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February 2011

Master of Business Administration – MBA Semester 3


MK0009 – International Marketing - 2 Credits
Assignment Set – 1

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Q.1 Explain the stages of international marketing.


International Marketing is simply marketing to people or companies outside of yo
ur 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 th
e firm-level marketing practices across the border including market identificati
on and targeting, entry mode selection, marketing mix, and strategic decisions t
o compete in international markets. According to the American Marketing Associat
ion (AMA) "international marketing is the multinational process of planning and
executing the conception, pricing, promotion and distribution of ideas, goods, a
nd services to create exchanges that satisfy individual and organizational objec
tives.It is simply the application of marketing principles to more than one coun
try.
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 stan
dardized 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 o
r more marketing mix decisions across national boundaries. At its most complex l
evel, 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 th
e flow of a company’s goods and services to consumers or users in more than one na
tion for a profit.The international market goes beyond the export marketer and b
ecomes more involved in the marketing environment in the countries in which it i
s doing business.

THE STAGES OF INTERNATIONAL MARKETING


International marketing is not a revolutionary shift, it is an evolutionary proc
ess. 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 interna
tionalization are outlined below:
i) Domestic marketing:
A company marketing only within its national boundaries only has to consider dom
estic competition. Even if that competition includes companies from foreign mark
ets, it still only has to focus on the competition that exists in its home marke
t. 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 market
ing decisions are made at headquarters.
The biggest obstacle these marketers face is being blindsided by emerging intern
ational marketers. Because domestic marketers do not generally focus on the chan
ges in the global marketplace, they may not be aware of a potential competitor w
ho is a market leader in other countries. These marketers can be considered ethn
ocentric, as they are most concerned with how they are perceived in their home c
ountry.
ii) Export marketing:
Generally, companies began exporting, reluctantly, to the occasional foreign cus
tomer 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 bec
ame direct exporters, creating exporting departments at headquarters. Product de
velopment at this stage is still focused on the needs of domestic customers. Thu
s, these marketers are also considered ethnocentric.
iii) International marketing:
If the exporting departments are becoming successful but the costs of doing busi
ness from headquarters plus time differences, language barriers, and cultural ig
norance are hindering the company’s competitiveness in the foreign market, then of
fices 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 individ
ual countries since that staff is the most knowledgeable about the target market
s. Local product development is based on the needs of local customers. These mar
keters are considered polycentric, because they acknowledge that each market/cou
ntry 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 m
ulti-national stage, consolidation, and thus product planning, does not take pla
ce across regions; a regiocentric approach.
v) Global marketing:
When a company becomes a global marketer, it views the world as one market and c
reates products that will only require minor modifications to fit into any regio
nal marketplace. Marketing decisions are made by consulting with marketers in al
l the countries that will be affected. The goal is to sell the same thing the sa
me way everywhere. These marketers are considered geocentric.
Q2. Give a detail note on protectionism.
Protectionism is the economic policy of restraining trade between nations, throu
gh methods such as tariffs on imported goods, restrictive quotas, a variety of r
estrictive government regulations designed to discourage imports and anti-dumpin
g laws in an attempt to protect domestic industries in a particular nation from
foreign take-over or competition. This is closely aligned with anti-globalizatio
n, and contrasts with free trade, where no artificial barriers to entry are inst
ituted. The term is mostly used in the context of economics, where protectionism
refers to policies or doctrines which "protect" businesses and "living wages" b
y 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 dome
stic exporters also may suffer, because foreign countries tend to retaliate agai
nst protectionism with tariffs and barriers of their own. Many economists say th
at the Depression of the 1930s was precipitated by the protectionist trade barri
ers erected by the United States under the Smoot-Hawley Act, which led to retali
ation by many countries throughout the world. In more recent years, many protect
ionist trade barriers have fallen through the passage of GATT, the General Agree
ment on Tariffs and Trade, which went into effect in 1995, and the creation of t
he World Trade Organization (WTO).

