture. For example ,
Moussy, a nonalcoholic beer from Switzerland is a product that was seen as being able to overcome the religious
restriction of consuming alcoholic beverages. By conforming to the religious beliefs of Islam that ban alcohol,
Moussy has become so successful in Saudi Arabia that half of its worldwide sales are accounted for in that
country.

Influence of Material Culture

Material culture relates to the way in which a society organizes and views its economic activities.
It includes the techniques and know-how used in the creation of goods and services, the manner in
which the people of the society use their capabilities, and the resulting benefits. When one
refers to an 'industrialized' or a 'developing' nation, one is really referring to a material culture. For
example , In Germany, the United States, Japan or other countries with high levels of technology, the general
population has a broad level of technical understanding that allows them to adapt and learn new
technology more easily than populations with lower levels of technology. Simple repairs, preventive
maintenance and a general understanding of how things work all constitute a high level of technology.
The material culture of a particular market will affect the nature and extent of demand for a product.
Whereas a luxury item, such as a sophisticated piece of computer hardware, may have a ready market
in a country such as France, demand for it may be non-existent in a developing country which is
hampered by inadequate facilities and/or foreign exchange shortages. The material culture of a
country may also necessitate modifications to the product. Electrical appliances, for example, may
have to be adapted to cater for differences in voltage levels. To illustrate this: the United States operates
under a system of 110V in contrast to South Africa's 220V. Alternatively, weights and measurements may have
to be converted to those applicable in the importing country (again the US uses measures such as miles, gallons
and pounds, whereas most other parts of the world use the metric system - kilometers, liters and kilograms).

Material culture can also have a significant effect on the proposed marketing and distribution
strategies. While highways and rail transport are the principal means of moving goods within the
United States, rivers and canals are used extensively in certain European countries. If the
company is planning to develop a manufacturing operation in a foreign market, aspects such as
the supply of raw materials, power, transportation and financing need to be investigated.

Changing Roles in the household

As more women enter the workforce and household compositions change, typical household roles
are altered. No longer are financially supporting the household and developing a career solely
the responsibility of men. No longer are household chores, child care, or grocery shopping solely the
responsibility of women. In many households, roles have shifted and distinctions have become
blurred. More men spend time on household and shopping chores, and many women are involved in
career development and provide much or most of the financial resources for a household.
Tremendous market opportunities exist for firms that can develop effective strategies for appealing to
these changing roles.

2.3. Economic Environment

Firms need to be aware of the economic policies of countries and the direction in which a particular
market is developing economically in order to make an assessment as to whether they can profitably
satisfy market demand and compete with firms already in the market. The economic environment
includes factors and trends related to income levels and the production of goods and services.
Economic trends affect the purchasing power of the markets. Thus, it is not enough for a population
to be large or fast growing, as in many developing countries, to offer good market opportunities; the
economy must provide sufficient purchasing power for consumers to satisfy their wants and
needs.
For example , Amongst the 194 countries in the world, there are varying economic conditions, levels of
economic development and Gross national income (GNI) per capita. Gross national income in the world is
US$62 trillion (purchasing power parity [ppp]); however, it is not shared equitably across the world. The United
Nations classes 75 per cent of the world‘s population as poor, that is, they have a per capita income of less than
US$3470, and only 11 per cent of the population as rich, meaning they have a per capita income of more than
US$8000. Perhaps more startling is the UN claim that the richest 50 million people in the world share the same
amount of wealth as the poorest 3000 million.

Such disparities of incomes set particular challenges for companies operating in international markets
in terms of seeking possible market opportunities, assessing the viability of potential markets as well
as identifying sources of finance in markets where opportunities are identified but where there
is not capacity to pay for goods.

Another key challenge facing companies is the question as to how they can develop an integrated
strategy across a number of international markets when there are divergent levels of economic
development. Such disparities often make it difficult to have a cohesive strategy, especially in pricing.

Economic trends in different parts of the world can affect marketing activities in other parts of
the world. For example, changes in interest rates in Germany affect the value of the dollar on world
currency markets, which affects the price, and subsequently sales, of Ethiopian exports and imports.

The economic environment is important to marketers because it affects the amount of money
people have to spend on products and services. One of the components of the economic
environment is the distribution of income. Decisions about how much of a product people buy and
which products they choose to buy are largely influenced by their purchasing power. If a large
portion of a country's population is poor, the market potential for many products may be lower
than it would be if they were reasonable prosperous. If a country is expected to enjoy rapid economic
growth and large sectors of the population are expected to share in the increased wealth, sales
prospects for many products would clearly be more promising than if the economy were stagnating.

Below are some of the economic factors which should be of interest to the international
marketer.
 Gross domestic product (GDP)

A widely accepted measure of a country's economic performance is its GDP, which is the total
market value of all final goods and services produced in a particular country within a year. The GDP
measures the productive resources of a country. Changes in GDP indicate trends in economic activity. The
US has the largest economy in the world, followed by Japan, Germany, France, Italy, and Britain. Yet, the US
ranks relatively low on economic growth in recent years, surpassed by much higher growth in Hong Kong,
China, and some countries in Western Europe.



  Disposable income
For consumer goods, perhaps the most important factor influencing the per capita (or 'per
head') demand for a product in a given country is the real disposable income per capita. 'Real income'
means the monetary value of income adjusted for inflation. 'Disposable income' nets out tax
liabilities from the gross income of individuals. Presumably, the higher the per capita income in a
particular market, the greater the demand for (and the higher the price that can be charged for)
goods and services in that region. China is an example of a country whose economic growth has been
increasing at a rapid pace over the past few years, offering substantial opportunities. As incomes rise in China,
so does the demand for consumer products and the heavy machinery, agricultural and medical equipment,
power plants, and communication equipment needed by business and government organizations.

Samuel Chi-Hung Lee, President, International Marketing Consultants Company Limited, discusses
the marketing opportunities available in China: The growth of the Chinese economy has produced
tremendous market opportunities. Hong Kong companies have taken advantage of opportunities in
manufacturing, infrastructure, and property development in the past. Now, opportunities in retailing,
distribution, and other areas are being pursued. For example, we are helping company export costume jewelry
from Hong Kong to south China. I am also considering the establishment of a series of
entertainment/theme/amusement parks in China.

 Government policies toward foreign investment

The policies of foreign governments toward international trade and investment constitute one of
the most important influences on competitive conditions in foreign markets. Many governments,
particularly in developing countries, protect local producers with a combination of tariff and non-tariff
barriers. This often enables firms already established in a particular domestic industry to maintain
their share of the local market while charging prices substantially higher than the cost of production.
 Degree of government intervention
The international marketing strategies that you will put in place will almost certainly differ depending
on whether the target country/market is oriented towards a free market system or whether
there is considerable government intervention in the target country's economy.
  Currency risks
Whilst we have examined economic factors within markets, we also need to bear in mind that in
international marketing transactions invariably take place between countries, so exchange rates
and currency movements are an important aspect of the international economic environment. On top
of all the normal vagaries of markets, customer demands, competitive actions and economic
infrastructures, foreign exchange parities are likely to change on a regular if unpredictable basis.

World currency movements, stimulated by worldwide trading and foreign exchange dealing, are
an additional complication in the international environment. Companies that guess wrongly as to
which way a currency will move can see their international business deals rendered
unprofitable overnight. Businesses that need to swap currencies to pay for imported goods, or because
they have received foreign currency for products they have exported, can find themselves squeezed to
the point where they watch their profits disappear.

2.4. Political/legal environment

The political/legal environment encompasses factors and trends related to governmental activities
and specific laws and regulations that affect marketing practice. The political/legal environment is
closely tied to the social and economic environments. That is, pressures from the social
environment, such as ecological or health concerns, or the economic environment, such as slow
economic growth or high unemployment, typically motivate legislation intended to improve the
particular situation. Regulatory agencies implement legislation by developing and enforcing
regulations. Therefore, it is important for marketers to understand specific political processes, laws,
and regulations, as well as important trends in each of these areas.

A government by its perspective on business enterprise influences the business environment. For
any firm involved in marketing, the role government assumes will influence its activities. The
government may choose to allow and in fact provide free and fair competition, choosing to let the
economic direction of the country be directed by business entities or it may choose to provide the
economic direction itself.

The political environment in which the firm operates (or plan to operate) will have a significant
impact on a company's international marketing activities. The greater the level of involvement in a
foreign markets, the greater the need to monitor the political climate of the countries business is
conducted. Changes in government often result in changes in policy and attitudes towards foreign
business. Bearing in mind that a foreign company operates in a host country at the discretion of the
government concerned, the government can either encourage foreign activities by offering attractive
opportunities for investment and trade, or discourage its activities by imposing restrictions such as import
quotas, etc. An exporter that is continuously aware of shifts in government attitude will be able to adapt export
marketing strategies accordingly.

International Political Trends

In today‘s world economy, international political events greatly affect marketing activities. Here are
the trends of the current global political environment:

 One significant trend is a move from government-dominated economies and socialist

political systems toward free market economies and, in many countries, democratic
governments.

 A second important political trend is movement toward free trade and away from
protectionism.

One approach is the development of trading blocs throughout the world. The aim is to eliminate
trade barriers and to promote easier access to the markets in each participating country. As this
development continues, trading blocs have the potential to generate many opportunities for
marketers. The free trade trend goes beyond trading blocs and encompasses a global perspective. The best
example of this perspective is the General Agreement on Tariffs and Trade, or GATT. This agreement was
signed by 124 countries in 1994to eliminate trade barriers worldwide. The World Trade Organization
(WTO) was established as the watchdog organization, and a world court was set up in Geneva to arbitrate
trade disputes. Although results have been mixed, the WTO is makings low but steady progress toward
free trade around the world.

 A final trend is the use of embargoes or sanctions by the UN or individual governments to

limit trade to specific countries, a popular political weapon in recent years. For example, the US
participated in embargoes against Iraq, South Africa, Libya, and Vietnam. An embargo, of
course, eliminates many potential market opportunities. In contrast, the lifting of trade
sanctions, as in the case of South Africa, can release pent-up demand and produce tremendous
opportunities.

Political Risks

The political environment is connected to the international business environment through the concept
of political risk. An international business entity is a guest of the host country and, therefore, the
host country reserves the right of not only allowing it access but also of expropriating it. It also can
influence the scale and dimensions of the operations through its policies. Political risk is thus the
vulnerability of returns of a project to the political acts of a sovereign government.

