February 2011

Master of Business Administration – MBA Semester 3

MK0009 – International Marketing - 2 Credits

Assignment Set – 1

DEEP DHAR

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Q.1 Explain the stages of international marketing.

International Marketing is simply marketing to people or companies outside of your own

domestic market. International marketing (IM) refers to marketing carried out by companies
overseas or across national borderlines. This strategy uses an extension of the techniques used in
the home country of a firm. It refers to the firm-level marketing practices across the border
including market identification and targeting, entry mode selection, marketing mix, and strategic
decisions to compete in international markets. According to the American Marketing Association
(AMA) "international marketing is the multinational process of planning and executing the
conception, pricing, promotion and distribution of ideas, goods, and services to create exchanges
that satisfy individual and organizational objectives.It is simply the application of marketing
principles to more than one country.

Many see international marketing as a simple extension of exporting, whereby the marketing mix
is simply adapted in some way to take into account differences in consumers and segments. It then
follows that global marketing takes a more standardized approach to world markets and focuses
upon sameness, in other words the similarities in consumers and segments.

At its simplest level, international marketing involves the firm in making one or more marketing
mix decisions across national boundaries. At its most complex level, it involves the firm in
establishing manufacturing facilities overseas and coordinating marketing strategies across the
globe.

International Marketing is the performance of business activities that direct the flow of a
company’s goods and services to consumers or users in more than one nation for a profit.The
international market goes beyond the export marketer and becomes more involved in the
marketing environment in the countries in which it is doing business.

THE STAGES OF INTERNATIONAL MARKETING

International marketing is not a revolutionary shift, it is an evolutionary process. While the

following does not apply to all companies, it does apply to most companies that begin as
domestic-only companies. The five stages of this internationalization are outlined below:

i) Domestic marketing:

A company marketing only within its national boundaries only has to consider domestic
competition. Even if that competition includes companies from foreign markets, it still only has to
focus on the competition that exists in its home market. Products and services are developed for
customers in the home market without thought of how the product or service could be used in
other markets. All marketing decisions are made at headquarters.

The biggest obstacle these marketers face is being blindsided by emerging international marketers.
Because domestic marketers do not generally focus on the changes in the global marketplace, they
may not be aware of a potential competitor who is a market leader in other countries. These
marketers can be considered ethnocentric, as they are most concerned with how they are perceived
in their home country.

ii) Export marketing:

Generally, companies began exporting, reluctantly, to the occasional foreign customer who sought
them out. At the beginning of this stage, filling these orders was considered a burden, not an
opportunity. If there was enough interest, some companies became passive or secondary exporters,
by hiring an export management company to deal with all the customs paperwork and language
barriers. Others became direct exporters, creating exporting departments at headquarters. Product
development at this stage is still focused on the needs of domestic customers. Thus, these
marketers are also considered ethnocentric.

iii) International marketing:

If the exporting departments are becoming successful but the costs of doing business from
headquarters plus time differences, language barriers, and cultural ignorance are hindering the
company’s competitiveness in the foreign market, then offices could be built in the foreign
countries. Sometimes companies buy firms in the foreign countries to take advantage of
relationships, storefronts, factories, and personnel already in place. These offices still report to
headquarters in the home market, but most of the marketing mix decisions are made in the
individual countries since that staff is the most knowledgeable about the target markets. Local
product development is based on the needs of local customers. These marketers are considered
polycentric, because they acknowledge that each market/country has different needs.

iv) Multinational marketing:

At the multi-national stage, the company is marketing its products and services in many countries
around the world and wants to benefit from economies of scale. Consolidation of research,
development, production, and marketing on a regional level is the next step. An example of a
region is Western Europe. But, at the multi-national stage, consolidation, and thus product
planning, does not take place across regions; a regiocentric approach.

v) Global marketing:

When a company becomes a global marketer, it views the world as one market and creates
products that will only require minor modifications 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. These marketers are considered geocentric.
Q2. Give a detail note on protectionism.

Protectionism is the economic policy of restraining trade between nations, through methods such as tariffs
on imported goods, restrictive quotas, a variety of restrictive government regulations designed to
discourage imports and anti-dumping laws in an attempt to protect domestic industries in a particular nation
from foreign take-over or competition. This is closely aligned with anti-globalization, and contrasts with
free trade, where no artificial barriers to entry are instituted. The term is mostly used in the context of
economics, where protectionism refers to policies or doctrines which "protect" businesses and "living
wages" by restricting or regulating trade between foreign nations.

Protectionism causes higher prices for consumers because domestic producers are not exposed to foreign
competition, and can therefore keep prices high. But domestic exporters also may suffer, because foreign
countries tend to retaliate against protectionism with tariffs and barriers of their own. Many economists say
that the Depression of the 1930s was precipitated by the protectionist trade barriers erected by the United
States under the Smoot-Hawley Act, which led to retaliation by many countries throughout the world. In
more recent years, many protectionist trade barriers have fallen through the passage of GATT, the General
Agreement on Tariffs and Trade, which went into effect in 1995, and the creation of the World Trade
Organization (WTO).

Methods of Protectionism

Although trade generally benefits a country as a whole, powerful interests within countries frequently put
obstacles – i.e., they seek to inhibit free trade. There are several ways this can be done:

· Tariff barriers: A duty, or tax or fee, is put on products imported. This is usually a percentage of the cost
of the good. A tariff is a tax that raises the price of imported products and causes a contraction in domestic
demand and an expansion in domestic supply. The net effect is that the volume of imports is reduced and
the government received some tax revenue from the tariff.

· Quotas: A country can export only a certain number of goods to the importing country. For example,
Mexico can export only a certain quantity of tomatoes to the United States, and Asian countries can send
only a certain quota of textiles.