Methods of Protectionism
Although trade generally benefits a country as a whole, powerful interests withi
n countries frequently put obstacles – i.e., they seek to inhibit free trade. Ther
e are several ways this can be done:
• Tariff barriers: A duty, or tax or fee, is put on products imported. This is usu
ally a percentage of the cost of the good. A tariff is a tax that raises the pri
ce of imported products and causes a contraction in domestic demand and an expan
sion 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 cou
ntry. 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 agreem
ents 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 str
ingent restrictions if the exporters do not agree to limit themselves. For examp
le, Japanese car manufacturers have agreed to limit the number of automobiles th
ey 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 spend
ing 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 co
al or steel industry, or the widely criticized use of export refunds (subsidies)
to European farmers under the Common Agricultural Policy (CAP) which is critici
zed 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 domes
tic 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 barrie
rs range from stringent safety and specification checks to extensive hold-ups in
the customs arrangements. A good example is the quality standards imposed by th
e EU on imports of dairy products.
Protectionism has frequently been associated with economic theories such as merc
antilism, 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 motivate
d by the desire to protect the livelihood of individuals in politically importan
t domestic industries. Whereas formerly blue-collar jobs were being lost to fore
ign competition, in recent years there has been a renewed discussion of protecti
onism 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. W
hether protectionism provides such a tradeoff between jobs and prices has not ye
t reached a consensus with economists.
Justifications for protectionism
Several justifications have been made for the practice of protectionism. Some ap
pear 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 e
xploited the potential economies of scale. Short-term protection from establishe
d foreign competition allows the ‘infant industry’ to develop its comparative advant
age. 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 protecti
on is that the industry will never achieve full efficiency. The short-term prote
ctionist measures often start to appear permanent.
Costs are often higher, and quality lower, when an industry first gets started i
n a country, and it would thus be very difficult for that country to compete. Ho
wever, 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 comp
uter 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 fo
llow to remain competitive. This argument will hold little merit with the disput
e 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 c
onflicts 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 compe
lling ones (e.g., manufactures of funeral caskets or honey).
• Intervention into a temporary trade balance: A country may want to try to revers
e a temporary decline in trade balances by limiting imports. In practice, this d
oes not work since such moves are typically met by retaliation.
• Maintenance of domestic living standards and preservation of jobs. Import restri
ctions can temporarily protect domestic jobs, and can in the long run protect sp
ecific jobs (e.g., those of auto makers, farmers, or steel workers). This is les
s of an accepted argument—these workers should instead be re-trained to work in jo
bs where their country has a relative advantage.
• Retaliation: The proper way to address trade disputes is now through the World T
rade 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 m
ay be beneficial to specific industries or other interest groups. Thus, while su
gar 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 cons
umer 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 call
ed protectionist. For example, some commentators, such as Jagdish Bhagwati, see
developed countries’ efforts in imposing their own labor or environmental standard
s 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 disg
uise, that is, using tax policy to protect foreign manufacturers from domestic c
ompetition. By ruling out revenue tariffs on foreign products, government must f
ully rely on domestic taxation to provide its revenue, which falls heavily dispr
oportionately on domestic manufacturing. Further, others point out that free tra
de agreements often have protectionist provisions such as intellectual property,
copyright, and patent restrictions that benefit large corporations. These provi
sions restrict trade in music, movies, drugs, software, and other manufactured i
tems 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 star
tling 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 substa
ntial costs. Among the main criticisms of protectionist policies are the follow
ing:
• Market distortion: Protection has proved an ineffective and costly means of sust
aining 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 competiti
on. They penalise foreign producers and encourage the inefficient allocation of
resources both domestically and globally. In general terms, import controls im
pose 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 an
d other barriers placed on imports of steel into the US increased the price of e
very car produced there by an average of $100
b. Reduction in market access for producers: Export subsidies, depressing w
orld prices and making them more volatile while depriving efficient farmers of a
ccess to the world market. This is a major criticism of the EU common agricultur
al 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 milli
on people survive on less than $2 a day.
• Loss of economic welfare: Tariffs create a deadweight loss of consumer and produ
cer surplus arising from a loss of allocative efficiency. Welfare is reduced thr
ough higher prices and restricted consumer choice.
• Regressive effect on the distribution of income: It is often the case that the h
igher prices that result from tariffs hit those on lower incomes hardest, becaus
e 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 pr
otection may worsen the inequalities in the distribution of income making the al
location of scarce resources less equitable
• Production inefficiencies: Firms that are protected from competition have little
incentive to reduce production costs. Governments must consider these disadvant
ages carefully
• Little protection for employment: One of the justifications for protectionist t
ariffs and other barriers to trade is that they help to protect the loss of rela
tively low skilled and low paid jobs in industries that are coming under sever i
nternational competition. The evidence suggests that, in the long term, tariffs
are a costly and ineffective way of protecting such jobs. According to the DTI s
tudy on trade published in 2004, since 1997 UK employment in textiles manufactur
ing has fallen by 45%, in clothing manufacture by nearly 60%, and in footwear ma
nufacturing 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 m
ore 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 l
ead 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 anothe
r, the resultant decrease in total trade will have a negative multiplier effect
affecting many more countries because exports are an injection of demand into th
e global circular flow of income. The negative multiplier effects are more prono
unced 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 measure