Political risk is determined differently for different companies, as not all of them will be equally
affected by political changes. For example, industries requiring heavy capital investment are generally
considered to be more vulnerable to political risk than those requiring less capital investment. Vulnerability
stems from the extent of capital invested in the export market, e.g. capital-intensive extracting or energy-related
businesses operating in the foreign market are more vulnerable than manufacturing companies exporting from a
South African base.

Types of Political risks

The types of action that governments may take which constitute potential political risks to firms fall
into three main areas:

 Operational restrictions. These could be exchange controls, employment policies, insistence on

locally shared ownership and particular product requirements.

 Discriminatory restrictions. These tend to be imposed on purely foreign firms and, sometimes,
only firms from a particular country. The USA has imposed import quotas on Japan in protest at
non-tariff barriers which they view as being imposed unfairly on US exporters. They have also
imposed bans on imports from Libya and Iran in the past. Such barriers tend to be such things as
special taxes and tariffs, compulsory subcontracting, or loss of financial freedom.

 Physical actions. These actions are direct government interventions such as confiscation
without any payment of indemnity, a forced takeover by the government, expropriation,
nationalization or even damage to property or personnel through riots and war. In 2001 the
Nigerian government claimed ownership of Shell‘s equipment and machinery without any prior
warning.

1. Blockage of Funds
An issue associated very closely with the subject of political risk is a temporary or permanent blocking
of funds. Blockage of funds refers to the fact that although a business entity may own the
funds and still hold property rights, it cannot export its earnings. This was a common
problem faced by Indians during Idi Amin's rule in Uganda. Although the government did not
formally make any announcements regarding takeover of property, it had become almost impossible
for the firms to repatriate their earnings in any form.

2. Expropriation
The most extreme case of political vulnerability is expropriation. Expropriation refers to
the government confiscation of property with or without proper reimbursement. Even
where reimbursement is forthcoming, it doesn't equate with the value of the firm, which is the
summation of future earnings by a firm. Reimbursement is often fixed keeping in mind the book value
of assets. It may occur for a number of reasons, including the desire to retain national assets, as a
"hostage" situation in international disputes…

3. Confiscation
Confiscation is the process of a government‘s taking ownership of a property without compensation.
After property has been confiscated or expropriated, it can be either nationalized or domesticated.
  Nationalization involves government ownership, and it is the government that operates
the business being taken over.

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

Another classification system of political risks is the one used by Root. Based on this classification,
four sets of political risks may be identified: general instability risk, ownership/control risk,
operation risk, and transfer risk.
1. General instability risk is related to the uncertainty about the future viability of a host
country‘s political system.
2. Ownership/control risk is related to the possibility that a host government might take
action (e.g., expropriation) to restrict an investor‘s ownership and control of a subsidiary in
that host country.
3. Operation risk proceeds from the uncertainty that a host government might constrain the
investor‘s business operations in all areas, including production, marketing, and finance.
4. Transfer risk applies to any future acts by a host government that might constrain the ability
of a subsidiary to transfer payments, capital, or profit out of the host country back to the
parent firm.

The legal environment

The legal system is an inevitable component of the environment within which a business operates.
The commercial law existing within any country influences not only each and every variable of
marketing mix but also the environment within which a business operates.

It is important, therefore, for the firm to know the legal environment in each of its markets. These
laws constitute the ‗rules of the game‘ for business activity. The legal environment in international
marketing is more complicated than in domestic markets since it has three dimensions: (1) local
domestic law; (2) international law; (3) domestic laws in the firm‘s home base.

Local domestic laws. These are all different! The only way to find a route through the legal
maze in overseas markets is to use experts on the separate legal systems and laws pertaining in
each market targeted.

International law. There are a number of international laws that can affect the organization‘s
activity. Some are international laws covering piracy and hijacking, others are more international
conventions and agreements and cover items such as the International Monetary Fund (IMF)
 and World Trade Organization (WTO) treaties, patents and trademarks legislation and
harmonization of legal systems within regional economic groupings, e.g. the European Union.

Domestic laws in the home country. The organization‘s domestic (home market) legal
system is important for two reasons. First, there are often export controls which limit the free
export of certain goods and services to particular marketplaces, and second, there is the duty of the
organization to act and abide by its national laws in all its activities, whether domestic or
international.

Most issues in the legal/political environment center around the following:-

 Institutional environment - made up of political, social and legal ground rules within which
the global marketer must operate.
 Property rights - patents, trademarks.
 Taxation - what taxation schemes will be faced abroad?
 Recourse - possibility and length of action with the possibility of image damaging
necessitating arbitration.
 Movement of equity and expropriation threats - often necessitating protocols or the
signing of trade frame working agreements.

Legislation

Organizations must deal with laws at the international, federal, state, and local levels. Laws promoting
competition focus on outlawing practices that give a few firms unfair competitive advantages over
others. The specific impact of these laws depends on court rulings that may change over time or differ
at the state and national levels.

Legislations set by foreign governments mainly focused on Consumer protection laws that
may include:

 Consumer protection laws generally indicate what firms must do to give consumers the
information they need to make sound purchasing decisions or to ensure that the products they
buy are safe. For example, the Fair Packaging and Labeling Act require packages to be labeled
honestly; the Child Protection Act regulates the amount of advertising that can appear on children‘s
television programs .
 Laws typically affect marketing activities by indicating what can or cannot be done. For example
Germany had a law that forced most retail stores to close at 6:30 PM on weekdays and 2 PM on
Saturdays until recently , and it did not allow commercial baking on Sunday. This restricted the
operations of retailers. A new law expanded allowable shopping hours to 8 PM on weekdays
and 4 PM on Saturdays; it also allowed bakeries to sell fresh bread on Sunday mornings. Other
stores must remain closed on Sunday.
2.5. Technological Environment

Technology can be defined as the method or technique for converting inputs to outputs in
accomplishing a specific task. Thus, the terms 'method' and 'technique' refer not only to the
knowledge but also to the skills and the means for accomplishing a task. Technological innovation,
then, refers to the increase in knowledge, the improvement in skills, or the discovery of a new or
improved means that extends people's ability to achieve a given task. High technology has become like a
force of nature. It transforms the economy, schools, consumer habits, and the very character of modern life.
Investors pour money into it; parents urge their children to study it; communities vie to attract its factories;
decorators adopt it as a style; politicians push it as a panacea. (Source: Science Digest Magazine)

The technological environment includes factors and trends related to innovations that affect the
development of new products or the marketing process. Rapid technological advances make it
imperative that marketers take a technology perspective. These technological trends can provide
opportunities for new-product development; affect how marketing activities are performed, or both.
For example, advances in information and communication technologies provide new products for firms to
market, and the buyers of these products often use them to change the way they market their own products.
Using these technological products can help marketers be more productive. Fax machines and cellular
telephones are illustrative.

New technologies can spawn new industries, new businesses, or new products for existing business.
To compete successfully, firms must monitor developments in specific technologies. Technological
developments offer marketers both opportunities and threats. Although firms can offer customers a
wider array of advanced products, changes in technology also mean that there may be more than one
technical solution to a customer‘s needs. Increased technological development accelerates the speed
of obsolescence. Marketers have to consider how their product may need to be developed
overtime, if it is to remain competitive. For example, Apple Computer gained an advantage over IBM and
IBM compatibles through the use of its Graphic User Interface (GUI), which meant that the users can
manipulate pictures on the computer screen rather than use complex commands.

The risks from technological changes have meant that firms are increasingly entering into ‗strategic
alliances‘ with customers, suppliers and even competitors. Indeed, there has been an increasing
emphasis on open, long-term relationships, based on trust between customers and suppliers. This is
expected to help in the development of products and the management of technological
Chapter Three
Entry Modes in International Marketing
Introduction
A merchant, it has been said very properly, is not necessarily the citizen of any particular country. It
is in great measure indifferent to him from what places he carries on his trade; and a very stifling
disgust will make him move his capital, and together with the industry which it supports, from one
country to another. For example , Red Bull has demonstrated a practical way to enter foreign
markets. Likewise, Heineken has not entered all markets with a one-track mind and a single-entry
method. Even a large multinational corporation, with all its power, still has to adapt its operating
methods and formulate multiple entry strategies. The dynamic nature of many overseas markets
makes it impossible for a single method to work effectively in all markets.

A mode of entry into an international market is the channel which your organization employs to
gain entry to a new international market.

3.2 Types of entry modes

There are a number ways businesses can sell their products in international markets. The most
appropriate method will depend on the business, its products, the outcome of its Marketing
Environment analysis and its Marketing Plan.
3.2.1 Exporting

Exporting is a strategy in which a company, without any marketing or production organization

overseas, exports a product from its home base. Often, the exported product is fundamentally the
same as the one marketed in the home market.

Advantages of Exporting
Many manufacturing firms begin their global expansion as exporters and only later switch to another
mode for serving a foreign market. Exporting has two distinct advantages:

First, it avoids the costs of establishing manufacturing operations in the host country.

Second, exporting may help a firm achieve experience curve and location economies. By
manufacturing the product in a centralized location and exporting it to other national markets, the
firm may realize substantial scale economies from its global sales volume.

This is how Sony came to dominate the global TV market, Matsushita (Panasonic brand) came to dominate
VCR market, and Samsung gained market share in computer chips.

Other advantages of exporting includes:

 Need for limited finance
 Less Risk
 Motivation for exporting
 Ease in implementing the strategy
Types of Exporting
There are direct and indirect approaches to exporting to other nations.
i. Export indirectly
This involves making use of an export agent, trading house or by piggybacking. The export agent
simply acts as your representative, while the trade house buys and sells for its own account and
represents a customer for you. Piggybacking is when a firm with an existing sales network in the
foreign marketplace agrees to carry your product in addition to their own line. They will normal only
agree to this arrangement if your product(s) complement theirs in some way and adds value to their
sales network.
ii. Direct exporting
Direct exporting is straightforward. Essentially the organization makes a commitment to market
overseas on its own behalf. This gives it greater control over its brand and operations overseas, over
an indirect exporting. In direct exporting, you are responsible for handling the market research,
foreign distribution, logistics of shipment, and for collecting payment.
Direct Export takes for forms: -
 i. Domestic based export department or division : An export sales manager, supporting sales staff,
with some clerical assistants carry on actual selling and draw on marketing assistance as needed. It
might evolve into a self-contained export department or sales subsidiary carrying out all the
activities involved in export and possibly operating as a profit center.
ii. Travelling Export Sales Representatives: The company can send home-based sales representatives
abroad at certain times to find and promote business.
iii. Foreign based Sales Branch or Subsidiary: An overseas sales branch allows the manufacturer to
achieve greater presence and programmed control in the foreign market. The sales branch handles
sales distribution and may handle warehousing and promotion as well. It also serves as a display and
customer service center.
iv. Foreign Based Distributor or Agents: Foreign based distributor would buy and own the goods.
Foreign-based agent would sell the goods on behalf of the company. They may be given exclusive
right to represent the company in that country or only general right.

