International Marketing MRM402

International Marketing (MRM402) Note
Chapter 1: The Scope and Challenges of International Marketing Objectives At the end of this chapter, students are expected to: Define the term international marketing from various perspectives. Describe the importance/significance of international marketing Identify and explain the subsequent stages that a company should undergo to be international; Comprehend the strategic orientations of International Marketing Introduction This Chapter has four sections (sub-titles). The first section deals with the definition of international marketing contributed by different marketing scholars and the various versions, similarities and differences of each definition. The second section gives insights to possible benefits those international marketing offers to various parties. The third section discusses the various stages that a company should undergo in international Marketing. The fourth section assesses the strategic orientations of international marketing.
1.1
Definition of international Marketing According to AMA (American marketing association), International marketing is a process of planning & executing the conception, pricing, promotion, and distribution of ideas, goods services to create exchanges that satisfy individual & organizational objectives. According to Cateora graham (2005), International marketing is the
performance of business activities designed to plan, price, promote, and direct the flow of a companys goods and services to consumers or users in more than one nation for a profit. 1.2 Benefits of international marketing
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International marketing daily affects consumers in many ways, though its importance is neither well understood nor appreciated. The benefits of international marketing must be explicitly discussed here under. 1 Survival: most countries must trade with others to survive. For example Hong Kong without food and water from china would not have survived long. 2 Growth of overseas markets: developing countries, in spite of economic & marketing problems are excellent markets. For example, Latin America and Asia/Pacific are experiencing strong economic Growth. 3 Sales and profits: foreign markets constitute a large share of total business of many firms that have wisely cultivated markets abroad. For example, IBM and Compaq sell more computers abroad than home. CocaColas international sales account more than 80 % of its operating profits. For example, for soft drinks, all countries will not enter to winter season at the same time and some countries are relatively warm round the year. 4 Diversification: Demand for most products is affected by such cyclical factors as recession and seasonal factors as climate. One way to diversify risk is to consider foreign markets as a solution for variable demand. Such markets provide outlets for excess product capacity. 5 Inflation and price moderation: the lack of imported product alterative forces consumers to pay more, resulting in inflation and excessive profits for local firms. 6 7 8 Employment: unrestricted trade improves the worlds GNP and enhances employment generally for all nations. Standard of living: trade affords countries and their citizens higher standards of living than otherwise possible. Understanding of marketing process: can prove to be valuable in providing insights for the understanding of behavioral patterns often taken for granted at home. Coca cola has applied the lessons learned in Japan to the US and European markets. Stages of International Marketing
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The stages of international marketing involvement are presented here in a linear order; the reader should not infer that a firm progresses from one stage to another, quite to the contrary, a firm may begin its international involvement at any one stage or be in more than one stage simultaneously For example, many high-tech companies large and small see the entire world, including their home market, as a single market and strive to reach all possible customers as rapidly as possible. 1. No Direct Foreign Marketing A company in this stage does not actively cultivate customers outside national boundaries; however, this companys products may reach foreign customers who come directly to the firm. Products may reach foreign markets via domestic wholesalers or distributors who sell abroad without explicit encouragement or even knowledge of the producer. As companies develop websites on the internet, many receive orders from international web surfers. Often an unsolicited order from a foreign buyer is what piques the interest of a company to seek additional international sales. 2. Infrequent Foreign Marketing Temporary surpluses caused by variations in productions levels or demand may result in frequenting overseas. The surpluses are characterized by their temporary nature; therefore, sales to foreign markets are made as goods are available, with little or no intention of maintaining continuous market representation. As domestic demand increases and absorbs surpluses, foreign sales activity is withdrawn. In this stage, there is little or no change in company organization or product lines. However, few companies today fit this model because customers around the world increasingly seek long-term commercial relationships.
3. Regular Foreign Marketing

At this level, the firm has permanent productive capacity devoted to the production of goods to be marketed in foreign markets. A firm may employ foreign or domestic overseas middlemen or it may have its own sales force or Addis Ababa university School Of Commerce Page 3

sales subsidiaries in important foreign markets. The primary focus of operations and production is to service domestic market needs. However, as overseas demand grows, production is allocated for foreign markets, and products may be adapted to meet the needs of individual foreign markets. Profits expectations from foreign markets move from being seen as a bonus to regular domestic profits to a position in which the company depends on foreign sales and profits to meet its goals. 4. International Marketing Companies in this stage are fully committed & involved in international marketing activities. Such companies seek markets all over the world and sell products that a result of planned production for markets in various countries. This generally entails not only the marketing but also the production of goods outside the home market. At this point a company becomes an international or multinational marketing firm. 5. Global Marketing At the Global marketing level, the most profound change is the orientation of the company toward markets and associated planning activities. At this stage, companies treat the world, including their home market, as one market. Market segmentation decisions are no longer focused on national borders. Instead, market segments are defined by income levels, usage patterns, or other factors that often span countries and regions. Often this transition from international marketing to global marketing is catalyzed, by a companys crossing the threshold of more than half its sales revenues coming from. The best people in the company begin to seek international assignments, and entire operation-organizational structure, sources of finance, production, marketing, and so forth begins to take on a global perspective. International operation of business in Global marketing reflect the heightened competitiveness brought about by the globalization of markets , interdependence of the worlds economies, and the growing number of competing firms from developed and developing countries vying for the world markets. Addis Ababa university School Of Commerce Page 4

Global companies and Global marketing are terms frequently used to describe the scope of operations and marketing management orientation of companies in this stage. Activity 4: what is the difference between international Marketing and |Global marketing? _____________________________________________________________________________________ _____________________________________________________________________________________ ___________________________________________________________________________________.
8.1
Strategic orientations of International Marketing
The stages of international marketing involvement described above do necessarily coincide with managers thinking & strategic orientations. Often companies are led into international and even Global markets by burgeoning consumer or customer demands, and strategic thinking is secondary filling the next order. But putting strategic thinking on the back burner has resulted in marketing failures for even the larger companies. The consensus of the researchers and authors in the area reveals three relatively distinctive approaches that dominate strategic thinking in firms involved in international markets.
1. Domestic Market Extension Concept The domestic company seeking sales extensions of its domestic products into foreign markets illustrates this orientation to international marketing. It views its international operations as secondary to and an extension of its domestic operations; the primary motive is to market excess domestic production. Domestic business is its priority, and foreign sales are seen as a profitable extension of domestic operations. Even though foreign markets may be vigorously pursued, the firms orientation remains basically domestic. It seeks Addis Ababa university School Of Commerce Page 5

markets where demand is similar to the home market and its domestic product will be acceptable. This domestic market extension strategy can be very profitable; large and small exporting companies approach international marketing from this perspective. ethnocentric. 2. Multi-Domestic Market Orientation When a company recognizes the importance of differences in overseas market and the importance of offshore business to the organization, its orientation toward international business may shift to a multi-domestic market strategy. A company guided by this concept has a strong sense that country markets are vastly different and that market success requires an almost independent program for each country. Firms with this orientation market on a country bycountry basis, with separate marketing strategies for each country. Subsidiaries operate independently of one another in establishing marketing objectives and plans, and the domestic market and each of the country markets have separate marketing mixes with little interactions among them. Products are adapted for each market with little coordination with other country markets; advertising campaigns are localized, as are distribution decisions. A company with this concept does not look for similarity among elements of the marketing mix that might respond to standardization; rather, it aims for adaptation to local country markets. Control is typically decentralized to reflect the belief that the uniqueness of each market requires local marketing input and control. Firms with this orientation are polycentric. 3. Global Marketing Orientation A company guided by the global marketing orientation or philosophy is generally referred to as a global company; its marketing activity is global, and its market. A Company employing a global marketing strategy strives for efficiencies of scale by developing a standardized marketing mix applicable across national boundaries. the pricing and Firms with this marketing approach are
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Markets are still segmented, but country or regions are considered side by side with a variety of other segmentation variables, such as consumer characteristics (age, income, language group), usage patterns, legal constraints, and so on. The world as a whole is viewed as the market, and the firm develops a global marketing strategy. The Global marketing company is Geocentric. Coca - cola, Ford Motor Company and Intel describes a global market. The Global marketing concept views an entire set of country markets as a unit, identifying groups of prospective buyers with similar needs as a global market segment and developing a marketing plan that strives for standardization wherever it is cost and culturally effective.
This might mean a companys global marketing plan has a standardized product but country-specific advertising, or has a standardized theme in all countries with country or cultural-specific appeals to a unique market characteristics , or has a standardized brand or image but has adapted products to meet specific country needs , and so on.
In other words, the marketing planning and marketing mix efficiencies of standardization are sought. Wherever cultural uniqueness dictates the need for adaptation of the product, its image, and so on, it is accommodated. 4. The Orientation Of International Marketing Most problems encountered by the foreign marketer result from the strangeness of the environment within which marketing programs must be implemented. Success hinges, in part, on the ability to assess and adjust properly to the impact of a strange environment. The successful international marketer possesses the best qualities of the anthropologist, sociologist, psychologist, diplomat, lawyer, prophet, & business person. Summary
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The Globalization of markets and competition necessisitates all managers to pay the attention to the Global environment .International marketing is defined as performance of business activities
including pricing , promotion , product ,and
distribution decisions across national borders. The international marketing task is made more daunting because environmental factors such as laws, customs, and cultures vary from country to country. These environmental differences must be taken into account if firms are to market products and services at a profit in other countries. Key obstacles facing international marketers are not limited to environmental issues. Just as important are difficulties associated with the marketers own self-reference criteria and ethnocentrism. Both limit the international marketers abilities to understand and adapt to differences prevalent markets. A Global awareness and sensitivity are the best solutions to these problems, and these should be nurtured in international marketing organizations.
Three strategic orientations are found among managers of international marketing operations. Some see international marketing as ancillary to the domestic operations. A second kind of company sees international marketing as a crucial aspect of sales revenue generation, but each market is treated as a separate entity. Finally , A Global orientation views the Globe as the market place and market segments are no longer solely on national borders common consumer characteristics and behaviors come into play as key segmentation variables applied across countries.
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Chapter -2 Trade Theories and Economic Development
At the end of this chapter , students are expected to: Identify the Basis of international trade Describe Production possibility curve Explain the Principle of absolute advantage Assess Principle of relative advantage Identify Factor endowment theories Examine Trade distortions Marketing tariff and non tariff barriers. Introduction This chapter has six sections (sub-titles). The first section deals with the basis of
international trade. The second section highlights production possibility curve. The third section discusses the principle of absolute advantage. The fourth section assesses the principle of relative advantage. The fifth deals with factor endowment theories. The sixth is concerned with trade tariff and non-tariff barriers. 2.1 Basis for international trade/ international trade theories Why Do Nations Trade? A nation trades because it expects to gain something from its trading partner. One may ask whether trade is like a zero-sum game, in the sense that one must lose so that another will gain. The answer is zero, because though one does not mind gaining benefits at someone elses expense, no one wants to engage in transaction that includes a high risk of loss. For trade to take place, both nations must anticipate gain from it. In other words, trade is a positive sum Game. In order to explain how gain is derived from trade, it is necessary to examine a countrys production possibility curve.
2.2 Production Possibility Curve
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Without trade, a nation would have to produce all commodities by itself in order to satisfy all its needs. Because each country has a unique set of resources, each country possesses its own unique production possibility curve. This curve, when analyzed, provides an explanation of the logic behind international trade. Regardless of whether the opportunity cost is constant or variable, a country must determine the proper mix of any two products and must decide whether it wants to specialize in one of the two.
Specialization will likely occur if specialization allows the country to improve its prosperity by trading with another nation. The principles of absolute advantage & relative advantage explain how the production possibility curve enables a country to determine what to export and what to import. 2.3 Principle of Absolute Advantage
Adam smith may have been the 1st scholar to investigate formally the rationale behind foreign trade. Smith used the principle of absolute advantage as the justification for international trade. Possible physical out put Product Case 1 Computer automobile Case 2 Computer automobile Case 3 Computer automobile United states 20 10 20 30 20 40 Japan 10 20 10 20 10 20
Case 1: the US can produce 20 computers or 10 automobiles or some combination of