s by other countries in retaliation, reduced competition (which results in infla
tion and less choice for consumers), a weakening of the trade balance (due in pa
rt to diminished export abilities resulting from foreign retaliations and in par
t 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 deno
unced critics of protectionism as ideologues whose opinions are shaped more by i
deology than facts. However, academic economists are generally supporters of fre
e 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 producti
on of goods and services in which they have a comparative advantage.
Some economists, such as Paul Krugman, argue that free trade helps third world w
orkers, even though they are not subject to the stringent health and labour stan
dards of developed countries. This is because "the growth of manufacturing – and o
f the penumbra of other jobs that the new export sector creates – has a ripple eff
ect throughout the economy" that creates competition among producers, lifting wa
ges and living conditions. It has even been suggested that those who support pro
tectionism 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 pro
tectionist proposals as leading "to an atrophy of our competitive ability. … If th
e protectionist route is followed, newer, more efficient industries will have le
ss 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. Pro
ponents of this theory point to the constant warfare in the 17th and 18th centur
ies among European countries whose governments were predominantly mercantilist a
nd protectionist, the American Revolution, which came about primarily due to Bri
tish 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 degr
ee of control which can be exercised over them. The simplest form of entry strat
egy is exporting, using either a direct or indirect method such as an agent in t
he 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 expor
t 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 market
ing 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, an
d its purpose is to gauge which international market or markets offer the best o
pportunities 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 King
dom and Australia, a similar language e.g. the United States and Australia, or e
ven 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 nearb
y 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 requi
re 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 exper
iencing 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 ma
nager 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 m
arket entry. So it is vital that detailed information on the target market is ob
tained 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 rese
arch in relation to the marketing mix i.e. what prices can be charged in the nat
ion? - 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 p
roduct or service need to be adapted for the nation? All of this will informatio
n 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 ope
ration, and similar opportunities or threats to new entrants.
Step Four - Final Selection
Now a final shortlist of potential nations is decided upon. Managers would refle
ct 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 co
uld also look at other nations that it has entered to see if there are any simil
arities, or learning that can be used to assist with decision-making in this ins
tance. 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 sho
uld travel to a particular nation to experience firsthand the nation s culture a
nd business practices. On a first impressions basis at least one can ascertain i
n what ways the nation is similar or dissimilar to your own domestic market or t
he 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 u
pon 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 eleme
nt 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 p
erceived risks.
iv) Low price strategy – penetration price.
v) Total adaptation and conformity strategy – foreign producer gives a straight co
py.
In marketing products from less developed countries to developed countries, poin
t (iii) poses major problems. Buyers in the interested foreign country are usual
ly very careful as they perceive transport, currency, quality and quantity probl
ems.
In building a market entry strategy, time is a crucial factor. The building of a
n 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 u
p 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. Enforce
ment of contracts may be costly and weak legal integration between countries mak
es 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, geographi
cal 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 comple
xity. 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 g
eographic areas and do things well.
Ways to concentrate include concentrating on geographic areas, reducing operatio
nal variety (more standard products) or making the organizational form more appr
opriate. In the latter the attempt is made to "globalize" the offering and the o
rganization to match it. This is true of organizations like Coca Cola and MacDon
ald’s.
Global strategies include
• "Country centred" strategies (highly decentralized and limited international coo
rdination),
• "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 bet
ween markets.