· "Voluntary" export restraints: These are not official quotas, but involve agreements made by countries
to limit the amount of goods they export to an importing country. Such restraints are typically motivated by
the desire to avoid more stringent restrictions if the exporters do not agree to limit themselves. For
example, Japanese car manufacturers have agreed to limit the number of automobiles they export to the
United States.

. Preferential Government Procurement Policies and State Aid: Free trade can be limited by
preferential behaviour by the government when allocating major spending projects that favour domestic
rather than overseas suppliers. Good examples include the award of contracts to suppliers of defence
equipment or construction companies involved in building transport infrastructure projects.

The use of financial aid from the state can also distort the free trade of goods and services between
nations, for example the use of subsidies to a domestic coal or steel industry, or the widely criticized use of
export refunds (subsidies) to European farmers under the Common Agricultural Policy (CAP) which is
criticized for damaging the profits and incomes of farmers in developing countries
· Subsidies to domestic products: If the government supports domestic producers of a product, these may
end up with a cost advantage relative to foreign producers who do not get this subsidy. U.S. honey
manufacturers receive such subsidies.

· Non-tariff barriers, such as differential standards in testing foreign and domestic products for safety,
disclosure of less information to foreign manufacturers needed to get products approved, slow processing
of imports at ports of entry, or arbitrary laws which favor domestic manufacturers.

. Administrative Barriers Countries can make it difficult for firms to import by imposing restrictions and
being 'deliberately' bureaucratic. These trade barriers range from stringent safety and specification checks
to extensive hold-ups in the customs arrangements. A good example is the quality standards imposed by the
EU on imports of dairy products.

Protectionism has frequently been associated with economic theories such as mercantilism, the belief that it
is beneficial to maintain a positive trade balance, and import substitution.

Recent examples of protectionism in first world countries are typically motivated by the desire to protect
the livelihood of individuals in politically important domestic industries. Whereas formerly blue-collar jobs
were being lost to foreign competition, in recent years there has been a renewed discussion of protectionism
due to offshore outsourcing and the loss of white-collar jobs.

Some may feel that better job choice is more important than lower goods costs. Whether protectionism
provides such a tradeoff between jobs and prices has not yet reached a consensus with economists.

Justifications for protectionism

Several justifications have been made for the practice of protectionism. Some appear to hold more merit
than others:

· Protection of an "infant" industry: The essence of the argument is that certain industries possess a
potential (latent) comparative advantage but have not yet exploited the potential economies of scale. Short-
term protection from established foreign competition allows the ‘infant industry’ to develop its comparative
advantage. At this point the trade protection could be relaxed, leaving the industry to trade freely on the
international market. The danger of this form of protection is that the industry will never achieve full
efficiency. The short-term protectionist measures often start to appear permanent.

Costs are often higher, and quality lower, when an industry first gets started in a country, and it would thus
be very difficult for that country to compete. However, as the industry in the country matures, it may be
better able to compute. Thus, for example, some countries have attempted to protect their domestic
computer markets while they gained strength. This is generally an accepted reason in trade agreements, but
the duration of this protection must be limited (e.g., a maximum of five to ten years).

· Resistance to unfair foreign competition: The U.S. sugar industry contends that most foreign
manufacturers subsidize their sugar production, so the U.S. must follow to remain competitive. This
argument will hold little merit with the dispute resolution mechanism available through the World Trade
Organization.

· Preservation of a vital domestic industry: The U.S. wants to be able to produce its own defense
products, even if foreign imports would be cheaper, since the U.S. does not want to be dependent on
foreign manufacturers with whose countries conflicts may arise. Similarly, Japan would prefer to be able to
produce its own food supply despite its exorbitant costs. For an industry essential to national security, this
may be a compelling argument, but it is often used for less compelling ones (e.g., manufactures of funeral
caskets or honey).
· Intervention into a temporary trade balance: A country may want to try to reverse a temporary decline
in trade balances by limiting imports. In practice, this does not work since such moves are typically met by
retaliation.

· Maintenance of domestic living standards and preservation of jobs. Import restrictions can
temporarily protect domestic jobs, and can in the long run protect specific jobs (e.g., those of auto makers,
farmers, or steel workers). This is less of an accepted argument—these workers should instead be re-trained
to work in jobs where their country has a relative advantage.

· Retaliation: The proper way to address trade disputes is now through the World Trade Organization. In
the past, where enforcement was less available, this might have been a reasonable argument.

It may be noted that while protectionism generally hurts a country overall, it may be beneficial to specific
industries or other interest groups. Thus, while sugar price supports are bad for consumers in general,
producers are an organized group that can exert a great deal of influence. In contrast, the individual
consumer does not have much of an incentive to take action to save a small amount in a year.

De facto Protectionism

In the modern trade arena, many other initiatives besides tariffs have been called protectionist. For
example, some commentators, such as Jagdish Bhagwati, see developed countries’ efforts in imposing their
own labor or environmental standards as protectionism. Also, the imposition of restrictive certification
procedures on imports is seen in this light.

Protectionists fault the free trade model as being reverse protectionism in disguise, that is, using tax policy
to protect foreign manufacturers from domestic competition. By ruling out revenue tariffs on foreign
products, government must fully rely on domestic taxation to provide its revenue, which falls heavily
disproportionately on domestic manufacturing. Further, others point out that free trade agreements often
have protectionist provisions such as intellectual property, copyright, and patent restrictions that benefit
large corporations. These provisions restrict trade in music, movies, drugs, software, and other
manufactured items to high cost producers with quotas from low cost producers set to zero.