both. In contrast Japan produces only as many computers. The disparity might be the result of better skills by American workers in making this product. Therefore, the US has an absolute advantage in computers. For automobile the situation is Addis Ababa university School Of Commerce Page 10

reversed. Japan has an absolute advantage over automobiles. In other words, the US has an absolute advantage over computers & an absolute disadvantage for automobiles & vice versa to Japan. If each country specializes in the product for which it has an absolute advantage, each can use its resources more effectively while improving consumer welfare at the same time. By the same analogy a Dr. is absolutely better than a mechanic in performing surgery, whereas the mechanic is absolutely superior in repairing cars. 2.3 Principle of Relative Advantage The principle of absolute advantage fails to explain whether trade will take place if one nation has absolute advantage for all products under consideration. Case 2: shows this situation. The US has an absolute advantage for both products, resulting in absolute advantage for both products, resulting in absolute disadvantage for Japan for both. The efficiency of the United States enables it to produce more of both products at lower cost.
According to Ricardos principle of relative or comparative advantage, a country may be better than another in producing many products but should only produce what it produces best. Essentially it should concentrate on either a product with the greatest comparative advantage or a product with the least comparative disadvantage. Conversely, it should import either a product for which it has the greatest comparative disadvantage or one for which it has the least comparative advantage. In case 2 the relative advantage varies from product to product. The extent of relative advantage can be found by determining the ratio of computers to automobiles. The advantage ratio for computers is 2: 1 (20: 10) in favor of the USA. The ratio of automobiles is also 1.5: 1 (30: 20) Interpretation: These two ratios indicate that the United States possesses a 100 % advantage over Japan for computers but only a 50 % advantage for automobiles. Addis Ababa university School Of Commerce Page 11

Consequently, the USA has a greater relative advantage for the computer product. Therefore, the USA should specialize in producing the computer product. For Japan, having the least comparative disadvantage in automobiles indicates that it should make and export automobiles to the USA.
The analogy of a Dr. and a mechanic in the case of surgery and repair of an automobile may also hold true. (It is even possible, if not probable, that the Dr. may eventually be able to repair an automobile faster and better than the mechanic.)
2.4 Exchange Ratios, Trade and Gain
Although an analysis of a relative advantage can indicate what a country should export and import, that analysis cant explain exactly how a country will gain from trading with a partner. In order to determine the extent of trading again, an examination of the domestic exchange ratio is required. Based on case 2: a) Japan: Japans domestic exchange ratio between the two products in question is 2: 1 (10 computers for every 20 automobiles). This implies Japan must give up two automobiles to make one computers. But by exporting automobiles to the USA, Japan has to give up only 1.5 automobiles in order to get one computer. Thus, trading essentially enables Japan to get more computers than feasible without trading. b) USA: The US domestic exchange ratio is 1: 1.5 (for every 20 computers for 30 automobiles).The incentive for the USA to trade with Japan occurs in the form of a gain from specializing in computer manufacturing and exchanging computers for automobiles from Japan. The extent of the gain is determined by comparing the domestic exchange ratios in the two countries. In the United States, one computer brings 1.5 automobiles in exchange. But this same computer will result in two automobiles in Japan. Thus, trading is the most profitable way for the United States to employ its resources. Theoretically, trade should equalize the previously unequal domestic exchange ratios and bring about a new ratio known as the world market exchange ratio/terms of trade. This ratio, which will replace the two different domestic exchange ratios, will lie between the limits established by the pre-trade domestic exchange ratios. Addis Ababa university School Of Commerce Page 12

Such benefits derived from trade do not imply that the trade must always take place and that all nations will always gain from trade.
Case 3: the USA now makes 40 automobiles instead of 10 in case 1 & 30 in cases 2. Not only does the United States have absolute advantage for both products, but it also has the same domestic exchange ratio as that of Japan. This situation is graphically expressed by two parallel production possibility curves. Absolute advantage without relative advantage (identical domestic exchange ratio)
Graph
Under these circumstances, trade probably will not occur for two principal reasons.
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Since the United States is 100 % better than Japan for each product, the relative advantage for the United States is identical for both products. Since both countries have the identical domestic exchange ratio, there is no incentive or gain from trading for either party. Whether in the USA or in Japan, one unit of computer will fetch two automobiles. When such other costs as paperwork and transportation are taken into account, it becomes too expensive to export a product from one country to another. Thus, international trade is a function of the varying domestic exchange ratios, and these ratios cause variations in comparative costs or prices.
2.5 Factor Endowment Theory The principles of absolute & relative advantage provide a primary basis for trade to occur, but the usefulness of these principles is limited by their assumptions. One basic assumption is that the advantage, whether absolute or relative, is solely determined by labor in terms of time and cost. Labor then determines comparative production costs and subsequent product prices for the same commodity. The basis of the factor endowment theory is the varying factor inputs and proportions for different commodities, together with the uneven distribution of such factors of production in different regions of the world. This theory holds that the inequality of relative prices is a function of regional factor endowments and that comparative advantage is determined by the relative abundance. According to Ohlin, there is a mutual interdependence among production factors, factor movements, income, prices, and trade. A change in one affects the rest, prices of factors and subsequent product prices in each region depend on supply and demand, which in turn are affected by the desires of consumers, income levels, quantity of various factors, and physical conditions of production. Therefore, a country that is relatively abundant in labor but relatively scares in capital is likely to have a comparative advantage in the production of labor-intensive goods and to have deficiencies in the production of capital-intensive goods. This concept explains why china, a formidable competitor in textile products, has to depend on US and European firms for oil exploration within china itself. 2.6 A Critical Evaluation of Trade Theories In theory, the more different two countries are, the more they stand to gain by trading with each other. There is no reason why a country should want to trade with another that is a mirror image of itself. However, a look at world trade casts some doubt on the validity of classical trade theories. Developed countries trade more among themselves than with developing countries. In the case of the United States, it is apparent that American corporations prefer to form direct-investment ties in the more stable, Addis Ababa university School Of Commerce Page 14

developed countries while avoiding heavy investment in the fast growing developing world. Apparently, other variables in addition to factor endowment play a significant role in determining trade volume and practices because much trade does occur between developed nations. Porter, based on his analysis of over one hundred case studies of industries, has identified four major determinants of international competitiveness: a. Factor conditions- factors of productions; b. Demand conditions; c. Related and supporting industries; and d. Firm strategy, structure, and rivalry, chance and government policy are minor determinants. Limitations and Suggested Refinements The limitation of trade theories can be discussed from two perspectives: I. Trade Theories from Supply Side 1. Trade theories provide logical explanations about why nations trade with one another, but such theories are limited by their underlying assumptions. Most of the worlds trade rules are based on a traditional model that assumes that: a. trade is bilateral b. trade involves products originating primarily in the exporting country c. the exporting country has a comparative advantage, and d. Competition primarily focuses on the importing countrys market. However, todays realities are quite different: Firstly, trade is a multilateral process; secondly, trade is often based on products assembled from components that are produced in various countries. Thirdly, it is not easy to determine a countrys comparative advantage, as evidenced by the countries that often export and import the same product. Finally, competition usually extends beyond the importing country to include the exporting country and third countries. The other limitation of classical trade theories is that the factors of production are assumed to remain constant for each country because of the assumed immobility of such resources between countries. This assumption is especially true in the case of land, since physical transfer and ownership of land can only be accomplished by war or purchase. There is a significant difference in the immobility of land and capital. It is possible for a country to attract foreign capital for investment or for a country to borrow money from foreign banks or international development agencies. In spite of restrictions imposed by most governments, for instance US banks as financial institutions in a capital rich-country, provide huge loans to Latin American countries. Labor as a factor is relatively immobile. Immigration laws in most countries severely limit the freedom of movement of labor between countries. (In china, people- labor, are not even able to select Addis Ababa university School Of Commerce Page 15

residence of a city of their choice).Labor can and does move across borders. (Western European countries allow their citizens to pass across borders rather freely. The US has a farm program that allows Mexican workers to work in the United States temporarily. South Koreans & Thailand wellendowed with abundant labor send laborers to Saudi Arabia. China likewise sends its peasants to the USA for rail road construction in the mid-19th century.)Note: While immigration laws often restrict labor movement across countries, business laws however tend to welcome capital movement to utilize labor in a foreign country. 2. The level of quality of production factors: The quality of each factor should not be assumed to be homogeneous worldwide. Some countries have relatively better trained personnel, better equipment, and better quality land & climate. II. Trade Theories from the Demand Side 1. Tastes should not be assumed to be the same among various countries. A Country may have a scarcity of certain products and yet its citizens may have no desire for those products. Frequently, LDCS products may not be of sufficient quality to satisfy the tastes of industrial nations. In some situations, the quality of the product may be too high and highly costly. Ex. German machineries. Therefore, many LDCs opt for less reliable machinery products which are less costly. 2. Perhaps the most serious shortcoming of classical trade theories is that they ignore the marketing aspect of trade. These theories are primarily concerned with commodities rather than with manufactured goods or value-added products. It is assumed that all suppliers have identical products with similar physical attributes and quality. This habit of assuming product homogeneity is not likely to be made among those familiar with marketing. Products are endowed with psychological attributes. Brand name products are often promoted as having additional value based on psychological nuance. Ex. Marlboro and Winston sell well worldwide because of the images of those brands. Firms in two countries may produce virtually identical products in physical terms, but one product has different symbolic meaning than the other. 3. A further shortcoming of classical trade theories is that the trade patterns as described in the theories are in reality frequently affected by trade restrictions. The direction of the flow of trade, according to some critics of free trade, is no longer determined by a countrys natural comparative advantage. Rather a country can create a relative advantage by relying on outsourcing and other trade barriers, such as tariffs and quotas. The US trade pattern is also distorted by trade restrictions and regulations. The US automobile emission control standards have effectively prevented Brazilian cars from entering the US markets.(protectionism alter trade patterns).
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2.7 Trade Distortions and Marketing Barriers There are two major marketing barriers: I. Marketing Barriers: Tariffs Tariffs is derived from a French word meaning rate, price, or list of charges, is a customs duty or tax on products that move across borders. Tariffs are classified based on the following issues: 1. Direction: Import And Export Tariffs: Tariffs are often imposed on the basis of the direction of product movement i.e. on imports & exports, with the later being the less common one. When export tariffs are levied, they usually apply to an exporting countrys scarce resources or raw materials rather than finished manufactured products. For example, companies exporting from Russia must pay an average export tariff of about 20 % on a number of Goods sold on cash transactions and an average export tariff of about 30% for goods sold in non cash or barter transactions.
2. Purpose: Protective and Revenues Tariffs