Entry Strategies
There are a variety of ways in which organizations can enter foreign markets. Th
e three main ways are by direct or indirect export or production in a foreign co
untry.
1 Exporting
Exporting is the most traditional and well established form of operating in fore
ign 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 c
ountry, significant investments in marketing are required. The tendency may be n
ot to obtain as much detailed marketing information as compared to manufacturing
in marketing country; however, this does not negate the need for a detailed mar
keting 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 marketin
g 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 willin
g to do a good job of marketing, this arrangement may represent a "win-win" situ
ation, but it may be more difficult for the firm to enter on its own later, if i
t 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 passiv
e exporter awaits orders or comes across them by chance; an aggressive exporter
develops marketing strategies which provide a broad and clear picture of what th
e firm intends to do in the foreign market. There are significant differences wi
th regard to the severity of exporting problems in motivating pressures between
seekers and non-seekers of export opportunities. There are differences between f
irms whose marketing efforts were characterized by no activity, minor activity a
nd aggressive activity.
Those firms who are aggressive have clearly defined plans and strategy, includin
g product, price, promotion distribution and research elements. Passiveness vers
us aggressiveness depends on the motivation to export. In many LDC countries lik
e Tanzania and Zambia, which have embarked on structural adjustment programs, or
ganizations are being encouraged to export, motivated by foreign exchange earnin
gs potential, saturated domestic markets, growth and expansion objectives, and t
he need to repay debts incurred by the borrowings to finance the programs. The t
ype of export response is dependent on how the pressures are perceived by the de
cision maker. The degree of involvement in foreign operations depends on "endoge
nous versus exogenous" motivating factors, that is, whether the motivations were
as a result of active or aggressive behavior based on the firm’s internal situati
on (endogenous), or as a result of reactive environmental changes (exogenous).
If the firm achieves initial success at exporting quickly all to the good, but t
he risks of failure in the early stages are high. The "learning effect" in expor
ting 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 incremen
tal 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 ma
rket 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 org
anisation. 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 casua
l exporting. Alternatively, a foreign buyer may approach to the firm. Products a
re sold in the domestic market but used or resold abroad. This type of arrangeme
nt 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 companie
s with local offices all over the world. Perhaps the best-known trading companie
s are the Sogo Sosha of Japan such as Mitsui or Mitsubishi. The size and market
coverage of these trading companies make them attractive distributors, especiall
y with their credit reliability and their information network. The trading compa
nies of European origin are important primarily in trade with former European co
lonies, particularly Africa and Southeast Asia. The drawback to the use of tradi
ng companies is that they are likely to carry competing products and the firm’s pr
oducts might not receive the attention and support the firm desires.
• A third form of indirect exporting is the export management company located in t
he same country as the producing firm and which plays the role of an export depa
rtment. That is the firm has the performance of an export department without est
ablishing one in the firm. The economic advantage arises because the export comp
any performs the export function for several firms at the same time. The produce
r can establish closer relationships and gains instant foreign market contacts a
nd 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. E
xport management companies handle different but complementary product lines whic
h can often get better foreign representation than the products of just one manu
facturer. Indirect export can open up new markets without requiring special expe
rtise or investment. Both the international know-how and the sales achieved by t
hese 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 product
s in foreign markets, because the firm itself performs the export task (rather t
han delegating it to others).
This necessitates the creation of an export department responsible for tasks suc
h as:
• Market contact
• Market research
• Physical distribution
• Export documentation
• Pricing.
This approach to export requires more corporate resources and also entails great
er 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 t
he 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 pot
ential 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 fore
ign operations. (In most cases, the commercial subsidiary will be a joint ventur
e 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 proble
m 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, pr
omote and price the product. Control, or the lack of it, is a major problem whic
h often results in decisions on pricing, certification and promotion being in th
e hands of others.