Criticism of Protectionism

According to Professor Jagdish Bhagwati, “the fact that trade protection hurts the economy of the
country that imposes it is one of the oldest but still most startling insights economics has to offer.”

The folly of protection has been confirmed by a range of studies from around the world. These indicate
that that it has brought few benefits but imposed substantial costs. Among the main criticisms of
protectionist policies are the following:

• Market distortion: Protection has proved an ineffective and costly means of sustaining
employment.

a. Higher prices for consumers: Trade barriers in the form of tariffs push up the prices
faced by consumers and insulate inefficient sectors from competition. They penalise
foreign producers and encourage the inefficient allocation of resources both domestically
and globally. In general terms, import controls impose costs on society that would not
exist if there was completely free trade in goods and services. It has been estimated for
 example that the recent tariff and other barriers placed on imports of steel into the US
increased the price of every car produced there by an average of $100
b. Reduction in market access for producers: Export subsidies, depressing world prices
and making them more volatile while depriving efficient farmers of access to the world
market. This is a major criticism of the EU common agricultural policy. In 2002 the EU
sugar regime lowered the value of Brazil, Thailand and South Africa’s sugar exports by
over $700 million – countries where nearly 70 million people survive on less than $2 a
day.

• Loss of economic welfare: Tariffs create a deadweight loss of consumer and producer surplus
arising from a loss of allocative efficiency. Welfare is reduced through higher prices and restricted
consumer choice.
• Regressive effect on the distribution of income: It is often the case that the higher prices that
result from tariffs hit those on lower incomes hardest, because the tariffs (e.g. on foodstuffs,
tobacco, and clothing) fall on those products that lower income families spend a higher share of
their income. Thus import protection may worsen the inequalities in the distribution of income
making the allocation of scarce resources less equitable
• Production inefficiencies: Firms that are protected from competition have little incentive to
reduce production costs. Governments must consider these disadvantages carefully
• Little protection for employment: One of the justifications for protectionist tariffs and other
barriers to trade is that they help to protect the loss of relatively low skilled and low paid jobs in
industries that are coming under sever international competition. The evidence suggests that, in the
long term, tariffs are a costly and ineffective way of protecting such jobs. According to the DTI
study on trade published in 2004, since 1997 UK employment in textiles manufacturing has fallen
by 45%, in clothing manufacture by nearly 60%, and in footwear manufacturing by around 50% -
and this despite the protection afforded to European Union textile manufacturers. The cost of
protecting each job runs into hundreds of thousands of Euros for the EU as a whole. Might that
money have been spent more productively in other ways? Often there is a huge opportunity cost
involved in imposing import tariffs.
• Trade wars: There is the danger that one country imposing import controls will lead to
“retaliatory action” by another leading to a decrease in the volume of world trade. Retaliatory
actions increase the costs of importing new technologies
• Negative multiplier effects: If one country imposes trade restrictions on another, the resultant
decrease in total trade will have a negative multiplier effect affecting many more countries
because exports are an injection of demand into the global circular flow of income. The negative
multiplier effects are more pronounced when trade disputes boil over and lead to retaliation.
The diagram below shows the welfare consequences of imposing an import tariff

Protectionism tends to lead to additional tariffs or other protectionist measures by other countries in
retaliation, reduced competition (which results in inflation and less choice for consumers), a weakening of
the trade balance (due in part to diminished export abilities resulting from foreign retaliations and in part
because of the domestic currency loses power as there is less demand for it). An overall effect may be a
vicious cycle of trade wars, as each country responds to the other with a "tit for tat."

Protectionism is frequently criticised as harming the people it is meant to help, instead of aiding them;
these critics often support free trade. Some have denounced critics of protectionism as ideologues whose
opinions are shaped more by ideology than facts. However, academic economists are generally supporters
of free trade. Economic theory, under the principle of comparative advantage, suggests that the gains from
free trade outweigh any losses; as free trade creates more jobs than it destroys, because it allows countries
to specialize in the production of goods and services in which they have a comparative advantage.

Some economists, such as Paul Krugman, argue that free trade helps third world workers, even though they
are not subject to the stringent health and labour standards of developed countries. This is because "the
growth of manufacturing – and of the penumbra of other jobs that the new export sector creates – has a
ripple effect throughout the economy" that creates competition among producers, lifting wages and living
conditions. It has even been suggested that those who support protectionism ostensibly to further the
interests of third world workers are being disingenuous, seeking only to protect jobs in developed countries.

Alan Greenspan, former chair of the American Federal Reserve, has criticised protectionist proposals as
leading "to an atrophy of our competitive ability. … If the protectionist route is followed, newer, more
efficient industries will have less scope to expand, and overall output and economic welfare will suffer."

Protectionism has also been accused of being one of the major causes of war. Proponents of this theory
point to the constant warfare in the 17th and 18th centuries among European countries whose governments
were predominantly mercantilist and protectionist, the American Revolution, which came about primarily
due to British tariffs and taxes, as well as the protective policies preceding World War 1 and 2. According
to Frederic Bastiat, "When goods cannot cross borders, armies will."
Q.3 Which are the various international market entry strategies? Give examples.

International Market Entry Strategies

When an organization has made a decision to enter an overseas market, there are a variety of options open
to it. These options vary with cost, risk and the degree of control which can be exercised over them. The
simplest form of entry strategy is exporting, using either a direct or indirect method such as an agent in the
case of the former, or countertrade, in the case of the latter. More complex forms include truly global
operations which may involve joint ventures, or export processing zones.

Basic issues

An organization wishing to "go international" faces three major issues:

i) Marketing – which countries, which segments, how to manage and implement marketing effort, how to
enter – with intermediaries or directly, with what information?

ii) Sourcing – whether to obtain products, make or buy?

iii) Investment and control – joint venture, global partner, acquisition?