2.1 Protective: Tariffs can be classified as protective tariffs and revenue tariffs. The distinction is based on purpose. The purpose of a protective tariff is to protect home industry, agriculture, and labor against foreign competitors by trying to keep foreign goods out of the country. The South American markets have high import duties that hinder the import of fully built cars. For instance, Brazil has a 50 % import tax on imported flyaway planes. Revenue Tariffs: The purpose of revenue tariffs is to generate tax revenues for the government. Compared to a protective tariff, a revenue tariff is relatively low. When Japanese and other foreign cars are imported into the USA, there is a 3 % duty. On the other hand, Americans cars exported to Japan are subject to a variety of import taxes. Even the cost of shipping is taxed. Thus, the US tax is a revenue tariff, whereas the Japanese tax is more of a protective tariff.
2.2
3. Length: Tariff surcharge versus countervailing Duty: Protective tariff can be further classified according to length of time. a. A Tariff Surcharge: a temporary action taken, say for example to protect the local industry in line with national interest. For example, the tariff on heavy motorcycles jumped from 4.4 % to 45 % for one Addis Ababa university School Of Commerce Page 17

year and then declined to 35 %, 20 %, 15 %, and finally 10 % in subsequent years. b. A Countervailing Duty: a permanent surcharge which are imposed on certain imports when products are subsidized by foreign governments. These duties are thus assessed to offset a special advantage or discount allowed by an exporters government. 4. Rates: Specific, Ad Val Orem, and Combined: To understand how tax rates are applied, three kinds of tax rates must be distinguished. a. Specific Duties: These are a fixed or specified amount of money per unit of weight, gauge, or other measure of quantity. Based on a standard physical unit of a product, they are specific rates of so many dollars or cents for a given unit of measure.($ 1 /gallon, 25/ square yard,$2/tone, etc; ). Product cost or prices are irrelevant here. The duties are constant for low and high-priced products of the same kind. b. Ad Valorem Duties: These are duties according to value. They are stated as a fixed percentage of the invoice value and are applied as a percentage to the dutiable value of the imported goods. For example Japans ad valorem tariffs on beef and processed cheese are 25 % and 35 % respectively. This is the opposite of specific duties since the percentage is fixed but the total duty is not. There is a direct relationship between the total duties collected and the price of the product. It provides a continuous and relative protection against all price levels of a particular product. Moreover, it provides an easy comparison of rates across countries and across products. c. Combined Rates or Compound Duty: These are a combination of the specific & ad valorem duties on a single product. They are duties based on both the specific rate & the ad valorem rate that are applied to an imported product. For example the tariff may be 10 per pound plus 5 % ad valorem.Under this system, both rates are used together, though in some countries only the rate producing more revenue may apply. 5. Distribution Point: Distribution and Consumption Taxes
Some taxes are collected at a particular point of distribution or when purchases and consumptions occur. These indirect taxes, frequently adjusted at the border, are of four kinds: a. Single-Stage Sales Tax: This is a tax collected only at one point in the manufacturing and distribution chain. This sales tax is not collected until products are purchased by final consumers. This tax is most common in USA b. A value-added Tax (VAT): This is a multi-stage, noncumulative tax on consumption. It is a national sales tax levied at each stage of the Addis Ababa university School Of Commerce Page 18

production and distribution system, though only on the value added at that stage. In other words, each time a product changes hands, even between middlemen, a tax must be paid. But the tax collected at a certain stage is based on the added value and not the total value of the product at that point. Sellers in the chain collect the VAT from a buyer, deduct the Amount of VAT they have already paid on their purchase of the product, and remit the balance to the government. c. Cascade Taxes: They are collected at each point in the manufacturing and distribution chain and are levied on the total value of the product, including taxes borne by the product at earlier stages. Of the tax systems examined, this appears to be the most severe of them all. This defunct type of taxation system was used in Italy and replaced by Vat in 1973. d. An Excise Tax: This is a one-time charge levied on the sales of specified products. Alcoholic beverages and cigarettes are good examples. In the US 3 % excise tax is collected on telephone services and 16 for each pack of cigarettes at the federal level. However each state, county and city has their own excise taxes. II. Marketing Barriers: Non-Tariff Barriers Tariffs, though generally undesirable, are at least straight forward and obvious. Ontariff barriers, in comparison, are more elusive or non-transparent. Tariffs have declined in importance, while non-tariff have become more prominent. The impact of non-tariff barriers can be just as devastating, if not more, as the impact of tariffs. Non tariff barriers can be grouped into five major categories: 1 Government Participation In Trade The degree of government involvement in trade varies from passive to active. The types of participation include: a. Administrative Guidance: Many governments routinely provide trade consultation to private companies. Japan has been doing this on a regular basis to help implement its industrial policies. The government uses a carrot-and stick approach by exerting the influence through regulations, recommendations, encouragement, discouragement, or prohibition. b. Government Procurement and State Trading: State trading is the ultimate in government participation, because the government itself is now the customer or buyer who determines what, when, where, and how much to buy. In this practice the state engages in commercial operations, either directly or indirectly, through the agencies under its control. Such activities are either in place of or in addition to private firms. The government procurement code requires the signatory nations to guarantee that they will provide suppliers from other signatory countries treatment equal to that which provide their own suppliers. This guarantee of national treatment means that a foreign government must choose the Addis Ababa university School Of Commerce Page 19

goods with the lowest price that best meet the specifications regardless of the suppliers nationality. The code requires that technical specifications not be prepared, adopted, or applied with a view to creating obstacles to international trade. c. Subsidies: According to GATT, subsidy is a financial contribution provided directly or indirectly by a government and which confers a benefit.Subsidies can take many forms including cash, interest rate, and value added tax, corporate income tax, sales tax, freight, insurance, and infrastructure. Subsidized loans for priority sectors, preferential rediscount rates, and budgetary subsidies are among the various subsidy policies of several Asian countries. For example in order to attract foreign automakers to locate their plants , Ohio, Michigan, and Illinois , provided such services as highway construction, training of workers, and tax breaks, which are simply subsidies in disguise. To combat subsidies the US has proposed the adoption of Tariff light approach to provide a framework for the classification of all subsidy programs. Based on a subsequent GATT agreement, there are three categories: a. Prohibited - red light subsidies b. Permissible but actionable - yellow light subsidies : These types of subsidies are actionable multilaterally and counter available unilaterally if they cause adverse trade effects. c. Permissible but non actionable green light subsidies. They are not counter available if provided according to criteria intended to limit their potential for distortion. Customs and Entry Procedures: Customs and entry procedures can be employed as non tariff barriers. These restrictions involve classification, valuation, documentation, license, inspection, and health and safety regulations. a. Classification: Product classification is important because the way in which a product is classified determines its duty status. Classification thus determines if certain product categories are qualified for a special treatment, but it also determines whether some products should be banned altogether. Most countries ban obscene, immoral, and seditious materials, as well as imports of counterfeit coins, bills, securities, postage stamps, and narcotics. In South Korea, prohibited articles include books, printed matter, motion pictures, phonograph records, sculptures, and other like articles that are deemed subversive or injurious to national security or detrimental to the public interest, as well as articles used for espionage or intelligence activities. Products can also be reclassified. b. Valuation: Regardless of how a product is classified, each product must still be valued. The value affects the amount of tariffs levied. A custom appraiser is the one who determines the value. The process can be highly subjective, and the valuation of the product can be interpreted in different ways, depending on what value is used (foreign, export, import, or manufacturing costs) and how this value is constructed. In Japan a Addis Ababa university School Of Commerce Page 20

commodity tax of 15 % is applied to the FOB factory price of Japanese cars. Yet U.S cars are valued on the CIF basis, adding $1000 more to the final retail price of these cars. c. Documentation: Documentation can present another problem at entry because many documents and forms are often necessary, and the documents required can be complicated. Documentation requirements vary from country to country. Usually, the following shipping documents are either required or requested: commercial invoice, pro forma invoice, certificate of origin, bill of lading, packing list, insurances certificate, import license, and shippers export declarations. Without proper documentation, goods may not be cleared through customs. At the very least, such complicated & lengthy documents serve to slow down product clearance. French, requiring customs documentation in French. d. License or Permit: Not all products can be freely imported; controlled imports require licenses or permits. For example, importation of distilled spirits, wines, malt beverages, arms, ammunition, and explosives into the USA require a license issued by the bureau of alcohol, Tobacco, and Fire arms. India requires license for all imported goods. e. Inspection: It is an integral part of a product clearance. Goods must be examined to determine quality and quantity. First, Inspection classifies and values products for tariff purposes. Second, inspection reveals whether imported items are consistent with those specified in the accompanying documents & whether such items require any licenses. Third, inspection determines whether products meet health and safety regulations order to make certain that food products are fit for human consumption or that the products can be operated safely. Fourth, inspection prevents the importation of prohibited articles. Marketers should be careful in stating the amount and quality of products, as well as in providing an accurate description of products. Any deviations from the statements contained in invoices necessitate further measurements and determination, more delay, and more expenses. f. Health and Safety Regulations: Many products are subject to health and safety regulations, which are necessary to protect the public health and environment. Health and safety regulations are not restricted to agricultural products. The regulation also applies to TV receivers, micro wave ovens, Xray devices, cosmetics, chemical substances, and wearing apparel. For example, Japan bans aluminum softball bats from the United States which has a small hole in the top filled with a rubber stopper; on the ground that the stopper may fly out and hurt someone which is unfounded. 3 Product Requirements For goods to enter a country, product requirements set by that country must be met. Requirements may apply to product standards, product specifications, packaging, labeling and marking. Addis Ababa university School Of Commerce Page 21

a. Product standards: Each country determines its own product standards to protect the health and safety of its consumers. Such standards may also be erected as barriers to prevent or to slow down importation of foreign goods. Because of U.S grade, size, quality, and maturity requirements, many Mexican agricultural commodities are barred from entering into the U.S.Japanese product standards are even more complex, and they are based on physical characteristics instead of product performance. Furthermore these standards are frequently changed in Japan in order to exclude imports. b. Packaging, Labeling, and Marking: These concepts are considered together because they are interrelated. Many products must be packaged in a certain way for safety and other reasons. Canada requires imported canned foods to be packed in specified can sizes, and instructions contained within packages or on them must be English and French. The Canadian labeling Act also requires all imported clothing to have labels in both languages. Products must also be properly marked and labeled, and marking and labeling may apply either to products themselves or to their packages. An Italian judge ordered a seizure of bottled coke because he felt that the ingredients listed on the bottle cap were not properly described and labeled. France requires all imported goods to carry labels of origin, and so does the USA. For identification and transportation purposes, packages should bear a consignees mark, port mark, and package numbers. c. Product Testing: Many products must be tested to determine their safety and suitability before they can be marketed. This is another area in which the USA has some troubles in Japan. Although products may have won approval everywhere else for safety and effectiveness, such products as medical equipment and pharmaceuticals must go through elaborate standards testing that can take a few years-just long enough for Japanese companies to develop competing products. Moreover, the reviews take place behind the health and welfare Ministrys closed doors. d. Product Specification: Product specification though appearing to be an innocent process, can wreak havoc on imports. Specification can be written in such a way as to favor local bidders and to keep out foreign suppliers. For example, specification can be extremely detailed, or they can be written to closely resemble domestic products. Thus, they can be used against foreign suppliers who cannot satisfy the specifications without expensive or lengthy modification. 4. Quotas: Quotas are a quantity control on imported goods. Generally, they are specific provisions limiting the amount of foreign products imported in order to protect local firms and to conserve foreign currency. Quotas can be used for export control as well. From a policy stand point, a quota is not as desirable as a tariff since a quota generates no revenues for a country. There are three kinds of Quotas: absolute, tariff, and voluntary. 4.1
Absolute Quotas (Unilaterally Imposed: An absolute quota is the most

restrictive of all. It limits in absolute terms the amount imported during a Addis Ababa university School Of Commerce Page 22

quota period. Once filled, further entries are prohibited. Some quotas are global, but others are allocated to specific foreign countries. Japan imposes strict quotas on oranges and beef. To appease the EU, it has lifted quotas on skimmed milk powder and tobaccos from Europe. The most extreme of the absolute quota is an embargo, or a zero quota, as shown in the case of the U.S. Trade embargoes against Iraq and North Korea. 4.2 Tariff Quotas (Unilaterally imposed): Tariff Quotas are a quantity control on imported goods. A tariff quota permits the entry of a limited quantity of the quota product at a reduced rate of duty. Quantities in excess of quota can be imported but are subject to a higher duty rate. Through the use of tariff quotas, a combination of tariffs and quotas is applied with the primary purpose of importing what are needed and discouraging excessive quantities through higher tariffs. When the U.S.A increased tariffs on imported motorcycles to protect the motorcycle industry, it exempted from the tax the first 6,000 big motorcycles from Japan and the 1st 4,000-5,000 units from Europe. Voluntary Quotas: A voluntary quota differs from other two kinds of quotas, which are unilaterally imposed. A voluntary quota is a formal agreement between nations or between a nation and an industry. This agreement usually specifies the limit of supply by product, country, and volume. There are two kinds of voluntary quotas:
4.3
a. Voluntary export restraint (VER): is a direct agreement between an importing nations government and a foreign exporting industry-a quota with the industry participation. b. Orderly Marketing agreement (OMA): a negotiation between two Governments to specify export management rules, the monitoring of trade volumes, and consultation rights. 5. Financial Control Financial regulations restrict international trade. These restrictive monetary policies are designed to control capital flow so that currencies can be defended or imports controlled. There four forms of financial restrictions: a. Exchange Control: An exchange control is a technique that limits the amount of the currency that can be taken abroad. The reasons exchange controls are usually applied is that the local currency is overvalued, thus causing imports to be paid for in smaller amounts of currency. Purchasers then try to use the relatively cheap foreign exchange to obtain items either unavailable or more expensive in the local currency. It limits the length of time and amount of money an exporter can hold for the goods sold. For example, French exporters must exchange the foreign currencies for francs within one month. By regulating all types of capital outflows in foreign currencies, the government Addis Ababa university School Of Commerce Page 23