Exporting requires a partnership between exporter, importer, government and tran


sport. Without these four coordinating activities, the risk of failure is increa
sed. Contracts between buyer and seller are a must. Forwarders and agents can pl
ay a vital role in the logistics procedures, such as booking air space and arran
ging 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 establi
shment of subsidiaries may be one of the only ways forward in future. Indirect m
ethods of exporting include the use of trading companies, export management comp
anies, 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 De
velopment Authority (HCDA) in Kenya may be merely a promotional body, dealing wi
th advertising, information flows and so on, or it may be active in exporting it
self, 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 i
s the consolidation of orders by a number of companies, in order to take advanta
ge 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 int
ensity means more and more investment in marketing. In this situation the organi
zation may expand operations by operating in markets where competition is less i
ntense, 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. C
ountertrade 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, invol
ving some 90 nations and between US $100-150 billion in value. The UN defines co
untertrade 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 a
nd it is not covered by GATT. It can be used to circumvent import quotas. Counte
rtrade can take many forms. Basically two separate contracts are involved, one f
or the delivery of and payment for the goods supplied and the other for the purc
hase of and payment for the goods imported. The performance of one contract is n
ot 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 e
xports. There is a broad agreement that countertrade can take various forms of e
xchange 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 a
nd methanol complex. Information on potential exchange can be obtained from emba
ssies, trade missions or the EU trading desks.
Barter is the direct exchange of one good for another, although valuation of res
pective commodities is difficult, so a currency is used to underpin the item’s val
ue. Barter trade can take a number of formats. Simple barter is the least comple
x and oldest form of bilateral, non-monetarized trade. Often it is called "strai
ght", "classical" or "pure" barter. Barter is a direct exchange of goods and ser
vices between two parties. Shadow prices are approximated for products flowing i
n either direction. Generally no middlemen are involved. Usually contracts for n
o more than one year are concluded, however, if for longer life spans, provision
s 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 tradin
g parties. No money is involved and risks related to product quality are signifi
cantly reduced.
• Clearing account barter, also termed clearing agreements, clearing arrangements,
bilateral clearing accounts or simply bilateral clearing, is where the principl
e is for the trades to balance without either party having to acquire hard curre
ncy. 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, clearin
g 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 betw
een countries and parties whose commercial relationships are based on bilateral
agreements. The contract sets forth the goods to be exchanged, the rates of exch
ange, and the length of time for completing the transaction. Limited export or i
mport 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 p
reviously 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 t
urn, the trader may forfeit a portion of the discount to sell these products for
hard currency on the international market. Compared with simple barter, clearin
g accounts offer greater flexibility in the length of time for drawdown on the l
ines of credit and the types of products exchanged.
• Counter purchase, or buyback, is where the customer agrees to buy goods, on cond
ition that the seller buys some of the customer’s own products in return (compensa
tory products). Alternatively, if exchange is being organized at national govern
ment level, then the seller agrees to purchase compensatory goods from an unrela
ted organization up to a pre-specified value (offset deal). The difference betwe
en the two is that contractual obligations related to counter purchase can exten
d 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 agre
ed currency value.
Where the seller has no need for the item bought he may sell the produce on, usu
ally at a discounted price, to a third party. This is called a switch deal. In t
he 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. F
or 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 bui
lder until the period has elapsed. The plant then becomes the property of India.
One problem is the marketability of products received in countertrade. This prob
lem 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 rel
ated 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 there
fore 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 under
standing 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 entr
y method", especially in developing countries.
Classification Of countertrade