3.2.2 Licensing
When a company finds exporting ineffective but is hesitant to have direct investment abroad,
licensing can be a reasonable compromise.
Licensing arrangement represents signing of an agreement with a foreign-based enterprise. It is an
arrangement whereby a licensor grants the rights of intangible property to another party, called
licensee, for a specified period, and in return receives a royalty fee. Intangible property includes
patents, processing know-how, trademarks, inventions, formulas, copyrights, and designs etc. of the
company.

Licensing is an agreement that permits a foreign company to use industrial property (i.e. patents, trademarks,
and copyrights) technical knowhow and skills (i.e. feasibility studies, manuals, technical advice, etc),
Architectural and engineering designs, or any combination of these in a foreign market.

Through this agreement, licenser can enter the foreign market at little risk and the licensee gets the
benefits of gaining the manufacturing technology and marketing of a well-known product or brand.
Licensing does not involve marketing facilities. If the cost of production is comparatively lower in
the licensee‘s country, the licenser can import the product from the licensee to improve its
competitive position in its own market.

Licensing is an alternative entry and expansion strategy with considerable appeal. A company with
technology, know how, or a strong brand image can use licensing agreements to supplement its
bottom-line profitability with no investment and very limited expenses. The only cost is the cost of
signing the agreements and of policing their implementation. Licensing, therefore, is very lucrative
for firms lacking the capital to develop operations overseas. In addition, licensing can be attractive when a
firm is unwilling to commit substantial financial resources to an unfamiliar or politically volatile foreign
market. Licensing is frequently used when a firm possess some intangible property that might have business
applications, but it does not want to develop those applications itself. For example , Coca-Cola has licensed its
famous trademark to clothing manufacturers, which have incorporated the design into their clothing.On the other
hand licensing has also some serious drawbacks:

First, it does not give a firm the tight control over manufacturing, marketing, and strategy that is required
for realizing experience curve and location economies.
Second, competing in a global market may require a firm to co-ordinate strategic moves across
countries by using profits earned in one country to support competitive attacks in another. By its very
nature, licensing limits a firm‘s ability to do this. A licensee is unlikely to allow a multinational firm to use its
profits, beyond those due in the form of royalty payments, to support a different licensee operating in
another country.

Another problem with licensing is the risk associated with licensing technological know-how to
foreign companies. Technological know-how constitutes the basis of many multinational firms‘ competitive
advantage. Most firms wish to maintain control over how their know-how is used, and a firm can quickly lose
control over its technology by licensing it. RCA Corporation, for example, once licensed its color TV technology
to Japanese firms including Matsushita (Panasonic brand) and Sony. The Japanese firms quickly assimilated the
technology, improved on it, and used it to sell their products all over the world. Now these firms have bigger
share of TV market than RCA.

Licensing includes franchising, Turn key contracts and contract manufacturing.

 Franchising is the practice of using another firm's successful business model. A parent company
allows entrepreneurs to use the company's strategies and trademarks; in exchange, the franchisee pays an
initial fee and royalties based on revenues. The parent company also provides the franchisee with support,
including advertising and training, as part of the franchising agreement. Franchising is a faster, cheaper form of
expansion than adding company-owned stores, because it costs the parent company much less when new stores are
owned and operated by a third party. On the flip side, potential for revenue growth is more limited because the
parent company will only earn a percentage of the earnings from each new store. Franchising is basically a
specialized form of licensing in which the franchiser not only sells intangible property to the
franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. For
example , McDonald‘s and KFC are good examples of firms that have grown by using a franchising strategy.
McDonald‘s has strict rules as to how franchisees should operate a restaurant. These rules extend to control over the
menu, cooking methods, staffing policies, and design and location of a restaurant. McDonald‘s also organizes the
supply chain for its franchisees and provides management training and financial assistance.


 Turnkey Contract: is a business arrangement in which a project is delivered in a completed state.
Rather than contracting with an owner to develop a project in stages, the developer is hired to finish the
entire project without owner input.

In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client,
including the training of operating personnel. They are more common with the firms that specialize in
design and construction and in chemical, pharmaceutical, petroleum refining, and metal refining industries,
all of which use complex, expensive production technologies. At completion of the contract, the foreign
client is handed the ‗key‘ of the plant that is ready for full operation, hence, the name turnkey.

The firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor.
For example, many of the Western firms that sold oil refining technology to firms in Saudi Arabia, Kuwait,
and other Gulf states now find themselves competing with these firms in the world oil market. Another
disadvantage is that, if the firm‘s process technology is a source of competitive advantage, then selling this
technology through a turnkey project is also selling competitive advantage to potential and/or actual
competitors. Turnkey contracts are major strategies to build large plants. They often include a training and
development of key employees where skills are sparse - You would not own the plant once it is handed over.

For example, nuclear power plants, airports, oil refinery, national highways, railway line etc.

 Contract manufacturing is a process that establishes a working agreement between two

companies. As part of the agreement, one company custom produces parts or other materials on behalf of
their client. In most cases, the manufacturer also handles the ordering and shipment processes for the
client. As a result, the client does not have to maintain manufacturing facilities, purchase raw materials, or
hire labor in order to produce the finished goods.

There are a number of examples of pharmaceutical contract manufacturing currently functioning today, as well
as similar arrangements in food manufacturing, the creation of computer components and other forms of
electronic contract manufacturing. Even industries like personal care and hygiene products, automotive parts,
and medical supplies are often created under the terms of a contract manufacture agreement. For example, Coco
Cola and Pepsi are from the beverage industry. They manufacture flavored soda water. They contract local beverage
manufacturing plants. They also take over many popular local beverage companies.

Home Depot sells General Electric water heaters. General Electric doesn't own a water heater factory. Instead,
they contract with Rheem, who has a huge water heater factory; Rheem makes water heaters to GE's specifications,
puts a GE label on them and ships them in GE-labeled packaging.
 Joint Venture: is a contractual agreement joining together two or more parties for the purpose of
executing a particular business undertaking. All parties agree to share in the profits and losses of the
enterprise.
A joint venture (JV) is a business agreement in which parties agrees to develop, for a finite time, a new
entity and new assets by contributing equity. They exercise control over the enterprise and consequently
share revenues, expenses and assets.

There are five common objectives in a joint venture: market entry, risk/reward sharing,
technology sharing and joint product development, and conforming to government
regulations. Other benefits include political connections and distribution channel access that may depend
on relationships.

Potential problems include:

 conflict over asymmetric new investments
 mistrust over proprietary knowledge
 performance ambiguity - how to split the pie
 lack of parent firm support
 cultural clashes
 if, how, and when to terminate the relationship

For example ,Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and
the Swedish telecommunications company Ericsson to make mobile phones. The stated reason for this venture is to
combine Sony's consumer electronics expertise with Ericsson's technological leadership in the communications sector.
Both companies have stopped making their own mobile phones.

Virgin Mobile India Limited is a cellular telephone service provider company which is a joint venture between Tata
Tele service and Richard Branson's Service Group. Currently, the company uses Tata's CDMA network to offer its
services under the brand name Virgin Mobile, and it has also started GSM services in some states. The advantages of
this strategy include the sharing of risk and the ability to combine different value chain strengths. One
company may have in depth knowledge of a local market, and extensive distribution system, or access to
low-cost labor or raw materials. Such a company might link up with a foreign partner possessing
considerable know-how in the area of technology, manufacturing and process applications.
For example Lenvest is a joint venture between West Germany‘s Salmander, a shoe manufacturer, and the
Proletarian Shoe factory in St. Petersburg Russia. The Russian side brought abundant, low wage labor and plentiful
raw materials to the table. The Germans provide machinery and equally important the knowhow, management
technique, and quality control that are virtually unknown in the former Soviet republic.
  Foreign Direct Investment (FDI) is the direct ownership of facilities in the target country. It
involves the transfer of resources including capital, technology, and personnel. Direct foreign
investment may be made through the acquisition of an existing entity or the establishment of a new
enterprise.
 Foreign direct investment (FDI) is direct investment into production in a country by a company
in another country, either by buying a company in the target country or by expanding operations of
an existing business in that country. Foreign direct investment is done for many reasons including to
take advantage of cheaper wages, and/or for special investment privileges such as tax exemptions
offered by the country as an incentive to gain tariff-free access to the markets of the country or the
region.

Direct ownership provides a high degree of control in the operations and the ability to better know the consumers
and competitive environment. However, it requires a high level of resources and a high degree of commitment.
Making a direct foreign investment allows companies to accomplish several tasks:

 Avoiding foreign government pressure for local production.

 Circumventing trade barriers, hidden and otherwise.

 Making the move from domestic export sales to a locally-based national sales office.

 Capability to increase total production capacity.

 Opportunities for co-production, joint ventures with local partners, joint marketing
arrangements, licensing, etc;

For example, Toyota, Honda, etc have factories in the United States. Whereas if you want a Lamborghini, it is built
overseas and imported. The company has not direct investment of capital in the U.S.

Foreign direct investment can be Green field (I.e. 100% owned new entity), and Acquisition
(100% owned of already established business).

 Strategic Alliances (SA): is a relationship between two or more parties to pursue a set of agreed
upon goals or to meet a critical business need while remaining independent organizations.

Strategic alliances refer to co-operative agreements between potential or actual competitors to co- operate
out of mutual need and to share risk in achieving common objectives. Strategic alliances run the range from
formal joint ventures in which two or more firms have equity stake, like Fuji-Xerox venture for Japan; to
short-term contractual agreements, in which two companies agree to cooperate on a particular task such as
developing a new product, like Coca-Cola and Nestle joined forces to develop the international market for
‗ready to drink‘ tea and coffee, which currently sell in significant amounts only in Japan.
For example, Starbucks partnered with Barnes and Nobles bookstores in 1993 to provide in-house coffee shops,
benefiting both retailers. In 1996, Starbucks partnered with Pepsico to bottle, distribute and sell the popular coffee-
based drink, Frappacino.