either makes it difficult to get imported products or makes such items available only at higher prices. b. Multiple Exchange Rates: Multiple exchange rates are twofold: To encourage exports and imports of certain goods and To discourage exports and imports of others. This means that there is no single rate for all products or industries. But with the application of multiple exchange rates, some products and industries will benefit and some will not. Spain once used low exchange rates for goods designated for export and high rates for those it desired to retain at home. Multiple exchange rates may also apply to imports. The high rates may be used for imports of particular goods with the governments approval, whereas low rates may be used for other imports. According to the IMF, any unapproved multiple currency practices are a breach of obligations, and the member may become ineligible to use the Funds resources. c. Prior Import Deposits and Credit Restrictions: Both of these barriers operate by imposing certain financial restrictions on importers. I. Prior Import Deposits: A government can require prior import deposit forced deposits that make imports difficult by tying up an importers capital. In effect the importer is paying interest for money borrowed without being able to use the money or get interest earnings on money from the governments. Importers in Brazil and Italy must deposit a large sum of money with their central banks if they intend to buy foreign goods. II. Credit Restrictions: These restrictions are applied to importers; i.e. exporters may be able to get loans from the government, usually at favorable rates, but importers will not be able to receive any credit or financing from the government. Importers must look for loans in the private sector-very likely at significantly higher rates, if such loans are available at all. d. Profit Remittance Restrictions: ASEAN Countries share a common philosophy in allowing unrestricted repatriation of profits earned by foreign companies. Singapore, in particular, allows the unrestricted movement of capital. But many countries regulate the remittance of profits earned in local operations and sent to a parent organization located abroad. Brazil uses progressive rates in taxing all profits remitted to a parent company abroad, with such rates going up to 60%. Other countries practice a form of profit remittance restriction by simply having long delays in permission for profit expatriation. 2.5 Summary
The theory of comparative advantage suggests that it makes sense for a country to specialize in producing those goods that it can produce most Addis Ababa university School Of Commerce Page 24

efficiently ,while buying goods that it can produce relatively less efficiently from other countries-even if that means buying goods from other countries that it could produce more efficiently itself. The theory of comparative advantage suggests that unrestricted free trade brings about increased world productions, that is , that trade is a positive sum game. The theory of comparative advantage suggests that opening a country to free-trade stimulates economic growth, which creates dynamic gains from trade. The empirical evidence seems to be consistent with this claim. The Heckscher Ohlin theory argues that the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. The product life cycle theory suggests that trade patterns are influenced by where a new product is introduced. In an increasingly integrated global economy, the product life-cycle theory seems to be less predictive than it once was. New trade theory states that trade allows a nation to specialize in the production of certain goods, attaining scale economies and lowering the costs of producing those goods, while buying goods that it does not produce from other nations that are specialized. By this mechanism, the variety of goods available to consumers in each nation is increased, while the average costs of those goods should fall.
New trade theory also states that in those industries where substantial economies of scale imply that the world market will profitably support only a few firms, countries may predominate in the export of certain products simply they had a firm that was a first mover in that industry. Some new trade theorists have promoted the idea of strategic trade policy. The argument is that government, by the sophisticated and judious use of subsidies might be able to increase the chances of domestic firms becoming first movers in newly emerging industries. Porters theory of national competitive advantage suggests that the pattern of trade is influenced by four attributes of a nation. Factors endowments Domestic demand conditions Addis Ababa university School Of Commerce Page 25

Relating an supporting industries and Firm strategy, structure, and rivalry. Theories of international trade are important to an individual business firm primarily because they can help the firm decide where to locate its various production activities. Firms involved in international trade can and do exert a strong influence on government policy toward trade. By lobbying government, business firms can promote free trade or trade restrictions. Two types of trade barriers, tariff and Non tariff barriers, have been erected to protect national economies and employment. Efforts at liberalizing international trade in a systematic fashion began after World War II with the establishment of GATT. In all, eight rounds of multilateral negotiations have been held under GATT toward this end.
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Chapter 3 Foreign Exchange Market Objectives At the end of this chapter, students are expected to: Define Foreign Currency Markets Examine Foreign exchange rates Analyzes Fixed vs. floating rates Evaluate of Floating rates Introduction This Chapter has four sections (sub-titles). The first section deals with the nature and definition of foreign currency Market. The second section defines fourth section examines the Evaluation of Floating rates. foreign currency exchange rates. The third section discusses fixed versus floating exchange rates. The
3.1
Definition Of Foreign Marketing Foreign Exchange Market is a market for converting the currency of one country into that of another country. Exchange rate is the rate at which one currency is converted into another. The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business's income is in US dollars. It also supports speculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend (invest in) high-yielding Addis Ababa university School Of Commerce Page 27

currencies, and which (it has been claimed) may lead to loss of competitiveness in some countries. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system The foreign exchange market is unique because of its huge trading volume, leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and The use of leverage to enhance profit margins with respect to account size. According to the Bank for International Settlements,[3] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. The $3.98 trillion break-down is as follows:
The $3.98 trillion break-down is as follows: $1.490 trillion in spot transactions $475 billion in outright forwards
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$1.765 trillion in foreign exchange swaps $43 billion currency swaps $207 billion in options and other products
3.2
The Function of the Foreign Exchange Market
The foreign exchange market serves two main functions. The first is to convert the currency of one country into the currency of another. The second is to provide some insurance against foreign exchange risk, by which we mean the adverse consequences of unpredictable changes in exchange rates. Currency Conversion Each country has a currency in which the prices of goods and services are quoted. In the united states it is the Dollar, in Great Britain it is the pound; in France ,Germany ,and other members of the euro zone it is the euro; in Japan , the yen; and so on. In general within the borders of a particular country, one must use the national currency. International Business has four main uses of foreign exchange markets: Firstly, the payment a company receives for its exports, the income it receives from foreign investments, or the income it receives from licensing agreements with foreign firms may be in foreign currencies. To use those funds in the home country, the company must convert them to its home countrys currency. Consider the Scottish distillery that exports its whisky to the United States. The distillery is paid in dollars, but since those dollars cannot be spent in Great Britain, they must be converted into British pounds. Similarly, when Kia sells cars in the United States for dollars, it must convert those dollars into won to use them in Korea. Secondly, international businesses use foreign exchange markets when they must pay a foreign company for its products or services in its countrys currency. For example, Dell buys many of the components for its computers Addis Ababa university School Of Commerce Page 29

from Malaysians firms. The Malaysian companies must be paid in Malaysians currency, the ringgit, so Dell must convert money from dollars into ringgit to pay them. Thirdly, international business use foreign exchange markets when they have spare cash that they wish to invest for short terms in money markets. For example a US company that has $10 million it wants to invest for three months. The best interest rate it can earn on these funds in the U.S.A may be 4%.Investing into a South Korean Money market account, however may earn 12%. Thus, the company may change its $10 million to into Korean won and invest it in South Korea. Note ,However, that the rate of return it earns on this investment depends not only on the Korean interest rate, but also on the changes in the value of the Korean won against the Dollar in the investment period. Finally, currency speculation is another use of foreign exchange markets. Currency speculation typically involves the short-term movement of founds from other currency to another in the hopes of profiting from shifts in exchange rates. Insuring Against Foreign Exchange Rate A second function of the foreign exchange markets is to provide insurance against foreign exchange risk, which is the possibility that unpredicted changes in future exchange rates will have adverse consequences for the firm. When a firm insures itself against foreign exchange risk, we say that is it engaging in hedging. To explain how the market performs this function, we must distinguish among spot exchange rates, forward exchange rates, and currency swaps. Spot Exchange Rates When two parties agree to exchange currency and execute the deal immediately, the transaction is referred to as a spot exchange. Exchange rates governing such on the spot exchange rates. The spot exchange rates are reported on a real-time basis on many financial Web sites. Forward Exchange Rates Changes in spot exchange rates can be problematic for an international business. For example, a U.S. company that imports laptop computers
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from Japan knows that in 30 days it must pay yen to a Japanese supplier when a shipment arrives. To insure or badge against this risk, the U.S. importer might want to engage in a forward exchange. A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. Exchange rates governing such future transactions are referred to as forward exchange rates. For most major currencies, forward exchange rates are quoted for 30 days, and 180 days into the future. In some cases, it is possible to get forward exchange rates for several years into the future. Returning to our computer importer example, let us assume the 30-day forward exchange transaction with a foreign exchange each computer (1,818=200,000/110). This guarantees her a profit of $182 per computer ($2,000$1,818). She also insures herself against the possibility that an unanticipated change in the dollar/yen exchange rate will turn a profitable deal into an unprofitable one.
In sum, when a firm enters into a forward exchange contract, it is taking out insurance against the possibility that future exchange rate movements will make a transaction unprofitable by the time that transaction has been executed. Although many firms routinely enter into forward exchange contracts to hedge their foreign exchange risk, there are some spectacular examples of what happens when firms dont take out this insurance. Volkswagen daily. Currency swaps: The preceding discussion of spot and forward exchange rates might lead you to conclude that the option to buy forward is very important to companies engaged in international trade-and you would be right. By April 2007, the latest date for which information is available, forward instruments accounted for some 69 percent of all foreign exchange transactions, while spot exchanges accounted for 31 percent. However, the vast majority of these forward exchanges were not forward exchange of the type we have been discussing, but a more sophisticated instrument known as currency swaps. An example is given in the accompanying Management Focus, which explains how a failure to fully insure against foreign exchange risk cost
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A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. Swaps are transacted between international businesses and their banks, between banks and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk. A common kind of swap is spot against forward. Consider a company such as Apple Computer. Apple assembles tap top computers in the United States, but the screens are made in Japan. Apple also sees some of the finished laptops in Japan. So, like many companies, Apple both buys from and sells to Japan. Imagine apple needs to change $1million into yen to pay its supplier of laptop screens today. The Nature of the Foreign Exchange Market The foreign exchange market is not located in any one place. It is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems. When companies wish to concert currencies, they typically go through their own banks rather than entering the market directly. The foreign exchange market has been growing at a rapid pace, reflecting a general growth in the volume of cross-border trade and investment (see Chapter1). In March 1986, the average total value of global foreign exchange trading was about $200 billion per day. By April 1995, it was more than $1,200 billion per day, and by April 2004 it had reached $1.8 trillion per day, and by April 2007 it had surged to $3.21 trillion per day. The most important trading centers are London (34 percent of activity), New York (16 percent of activity), and Zurich, Tokyo, and Singapore (each with about 6 percent of activity) for only 3 hours out of every 24. During these three hours, trading continues in a number of minor centers, particularly San Francisco and Sydney, Australia. The second feature of the market is the integration of the various trading centers. market. High-speed computer linkages between trading centers around the globe have effectively created a single The integration of financial centers implies there can be no significant For example, if the difference in exchange rates quoted in the trading centers.
yen/dollar exchange rate quoted in London at 3p.m. is 120=$1, the yen/dollar exchange rate quoted in New York at the same time (110a.m.New York time) will be identical. If the New York yen/dollar exchange rate were 125=$1, a dealer could make
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a profit through arbitrage, buying a currency low and selling it high. For example, if the Price differed in London and New York as given, a dealer in New York could take$1 million and use that to purchase 125 million. She could then immediately sell the v125 million for dollars in London, where the transaction would yield $1.046666 million, allowing the trader to book a profit of $46, 666 on the transaction. If all dealers tried to cash in on the opportunity, however, the demand for yen in New York would rise, resulting in an appreciation of the yen against the dollar such that the price differential between New York and London would quickly disappear. Because foreign exchange dealers are always watching their computer screens for arbitrage opportunities, the few that arise tend to be small, and they disappear in minutes. Economic Theories of Exchange Rate Determination At the most basic level, exchange rates are determined by the demand and supply of one currency relatives to the demand and supply of another. For example, if the demand for dollars outstrips the supply of Japanese yen is greater than the demand for them; the dollar/yen exchange rate will change. The dollar will appreciate against the yen (or the yen will depreciate against the dollar). However, while differences in relative demand and supply explain the determination of exchange rates, they do so only in a superficial sense. This simple explanation does not tell us what factors Nor does it tell us when the underlie the demand for and supply of a currency.
demand for dollars will exceed the supply (and vice versa) or when the supply of Japanese yen will exceed demand for them (and vice versa). Neither does it tell us under what conditions a currency is in demand or under what conditions it is not demanded. rates are determined. If we understand how exchange rates are determined, we may be able to forecast exchange rate movements. Because future exchange rate movements influence export opportunities, the profitability of international trade and investment deals, and the price competitiveness of foreign imports, this is valuable information for an international business. Unfortunately, there is no simple expiation. The forces that Addis Ababa university School Of Commerce Page 33 In this section, we will review economic theorys answers to these questions. This will give us a deeper understanding of how exchange