2 Foreign production
Besides exporting, other market entry strategies include licensing, joint ventur
es, 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 trainin
g 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 br
and, based on premium contents in the home country.
Contract manufacturing involves having someone else manufacture products while y
ou take on some of the marketing efforts yourself. This saves investment, but ag
ain you may be training a competitor.
Direct entry strategies, where the firm either acquires a firm or builds operati
ons "from scratch" involve the highest exposure, but also the greatest opportuni
ties for profits. The firm gains more knowledge about the local market and maint
ains greater control, but now has a huge investment. In some countries, the gove
rnment may expropriate assets without compensation, so direct investment entails
an additional risk. A variation involves a joint venture, where a local firm pu
ts 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 c
ountry agrees to permit a company in another country to use the manufacturing, p
rocessing, 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 inclu
des plant construction, personnel training and initial production runs.
• Co-production agreement: This was most common in Soviet bloc countries where pla
nts were built and then paid for with part of the output.
• Management Contract: Currently widely used in Middle East, the MNC is supposed t
o 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 ho
w, 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 manufactur
ing relationships
• Linkage of parent and receiving partner interests means both get most out of mar
keting 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 e
nterprise. 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 s
hare ownership and control over property rights and operation". Joint ventures a
re 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 forei
gn 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. Common
ly called international strategic alliance, leading firms particularly in high t
ech 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 ar
e especially useful for seeking entry into emerging markets. This form is very p
opular 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 a
lready 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 han
dling 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 alon
e. Boeing can partner with Rolls Royce, with the latter making the engines for t
he 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 togethe
r.
• 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 h
eld 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 cr
edible 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 n
ot 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 ag
reements may have to be made up. Also, there may be limitations on market concen
tration, and there may be some concern about the legality of technology transfer
. In some countries, as previously mentioned, it may be difficult to enforce agr
eements.
• Complacency: If two firms join forces where they previously competed, they may b
ecome complacent in developing new products, improving quality, and lowering cos
ts and prices. When competition is place, firms tend to maintain greater discipl
ine, which is needed for competitive ability in the long run.
• Costs of coordination: When two firms have different cultures (e.g., individuali
stic 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 meri
tocracy might have difficulty working with a collectivistic Japanese firm.
• Blurred lines between areas of competition and cooperation: Suppose Sony and Com
paq, which both make computers, want to collaborate on making memory chips. To d
o so, they may have to share information about other computer technology in area
s where they may compete. There is now a question of what to share and what to h
old back. Not only is time spent deciding whether to share or withhold, but esse
ntial 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 communicat
e and control 100% may outweigh any of the disadvantages of joint ventures and l
icensing. However repatriation of earnings and capital has to be carefully monit
ored. The more unstable the environment, the less likely is the ownership pathwa
y 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 mo
de can be summarized as a choice between company owned or controlled methods – "in
tegrated" channels – or "independent" channels.
• Integrated channels offer the advantages of planning and control of resources, f
low of information, and faster market penetration, and are a visible sign of com
mitment. The disadvantages are that they incur many costs (especially marketing)
, the risks are high, some may be more effective than others (due to culture) an
d in some cases their credibility amongst locals may be lower than that of contr
olled independents.
• Independent channels offer lower performance costs, risks, less capital, high lo
cal knowledge and credibility. Disadvantages include less market information flo
w, greater coordinating and control difficulties and motivational difficulties.
In addition, they may not be willing to spend money on market development and se
lection 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 co
untry and diversify into segments. Other activities include country and market s
egment concentration – typical of Coca Cola or Gerber baby foods, and finally coun
try 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 o
rientations respectively) and
• Stage three – global strategy (corresponds with geocentric orientation).
The basic philosophy behind stage one is extension of programs and products, beh
ind stage two is decentralization as far as possible to local operators and behi
nd stage three is an integration which seeks to synthesize inputs from world and
regional headquarters and the country organization. Whilst most developing coun
tries 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 multi
nationals, often unfounded.