Decisions in the marketing area focus on the value chain. The strategy or entry alternatives must ensure that
the necessary value chain activities are performed and integrated.

How to Enter a Foreign Market

The International Marketing Entry Evaluation Process is a five stage process, and its purpose is to
gauge which international market or markets offer the best opportunities for our products or services to
succeed. The five steps are Country Identification, Preliminary Screening, In-Depth Screening, Final
Selection and Direct Experience. Let's take a look at each step in turn.

Step One - Country Identification

It is a general overview of potential new markets. There might be a simple match - for example two
countries might share a similar heritage e.g. the United Kingdom and Australia, a similar language e.g. the
United States and Australia, or even a similar culture, political ideology or religion e.g. China and Cuba.
Often selection at this stage is more straightforward. For example a country is nearby e.g. Canada and the
United States. Alternatively your export market is in the same trading zone e.g. the European Union. Again
at this point it is very early days and potential export markets could be included or discarded for any
number of reasons.

Step Two - Preliminary Screening

At this second stage one takes a more serious look at those countries remaining after undergoing
preliminary screening. Now one begins to score, weight and rank nations based upon macro-economic
factors such as currency stability, exchange rates, level of domestic consumption and so on. Now you have
the basis to start calculating the nature of market entry costs. Some countries such as China require that
some fraction of the company entering the market is owned domestically - this would need to be taken into
account. There are some nations that are experiencing political instability and any company entering such a
market would need to be rewarded for the risk that they would take. At this point the marketing manager
could decide upon a shorter list of countries that he or she would wish to enter. Now in-depth screening can
begin.

Step Three - In-Depth Screening

The countries that make it to stage three would all be considered feasible for market entry. So it is vital that
detailed information on the target market is obtained so that marketing decision-making can be accurate.
Now one can deal with not only micro-economic factors but also local conditions such as marketing
research in relation to the marketing mix i.e. what prices can be charged in the nation? - How does one
distribute a product or service such as ours in the nation? How should we communicate with are target
segments in the nation? How does our product or service need to be adapted for the nation? All of this will
information will for the basis of segmentation, targeting and positioning. One could also take into account
the value of the nation's market, any tariffs or quotas in operation, and similar opportunities or threats to
new entrants.
Step Four - Final Selection
Now a final shortlist of potential nations is decided upon. Managers would reflect upon strategic goals and
look for a match in the nations at hand. The company could look at close competitors or similar domestic
companies that have already entered the market to get firmer costs in relation to market entry. Managers
could also look at other nations that it has entered to see if there are any similarities, or learning that can be
used to assist with decision-making in this instance. A final scoring, ranking and weighting can be
undertaken based upon more focused criteria. After this exercise the marketing manager should probably
try to visit the final handful of nations remaining on the short, shortlist.

Step Five - Direct Experience

Personal experience is important. Marketing manager or their representatives should travel to a particular
nation to experience firsthand the nation's culture and business practices. On a first impressions basis at
least one can ascertain in what ways the nation is similar or dissimilar to your own domestic market or the
others in which your company already trades. Now you will need to be careful in respect of self-
referencing. Remember that your experience to date is based upon your life mainly in your own nation and
your expectations will be based upon what your already know. Try to be flexible and experimental in new
nations, and don't be judgemental - it's about what's best for your company - happy hunting.

The value chain -marketing function detail

In making international marketing decisions on the marketing mix, more attention to detail is required than
in domestic marketing. Details on the sourcing element have already been covered in the earlier coverage
of competitive analysis and strategy. Concerning investment and control, the question really is how far the
company wishes to control its own fate. The degree of risk involved, attitudes and the ability to achieve
objectives in the target markets are important facets in the decision on whether to license, joint venture or
get involved in direct investment.

There are five strategies used by firms for entry into new foreign markets:

i) Technical innovation strategy – perceived and demonstrable superior products.

ii) Product adaptation strategy – modifications to existing products.

iii) Availability and security strategy – overcome transport risks by countering perceived risks.

iv) Low price strategy – penetration price.

v) Total adaptation and conformity strategy – foreign producer gives a straight copy.

In marketing products from less developed countries to developed countries, point (iii) poses major
problems. Buyers in the interested foreign country are usually very careful as they perceive transport,
currency, quality and quantity problems.

In building a market entry strategy, time is a crucial factor. The building of an intelligence system and
creating an image through promotion takes time, effort and money. Brand names do not appear overnight.
Large investments in promotion campaigns are needed. Transaction costs also are a critical factor in
building up a market entry strategy and can become a high barrier to international trade. Costs include
search and bargaining costs. Physical distance, language barriers, logistics costs and risk limit the direct
monitoring of trade partners. Enforcement of contracts may be costly and weak legal integration between
countries makes things difficult. Also, these factors are important when considering a market entry strategy.

Normal ways of expanding the markets are by expansion of product line, geographical development or
both. It is important to note that the more the product line and/or the geographic area is expanded the
greater will be the managerial complexity. New market opportunities may be made available by expansion,
but the risks may outweigh the advantages. In fact it may be better to concentrate on a few geographic areas
and do things well.
Ways to concentrate include concentrating on geographic areas, reducing operational variety (more
standard products) or making the organizational form more appropriate. In the latter the attempt is made to
"globalize" the offering and the organization to match it. This is true of organizations like Coca Cola and
MacDonald’s.

Global strategies include

· "Country centred" strategies (highly decentralized and limited international coordination),

· "Local market approaches" (the marketing mix developed with the specific local (foreign) market in
mind) or

· "Lead market approach" (develop a market which will be a best predictor of other markets).