determine exchange rates are complex, and no theoretical consensus exists, even among academic economists who study the phenomenon every day. Nonetheless, most economic theories of exchange rate movements seem to agree that the three factors have an important impact on future exchange rate movements in a countrys currency: the countrys price inflation, its interest rate, and market psychology. PRICES AND EXCHANGE RATES to understand how prices are related to exchange rate movements, we first need to discuss an economic proposition known as the law of one price. Then we will discuss the theory of purchasing power parity (PPP), which links changes in the exchange rate between two countries currencies to changes in the countries price levels The Law of One Price. The law of one price states that in competitive markets free of transportation costs and barriers to trade (such as tariffs), identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency. For example, if the exchange rate between the British pound and the dollar is 1=$2.00, a jacket that retails for $80 in New York should sell for 40 in London (since $80/2.00=40). Consider what would happen if the jacket cost $30 in London and sell them in New York (an example of arbitrage). The company initially could make a profit of $20 on each jacket by purchasing it for 30 ($60) in London and selling it for $80 in New York (we are assuming away transportation costs and trade barriers). However, the increased demand for jackets in London, and the increased supply of jackets in New York would lower their price there. This would continue until prices were equalized. Thus, prices might equalize when the jacket cost 35 ($70) in London and $70 in New York (assuming no change in the exchange rate of 1=$2.00) Purchasing Power Parity if the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices. By comparing the prices of identical products in different currencies, it would be possible to determine the real or PPP exchange rate that would exist if markets were efficient. (An efficient market has no impediments to the free flow of goods and services, such as trade barriers).
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Money Supply and Price Inflations In essence, PPP theory predicts that changes in relative price will result in a change in exchange rates. Theoretically, a country in which price inflation is running wild should expect to see its currency depreciate that of counties in which inflation rates are lower. If we can predict what a countrys future inflation rate is likely to be, we can also predict how the value of its currency relative to other currencies-its exchange rate-is likely future inflation rate. Thus, in theory at least, we can use information about the growth in money supply to forecast exchange rate movements. Empirical Tests of PPP Theory - PPP theory predicts that exchange rates are determined by relative prices, and that changes in relative prices will result in a change in exchange rates. A country in which price inflation is running wild should expect to intuitively appealing, but is it true in practice? There are several good examples of the connection between a countrys price inflation and exchange rate position (such as Bolivia). However, extensive empirical testing of PPP theory has yielded mixed results. While PPP theory seems to yield relatively accurate predictions in the long run, it does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years or less. In addition, the theory seems to best predict exchange rate changes for counties with high rates of inflation and underdeveloped capital markets. The theory is less useful for predicting short-term exchange rate movements between the currencies of advanced industrialized nations that have relatively small differentials in inflation rates. INTEREST RATES AND EXCHANGE RATES Economic theory tells us that interest rates reflect expectations about likely future inflation rates. In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship was first formalized by economist Irvin Fisher and is referred to as the Fisher Effect. Since we know from PPP theory that there is a link (in theory at least) between inflation and exchange rates, and since interest rates reflect expectations about inflation, it follows that there must also be a link between interest rates and exchange rates. Investor Psychology And Bandwagon Effects Empirical evidence suggests that neither ppp theory nor the international Fisher Effect are particularly good at
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explaining short-term movements in exchange rates. One reason may be the impact of investor psychology on short-run exchange rate movement.
In Summery Relative monetary growth, relative inflation rates, and nominal interest rate differentials are all moderately good predictors of long-run changes in exchange rates. They are poor predictors of short-run changes in exchange rates Exchange Rate Forecasting A companys need to predict future exchange rate variations raises the issue of whether it is worthwhile for the company to invest in exchange rate forecasting services to aid decision making. Two schools of thought address this issue. The efficient market school argues that forward exchange rates do the best possible job of forecasting future spot exchange rates, and therefore, investing in forecasting service would be a waste of money. The other school of thought, the inefficient market school, argues that companies can improve the foreign exchange markets estimate of future exchange rate (as contained in the forward rate) by investing in forecasting services. In other words, this school of thought does not believe the forward exchange rates are the best possible predictors of future spot exchange rates. The Efficient Market School forward exchange rates represent market participants collective predictions of likely spot exchange rates at specified future dates. If forward exchange rates are the best possible predictor of future spot rates, it would make no sense for companies to spend additional money trying to forecast short-run exchange rate movements. Many economists believe the foreign exchange market is efficient at setting forward rates. An efficient market is one in which prices reflect all available public information. forecasting services). If the foreign exchange market is efficient, forward exchange rates should be unbiased predictors of future spot rates. This does not mean the predictions will be accurate in any specific situation. It means inaccuracies will not be consistently above or below future spot rates; they will be random. Addis Ababa university School Of Commerce Page 36 (If forward rates reflect all available information about likely future changes in exchange rates, a company cannot beat the market by investing in

The Inefficient Market School citing evidence against the efficient market hypothesis, some economists believe the foreign exchange market is inefficient. An inefficient market is one in which prices do not reflect all available information. In an inefficient market, forward exchange rates will not be the best possible predictors of spot exchange rates. If this is true, it may be worthwhile for international businesses to invest in forecasting services (as many do). The belief is that professional exchange rate forecasts might provide better predictions of future spot rates than forward exchange rates do. However, the track record of professional forecasting services is not that good. For example, forecasting services did not predict the 1997 currency crisis that swept through Southeast Asia. Approaches To Forecasting Assuming the inefficient market school is correct that the foreign exchange markets estimate of future spot rates can be improved, on what basis should forecasts be prepared? Here again, there are two schools of thought. One adheres to fundamental analysis, while the other uses technical analysis. Fundamental Analysis fundamental analysis draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements. The variables contained in these models typically include those we have discussed, such as relative money supply growth rates, inflation rates, and interest rates. In addition, they may include variables related to balance-of-payments positions. Running a deficit on a balance of-payments current account (a country is importing more goods and service than it is exporting) creates pressures that may result in the depreciation of the countrys currency on the foreign exchange market. Consider what might happen if the United States was running a persistent current account balanceof-payment deficit (as it has been). Since the United States would be importing more than it was exporting, people in other countries would be increasing their holding of U.S. dollars. If these people were willing to hold their dollars, the dollars exchange rate would not be influenced. However, if these people converted their dollar into other currencies, the supply of dollars in the foreign exchange market would increase (as would demand for the other currencies). This shift in demand and supply would create pressure that could lead to the depreciation of the dollar against other currencies.
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Technical Analysis Technical Analysis uses price and volume data to determine past trends. Which are expected to continue into the future. This approach does not rely on a consideration of economic fundamentals. Technical analysis is based on the Since there is not premise that there are analyzable market trends and waves and that previous trends and waves can be used to predict future trends and waves. theoretical rationale for this assumption of predictability, many economists compare technical analysis to fortune-telling. Despite this skepticism, technical analysis has gained favor in recent years. Currency Convertibility Until this point we have invalidly assumed that the currencies of various countries are freely convertible into other currencies. Due to government restrictions, a significant number of currencies are not freely convertible into other currencies. A countrys currency is said to be freely convertible when the countrys government allows both resident and nonresidents to purchase unlimited amount of a foreign currency with it. A currency is said to be externally convertible when only nonresidents may convert it into a foreign currency without any limitations. A currency is non convertible when neither residents nonresidents are allowed to convert it into a foreign currency. Free convertibility is not universal. Many countries place some restrictions on their residents ability to convert the domestic currency into a foreign currency (a policy of external convertibility). Restrictions range from the relatively minor (such as restricting the amount of foreign currency they may take with them out of the country on trips) to the major (such as restricting domestic businesses ability to take foreign currency out of the country). External convertibility restriction can limit domestic companies ability to invest abroad, but they present for problems for foreign companies wishing to do business in that county. For example, even if the Japanese government tightly controlled the ability of its residents to convert the yen into U.S. dollars, all U.S. business with deposits in Japanese banks may at any time convert all their yen in Japan is assured that it will be able to convert the profits from its Japanese operation into dollars and take them out of the country. Governments limit convertibility to preserve their foreign exchange reserves. A country needs an adequate supply of these reserves to service its international debt Addis Ababa university School Of Commerce Page 38

commitments and to purchase imports. Governments typically impose convertibility restrictions on their currency when they fear that free convertibility will lead to a run on their foreign exchange reserves. This occurs when residents and nonresidents rush to convert their holdings of domestic currency it in to foreign currency-phenomena non generally referred to as capital flight. Capital flight is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation, or when a countys economic prospects are shaky in other respects. Under such circumstances, both residents and nonresidents tend t o believe that their money is more likely to hold its value if it is converted into a foreign currency and invested abroad.
Not only will a run on foreign exchange reserves limit the countrys ability to service its international debt and pay for imports, but it will also lead to a precipitous depreciation in the exchange rate as residents and nonresidents and nonresidents unload their holdings of domestic currency on the foreign exchange markets (thereby increasing the market supply of the countrys currency). Governments fear that the rise in import prices resulting from currency deprecation will lead to further increases in inflation. This fear provides another rationale for limiting convertibility. 3.5 Summary
This chapter explained how the foreign exchange market works, examined the forces that determine exchange rates, and then discussed the implications of these factors for international business. Given that changes in exchange rates can dramatically alter the profitability of foreign trade and investment deals, this is an area of major interest to international business. This chapter made the following points: One function of the foreign exchange market is to convert the currency of one country into the currency of another. A second function of the foreign exchange market is to provide insurance against exchange risk. The spot exchange rate is the exchange rate at which a dealer converts one currency into another currency on a particular day. Addis Ababa university School Of Commerce Page 39