Today, Nokia and Microsoft have officially entered a strategic alliance that makes Windows Phone 7 Nokia‘s primary
smart-phone platform, but also extends into many other Microsoft services such as Bing, Xbox Live and Office.
A strategic alliance implies:

(i) that there is a common objective;

(ii) that one partner‘s weakness is offset by the other‘s strength;

(iii) that reaching the objectives alone would be too costly, take too much time, or be too risky; and (iv)
together their respective strengths make possible what otherwise would be unattainable. In short, a strategic
alliance is a synergistic relationship established to achieve a common goal where both parties benefit.

Strategic alliances also allow firms to share the fixed costs and associated risks of developing new products
or processes. Motorola‘s alliance with Toshiba also was partially motivated by a desire to share high fixed
costs of setting up an operation to manufacture microprocessors. The microprocessor business is so capital
intensive – Motorola and Toshiba each contributed close to $I billion to set up their facility – that few firms can
afford the costs and risks by themselves. Similarly, an alliance between Boeing and a number of Japanese companies to
build the 767 was motivated by Boeing‘s desire to share the estimated $2 billion investment required to develop the
aircraft.

An alliance is also a way to bring together complimentary skills and assets that neither company could
easily develop on its own. An example is the alliance between France‘s Thomson and Japan‘s JVC to
manufacture VCRs. JVC and Thomson are trading core competencies. Thomson needs product technology and
manufacturing skills, while JVC needs to learn how to succeed in the fragmented European market. Similarly, AT&T
struck a deal in 1990 with NEC Corporation of Japan to trade technological skills. AT&T gave NEC some of its
computer aided design technology, and NEC gave AT&T access to the technology underlying its advanced logic
computer chips. Such trading of core competencies seems to underlie many of the most successful strategic alliances.

 The Internet: is a new channel for some organizations and the sole channel for a large number of
innovative new organizations. The e-Marketing space consists of new Internet companies that have emerged
as the Internet has developed, as well as those pre-existing companies that now employ e-Marketing
approaches as part of their overall marketing plan. For some companies the Internet is an additional channel
that enhances or replaces their traditional channel(s). For others the Internet has provided the opportunity
for a new online company.
3.3 .Selecting entry modes

Firms should consider several strategic factors when selecting an entry mode.

Cultural differences can reduce managers‘ confidence in their ability to control operations
in the host country. A lack of cultural familiarity can cause a firm to avoid investment entry
and pursue exporting or contractual entry.

Political instability in a host country increases the risk exposure of assets. Political
uncertainty can cause companies to avoid investment entry in favor of other modes. But a
target market‘s laws can encourage investment if, for example, it imposes high tariffs or low
quota limits on imports.

Market size is often a determining factor in entry mode choice. Rising incomes can
encourage investment to help a firm better understand the target market and prepare for
growing demand. For example, companies are undertaking enormous investments in China,
but making far more modest investments or pursuing exporting and contractual entry in
smaller markets.

Low-cost production and shipping can give a company an advantage by helping it control
total costs. If producing in a host country lowers a firm‘s total production costs, it can
encourage investment, licensing, or franchising.

As international experience grows, a firm may select entry modes that require deeper
involvement, but which also involve greater exposure to risk.

Modes of entry

Exporting Contractual Joint Venture Acquisition Greenfield

Agreement Investment
Risk Low Low Moderate High High

Return Low Low Moderate High High

Control Moderate Low Moderate High High

Integration Negligible Negligible Low Moderate High

Chapter Four

Barriers In International Marketing

4.1. Tariff and non-tariff restrictions

Trade barriers are government-induced restrictions on international trade export products

generally become less competitive, or uncompetitive, as a result of the barriers. Besides for the
different environments that you will encounter abroad (which we have said are barriers to trade in
their own right), there are also tariff and non-tariff barriers to trade that you should be aware of.
These are discussed below:

Tariff barriers
A tariff is a tax that is placed on imported goods by governments. Governments do this for several
reasons:

 They may wish to restrict the amount of imported goods coming into the countryin
orderto protect or encourage a positive trade balance. If a country imports more than it
exports, it will have to use valuable foreign exchange to pay for these goods - this is referred
to as a negative trade balance or a trade deficit. Since a country's foreign exchange holdings
represents direct wealth to the country, as more foreign exchange leaves the country to pay
for imported goods so the country becomes relatively poorer. Governments try to prevent
this by placing tariffs (taxes) on imported goods.

 They may wish to protect a local industry from foreign competition . This is often done
where the industry in question is still very young and susceptible to foreign competition. The
government will then place a tax on imported goods that compete with goods being produced
by that industry, thus making these imported goods more expensive compared with locally
produced goods. In so doing, the expectation is that consumers will buy more of the locally
produced goods thereby helping the industry to grow. Once the industry is better established
the intention is normally to withdraw the tariff so that the local industry can compete
normally with foreign competitors.

 Some countries introduce tariffs in order to generate additional revenues for the country.
This is often done in the case of luxury goods.
  Protecting Consumers: A government may levy a tariff on products that it feels could
endanger its population. For example, South Korea may place a tariff on imported beef from
the United States if it thinks that the goods could be tainted with disease.

 National Security: Barriers are also employed by developed countries to protect certain
industries that are deemed strategically important, such as those supporting national security.
Defense industries are often viewed as vital to state interests, and often enjoy significant
levels of protection. For example, while both Western Europe and the United States are
industrialized, both are very protective of defense-oriented companies.
Types of Tariffs

A tariff may be one of the following four kinds:

1. Ad valorem

The phrase ad valorem is Latin for "according to value", and this type of tariff is levied on a good
based on a percentage of that good's value. The kind most commonly used is one that is calculated as
a percentage of the value of the imported goods - for example: 10, 25 or 35 percent. This may be
based, depending on the country, either on destination (c.i.f.), or on the value of the goods at the port in the
country of origin (f.o.b.).

2. Specific Tariffs

A fixed fee levied on one unit of an imported good is referred to as a specific tariff. This tariff can
vary according to the type of good imported. It is a tax of so much local currency per unit of the goods
imported (based on weight, number, length, volume or other unit of measurement). Specific duties are
often levied on foodstuffs and raw materials.

For example, a country could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each
computer imported.
3. Compound Duty

Compound duty is assessed as a combination of the specific duty and ad valorem duty ($20 per
kilogram net, plus 30% of FOB price).

4. Countervailing Duty

Countervailing duty is a duty imposed in addition to the regular (general) import duty, in order to
counteract or offset the subsidy and bounty paid to foreign export-manufacturers by their
government as an incentive to export, that would reduce the cost of goods. Imposing a
countervailing duty is the answer to unfair competition from subsidized foreign goods.
5. Anti-dumping Duty

Anti-dumping duty is a duty imposed to offset the advantage gained by the foreign exporters when
they sell their goods to an importing country at a price far lower than their domestic selling price or
below cost. Dumping usually occurs from the oversupply of goods, which is often a result of
overproduction, and from disposing of obsolete goods to other markets.

Non-tariff barriers
Any barrier to doing business over international borders and that is not a tariff barrier, is classified as a
non-tariff barrier. As the various environments that you are likely to encounter in foreign markets
represent barriers in their own right, they are also therefore a form of non-tariff barrier - these
environments have been discussed in some detail elsewhere.

Non-tariff barriers include the following:

 Quotes - Quotas are defined as a specific unit or currency limit applied to a particular type of good.
Quotes are thus quantitative restrictions applied to the import of goods and have the effect of either
barring goods from a market altogether, or increasing the price of the goods in that market.

 Licensing requirements - Some goods may only be imported only if they have been issued with
import licenses by the authorities (such as in the case of armaments). While licensing in itself should
not hinder the export process, some countries issue only a limited number of licenses (thereby
excluding late entrants from the market), or they may make the licensing process so cumbersome as
to make it impossible or extremely difficult to obtain the license.

 Sanctions/embargoes/boycotts - Sanctions, embargoes and boycotts represent an absolute

prohibition on the purchase and import of goods from the sanctioned/embargoed/boycotted
country. In the apartheid era, South Africa was subject to sanctions and boycotts from many of its
former trading partners.

 Customs and administrative entry procedures - These procedures, while they may be applied
uniformly, are often so cumbersome and complex that they represent a major trade restriction in
their own right. What is more, local manufacturers within the target market are generally not subject
to the same procedures (except in instances where they may be using imported raw materials or
components), and this places the exporter at a disadvantage compared to local firms.
 Standards - This category is described as including unduly discriminating health, safety, and quality
standards that make it difficult for exporters to comply with these standards, thereby effectively
barring them from that market.

 Government participation in trade - It is quite common for governments to follow discriminatory

public purchasing activities (i.e. that favor buying local) as an effective way to lock out international
competitors.
  Charges on imports - A few countries may apply port-of-entry taxes or levies on imported goods.
The purpose of such a tax is usually to offset infrastructure costs at a port, for example, but such
levies often stay in place long after their intended purpose has been achieved.

 Exchange controls - One of the more complete forms of non-tariff barriers, exchange controls
represent a government monopoly on all dealings in foreign exchange. South Africa is an example of
a country that still applies exchange controls on its trading community. Local firms therefore have to
obtain permission to buy the foreign exchange they need to import goods and services and exporters
also need to pay their foreign exchange earnings back to the commercial banks within seven days of
receiving such income. No company is allowed to hold foreign exchange without permission from
the Reserve Bank.

 Differing product classification - Since the classification of a product according to the various
customs' product categories will almost certainly impact on the duty that is applied to that imported
good, exporters may occasionally be frustrated by customs authorities (who always have the final say)
who classify their goods into a category that they exporter does not agree with. This classification
may render the goods completely uncompetitive in the market .

4.2. Export documents

Export documentation is a tedious but necessary process that all exporters must pay close attention
to, as documentation requirements vary considerably by country, commodity, and situation.
Although exporters must fill out and submit many different forms for each international shipment,
most require similar data elements and can (and should!) be duplicated precisely from one document to
the next. Fortunately, there are software products that capture the primary details of the shipment and
insert them into the necessary documents without flaw/error.