Global approaches give economies of scale and the sharing of costs and risks between markets.

Entry Strategies

There are a variety of ways in which organizations can enter foreign markets. The three main ways are by
direct or indirect export or production in a foreign country.

1 Exporting

Exporting is the most traditional and well established form of operating in foreign markets. Exporting can
be defined as the marketing of goods produced in one country into another. While no direct manufacturing
is required in an overseas country, significant investments in marketing are required. The tendency may be
not to obtain as much detailed marketing information as compared to manufacturing in marketing country;
however, this does not negate the need for a detailed marketing strategy.

Exporting is a relatively low risk strategy in which few investments are made in the new country. A
drawback is that, because the firm makes few if any marketing investments in the new country, market
share may be below potential. Further, the firm, by not operating in the country, learns less about the
market (What do consumers really want? Which kinds of advertising campaigns are most successful? What
are the most effective methods of distribution?) If an importer is willing to do a good job of marketing, this
arrangement may represent a "win-win" situation, but it may be more difficult for the firm to enter on its
own later, if it decides that larger profits can be made within the country.

The advantages of exporting are:

· Manufacturing is home based thus, it is less risky than overseas based

· Gives an opportunity to "learn" overseas markets before investing in bricks and mortar

· Reduces the potential risks of operating overseas.

The disadvantage is mainly that one can be at the "mercy" of overseas agents and so the lack of control has
to be weighed against the advantages.

A distinction has to be drawn between passive and aggressive exporting. A passive exporter awaits orders
or comes across them by chance; an aggressive exporter develops marketing strategies which provide a
broad and clear picture of what the firm intends to do in the foreign market. There are significant
differences with regard to the severity of exporting problems in motivating pressures between seekers and
non-seekers of export opportunities. There are differences between firms whose marketing efforts were
characterized by no activity, minor activity and aggressive activity.
Those firms who are aggressive have clearly defined plans and strategy, including product, price,
promotion distribution and research elements. Passiveness versus aggressiveness depends on the motivation
to export. In many LDC countries like Tanzania and Zambia, which have embarked on structural
adjustment programs, organizations are being encouraged to export, motivated by foreign exchange
earnings potential, saturated domestic markets, growth and expansion objectives, and the need to repay
debts incurred by the borrowings to finance the programs. The type of export response is dependent on how
the pressures are perceived by the decision maker. The degree of involvement in foreign operations
depends on "endogenous versus exogenous" motivating factors, that is, whether the motivations were as a
result of active or aggressive behavior based on the firm’s internal situation (endogenous), or as a result of
reactive environmental changes (exogenous).

If the firm achieves initial success at exporting quickly all to the good, but the risks of failure in the early
stages are high. The "learning effect" in exporting is usually very quick. The key is to learn how to
minimize risks associated with the initial stages of market entry and commitment – this process of
incremental involvement is called "creeping commitment".

1.1 Aggressive and passive export paths

Exporting methods include direct or indirect export.

Indirect export

The market-entry technique that offers the lowest level of risk and the least market control is indirect
export, in which products are carried abroad by others. The firm is not engaging in international marketing
and no special activity is carried on within the firm; the sale is handled like domestic sales.

There are several different methods of indirect exporting:

• The simplest method is to deal with foreign sales through the domestic sales organisation. For example, if
a firm receives an unsolicited order from a customer in Spain and responds to the request on a one-off
basis, it is engaging in casual exporting. Alternatively, a foreign buyer may approach to the firm. Products
are sold in the domestic market but used or resold abroad. This type of arrangement may arise if, for
example, a foreign department store has a buying office in the firm’s home country. If the exporting firm
does not follow up the contact with a sustained marketing effort, it is unlikely to gain future sales.

• A second form of indirect exporting is the use of international trading companies with local offices all
over the world. Perhaps the best-known trading companies are the Sogo Sosha of Japan such as Mitsui or
Mitsubishi. The size and market coverage of these trading companies make them attractive distributors,
especially with their credit reliability and their information network. The trading companies of European
origin are important primarily in trade with former European colonies, particularly Africa and Southeast
Asia. The drawback to the use of trading companies is that they are likely to carry competing products and
the firm’s products might not receive the attention and support the firm desires.

• A third form of indirect exporting is the export management company located in the same country as the
producing firm and which plays the role of an export department. That is the firm has the performance of
an export department without establishing one in the firm. The economic advantage arises because the
export company performs the export function for several firms at the same time. The producer can establish
closer relationships and gains instant foreign market contacts and knowledge. The firm is spared the burden
of developing in-house expertise in exporting. The method of payment is the commission and the costs are
variable. Export management companies handle different but complementary product lines which can often
get better foreign representation than the products of just one manufacturer. Indirect export can open up
new markets without requiring special expertise or investment. Both the international know-how and the
sales achieved by these indirect approaches are generally limited. In this approach, the commitment to
international markets is very weak.

Direct export

In direct exporting, the firm becomes directly involved in marketing its products in foreign markets,
because the firm itself performs the export task (rather than delegating it to others).

This necessitates the creation of an export department responsible for tasks such as:

• Market contact

• Market research

• Physical distribution

• Export documentation

• Pricing.

This approach to export requires more corporate resources and also entails greater risks. The expected
benefits are:

• Increased sales

• Greater control

• Better market information

• Development of expertise in international marketing.

To implement a direct exporting strategy, the firm must have representation in the foreign markets. This
can be achieved in a number of ways:

• Sending international sales representatives into the foreign market to establish contacts and to directly
negotiate sales contracts.

• Selecting local representatives or agents to prospect the market, to contact potential customers and to
negotiate on behalf of the exporting firm.