Foreign exchange risk can be reduced by using forward exchange rate governing future transaction. Foreign exchange risk can also be reduced by engaging in currency swaps. A swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. The law of one price holds that in competitive markets that are free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price, when their price is expressed in the same currency. Purchasing power parity (PPP) theory states the price of a basket of particular goods should be roughly equivalent in each country. PPP theory predicts that the exchange rate will change if relative prices change. The rate of change in countries relative prices depends on their relative inflation rates. A countrys inflation rate seems to be a function of the growth in its money supply. The PPP theory of exchange rate changes yields relatively accurate predictions of long-term movements. The failure of theory to predict exchange rate changes more accurately may be due to transportation costs, barriers to trade and investment, and the impact of psychological factors such as bandwagon effects on market movements and short-term exchange rates. Interest rates reflect expectations about inflation. In countries where inflation is expected to be high, interest rates also will be high.
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The international Fisher effect states that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates. The most common approach to exchange rate forecasting is fundamental analysis. This relies on variables such as money supply growth, inflation rates, nominal interest rates, and balance-of payments positions to predict future changes in exchange rates. In many countries, the ability of residents and non-residents to convert local currency into a foreign currency is restricted by government policy. A government restricts the convertibility of its currency to protect the countrys foreign exchange reserves and to halt any capital flight. Problematic for international business is a policy of non- convertibility, which prohibits residents and non-residents from exchanging local currency for foreign currency. None convertibility makes it very difficult to engage in international trade and investment in the country. One way of coping with the no convertibility problem is to engage in counter trade - to trade goods and services for other goods and services. The three types of exposure to foreign exchange risk are transaction exposure, translation exposure, and economic exposure. Tactics that insure against transaction and translation exposure include buying forward , using currency swaps , leading and lagging payables and transfer prices , using local debt financing receivables , manipulating foreign exchange exposure. Reducing a firms economic exposure requires strategic choices about how the firms productive assets are distributed around the Globe. Addis Ababa university School Of Commerce Page 41
,accelerating dividend payments ,and adjusting capital budgeting to reflect

To manage foreign exchange exposure effectively , the firm difference between transaction exposure and economic must exercise centralized oversight over its foreign exchange hedging activities ,recognize the exposure, forecast future exchange rate movements, establish good reporting systems within the firm to monitor exposure positions ,and produce regular foreign exchange exposure reports that can be used as a basis for action.
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Chapter 4: Global Markets and Regional Market Groups Objectives At the end of this unit, students are expected to: o o o o o Introduction This chapter has five sections (sub-titles). The first section deals with Definition of Global markets and regional market. The second section defines Levels of economic integration, the third section discusses the Case for Regional Integration, the fourth section addresses the Case against Regional Integration the fifth section examines different Regional Market Groups Definition of Global markets and regional market groups Levels of economic integration The Case for Regional Integration The Case against Regional Integration Regional Market Groups
4.1
Definition of Global markets and regional market groups
Economic integration is a process where barriers to trade are reduced or eliminated to facilitate trade between regions or nations. There are varying degrees of economic integration ranging from theoretically completely free trade the use of preferential trade agreements to stimulate relationships between specific trade partners. Removing trade barriers comes with costs and benefits, depending on the degree of economic integration and the level of cooperation between member regions or nations. Many economies have attempted some degree of economic integration. Some nations use free trade zones, for example, to stimulate trade with partners. Others sign free trade agreements the North American Free Trade Agreement (NAFTA). In the European Union (EU), a high degree of economic and monetary integration has been accomplished between member nations. Various EU nations may also have trade agreements with nations outside the union. Reducing barriers to trade has the tendency to cut costs associated with economic activities. Not having to pay taxes, tariffs fees, and other expenses can be beneficial for trading partners. This causes the volume of trade to increase, as trading partners actively seek out deals in regions where some degree of economic integration has been achieved. For nations outside integration agreements, Addis Ababa university School Of Commerce Page 43

however, barriers to trade can be created as they may not be able to compete with preferred trading partners. When economies are strong, economic integration has benefits for all members, and every member of an agreement, union, or treaty can experience economic growth. The same holds true of economic downturns. When individual members of a trade agreement start to be dragged down, their economic problems can spread. This was notably seen in the European Union during the economic crises of the early 2000s, when bad debt in nations like Greece and Portugal caused problems across the EU, including in nations with relatively strong economies, like Germany. Activity 1: Define Economic integration using your own words? ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ______________________________.
4.2
Levels of Economic Integration
Several levels of economic integration are possible in theory from least integrated to most integrated, they are a free trade area, a customs union, a common market, an economic union, and, finally, a full political union. 4.2.1 Free Trade Area In a free trade area, all barriers to the trade of goods and services among member countries are removed. In the theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or administrative impediments are allowed to distort trade between members. Each country, however, is allowed to determine its own trade policies with regard to nonmembers. Thus, for example, the tariffs placed on the products of Nonmember countries may vary from member to member. Free trade agreements are the most popular form of regional economic integration, accounting for almost 90 percent of regional agreements. The most enduring free trade area in the world is the European Free Trade association (EFTA). Established in January 1960, EFTA currently joins four countries Norway, Iceland, Liechtenstein, and Switzerland down from seven in 1995 (three EFTA members, Austria, Finland, and Sweden, joined the EU on January 1, 1996). EFTA was founded by those western European countries that initially decided not to be part of the European Community (the forerunner of the EU). Its original members included Austria, Great Britain, Denmark, Finland, and Sweden, all of which are now members of the EU. The Addis Ababa university School Of Commerce Page 44

emphasis of EFTA has been on free trade in industrial goods. Agriculture was left out of the arrangement, each member being allowed to determine its own level of support. Members are also free to determine the level of protection applied to goods coming from outside EFTA. 4.2.2 The Customs Union The customs union is one step further along the road to full economic and political and adopts a common external trade policy. Establishment of a common external trade policy necessitates significant administrative machinery to oversee trade relations with nonmembers. Most countries that enter into a customs union desire even greater economic integration down the road. The EU began as a customs union and has moved beyond this stage. Other customs unions around the world include the current version of the Andean Pact (between Bolivia, Colombia, Ecuador, and Peru). The Andean pact established free trade between member countries and imposes a common tariff, of 5 to 20 percent, on products imported from outside. 4.2.3 A Common Market A common market has no barriers to trade between member countries, includes a common external trade policy, and allows factors of productions to move freely between members. Labor and capital are free to move because there are no restrictions on immigration, emigration, or cross border flows of capital between member countries. Establishing a common market demands a significant degree of harmony and cooperation on fiscal, monetary, and employment policies. Achieving this degree of cooperation has proven very difficult. For years the European Union functioned as a common market, although it has now moved beyond this stage. MERCOSUR, the South American grouping of Argentina, Brazil, Paraguay, and Uruguay, Hopes to eventually establish itself as a common market. 4.2.4 An Economic Union An Economic Union entails even closer economic integration and cooperation than a common market. Like the common market, an economic union involves the free flow of products and factors of production between member countries and the adoption of a common external trade policy, but it also requires a common currency, harmonization of members tax rates, and a common monetary and fiscal policy. Such a high degree of integration demands a coordinating bureaucracy and the sacrifice of significant amounts of national sovereignty to that bureaucracy. The EU is an economic union, although an imperfect one since not all members of the EU have adopted the euro, the currency of the EU and differences in tax rates across countries still remain. Addis Ababa university School Of Commerce Page 45

4.2.5 Political Union The move toward economic union raises the issue of how to make a coordinating bureaucracy accountable to the citizens of member nations. The answer is through political union in which a central political apparatus coordinates the economic, social, and foreign policy of the member states. The EU is on the road toward at least partial political union.
The European parliament, which is playing an ever more important role in the EU, has been directly elected by citizens of the EU countries since the late 1970s. In addition, the council of Ministers (the controlling, decision-making body of the EU) is composed of government ministers from each EU member. Canada and the United States provide examples of even closer degrees of political union; in each country, independent states were effectively combined into a single nation. Ultimately, the EU may move toward a similar federal structure. Activity 2: identify and define the different levels of regional integration? ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ___________________________________________________________________________.
4.3
The Case for Regional Integration
The case for regional integration is both economic and political. The case for integration is typically not accepted by many groups within a country, which explains why most attempts to achieve regional economic integration have been contentious and halting. In this section, we examine the economic and political cases for integration and two impediments to integration. In the next section, we look at the case against integration. 4.3.1The Economic Case for Integration The economic case for regional integration is straightforward. The economic theories of international trade predict that unrestricted free trade will allow countries to specialize in the production of goods and services that they can produce most efficiently. The result is greater world production than would be possible with trade restrictions. Opening a country to free trade stimulates economic growth, which creates dynamic gains from trade. Given the central role of knowledge in stimulating economic growth, Addis Ababa university School Of Commerce Page 46

opening a country to FDI also is likely to stimulate economic growth. In sum, economic theories suggest that free trade and investment is a positive sum game, in which all participating countries stand to gain. Against this background, regional economic integration can be seen as an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under international agreements such as the WTO. It is easier to establish a free trade and investment regime among a limited number of adjacent countries than among the world community. Problems of coordination and policy harmonization are largely a function of the number of countries that seek agreement. The greater the number of countries involved, the greater the number of perspectives that must be reconciled, and the harder it will be to reach agreement. Thus, attempts at regional economic integration are motivated by a desire to exploit the gains from free trade and investment. 4.3.2 The Political Case for Integration The political case for regional economic integration has also loomed large in most attempts to establish free trade areas, customs unions, and the like, linking neighboring economies and making them increasingly dependent on each other creates incentives for political cooperation between the neighboring states and reduces the potential for violent conflict. In addition, by grouping their economies, the countries can enhance their political weight in the world. These considerations underlay the 1957 establishment of the European Community (EC), the forerunner of the EU. Europe had suffered two devastating wars in the first half of the 20 th century, both arising out of the unbridled ambitions of nation states. Those who have sought a united Europe have always had a desire to make another outbreak of war in Europe unthinkable. Many Europeans also believe that after World War II the European nation states were no longer large enough to hold their own in world markets and world politics. Activity 3: Discuss the Economic and political dimensions in favor of regional integration? ______________________________________________________________________________ ______________________________________________________________________________ _________________________________________________________________________.
4.3.3 Impediments to Integration
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Despite the strong economic and political arguments for integration, it has never been easy to achieve or sustain for two main reasons. First, although economic integration benefits the majority, it has its costs. While a nation as a whole may benefit significantly from a regional free trade agreement, certain groups may lose. Moving to a free trade regime involves painful adjustments. A second impediment to integration arises from concerns over national sovereignty. For example, Mexicos concerns about maintaining control of its oil interests negative. Clothing prices in the United States have also fallen since 1994 as textile production shifted from high cost U.S. producers to lower cost Mexican producers. This benefits consumers, who now have more money to spend on other items. Denim fabric, which used to sell for $3.20 per yard, now sells for $2.40 per yard. The cost of a typical pair of designer jeans, for example, fell from $55 in 1994 to about $48 today. In 1994, blank T-shirts wholesaled for $24 a dozen. Now they sell for $14 a dozen.
4.4
The Case against Regional Integration
Although the tide has been running strongly in favor of regional free trade agreements in recent years, some economists have expressed concern that the benefits of regional integration have been oversold, while the costs have often been ignored. They point out that the benefits of regional integration are determined by the extent of trade creation, as opposed to trade diversion. Trade creation occurs when high cost domestic producers are replaced by low cost producers within the free trade area. It may also occur when higher cost external producers are replaced by lower cost external producers within the free trade area (see the accompanying country focus for an example). Trade diversion occurs when lower cost external suppliers are replaced by higher cost suppliers within the free trade area. A regional free trade agreement will benefit the world only if the amount of trade it creates exceeds the amount it diverts. Suppose the United States and Mexico imposed tariffs on imports from all countries, and then they set up a free trade area, scrapping all trade barriers between themselves but maintaining tariffs on imports from the rest of the world. If the United States began to import textiles from Mexico, would this change be for the better? If the United States previously produced all its own textiles at a higher cost that Mexico, then the free trade agreement has shifted production to the cheaper source.
According to the theory of comparative advantage, trade has been created within the regional grouping, and there would be no decrease in trade with the rest of the world. Clearly, the change would be for the better. If, however, the United States previously imported textiles from Costa Rica, which produced them
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more cheaply than either Mexico or the United States, then trade has been diverted from a low cost source change for the worse. In theory, WTO rules should ensure that a free trade agreement does not result in trade diversion. These rules allow free trade areas to be formed only if the members set tariffs that are not higher or more restrictive to outsiders that the ones previously in effect. However, as we saw in Chapter 5, GATT an the WTO do not cover some non tariff barriers. As a result, regional trade blocs could emerge whose markets are protected from outside competition by high non tariff barriers. In such cases, the trade diversion effects might outweigh the trade creation effects. The only way to guard against this possibility, according to those concerned about this potential, is to increase the scope of the WTO so it covers non tariff barriers to trade. There is no sign that this is going to occur anytime soon, however; so the risk remains that regional economic integration will result in trade diversion. Activity 4: Discuss the Economic and political dimensions against regional integration? ______________________________________________________________________________ ______________________________________________________________________________ __________________________________________________________________________.
4.5
Regional Market Groups
Regional market groups can be divided into the following major market groups . 5.5.1 European Community/ European Union /EC/EU
Europe has two trade blocs the European Union and the European free trade association. Of the two, the EU is by far the more significant, not just in terms of membership (the EU currently has 15 members and is expanding to 25; the EFTA has 4), but also in terms of economic and political influence in the world economy. Many now see the EU as an emerging economic and political superpower of the same order as the United States and Japan. Accordingly, we will concentrate our attention on the EU. Evolution of the European Union The EU is the product of two political factors: (1) the devastation on Western Europe of two world wars and the desire for a lasting peace, and (2) the European nations desire to hold their own on the worlds political and economic stage. In addition, many Europeans were aware of the potential economic benefits of closer economic integration of the countries.
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The original forerunner of the EU, the European Coal and Steel Community, was formed in 1951 by Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands. Its objective was to remove barriers to intra group shipments of coal, iron, steel, and scrap metal. With the signing of the Treaty of Rome in 1957, the European community was established. The name changed again in 1994 when the European Community became the European Union following the ratification of the Maastricht Treaty. The treaty of Rome provided for the creation of a common market. Article 3 of the treaty laid down the key objectives of the new community, calling for the elimination of internal trade barriers and the creation of a common external tariff and requiring member states to abolish obstacles to the free movement of factors of production among the members. To facilitate the free movement of goods, services, and factors of production, the treaty provided for any necessary harmonization of the member states laws. Furthermore, the treaty committed the EC to establish common policies in agriculture and transportation. The community grew in 1973, when Great Britain, Ireland, and Denmark joined. These three were followed in 1981 by Greece, in 1986 by Spain and Portugal, and in 1996 by Austria, Finland, and Sweden bringing the total membership to 15 (East Germany became part of the EC after the reunification of Germany in 1990). With a population of 350 million and a GDP greater than that of the United States, the EU through these enlargements became a potential global superpower. Another 10 countries are scheduled to join the EU on May 1, 2004, if the electorates in those countries approve. Political Structure of the European Union The economic policies of the EU are formulated and implemented by a complex and still evolving political structure. The five main institutions in this structure are the European Council, the Council of Ministers, the European Commission, the European parliament, and the Court of Justice. The European Council is composed of the heads of state of the EUs member nations and the president of the European C omission. Each head of state is normally accompanied by a foreign minister to these meetings. The European Council meets at least twice a year and often resolves major policy issues and sets policy directions. The European Commission is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states. Headquartered in Brussels, Belgium, the commission has more than 10,000 employees. It is run by a group of 20 commissioners appointed by each member country for four year renewable terms. Most countries appoint only one commissioner, although the most populated states Great Britain, France, Germany, Italy, and Spain appoint two each. A president and six vice presidents are chosen from among these commissioners for two year renewable terms. The Addis Ababa university School Of Commerce Page 50