Shipping documents are the key to international trade, and have been used for thousands of years.
Documents outline the sale, shipment, and responsibilities of each party so that the full transaction is
understood and complete without delay or additional costs. Documents also ensure compliance with
applicable regulations. Below are some factors to consider when determining which documents are
needed for a particular shipment;

 Country of origin and destination, as well as transshipment

 Mode of transportation — truck, rail, ocean, air, pipeline

 Commodity — agriculture, livestock, safety/security, end-use, intangible- software, service

 Size — value, volume, weight, dimensions

 Parties to the transaction — shipper, consignee, agents, brokers, banks

Based on these factors, many of the following documents may be required for an international
shipment. These documents can be prepared by the exporter and then processed or forwarded by a
Freight Forwarder or clearing agent.

a. Invoices — Commercial, Pro-forma, Consular

b. Packing Lists — Dock, or Warehouse, Receipt

c. Bills of Lading (B/L) — Ocean B/L, or Motor/Truck or Air Bill, or Way Bill

d. Electronic Export Information (formerly the Shipper‘s Export Declaration, or SED) is not an
actual document but still a very important part of the export process

e. Certificates of Origin (C/O), sometimes country-specific — NAFTA C/O, Israel C/O

f. Declaration of Dangerous Goods (DGD) — Hazmat, placards

g. Certificates — Insurance, Free Sale, Inspection, Phytosanitary, Authentication (Apostille)

h. Miscellaneous: Letters of Credit, Duty Drawback…

4.3. Terms of sale Contract Terms or Incoterms/

Export transactions necessarily involve movement of goods from one country to another. The basic
task of an export contract is to allocate the risks and costs of export shipments between the exporter
and importer. Simultaneously, it also seeks to provide a system through which disputes, if any, can
be settled, in case either party fails to honor what the contract has provided in the first instance.

INCOTERMS: International Contract Terms or Incoterms in short is a series of

international sales terms that divides transaction costs and responsibilities between buyer and
seller.

The Incoterms, like other standard trade terms, facilitate contracting by giving the parties the option
of incorporating detailed regimes of rights and obligations, by the simple use of a shorthand
expression. The purpose of ‗Incoterms‘ is to provide a set of international rules for the interpretation
of the most common trade terms in foreign trade. Thus, the uncertainties of different interpretations
of such terms in different countries can be avoided or at least reduced to a considerable degree.

The INCOTERM Categories

There are 13 Incoterms, and they are grouped into four categories. There are several principles
underpinning this system of classification, and the subdivisions within each category (i.e. in the
individual terms themselves). Broadly, the terms are grouped according to the extent to which the
seller on the one hand, or the buyer on the other, are each responsible for the delivery of the goods,
and related aspects of this.
At one extreme, the EXW term imposes the minimum responsibility on the seller and a
corresponding maximum liability on the buyer (the seller‘s delivery obligations are ended when he
makes the goods available to the buyer at his premises). At the other extreme the D terms impose
the maximum obligation on the seller with a corresponding diminution of responsibility on the part
of the buyer, because these terms oblige the seller to deliver the goods to an agreed destination in the
buyer‘s country. The intermediate terms in categories F and C impose intermediate levels of
obligation on each party; C is more onerous/burdensome where the seller is concerned than F.

1) THE E CATEGORY—Ex-works

EX-Works

One of the simplest and most basic shipment arrangements places the minimum responsibility on the seller
with greater responsibility on the buyer. In an EX-Works transaction, goods are basically made available for
pickup at the shipper/seller's factory or warehouse and `delivery' is accomplished when the merchandise is
released to the consignee's freight forwarder. The buyer is responsible for making arrangements with their
forwarder for insurance, export clearance and handling all other paperwork.

2) THE F CATEGORY—FCA, FAS, FOB

The F terms are so named because the seller hands the goods over to the carrier free of expense
and risk to the buyer. Once, however, the carrier has them, the buyer assumes the risk and expense
including the expense of carriage. These contracts are known as ‗shipment‘ contracts, with the seller
fulfilling his delivery obligation in his own country. (D-class contracts, in contrast, are ‗arrival‘
contracts.) After the EXW term, the F terms are the most beneficial to the seller.
a. FOB (Free On Board)

One of the most commonly used-is FOB means that the shipper/seller uses his freight forwarder to move the
merchandise to the port or designated point of origin. Though frequently used to describe inland movement of
cargo, FOB specifically refers to ocean or inland waterway transportation of goods. "Delivery" is
accomplished when the shipper/seller releases the goods to the buyer's forwarder. The buyer's responsibility for
insurance and transportation begins at the same moment.

b. FCA (Free Carrier)

FCA requires that the seller deliver the goods to the carrier nominated by the buyer, at the specified place, after
having cleared them for export. Once delivery has been effected, the seller has fulfilled his delivery obligations.
The term is suitable for all forms of transport and formulate-modal operations.

c. FAS (Free Alongside Ship)

FAS requires the seller to deliver the goods alongside the ship, i.e. on the wharf/dock or in one or more
lighters. Thereupon, the risks and costs are divided. In principle, the transaction, from the seller‘s viewpoint, is
little different from a domestic sale where he delivers goods to the premises of a domestic buyer. The buyer is
responsible for export clearance and the main contract of carriage. By its nature, FAS is to be used only for sea
and inland water way transport.

3) THE C CATEGORY—CFR, CIF, CPT, CIF

As noted, the C terms are so designated because the seller bears specified costs even after delivery, at
which point the general costs and risks have passed to the buyer. Under C terms (and contrary to the
situation under the F terms), the seller is responsible for organizing the contract of (main) carriage. C
contracts are often referred to as shipment contracts (in contrast to the D contracts, which are known
as arrival contracts).

a. CFR (Cost and Freight)

This term formerly known as CNF (C&F) defines two distinct and separate responsibilities-one is dealing with
the actual cost of merchandise "C" and the other "F" refers to the freight charges to a predetermined
destination point. It is the shipper/ seller's responsibility to get goods from their door to the port of
destination. "Delivery" is accomplished at this time. It is the buyer's responsibility to cover insurance from the
port of origin or port of shipment to buyer's door. Given that the shipper is responsible for transportation, the
shipper also chooses the forwarder.

b. CIF (Cost; Insurance and Freight)

This arrangement similar to CFR, but instead of the buyer insuring the goods for the maritime phase of the
voyage, the shipper/seller will insure the merchandise. In this arrangement, the seller usually chooses the
forwarder. "Delivery" as above, is accomplished at the port of destination. The CIF seller‘s obligations, then,
are: obtain and pay for export clearance; and transport the goods to the ship and deliver them on board, with
the risks and costs being transferred to the buyer at the moment when the goods pass over the ship‘s rail.

c. CPT (Carriage Paid To)

In CPT transactions the shipper/seller has the same obligations found with CIF, with the addition that the
seller has to buy cargo insurance, naming the buyer as the insured while the goods are in transit.

d. CIP (Carriage and Insurance Paid To)

This term is primarily used for multimodal transport. Because it relies on the carrier's insurance, the
shipper/seller is only required to purchase minimum coverage. CIP imposesupon the seller, the
obligation to insure the goods against loss or damage during theircarriage to the named destination. The buyer's
insurance is effective when the goods are turned over to the Forwarder.

4) THE D CATEGORY—DAF, DES, DEQ, DDU, DDP

The D terms, it has been seen, are so designated because the seller contracts to deliver the goods at
an agreed destination (normally, in the buyer‘s country). Therefore, the seller‘s delivery obligation is
not fulfilled at an earlier time in his own country (a feature of the E, F and C categories) but at a
later time after the conclusion of the main carriage. The D terms (also known as ‗delivered‘ terms)
are the most demanding, from the seller‘s viewpoint. He must arrange the main carriage to the
agreed destination and bear the costs and risks during this carriage. If the goods are lost in transit,
this is to the seller‘s account rather than the buyer‘s (although the seller may have recourse against a
third party, such as the carrier). D terms are increasingly used, as exporters who can deliver in the
buyer‘s country are, all things being equal, more likely to get an order for their goods.

a. DAF (Delivered At Frontier)

Here the seller's responsibility is to hire a forwarder to take goods to a named frontier, which usually is a border
crossing point, and clear them for export. "Delivery" occurs at this time. The buyer's responsibility is to
arrange with their forwarder for the pick-up of the goods after they are cleared for export, carry them across
the border, clear them for importation and effect delivery. In most cases, the buyer's forwarder handles the task
of accepting the goods at the border across the foreign soil.

b. DES (Delivered Ex Ship)

In this type of transaction, it is the seller's responsibility to get the goods to the port of destination or to engage
the forwarder to move the cargo to the port of destination unclear. "Delivery" occurs at this time. Any
destination charges that occur after the ship is docked are the buyer's responsible.
c. DEQ (Delivered Ex Quay)
In this arrangement, the buyer/consignee is responsible for duties and charges and the seller is
responsible for delivering the goods to the quay, wharf or port of destination. In a reversal of previous practice,
the buyer must also arrange for customs clearance.

d. DDU (Delivered Duty Unpaid)

This arrangement is basically the same as with DDP, except for the fact that the buyer is responsible for the
duty, fees and taxes.

e. DDP (Delivered Duty Paid)

DDP terms tend to be used in intermodal or courier-type shipments. Whereby, the shipper/seller is responsible
for dealing with the entire task involved in moving goods from the manufacturing plant to the
buyer/consignee's door. It is the shipper/seller's responsibility to insure the goods and absorb all costs and
risks including the payment of duty and fees.

4.4. Terms of payment in International Marketing

Payment Modalities

There are 5 methods of payment depending upon the terms of payment & each method of payment
involves varying degrees of risks for the exporter. The methods are:
 A. Payment in advance

B. Open Account

C. Payment against Shipment on Consignment

D. Documentary Bills

E. Letter of Credit (L/C)

A. Payment in Advance

This method does not involve any risk of bad debts, provided entire amount has been received in
advance. At times, a certain percent is paid in advance, say 50% & the rest on delivery.

B. Open Account

After the goods are dispatched, the exporter sends documents of title to goods to the importer with
his invoice & then waits for payment. If no credit is allowed, the importer pays immediately. This
method is simple & avoids additional charges involved in other methods of payment. However,
there is a considerable risk involved in this method.
C. Payment Against Shipment or Consignment

The exporter supplies the goods to the overseas consignee or agent, without actually giving up the
title. Payment is made only when the goods are ultimately sold by the overseas consignee to other
parties. This method is costly, because of commission to be paid to the consignee, apart from other
charges & at the same time it is very risky. The consignee may return the goods back if remained
unsold & even the consignee may not clear of the dues in time. The price to be realized is also
uncertain as it depends on market conditions in the buyer‘s country. However, this method offers an
advantage to the buyer as the buyer can examine the goods before purchasing & the seller may get a
higher price if the buyer is satisfied about the quality.

The above types of payment methods also referred as clean payments. Clean payments are
characterized by trust. Either the exporter sends the goods and trusts the importer to pay once the
goods have been received, or the importer trusts the exporter to send the goods after payment is
effected. In the case of clean payment transactions, all shipping documents, including title
documents, are handled directly by the trading parties. The role of banks is limited to clearing funds
as required.