• Using independent local distributors who will buy the products to resell them in the local market (with or
without exclusivity).

• Creating a fully owned commercial subsidiary to have a greater control over foreign operations. (In most
cases, the commercial subsidiary will be a joint venture created with a local firm to gain access to local
relationships.
In direct exporting the organization may use an agent, distributor, or overseas subsidiary, or act via a
Government agency. In direct exporting the major problem is that of market information. The exporter’s
task is to choose a market, find a representative or agent, set up the physical distribution and
documentation, promote and price the product. Control, or the lack of it, is a major problem which often
results in decisions on pricing, certification and promotion being in the hands of others.

Exporting requires a partnership between exporter, importer, government and transport. Without these four
coordinating activities, the risk of failure is increased. Contracts between buyer and seller are a must.
Forwarders and agents can play a vital role in the logistics procedures, such as booking air space and
arranging documentation.

It is predicted that direct modes of market entry may be less and less available in the future. Growing
trading blocs like the EU or EFTA means that the establishment of subsidiaries may be one of the only
ways forward in future. Indirect methods of exporting include the use of trading companies, export
management companies, piggybacking and countertrade.

· Indirect methods offer a number of advantages including:

– Contracts – in the operating market or worldwide

– Commission sales give high motivation (not necessarily loyalty)

– Manufacturer/exporter needs little expertise

– Credit acceptance takes burden from manufacturer.

Example : the Grain Marketing Board in Zimbabwe, being commercialised but still having Government
control, is a Government agency. The Government, via the Board, are the only permitted maize exporters.
Bodies like the Horticultural Crops Development Authority (HCDA) in Kenya may be merely a
promotional body, dealing with advertising, information flows and so on, or it may be active in exporting
itself, particularly giving approval (like HCDA does) to all export documents.

Figure 7.4 The export marketing channel for Kenyan horticultural products.
1.2 Piggybacking

Piggybacking is an interesting development. The method means that organizations with little exporting skill
may use the services of one that has. Another form is the consolidation of orders by a number of
companies, in order to take advantage of bulk buying. Normally these would be geographically adjacent or
able to be served, say, on an air route.

Example: The fertilizer manufacturers of Zimbabwe, for example, could piggyback with the South Africans
who both import potassium from outside their respective countries.

1.3 Countertrade

By far the largest indirect method of exporting is countertrade. Competitive intensity means more and more
investment in marketing. In this situation the organization may expand operations by operating in markets
where competition is less intense, but currency based exchange is not possible. Also, countries may wish to
trade in spite of the degree of competition, but currency again is a problem. Countertrade can also be used
to stimulate home industries or where raw materials are in short supply. It can, also, give a basis for
reciprocal trade.

Estimates vary, but countertrade accounts for about 20-30% of world trade, involving some 90 nations and
between US $100-150 billion in value. The UN defines countertrade as "commercial transactions in which
provisions are made, in one of a series of related contracts, for payment by deliveries of goods and/or
services in addition to, or in place of, financial settlement".

Countertrade is the modern form of barter, except that contracts are not legal and it is not covered by
GATT. It can be used to circumvent import quotas. Countertrade can take many forms. Basically two
separate contracts are involved, one for the delivery of and payment for the goods supplied and the other
for the purchase of and payment for the goods imported. The performance of one contract is not contingent
on the other, although the seller is in effect accepting products and services from the importing country in
partial or total settlement for his exports. There is a broad agreement that countertrade can take various
forms of exchange like barter, counter purchase, switch trading and compensation (buyback).
Example: in 1986, Albania began offering items like spring water, tomato juice and chrome ore in
exchange for a contract to build a US $60 million fertilizer and methanol complex. Information on potential
exchange can be obtained from embassies, trade missions or the EU trading desks.

Barter is the direct exchange of one good for another, although valuation of respective commodities is
difficult, so a currency is used to underpin the item’s value. Barter trade can take a number of formats.
Simple barter is the least complex and oldest form of bilateral, non-monetarized trade. Often it is called
"straight", "classical" or "pure" barter. Barter is a direct exchange of goods and services between two
parties. Shadow prices are approximated for products flowing in either direction. Generally no middlemen
are involved. Usually contracts for no more than one year are concluded, however, if for longer life spans,
provisions are included to handle exchange ratio fluctuations when world prices change.

· Closed end barter deals are modifications of straight barter, in that a buyer is found for goods taken in
barter before the contract is signed by the two trading parties. No money is involved and risks related to
product quality are significantly reduced.

· Clearing account barter, also termed clearing agreements, clearing arrangements, bilateral clearing
accounts or simply bilateral clearing, is where the principle is for the trades to balance without either party
having to acquire hard currency. In this form of barter, each party agrees in a single contract to purchase a
specified and usually equal value of goods and services. The duration of these transactions is commonly
one year, although occasionally they may extend over a longer time period. The contract’s value is
expressed in non-convertible, clearing account units (also termed clearing dollars) that effectively represent
a line of credit in the central bank of the country with no money involved.

Clearing account units are universally accepted for the accounting of trade between countries and parties
whose commercial relationships are based on bilateral agreements. The contract sets forth the goods to be
exchanged, the rates of exchange, and the length of time for completing the transaction. Limited export or
import surpluses may be accumulated by either party for short periods. Generally, after one year’s time,
imbalances are settled by one of the following approaches: credit against the following year, acceptance of
unwanted goods, payment of a previously specified penalty, or payment of the difference in hard currency.

Trading specialists have also initiated the practice of buying clearing dollars at a discount, for the purpose
of using them to purchase saleable products. In turn, the trader may forfeit a portion of the discount to sell
these products for hard currency on the international market. Compared with simple barter, clearing
accounts offer greater flexibility in the length of time for drawdown on the lines of credit and the types of
products exchanged.