commission has a monopoly in proposing European Union legislation. The commission starts the legislative ball rolling by making a proposal, which goes to the Council of Ministers and then to the European Parliament. The Council of Ministers cannot legislate without a commission proposal in front of it. The commission is also responsible for implementing aspects of EU law, although in practice much of this must be delegated to member states. Another responsibility of the commission is to monitor member state to make sure they are complying with EU laws. In this policing role, the commission will normally ask a state to comply with any EU laws that are being broken. If this persuasion is not sufficient, the commission can refer a case to the Court of Justice. The European Commissions role in competition policy has become increasingly important to business in recent years. Since 1990 when the office was formally assigned a role in competition policy, the EUs competition commissioner has been steadily gaining influence as the chief regulator of competition policy in the member nations of the EU. As with antitrust authorities in the United States, which include the Federal Trade Commission and the Department of Justice, the role of the competition commissioner is to ensure that no one enterprise uses its market power to drive out competitors and monopolize markets. The commissioner also reviews proposed mergers and acquisitions to make sure they do not create a dominant enterprise with substantial market power. Between 1990 and 2001, the commission reviewed some 1,857 merger cases. Of these, 18 were rejected, and another 20 were withdrawn after the commission raised substantial objections. For example, in 2000 a proposed merger between time Warner of the United States and EMI of the United Kingdom, both music recording companies, was withdrawn after the commission expressed concerns that the merger would reduce the number of major record companies from five to four and create a dominant player in the $40 billion global music industry. Similarly, the commission blocked a proposed merger between two U.S. telecommunication companies, WorldCom and Sprint, because their combined holdings of Internet infrastructure in Europe would give the merged companies so much market power that the commission argued the combined company would dominate that market.
Another example of the commissions influence over business combinations is given in the accompanying management focus, which looks at the commissions role in shaping mergers and joint ventures in the media industry. The Council of Ministers represents the interests of member states. It is clearly the ultimate controlling authority within the EU since draft legislation from the commission can become EU law only if the council agrees. The council is composed of one representative from the government of each member Addis Ababa university School Of Commerce Page 51

state. The membership, however, varies depending on the topic being discussed. When agricultural issues are being discussed, the agriculture ministers from each state attend council meetings; when transportation is being discussed, transportation ministers attend, and so on. Before 1993, all council issues had to be decided by unanimous agreement between member states. This often led to marathon council sessions and a failure to make progress or reach agreement on commission proposals. In an attempt to clear the resulting logjams, the single European Act formalized the use of majority voting rules on issues which have as their object the establishment and functioning of a single market. Most other issues, however, such as tax regulations and immigration policy, still require unanimity among council members if they are to become law. The Establishment of the Euro In December 1991, leaders of the EC member states met in Maastricht, the Netherlands, to discuss the next steps for the EC. The results of the Maastricht meeting surprised both Europe and the rest of the world. The EC countries had been fighting for months over the issue of a common currency. Although many economists believed a common currency was required to cement a closer economic union, deadlock had been predicted. But instead of deadlock, the 12 members signed a treaty that committed them to adopting a common currency by January 1, 1999, and paved the way for closer political cooperation.
The euro is a currency unit now used by 12 of the 15 member states of the European Union; these 12 states are now members of what is often referred to as the euro zone. The establishment of the euro has rightly been described as an amazing political feat with few historical precedents. Establishing the euro required the participating national governments not only to give up their own currencies, but also to give up control over monetary policy. Governments do not routinely sacrifice national sovereignty for the greater good, indicating the importance that the Europeans attach to the euro. By adopting the euro, the EU has created the second largest currency zone in the world after that of the U.S. dollar. Some believe that ultimately the euro could come to rival the dollar as the most important currency in the world. Three EU countries, Britain, Denmark, and Sweden, are still sitting on the side lines. Benefits of the Euro Europeans decided to establish a single currency in the EU for a number of reasons. First, they believe that businesses and individuals will realize significant savings from having to handle one currency, rather than many. These savings come from lower foreign exchange Addis Ababa university School Of Commerce Page 52

and hedging costs. For example, people going from Germany to France will no longer have to pay a commission to a bank to change deutsche marks into francs. Instead, they will be able to use euros. According to the European Commission, such savings could amount to 0.5 percent of the European Unions GDP, or about $40 billion a year. Second, and perhaps more importantly, the adoption of a common currency will make it easier to compare prices across Europe. This should increase competition because it will be much easier for consumers to shop around. For example, if a German finds that cars sell for less in France than Germany, he may be tempted to purchase from a French car dealer rather than his local car dealer. Alternatively, traders may engage in arbitrage to exploit such price differentials, buying cars in France and reselling them in Germany. Third, faced with lower prices European producers will be forced to look for ways to reduce their production costs to maintain their profit margins. The introduction of a common currency, by increasing competition, should ultimately produce long run gains in the economic efficiency of European companies. Fourth, the introduction of a common currency should give a strong boost to the development of a highly liquid pan European capital market. The development of such a capital market should lower the cost of capital and lead to an increase in both the level of investment and the efficiency with which investment funds are allocated. This could be especially helpful to smaller companies that have historically had difficulty borrowing money from domestic bands. For example, the capital market of Portugal is very small and illiquid, which makes it extremely difficult for bright Portuguese entrepreneurs with a good idea to borrow money at a reasonable price. However, in theory, such companies should soon be able tap a much more liquid pan European capital market. Finally, the development of a pan European euro denominated capital market will increase the range of investment options open to both individuals and institutions. For example, it will now be much easier for individuals and institutions based in, lets say, Holland to invest in Italian or French companies. This will enable European investors to better diversify their risk, which again lowers the cost of capital, and should also increase the efficiency with which capital resources are allocated. Costs of the Euro The drawback, for some, of a single currency is that national authorities have lost control over monetary policy. Thus, it is crucial to ensure that the EUs monetary policy is well managed. The Maastricht Treaty called for establishment of an independent European Central Bank (ECB), similar in some respects to the Addis Ababa university School Of Commerce Page 53

U.S. Federal Reserve, with a clear mandate to manage monetary policy so as to ensure price stability. The ECB, based in Frankfurt, is meant to be independent from political pressure although critics question this. Among other things, the ECB sets interest rates and determines monetary policy across the euro zone. The implied loss of national sovereignty to the ECB underlies the decision by Great Britain, Denmark, and Sweden to stay out of the euro zone for now. Many in these countries are suspicious of the ECBs ability to remain free from political pressure and to keep inflation under tight control. Enlargement of the European Union One major issue facing the EU over the past few years has been that of enlargement. Enlargement of the EU into Eastern Europe has been a possibility ever since the collapse of communism at the end of the 1980s, and by the end of the 1990s, 13 countries had applied to become EU members. To qualify for EU membership the applicants had to privatize state assets, deregulate markets, restructure industries, and tame inflation. They also had to enshrine complex EU laws into their own systems, establish stable democratic governments, and respect human rights. In December 2002, the EU formally agreed to accept the applications of 10 countries. Only the Mediterranean island nations of Malta and Cyprus are not in Eastern Europe. They include the Baltic States, the Czech Republic, and the larger nations of Hungary and Poland. Their inclusion in the EU will expand the union to 25 states, stretching from the Atlantic to the borders of Russia; add 23 percent to the landmass of the EU; bring 75 million new citizens into the EU, creating an EU with a population of 450 million people; and create a single continental economy with a GDP of $9.3 trillion that rivals the United States in size. Activity 5: discuss the following questions about European Union? a. Evolution of the European Union __________________________________________________________________
b. Political Structure of the European Union. _________________________________________________________________ c. The Establishment of the Euro ________________________________________________________________ d. Benefits of the Euro ________________________________________________________________ e. Costs of the Euro _________________________________________________________________ Addis Ababa university School Of Commerce Page 54