 In case of open account: the importer is trusted to pay the exporter after receipt of the goods, i.e.,
the exporter ships the goods and the documents directly to the importer and waits for the Importer to
send payment.
  In case of payment in advance: the exporter is trusted to ship the goods after receiving payment
from the Importer, i.e., he importer sends payment directly to the exporter and waits for the exporter
to send the goods and document

D. Documentary Collection

A documentary collection is a method of payment used in international trade whereby the exporter
entrusts the handling of commercial and often financial documents to banks and gives the banks
instructions concerning the release of these documents to the importer.

Types of documentary collections

Documentary collections may be processed in two ways:

1. Documents against payment

Documents are released to the importer only against payment.

This is known as a sight collection or cash against documents (CAD).

2. Documents against acceptance

Documents are released to the importer only against acceptance of a draft (bill of exchange)

This is known as a term collection.

Mechanics of documentary collection

The mechanics of a documentary collection are separated into the following three steps:

I. Flow of Goods

After the importer and the exporter have established a sales contract and agree on a documentary
collection as the method of payment, the exporter ships the goods. In a documentary collection, the
importer is known as the “drawee” and the exporter as the “drawer”.

II. Flow of Documents

After the goods are shipped, documents originating with the exporter (e.g. commercial invoice) and
the transport document(e.g. bill of lading) are delivered to a bank, called the remitting bank in the
collection process. The role of the remitting bank is to send these documents, accompanied by a
collection instruction giving complete and precise instructions to a bank in the importer‘s country,
referred to as the collecting/ presenting bank.

The collecting/ presenting bank acts in accordance with the instructions given in the collection
instruction and releases the documents to the importer against payment or acceptance, according to
the remitting bank‘s collection instructions.
Note: The exporter’s bank and the remitting bank need not be the same. Also, the collecting
bank and presenting bank need not be the same. Each role could be performed by a different
bank.
III. Flow of Payment

Payment is forwarded to the remitting bank for the exporter‘s account and the importer can now
present the transport document to the carrier in exchange for the goods.

E. Letters of Credit

This method of payment has become the most popular form in recent times, as it is more secured as
compared to other methods of payment (other than advance payment).

A letter of credit can be defined as ―an undertaking by importer‘s bank stating that payment will be
made to the exporter if the required documents are presented to the bank within the validity of the
L/C.‖
A letter of credit is a written undertaking by the importer’s bank, known as the issuing bank,
on behalf an importer (applicant), promising to effect payment in favor of the exporter
(beneficiary) up to a stated sum of money, within a prescribed time limit and against stipulated
documents.
The popularity of letters of credit derives from the fact that a seller can be confident that, provided
he can meet the requirements stipulated in the letter, he will receive prompt payment.Also, a buyer
who is able to offer the security of payment by a letter of credit is usually in a better bargaining
position than a buyer offering an alternative method of payment.

A key principle underlying letters of credit is that banks deal only in documents and not in goods.
The decision to pay under a letter of credit will be based entirely on whether the documents
presented to the issuing bank appear on their face to be in accordance with the terms and conditions
of the letter of credit. It would be prohibitive for the banks to physically check whether all
merchandise has been shipped exactly as per each letter of credit.

Types of letters of credit

There are two types of letters of credit, revocable or irrevocable.

1. A revocable letter of credit can be revoked without the consent of the exporter, meaning that it
may be cancelled or changed up to the time the documents are presented. Revocable letters of credit
are very rarely used.

2. An irrevocable letter of credit cannot be cancelled or amended without the consent of all parties
including the exporter.

 Unless otherwise stipulated, all letters of credit are irrevocable.

Letters of credit may be settled either by sight or by acceptance:

 If payment is to be made at the time that documents are presented, this is referred to as a
sight letter of credit.

 If payment is to be made at a future fixed time from the presentation of documents, this is
referred to as an acceptance/term letter of credit.

Letters of credit may be confirmed, that is to say:

Under a confirmed letter of credit, a bank, called the confirming bank, adds its commitment
to that of the issuing bank to pay the exporter under the letter of credit provided all terms
and conditions of the letter of credit are met. The confirming bank is usually located in the
same country as the exporter.

An exporter would request a confirmed letter of credit if it does not consider the financial strength
of the issuing bank or the country in which it is located to be acceptable risks.
Mechanics of letters of credit

The mechanics of a letter of credit are separated into the following three steps:

I. Issuance

First, after the trading parties agree on a sale of goods where payment is made by letter of credit, the
importer requests that its bank (the issuing bank) issue a letter of credit in favor of the exporter
(beneficiary)

The issuing bank then sends the letter of credit to the advising bank. A request may be included for
the advising bank to add its confirmation. The advising bank is usually located in the country where
the exporter does business and may be the exporter‘s bank, but does not have to be.

Next, the advising/confirming bank verifies the letter of credit for authenticity and sends it to the
exporter.

Issuance process:

II. Flow of Goods

Upon receipt of the letter of credit, the exporter reviews the letter of credit to ensure that it
corresponds to the terms and conditions in the purchase and sales agreement; that the documents
stipulated in the letter of credit can be produced; and that the terms and conditions of the letter of
credit can be fulfilled. Assuming the exporter is in agreement with the above it arranges for
shipment of the goods.

After the goods are shipped, the exporter presents the documents specified in the letter of credit to
the advising/confirming bank. Once the documents are checked and found to comply with the letter
of credit (i.e. without discrepancies),the advising/confirming bank forwards these documents to the
issuing bank. In turn, the issuing bank examines the documents to ensure they comply with the letter
of credit. If the documents are in order, the issuing bank will obtain payment from the importer so
payment can be made to the exporter‘s bank. Documents are delivered to the importer to allow it to take
possession of the goods.

III. Flow of Payments

The payment under the letter of credit is either made at the time the documents are released to the
importer (sight letter of credit) or on acceptance of the bill of exchange (term letter of credit). The
importers bank then sends the payment or advice of acceptance to the exporter‘s bank.
The following diagram illustrates the flow of documents and payment under a letter of credit:

The following diagram illustrates the degree of risk involved across all three payment types:
Chapter Five

International Marketing Mix Elements

5.1 Introduction
Companies that operate in one or more foreign markets must decide how much, if at all, to adapt
their marketing strategies and programs to local conditions. At one extreme are global companies
that use standardized global marketing, essentially using the same marketing strategy approaches
and marketing mix worldwide. At the other extreme is adapted global marketing. In this case, the
producer adjusts the marketing strategy and mix elements to each target market, bearing more costs
but hoping for a larger market share and return.

In this chapter we will try to discuss about the major international marketing mix decision made by
international or global firms.

5.1. International Product Decisions

Product—a collection of physical, psychological, service and symbolic attributes that collectively
yield satisfaction, or benefits, to a buyer or user.

5.1.1. Adaptation Vs standardization

When management does not match products with target markets effectively, a product blunder
occurs. Two common reasons are:

 Marketing wrong products to wrong market

 Marketing right product but not adapting the products according to the needs of the target market.

These reasons call for two tasks to be performed by the managers when they formulate product
strategies for overseas markets. The first task is to take care in deciding what product to market and
the second is to decide whether the company should standardize its products or adapt according to
the needs of the market.

Some international firms enjoy strong customer preferences for their products. When these
conditions occur, customer adaptation needs are minimal, and companies can follow a global
strategy, selling a standardized product on a worldwide basis. IBM, Xerox, Coca-Cola, and
Mercedes-Benz are example. Other firms have to cater to market specific needs to be successful.
These firms use product adaptation strategies. Levi‘s, for example, sells its blue jeans internationally
but adjusts to different body types in different countries. For example , McDonalds has also adapted its
menu according to Indian customer‘s tastes and preferences by using cheese instead of ham and pork in its
burgers. International product decision-making often centers around the standardization versus
adaptation debate. Essentially, do we market the same, standard product in an international market or
segment, or do we localize it, and adapted it so that it pleases local tastes?

A. Product standardization

Many consumer durables such as automobiles, televisions, radios, camera, refrigerators, air
conditioners and so on appeal to similar basic needs in all markets. Generally, their promotional
campaigns emphasize reliability, quality, superior performance, and price-quality combinations. In
these categories of product, standardization is better approach. For these products, the same
formulas for market success work in most or all markets. The companies using this approach pursue
global strategies that entail marketing essentially the same product everywhere and making only
mandatory adaptations to secure market acceptance.

Unfortunately, such markets are not very easy to find. Coca-Cola and Mercedes-Benz have virtually
created such markets. Even Coca-Cola occasionally adapts the sweetness and fizziness of the
product. Mercedes-Benz cars are also slightly different only because of local government safety
requirements. Some arguments, as given below, advocates the use of product standardization:
Revlon, for example, used to shipsuccessful products abroad without changes inproduct formulation, packing
(without any translation,in some cases), and advertising.
The following are the factors that favor product standardization:

- Economies of scale in production:

- Reduction in stock costs:
- Technological content
- Consumer mobility: Standardization is essential to consumer acceptance where products are of
particular relevance to travelers or tourists, e.g. camera film, baby foods, etc.
- Market homogeneity: Some products are homogenous and a world market is available without
product modifications being necessary, e.g. blue jeans, CDs, raw materials, etc.

B. Product adaptation

As companies extend their marketing operations overseas, most find market segments with sets of
needs that can‘t be satisfied by global standards. If these market segments have large enough sales
potentials, then MNCs adapt products to fit the localized needs. Most markets possess some unique
characteristics that have the potential of rendering a global product unmarketable unless appropriate
adaptations are made. For instances, because roads and streets in many old European and Indian cities are
narrow and twisting, large US cars such as Cadillac and Lincoln are difficult to maneuver and sometimes
impossible to use. Thus large US cars can‘t be sold in Europe until or unless adapted to consumer needs.
Product adaptation is the process by which a company adjusts and improves upon a product to
make it more appealing to the target market.
The following are the factors that favor product adaptation/differentiation:

- Maximization of profits is usually the primary motivation for going to the expense of modifying a
product and is in direct contrast to the policy of cost reduction through standardization.
- Differing consumer tastes affect food, fashion, and household products, in particular
- Inadequate consumer purchasing power may necessitate a low price and a corresponding reduction
in the quality (e.g. finish or grade) of a product.
- Variations in national conditions, such as different approaches to wearing and washing clothes may
necessitate different kinds of washing machines, or soaps and detergents.
- Where the level of technical ability is generally low, a product may have to be simplified or provided
with good back-up.
- Tariff levels may dictate local manufacture or assembly, or local purchase of components, thus
preventing standardization.
- Government taxation policy may necessitate changes to the product in order to reduce the amount of
tax payable, e.g. car tax related to engine size.
- Sometimes climatic conditions dictate that modifications be made to products that are sensitive to
temperature or humidity, e.g. the composition of car tires will vary from one market to another
depending on the extremes of climate…

5.1.2. Degree of adaptation and standardization

The best way to define a product is to describe it as a bundle of utilities or satisfaction. Five
strategies allow for adapting product and marketing communication strategies to a global market.
We first discuss the three product strategies and then turn to the communication strategies.