· Counter purchase, or buyback, is where the customer agrees to buy goods, on condition that the seller
buys some of the customer’s own products in return (compensatory products). Alternatively, if exchange is
being organized at national government level, then the seller agrees to purchase compensatory goods from
an unrelated organization up to a pre-specified value (offset deal). The difference between the two is that
contractual obligations related to counter purchase can extend over a longer period of time and the contract
requires each party to the deal to settle most or all of their account with currency or trade credits to an
agreed currency value.

Where the seller has no need for the item bought he may sell the produce on, usually at a discounted price,
to a third party. This is called a switch deal. In the past, a number of tractors have been brought into
Zimbabwe from East European countries by switch deals.

· Compensation (buy-backs) is where the supplier agrees to take the output of the facility over a specified
period of time, or to a specified volume as payment. For example, an overseas company may agree to build
a plant in India, and output over an agreed period of time or agreed volume of produce is exported to the
builder until the period has elapsed. The plant then becomes the property of India.

One problem is the marketability of products received in countertrade. This problem can be reduced by the
use of specialized trading companies which, for a fee ranging between 1 and 5% of the value of the
transaction, will provide trade related services like transportation, marketing, financing, credit extension,
etc. These are ever growing in size.
Countertrade has following disadvantages:

· Not covered by GATT, so "dumping" may occur

· Quality is not of international standard, so costly to the customer and trader

· Variety is low, so marketing of that is limited

· Difficult to set prices and service quality

· Inconsistency of delivery and specification

· Difficult to revert to currency trading – so quality may decline further and therefore product is harder to
market.

The following precautions are hence suggested:

· Ensure that the benefits outweigh the disadvantages

· Try to minimize the ratio of compensation goods to cash – if possible inspect the goods for specifications

· Include all transactions and other costs involved in countertrade in the nominal value specified for the
goods being sold

· Avoid the possibility of error of exploitation by first gaining a thorough understanding of the customer’s
buying systems, regulations and politics

· Ensure that any compensation goods received as payment are not subject to import controls.

Despite these problems, countertrade is likely "to grow as a major indirect entry method", especially in
developing countries.

Classification Of countertrade
2 Foreign production

Besides exporting, other market entry strategies include licensing, joint ventures, contract manufacture,
ownership and participation in export processing zones or free trade zones.

Licensing and franchising are also low exposure methods of entry–you allow someone else to use your
trademarks and accumulated expertise. Your partner puts up the money and assumes the risk. Problems
here involve the fact that you are training a potential competitor and that you have little control over how
the business is operated. For example, American fast food restaurants have found that foreign franchisers
often fail to maintain American standards of cleanliness. Similarly, a foreign manufacturer may use lower
quality ingredients in manufacturing a brand, based on premium contents in the home country.

Contract manufacturing involves having someone else manufacture products while you take on some of the
marketing efforts yourself. This saves investment, but again you may be training a competitor.

Direct entry strategies, where the firm either acquires a firm or builds operations "from scratch" involve the
highest exposure, but also the greatest opportunities for profits. The firm gains more knowledge about the
local market and maintains greater control, but now has a huge investment. In some countries, the
government may expropriate assets without compensation, so direct investment entails an additional risk. A
variation involves a joint venture, where a local firm puts up some of the money and knowledge about the
local market.

2.1 Licensing

Licensing is defined as "the method of foreign operation whereby a firm in one country agrees to permit a
company in another country to use the manufacturing, processing, trademark, know-how or some other
skill provided by the licensor".

The several Licensing types are as under:

· Patent Licensing: This can be based on a fixed fee or royalty based.

· Turnkey Operation: This is based on fixed fee or cost plus arrangement and includes plant construction,
personnel training and initial production runs.

· Co-production agreement: This was most common in Soviet bloc countries where plants were built and
then paid for with part of the output.

· Management Contract: Currently widely used in Middle East, the MNC is supposed to provide key
personnel to operate the foreign enterprise for a fee, until local people acquire the ability to manage
independently.

· Licensing of Intangibles: Intangible assets like patents, trade secrets, know how, trade marks, company
name etc. are lent to the foreign company in return for royalties or other forms of payment. Transfer of
these assets is accompanied by technical services to ensure proper use.

Licensing involves little expense and involvement. The only cost is signing the agreement and policing its
implementation.

Licensing gives the following advantages:

· Good way to start in foreign operations and open the door to low risk manufacturing relationships

· Linkage of parent and receiving partner interests means both get most out of marketing effort

· Capital not tied up in foreign operation and

· Options to buy into partner exist or provision to take royalties in stock.

The disadvantages are:

· Limited form of participation – to length of agreement, specific product, process or trademark

· Potential returns from marketing and manufacturing may be lost

· Partner develops know-how and so license is short

· Licensees become competitors – overcome by having cross technology transfer deals and

· Requires considerable fact finding, planning, investigation and interpretation.

Those who decide to license ought to keep the options open for extending market participation. This can be
done through joint ventures with the licensee.

2.2 Joint ventures

This is the next most common form of entry beyond the exporting stage to a more regular overseas
involvement. This involves sharing risks to accomplish mutual enterprise. Widespread interest in joint
ventures is related to:

· Seeking market opportunities

· Dealing with rising economic nationalism

· Preempting raw materials

· Sharing risk

· Developing an export base

· Selling technology

Joint ventures can be defined as "an enterprise in which two or more investors share ownership and control
over property rights and operation". Joint ventures are a more extensive form of participation than either
exporting or licensing.