1. Straight product extension means marketing a product in a foreign market without any
change. Top management tells its marketing people, “Take the product as is and find
customers for it.” The first step, however, should be to find out whether foreign consumers use
that product and what form they prefer. Straight extension has been successful in some cases and disastrous
in others. Apple iPads, Gillette razors, and Black & Decker tools are all sold successfully in about the same
form around the world.

2. Product adaptation involves changing the product to meet local conditions or wants.

For example, Finnish cell phone maker Nokia customizes its cell phones for every major market. To meet
the needs of less-affluent consumers in large developing countries such as India, China, and Kenya, the
company has created full-featured but rugged and low-cost phones especially designed for harsher living
conditions.

3. Product invention consists of creating something new to meet the needs of consumers in a
given country. For example, companies ranging from computer and carmakers to candy producers have
developed products that meet the special purchasing needs of low-income consumers in developing economies
such as India and China. Ford developed the economical, low-priced Figo model especially for entry- level
consumers in India.

Companies can either adopt the same communication strategy they use in the home market or
change it for each local market. Consider advertising messages. Some global companies use a
standardized advertising theme around the world. For example, Apple sold millions of iPods with a
single global campaign featuring silhouetted figures dancing against a colorful background. And
other than for language, the Apple Web site looks about the same for any of the more than 70
countries in which Apple markets its products, from Australia to Senegal to the Czech Republic.

4. Communication adaptation, fully adapting their advertising messages to local markets. For
example , Kellogg ads in the United States promote the taste and nutrition of Kellogg‘s cereals versus
competitors‘ brands. In France, where consumers drink little milk and eat little for breakfast, Kellogg‘s
ads must convince consumers that cereals are a tasty and healthful breakfast. In India, where many
consumers eat heavy, fried breakfasts, Kellogg‘s advertising convinces buyers to switch to a lighter, more
nutritious breakfast diet. International marketers may choose one of the flowing five products and
communication strategies in the international markets:

 Product & Communication Extension: Dual Extension

Many companies employ product-communications extension as a strategy for pursuing

opportunities outside the home market. Under the right conditions, this is the easiest product
marketing strategy and, in many instances, the most profitable one as well. Companies pursuing this
strategy sell exactly the same product, with the same advertising and promotional appeals used in the
home country, in some or all world market countries or segments. This strategy works for company
which targets a ―global‖ customer with similar needs and offers substantial savings coming from
economics of scale.

 Product Extension – Communication Adaptation

When a product fills a different need, appeals to a different segment, or serves a different function
under use conditions that are the same or similar to those in the domestic market, the only
adjustment that may be required is in marketing communications. Bicycles and motor scooters are
examples of products that have been marketed with this approach. They satisfy recreation needs in
the United States but serve as basic transportation in many other countries.

 Product Adaptation – Communication Extension

The product is adapted to fit usage conditions but the communication stays the same. The
assumption is that the product will serve the same function in foreign markets under different usage
conditions. While product may differ, cultural similarities that stretch to consumers using the
product present an opportunity for a harmonized communication.
 Product & Communication Adaptation – Dual Adaptation

Under this strategy both product and communication strategies need attention to fit the peculiar
need of the market. When comparing a new geographic market to the home marker marketers
sometimes discover that environmental conditions of use or consumer preferences differ; the same
may be true of the function a product serves or consumer receptivity to advertising appeals. In
essence, this is a combination of the market conditions of strategies 2 and 3.

Differences in both cultural & physical environment across countries call for a dual adaptation
strategy.

 Product Invention

Adaptation and adjustment strategies are effective approaches to international (stage-two) and
multinational (stage-three) marketing, but they may not respond to global market opportunities. Nor
do they respond to the situation in markets where customers do not have the purchasing power to
buy either the existing or adapted product. This latter situation applies to the less developed part of
the world, which includes roughly three-quarters of the world‘s population.

This strategy calls for developing new products from scratch from common need & opportunities
around the world – instead for simply adapting existing products or services to the local market
conditions, i.e., produce products of global scope. Rather than extend or adapt an existing product, it is
often necessary to plan and design for the global market. An example is the rechargeable battery market,
whose voltage and cycles vary around the world. Anton/Bauer, a small Connecticut company, offers a portable
power system (batteries and chargers) that will operate anywhere in the world without adjustments by the user.

Product/functions Conditions of
Examples
Product- communication strategy Met product use

Dual Extension Same Same Pepsi

Product Extension – Communication Different Same Soups
Adaptation
Product Adaptation – Communication Same Different Agriculture
Extension chemicals
Dual Adaptation Different Same Farm
implements
Product Invention Same - -

5.1.3. THEORY OF INTERNATIONAL PRODUCT LIFE CYCLE (IPLC)

The international product life cycle theory, developed and verified by economists to explain trade in a
context of comparative advantage, describes the diffusion process of an innovation across national
boundaries. The life cycle begins when a developed country, having a new product to satisfy
consumer needs, wants to exploit its technological breakthrough by selling abroad. Other advanced
nations soon start up their own production facilities, and before long less developed countries do
the same.

Efficiency/comparative advantage shifts from developed countries to developing nations. Finally,

advanced nations, no longer cost-effective, import products from their former customers. The moral
of this process could be that an advanced nation becomes a victim of its own creation.

The IPLC international trade cycle consists of three stages:

a. NEW PRODUCT
The IPLC begins when a company in a developed country wants to exploit a technological
breakthrough by launching a new, innovative product on its home market. Such a market is more
likely to start in a developed nation because more high-income consumers are able to buy and are
willing to experiment with new, expensive products (low price elastic). Furthermore, easier access to
capital markets exists to fund new product development.

Export to other industrial countries may occur at the end of this stage that allows the innovator to
increase revenue and to increase the downward descent of the product‘s experience curve. Other
advanced nations have consumers with similar desires and incomes making exporting the easiest first
step in an internationalization effort. Competition comes from a few local or domestic players that
produce their own unique product variations.

b. MATURING PRODUCT

Exports to markets in advanced countries further increase through time making it economically
possible and sometimes politically necessary to start local production. The product‘s design and
production process becomes increasingly stable. Foreign direct investments (FDI) in production
plants drive down unit cost because labor cost and transportation cost decrease. Offshore
production facilities are meant to serve local markets that substitute exports from the organization‘s
home market. Production still requires high-skilled, high paid employees. Competition from local
firms jump start in these non-domestic advanced markets. Export orders will begin to come from
countries with lower incomes.

c. WORLDWIDE IMITATION
This stage means tough times for the innovating nation because of its continuous decline in exports.
There is no more new demand anywhere to cultivate. The decline will inevitably affect the
innovating firm‘s economies of scale, and its production costs thus begin to rise again.
Consequently, firms in other advanced nations use their lower prices (coupled with product
differentiation techniques) to gain more consumer acceptance abroad at the expense of the
innovating firm. As the product becomes more and more widely disseminated, imitation picks up at a
faster pace. Toward the end of this stage, the innovating firms export dwindles almost to nothing, and
any the innovating firms‘ production still remaining is basically for local consumption.

5.1.4. Packaging
The packaging of a product is substantially more important in international marketing than in
domestic marketing. There are three reasons for this:

First, products that travel great distances must be specially packaged for protection.
 Second, the package is often the company‘s first opportunity to communicate with
prospective buyers, and it can be internationally effective through pictures or logos on the
package.

Third, in many parts of the world, packaging is recycled because of heightened awareness of
preserving the environment.

Packaging frequently requires both discretionary and mandatory changes. For example, some
countries require labels to be printed in more than one language, while others forbid the use of any
foreign language. Labeling may contain some symbols that convey an unintended meaning and thus
must be changed. One company‘s red-circle trademark was popular in some countries but was
rejected in parts of Asia, where it conjured up images of the Japanese flag. Yellow flowers used in
another company trademark were rejected in Mexico, where a yellow flower symbolizes death or
disrespect.

Package size and price have an important relationship in poor countries. Companies find that they
have to package in small units to bring the price in line with spending norms. Unilever make its
Sunsilk brand shampoo affordable in India by packaging it in tiny polythene bags, called sachets,
enough for one use.

Labeling laws varies from country to country and does not seem to follow any predictable pattern.
Prices are required to be printed on the labels in India, but in Chile it is illegal to put prices on labels
or in any way suggest retail prices. For example , Coca-Cola ran into a legal problem in Brazil with its Diet
Coke. Brazilian law interprets ‗diet‘ to have medicinal qualities. Under the law, producers must give daily-
recommended consumption on the labels of all medicines. Coke had to get special approval to get around this
restriction.

5.2. International Pricing Decisions

Setting the right price for a product can be the key to success or failure. Even when the international
marketer produces the right product, promotes it correctly, and uses the proper distribution channel;
the efforts fail if the product is not properly priced. Of all the tasks facing the international marketer,
determining what price to charge is one of the most difficult and complicated decision specially
when the company sells its products to customers in different countries.

Price is the exchange value of a product. It is one element of marketing mix that produces revenue;
other elements incur costs. Price revolves around two elements-utility and value. Utility is the
generic property of the product to satisfy a need or want of the consumer. Value is the quantitative
worth the consumer attaches to the product, for which he is willing to part with a certain quantum
of money.

Companies that market their products internationally must decide what prices to charge in the
different countries in which they operate. In some cases, a company can set a uniform worldwide
price. For example, Boeing sells it airplanes at about the same price everywhere, whether in the USA,
Europe, or a third world country. However, most companies adjust their prices to reflect local market
conditions and cost considerations.

5.2.1. Pricing Policies and Strategies

1. Standard worldwide Pricing V/s Dual pricing V/s Market differentiated pricing
Besides skimming and penetration, we have three other basic pricing strategies that may
be used in the context of international operations. These are standard worldwide
pricing, dual pricing, and market differentiated pricing. The first two are cost oriented
while the last one is demand oriented.

In standard worldwide pricing, we fix the same price for every country in the world. This method is
based on average unit costs including the fixed, variable, and export related costs. This method is easy
to understand and use.

In dual pricing, marketers set different prices for domestic and foreign markets. The export price is
often based on marginal cost pricing.

Marketing differentiated pricing strategy calls for setting different prices for different countries,
based on demand.

2. Geographical Pricing

It helps the company in deciding how to price its products to different customers in different
locations and countries. Geographical pricing tries to answer the following two important questions:

 Should the company risk losing the business of more distant customers by charging them
higher prices to cover the higher transportation and shipping costs?

 Or should the company charge all customers the same prices regardless of location?

Five basic geographical strategies may answer these questions.

 a) Free on board (FOB) pricing – In this pricing strategy, goods are placed free on board a
carrier and the customer pays the freight from the factory to the destination. This means
factory price for all customers is same but the total price varies according to the
transportation cost. Naturally, the customers situated near to the factory have to pay less and
distant customers have to pay more because of the higher transportation cost.

b) Uniform delivered pricing – It is the opposite of FOB pricing. Here, the company charges
the same price plus freight to all customers, regardless of their location. The freight charge is
set at average freight cost. The advantage of this method is that it is easy to administer and it
lets the firm advertise its price nationally.

c) Zone pricing – It falls between FOB and uniform delivered pricing. The company sets up
two or more zones. All customers within a given zone pay a single total price; the more
distant the zone, the higher the price.

d) Basing point pricing – In this pricing method, the seller selects a given city as a ‗basing
point‘ and charges all customers the freight cost from that city to the customer location,
regardless of the city from which the goods are actually shipped. Some companies set up
multiple basing points to create more flexibility. They quote freight charges from the basing
point city nearest to the customer.

e) Freight absorption pricing – The seller who is anxious to do business with a certain
customer or geographical area might use freight absorption pricing. Using this strategy, the
seller absorbs all or part of the actual freight charges in order to get the desired business.
This pricing is useful for market penetration and to hold on to increasingly competitive
markets.

3. Competition-based Pricing

There are two aspects of competition that influence an organization‘s pricing, structure of the
market and the product‘s perceived value in the market. In other words, the more differentiated an
organization‘s product is from the competition, the more autonomy the organization has in pricing it,
because buyers come to value its unique benefits. Three policy methods are available to the firm
under this method:
 Premium Pricing: It means pricing above the level adopted by competitors.

 Discount Pricing: It means pricing below the level adopted by competitors.

 Parity Pricing/ going rate pricing: It means matching competitors‘ pricing.

5.2.2. Establishing International Prices

An International firm may either:

 Price higher in its home market than in its international markets.

 Price lower its home markets than in its international markets.

1. Prices higher in home Markets:

Different implications can result from price being higher in domestic markets than the international
prices.

 Products may be manufactured overseas, where raw materials are more plentiful & labour costs
are lower than home market.

 Higher prices in home market than overseas is fixed simply to encourage growth in international
markets since many overseas markets are small but fast growing. So low-price, i.e., ―Penetration
pricing‖ is used to build market share quickly.
 An international market may have large potential but low buying power, which is the season that
Seiko watches are priced lower in certain African countries than in Japan.

 Governments in some home markets may offer special incentives in order to obtain hard
currency, encouraging their manufacturers to price lower overseas than at home.

2. Prices lower in the home market

This means using price skimming in international markets. The conditions making for this situation
are as below:

 No significantly large – scale economies exist.

 There are no overseas cost advantages to justify lower international prices.

 Competition is international market is weak. iv) International market potentials are unattractive.

 International markets are rich & buyers can afford to pay high price.

 It is possible to gain hard foreign currency by charging high prices.

5.2.3. Global Pricing Approaches

There are three global pricing approaches:

a) Extension / Ethnocentric: This strategy calls for same price all over the world and the importer
absorbs freight & import duties. This approach has the advantage of extreme simplicity because no
information on competition or market conditions is required for implementation. Disadvantage of
this approach is directly tied to its simplicity. Extension pricing does not respond to the competitive
and market conditions of each national market and therefore, does not maximize the company‘s
profit in each foreign market.

b) Adaptation/Polycentric: This approach permits subsidiary or affiliate managers to establish

whatever price they feel is most desirable in their circumstances. Under such approach there is no
control or fixed requirement that prices be coordinated from one country to next. Only constraint
on this approach is in setting transfer prices within corporate system. There is also problem that
under such a strategy, valuable knowledge & experience within the corporate system concerning
effective pricing strategies is not applied to each local pricing problem.

c) Invention/Geocentric: Using this approach a company neither fixes a single price worldwide
nor remains aloof from subsidiary pricing decisions but instead strikes an intermediate position. A
company pursuing this approach works on the assumption that there are unique local market factors
that should be recognized in arriving at a pricing decision. These factors include local costs income
level, competition & the local marketing strategy.

5.2.4. Countertrade

Many buyers pay for goods in cash while others would like to offer other items in lie of the payment, a
practice known as countertrade which takes several forms such as:

Barter: The direct exchange of goods, with no money and no third party involved.

One of the largest barter deals to date involved Occidental Petroleum Corporation‘s agreement to ship
super phosphoric acid to the former Soviet Union for ammonia, urea, and potash under a two year, $20 billion
deal.
No money changed hands nor were any third parties involved. Obviously in a barter transaction, the
seller must be able to dispose of the goods at a net price equal to expected selling price in a regular,
for cash transaction. Further, during the negotiation stage of a barter deal, the seller must know the
market and the price for the items offered in trade.

 Compensation deal: The seller receives some percentage of the payment in cash and the rest in
products. An advantage of a compensation deal over barter is the immediate cash settlement of a
portion of the bill; the remainder of the cash is generated after successful sale of the goods received.
If the company has a use for he goods received, the process is relatively simple and uncomplicated.

 Buyback arrangement: The seller sells a plant, equipment or technology to another country and
agrees to accept as partial payment products manufactured with the supplied equipment.
  Counterpurchase or Offset: The seller receives full payment in cash but agrees to spend a
substantial amount of the money in that country within a stated time period.

5.2.5. Dumping

Dumping is selling goods overseas at a price lower than domestic market price, or at a price below
the cost of production, or both. There are several types of dumping:

a. Sporadic Dumping - It occurs when a manufacturer with unsold inventories wants to get rid of
distressed & excess merchandise.

b. Predatory Dumping – It is more permanent than sporadic dumping. This strategy involves selling
at a loss to gain access to a market and perhaps to drive out competition. Once the competition is
gone or the market established, the company uses its monopoly position to increase price.
c. Persistent Dumping – It is the most permanent type of dumping requiring a consistent selling at
lower prices in one market than in others. This practice may be the result of a firm‘s recognition that
markets are different in terms of overhead costs & demand characteristics.

d. Reverse Dumping - It is possible, however to have the opposite tactic – reverse dumping. In order
to have such a case, the overseas demand must be less elastic, and the market will tolerate a higher
price. Any dumping will thus be done in the manufacture‘s home market by selling locally at a lower
price.

5.3. International Distribution Decisions

Distribution channels in markets around the world are among the most highly differentiated aspects
of marketing systems. If marketing goals are to be achieved, a product must be made accessible to
the target market at an affordable price. As in many markets, the biggest constraint to successful
marketing is distribution, channel strategy has become one of the most challenging and difficult
components of international marketing program.

In every country and in every market, urban or rural, rich or poor, all consumer and industrial
products eventually go through a distribution process. The distribution process includes the physical
handling and distribution of goods, the passage of ownership (title), and, most important from the
point of marketing strategy, the buying and selling negotiations between producers and middlemen
and between middlemen and customers.

5.3.1. Channel structure

Channel structures are either direct or indirect.

1) Direct Channels - A direct international marketing channel is one that is owned and managed
by the international firm, which owns and operates all of its intermediary institutions and other
 facilities. Direct marketing channels can be either vertical or horizontal.

A vertical direct marketing channel is one in which the international firm owns all
manufacturing, wholesaling, retailing, and other intermediary institutions. Examples include the
worldwide distribution systems of IBM and Xerox.

A horizontal direct marketing channel is one in which an international retailer both owns
and operates multiple retail outlets in a market. Sears and Benetton provide examples of this
type of distribution structure.
2) Indirect Channels - Indirect marketing channels are distribution systems that are owned not
by international marketers but by others, particularly by local people.

Vertical indirect marketing channels, for instance, are commonly used by international
pharmaceutical companies, all of which typically work closely with local wholesalers and
retailers. Among these companies are such well-known firms as Squibb and Merck.

Horizontal indirect marketing channels are used by international marketers desiring access
to large numbers of retail establishments scattered throughout the target markets. Indonesian
textiles utilize this type of channel structure in their international distribution. Pakistani, Korean,
and Turkish textiles are also distributed this way.

The presence of a specific internal or external factor may determine the choice between a direct and
indirect structure. Sometimes, an internal factor, such as the company‘s large size or a strong need
for distribution control, causes an international firm to opt for direct marketing channels. At other
times, an external factor, such as a legal barrier or a high level of competition, causes an international
form to utilize indirect channels.
 International Channel-of-Distribution Alternatives

Once the marketer has clarified company objectives and policies, the next step is the selection of
specific intermediaries needed to develop a channel. External middlemen are differentiated
according to whether or not they take title to the goods:
 Agent middlemen work on commission and arrange for sales in the foreign country but do not take
title to the merchandise. By using agents, the manufacturer assumes trading risk but maintains the right
to establish policy guidelines and prices and to require its agents to provide sales records and customer
information.

 Merchant middlemen actually take title to manufacturers‘ goods and assume the trading risks, so
they tend to be less controllable than agent middlemen. Merchant middlemen provide a variety of
import and export wholesaling functions involved in purchasing for their own account and selling in
other countries. Because merchant middlemen primarily are concerned with sales and profit margins
on their merchandise, they are frequently criticized for not representing the best interests of a
manufacturer. Unless they have a franchise or a strong and profitable brand, merchant middlemen seek
goods from any source and are likely to have low brand loyalty.

 Home-country middlemen, or domestic middlemen, located in the producing firm‘s country,

provide marketing services from a domestic base.

 Export Management Companies: The export management company (EMC) is an important

middleman for firms with relatively small international volume or those unwilling to involve their
own personnel in the international function. These EMC‘s range in size from 1 person upward to
100 and handle about 10 percent of the manufactured goods exported. An example of an EMC is a
Washington, D.C.–based company that has exclusive agreements with 10 U.S. manufacturers of
orthopedic equipment and markets these products on a worldwide basis.