Joint ventures give the following advantages:

· Sharing of risk and ability to combine the local in-depth knowledge with a foreign partner with know-how
in technology or process

· Joint financial strength

· May be only means of entry and

· May be the source of supply for a third country.

They also have disadvantages:

· Partners do not have full control of management

· May be impossible to recover capital if need be

· Disagreement on third party markets to serve

· Partners may have different views on expected benefits.

If the partners carefully map out in advance what they expect to achieve and how, then many problems can
be overcome.
3 International Strategic Alliances

This is a new type of collaborative strategy which has gained popularity. Commonly called international
strategic alliance, leading firms particularly in high tech industries have used this route for their mutual
benefit. These are short of complete merger, but deeper than arm’s length market exchanges. Such alliances
are especially useful for seeking entry into emerging markets. This form is very popular in Latin America,
Asia and Eastern Europe.

Strategic alliances make sense due to following reasons:

· Flexibility and informality promote efficiencies

· Access to new markets and technologies

· Creation and disbanding of projects with minimum paperwork

· Multiple parties share risks and expenses

· Partners can retain their independent brand identification

· Rivals can often work harmoniously together

· Alliance can take various forms from R&D deals to huge projects

· Ventures can accommodate dozens of participants

There are many advantages of Strategic Alliances as follows:

· Ease of market entry: It may be useful for a firm to partner with another that already has a presence in
and knowledge of a market. For example, Kentucky Fried Chicken (KFC) partnered with the Mitsubishi
Keirishi in entering Japan. By doing so, KFC was assured of managerial talent to deal with local
regulations and handling logistics (e.g., labor and construction) while Mitsubishi in turn got the use of an
authentic American brand name.

· Shared risk: Some projects are just too big for any one company to approach alone. Boeing can partner
with Rolls Royce, with the latter making the engines for the aircraft, while Boeing makes the frame. Many
times, deep sea oil exploration is too big a commitment for any one oil company, so two or more may come
together.

· Shared knowledge and expertise: Intel, known for its cutting edge innovations in computer chips, can
partner with a Japanese firm to do its manufacturing.

· Synergy and competitive advantage: “Synergy” refers to the idea that the resources held by two firms,
when combined, add up to more than the sum of their parts. For example, Amazon.com and Federal
Express might be able to create, together, a credible image of fast, reliable service (from FedEx) and a large
selection (from Amazon). By itself, FedEx might not have a great edge over UPS, and Amazon may not
have a real edge over Barnes & Noble, but together, by coordination, they may be able, at an affordable
price, to provide faster delivery of a wider range of items than Barnes & Noble.

The disadvantages are as under:

· Legal obstacles: Since both firms have their own interests, complicated legal agreements may have to be
made up. Also, there may be limitations on market concentration, and there may be some concern about the
legality of technology transfer. In some countries, as previously mentioned, it may be difficult to enforce
agreements.

· Complacency: If two firms join forces where they previously competed, they may become complacent in
developing new products, improving quality, and lowering costs and prices. When competition is place,
firms tend to maintain greater discipline, which is needed for competitive ability in the long run.
· Costs of coordination: When two firms have different cultures (e.g., individualistic vs. collective or
authoritarian vs. more participative), more effort may be needed in circulating information and reaching
decisions. For example, Oracle, an aggressive computer firm in the Silicon Valley with a strong emphasis
on meritocracy might have difficulty working with a collectivistic Japanese firm.

· Blurred lines between areas of competition and cooperation: Suppose Sony and Compaq, which both
make computers, want to collaborate on making memory chips. To do so, they may have to share
information about other computer technology in areas where they may compete. There is now a question of
what to share and what to hold back. Not only is time spent deciding whether to share or withhold, but
essential information may end up not being available to those who need it.

3.1 Ownership

The most extensive form of participation is 100% ownership and this involves the greatest commitment in
capital and managerial effort. The ability to communicate and control 100% may outweigh any of the
disadvantages of joint ventures and licensing. However repatriation of earnings and capital has to be
carefully monitored. The more unstable the environment, the less likely is the ownership pathway an
option.

These forms of participation: exporting, licensing, joint ventures or ownership, are on a continuum rather
than discrete and can take many formats. The entry mode can be summarized as a choice between company
owned or controlled methods – "integrated" channels – or "independent" channels.

· Integrated channels offer the advantages of planning and control of resources, flow of information, and
faster market penetration, and are a visible sign of commitment. The disadvantages are that they incur
many costs (especially marketing), the risks are high, some may be more effective than others (due to
culture) and in some cases their credibility amongst locals may be lower than that of controlled
independents.

· Independent channels offer lower performance costs, risks, less capital, high local knowledge and
credibility. Disadvantages include less market information flow, greater coordinating and control
difficulties and motivational difficulties. In addition, they may not be willing to spend money on market
development and selection of good intermediaries may be difficult, as good ones are usually taken up
anyway.

Once in a market, companies have to decide on a strategy for expansion. One may be to concentrate on a
few segments in a few countries, or concentrate on one country and diversify into segments. Other
activities include country and market segment concentration – typical of Coca Cola or Gerber baby foods,
and finally country and segment diversification. Another way of looking at it is by identifying three basic
business strategies:

· Stage one – international

· Stage two – multinational (strategies correspond to ethnocentric and polycentric orientations respectively)
and

· Stage three – global strategy (corresponds with geocentric orientation).

The basic philosophy behind stage one is extension of programs and products, behind stage two is
decentralization as far as possible to local operators and behind stage three is an integration which seeks to
synthesize inputs from world and regional headquarters and the country organization. Whilst most
developing countries are hardly in stage one, they have within them organizations which are in stage three.
This has often led to a "rebellion" against the operations of multinationals, often unfounded.