f. Enlargement of the European Union __________________________________________________________________ 4.5.2 The North American Free Trade Agreement (NAFTA) The governments of the United States and Canada in 1998 agreed to enter into a free trade agreement, which took effect January 1, 1989. The goal of the agreement was to eliminate all tariffs on bilateral trade between Canada and the United States by 1998. This was followed in 1991 by talks among the United States, Canada, and Mexico aimed at establishing a North American Free Trade Agreement for the three countries. The talks concluded in August 1992 with an agreement in principle, and the following year the agreement was ratified by the governments of all three countries. NAFTAs Contents The agreement became law January 1, 1994. The contents of NAFTA include the following: Abolition within 10 years of tariffs on 99 percent of the goods traded between Mexico, Canada, and the United States. Removal of most barriers on the cross border flow of services, allowing financial institutions, for example, unrestricted access to the Mexican market by 2000. Protection of intellectual property rights. Removal of most restrictions on foreign direct investment between the three member countries, although special treatment (protection) will be given to Mexican energy and railway industries, American airline and radio communications industries, and Canadian culture. Application of national environmental standards provided such standards have a scientific basis. Lowering of standards to lure investment is described as being inappropriate. Establishment of two commissions with the power to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum ages, or child labor are ignored. Enlargement One issue confronting NAFTA is that of enlargement. A number of other Latin American countries have indicated their desire to eventually join NAFTA. The governments of both Canada and the United States are adopting a wait and see attitude with regard to most countries. Getting NAFTA approved was a bruising political experience, and neither government is eager to repeat the process soon. Nevertheless,
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the Canadian, Mexican, ad U.S. governments began talks in 1995 regarding Chiles possible entry into NAFTA. As of 2002, however, these talks had yielded little progress, partly because of political opposition in the U.S. Congress to expanding NAFTA. In December 2002, however, the United States and Chile did sign a bilateral free trade pact. 4.5.3 Southern Cone Free Trade Area (MERCOSUR)
MERCOSUR originated in 1988 as a free trade pact between Brazil and Argentina. The modest reductions in tariffs and quotas accompanying this pact reportedly helped bring about an 80 percent increase in trade between the two countries in the late 1980s. this success encouraged the expansion of the pact in March 1990 to include Paraguay and Uruguay. The initial aim was to establish a full free trade area by the end of 1994 and a common market sometime thereafter. The four countries of MERCOSUR have a combined population of 200 million. With a market of this size, MERCOSUR could have a significant impact on the economic growth rate of the four economies. In December 1995, MERCOSURs members agreed to a five year program under which they hoped to perfect their free trade area and move toward a full customs union. For its first eight years or so, MERCOSUR seemed to be making a positive contribution to the economic growth rates of its member states. Trade between MERCOSURs four core members quadrupled between 1990 and 1998. The combined GDP of the four member states grew at an annual average rate of 3.5 percent between 1990 and 1996, a performance that is significantly better than the four attained during the 1980s. However, MERCOSUR has its critics, including Alexander Yeats, a senior economist at the World Bank, who wrote a stinging critique of MERCOSUR that was leaked to the press in October 1996. According to Yeats, the trade diversion effects of MERCOSUR outweigh its trade creation effects. Yeats, points out that the fastest growing items in intra MERCOSUR trade are cars, buses, agricultural equipment, and other capital intensive goods that are produced relatively inefficiently in the four member countries. In other words, MERCOSUR countries, insulated from outside competition by tariffs that run as high as 70 percent of value on motor vehicle, are investing in factories that build products that are too expensive to sell to anyone but themselves. The result, according to Yeats, it that MERCOSUR countries might not be able to compete globally once the groups external trade barriers come down. In the mean time, capital is being drawn away from more efficient enterprises. In the near term, countries with more efficient
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manufacturing enterprises lose because MERCOSURs external trade barriers keep them out of the market. 4.5.4 Central American Common Market and CARICOM
Two other trade pacts in the Americas have not made much progress yet. In the early 1960s, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua attempted to set up a Central American common market. It collapsed in 1969 when war broke out between Honduras and El Salvador after a riot at a soccer match between teams from the two countries. Since then the five countries have made some progress toward reviving their agreement, and the proposed common market was given a boost in 2003 when the United States signaled its intention to enter into bilateral free trade negotiations with the group. A customs union was to have been created in 1991 between the English speaking Caribbean countries under the auspices of the Caribbean Community. Referred to as CARICOM, it was established in 1973. However, it has repeatedly failed to progress toward economic integration. A formal commitment to economic and monetary union was adopted by CARICOMs member states in 1984, but since then little progress has been made. In October 1991, the CARICOM governments failed, for the third consecutive time, to meet a deadline for establishing a common external tariff. 4.5.5. Association of Southeast Asian Nations /ASEAN Formed in 1967, ASEAN includes Brunei, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. Laos, Myanmar, and Vietnam have all joined recently and their inclusion complicates matters because their economies are so far behind those of the original members. The basic objectives of ASEAN are to foster freer trade between member countries and to achieve cooperation in their industrial policies. Progress has been very limited, however. For example, only 5 percent of intra ASEAN trade currently consists of goods whose tariffs have been reduced through an ASEAN preferential trade arrangement. Future progress seems limited because the financial crisis that swept through Southeast Asia in 1997 hit several ASEAN countries particularly hard, most notably Indonesia, Malaysia, and Thailand. Until these countries can get back on their economic feet, it is unlikely that much progress will be made. 4.5.6 Asia -Pacific Economic Cooperation (APEC) Asia pacific Economic Cooperation (APEC) was founded in 1990 at the suggestion of Australia. APEC currently has 21 member states including such economic power houses as the United States, Japan, and China. Collectively the 18 member states account for half of the worlds economy. The stated aim of Addis Ababa university School Of Commerce Page 57

APEC is to increase multilateral cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region. U.S. support for APEC was also based on the belief that it might prove a viable strategy for heading off any move to create Asian groupings from which it would be excluded. Interest in APEC was heightened considerably in November 1993 when the heads of APEAC member states met for the firs time at a two day conference in Seattle. Debate before the meeting speculated on the likely future role of APEC. One view was move that APEC should commit itself to the ultimate formation of a free trade area. Such a move would transform the Pacific Rim from a geographical expression into the worlds air and lots of photo opportunities for the leaders involved. As it turned out, the APEC meeting produced little more than some vague commitments from member states to work together for greater economic integration and a general lowering of trade barriers. However, significantly, member states did not rule out the possibility of closer economic cooperation in the future. The heads of state met again in November 1994 in Jakarta, Indonesia. This time they agreed to take more concrete steps, and the joint statement at the end of the meeting formally committed APECs industrialized members to remove their trade and investment barriers by 2010 and for developing economies to do so by 2020. They also called for a detailed blueprint charting how this might be achieved. This blueprint was presented and discussed at the next APEC summit, held in Osaka, Japan, in November 199535. This was followed by further annual meeting. At the 1997 meeting, Member states formally endorsed proposals designed to remove trade barriers in 15 sectors, training from fish to toys. However the plan is vague and commits APEC to doing no more than holding further talks. Commenting on the vagueness of APEC pronouncements the influential Brookings Institution a U.S based economic policy institution noted that APEC is in grave danger of shrinking into irrelevance as a serious forum. Despite the slow progress, APEC is worth watching. If it eventually does transform it sell into a free trade area, it will probably be the worlds largest. 4.5.7. The Andean Pact The Andean pact was formed in 1969 when Bolivia, Chile, Ecuador, Colombia, and Peru signed the Cartagena Agreement. The Andean pact was largely based on the EU model, but it has been far less successful at achieving its stated goals. The integration steps begun in 1969 included an internal tariff reduction program, a common external tariff, a transportation policy, a common industrial policy, and special concessions for the smallest members, Bolivia and Ecuador. Addis Ababa university School Of Commerce Page 58

By the mid 1980s, the Andean pact had all but collapsed and had failed to achieve any of its stated objectives. There was no harmonization of economic policies. Political and economic problems seem to have hindered cooperation between member countries. The countries of the Andean pact have had to deal with low economic growth, hyperinflation, high unemployment, political unrest, and crushing debt burdens. In addition, the dominant political ideology in many of the Andean countries during this period tended toward the radical/socialist end of the political spectrum. Since such an ideology is hostile to the free market economic principles on which the Andean pact was based, progress toward closer integration could not be expected. The tide began to turn in the late 1980s when, after years of economic decline, the governments of Latin America began to adopt free market economic policies. In 1990, the heads of the five current members of the Andean pact Bolivia, Ecuador, Peru, Colombia, and Venezuela met in the Galapagos Islands. The resulting Galapagos Declaration effectively re-launched the Andean pact. The declarations objectives included the establishment of a free trade area by 1992, a customs union by 1994, and a common market by 1995. This last milestone has not been reached. However, there are some grounds for cautions optimism. For the first time, the controlling political ideology of the Andean countries is at least consistent with the free market principles underlying a common market. In addition, since the Galapagos Declaration, internal tariff levels have been reduced by all five members, and a customs union with a common external tariff was established in mid 1994, six months behind schedule. Significant differences between member countries still exist that may make harmonization policies and close integration difficult. For example, Venezuelas GNP per person is four times that of Bolivias, and Ecuadors tiny production line industries. Such differences are a recipe for disagreement and suggest that many of the adjustments required to achieve a true common market will be painful, even though the net benefits will probably outweigh the costs. To complicate matters even further, in recent years Peru and Ecuador have fought a border war, Venezuela has remained aloof during a banking crisis, and Colombia has suffered from domestic political turmoil and problems related to its drug trade. This has led some to argue that the pact is more formal than real. The outlook for the Andean pact started to change in 1998 when the group entered into negotiations with MERCOSUR to establish a South American free trade area. However, these negotiations broke down in 1999, and there has been no progress since.
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4.5.8 Regional Trade Blocs in Africa / African Market Groups African countries have been experimenting with regional trade blocs for half a century. There are now nine trade blocs on the African continent. Many countries are members on more than one group. Although the number of trade groups in impressive progress toward the establishment of meaningful trade blocs has been slow. Many of these groups have been dormant for years. Significant political turmoil in several African nations has persistently impended any meaningful progress. Also, deep suspicion of free trade exists in several African countries. The argument most frequently heard is that because these countries have less developed and less diversified economics they need to be protected by tariff barriers from unfair foreign competition. Given the prevalence of this argument it has been hard to establish free trade areas of customs unions. African Market Groups includes: AfroMalegasyeconomicUnion(Benin,BurkinaFaso,Cameron,CentralAfricanRepublic,Chad,Cong o,CoteDEvore,Gabon,Mali,Mauritania,Niger,Senegal and Togo. East African Customs Union (Ethiopia, Kenya, Sudan, Tanzania, Uganda and Zambia). Union of Arab Maghrebs (Algeria, Libya, Tunisia, Morocco, Mauritania ) Economic Community of west African countries (Benin,Burkinafaso,Cape verdi,cote devour,Gambia,Ghana,Guniea,GuneaBissau,iberia,Mali,Mauritania,Niger,Nigeria,Senegal,Sierra Leone Togo) . South African Development Community ( Angola, Botswana Congo, Lesotho, Namibia, Malawi, Mauritius ,Mozambique, Seychelles, S. Africa, Swaziland, Tanzania, Zambia, Zimbabwe) The major African market groups are discussed herein under: East African Community (EAC) The most recent attempt to reenergize the free trade movement in Africa occurred in early 2001. When Kenya, Uganda and Tanzania member states of the East African Community (EAC) committed themselves to re-launching their block, 24 years after it collapsed. The three countries, with 80 million inhabitants, intend to establish a customs union, regional court, legislative assembly and eventually a political federation.
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Their program includes cooperation on immigration, road and telecommunication networks, investment and capital markets. However while local business leader welcomed the relanuch as a positive step, they were critical of the EACs failure in practice to make progress on free trade. At the EAC treatys signing in November 1999, members gave themselves four years to negotiate a customs union with a draft slated for the end of 2001. But that fell far short of earlier plans for an immediate free trade zone, shelved after Tanzania and Uganda, fearful of Kenyan competition, expressed concerns that the zone could create imbalances similar to those that contributed to the breakup of the first community. It remains to be seen if these countries can have success this time but if history is any guide it will be an uphill road. The Economic Community of West African States (ECOWAS) A 15-nation group, ECOWAS has an aggregate gross domestic product of more than $57.9Billion and is striving to achieve full economic integration. The 20th ECOWAS summit in 1997 approved a plan to accelerate sub regional economic integration and development , with emphasis on their full commitment to regional monetary integration and development, with emphasis on their full commitment to regional monetary integration and the eventual adoption of a single west African Currency. Unfortunately, ECOWAS continues to be plagued with financial problems, conflict within the group, and inactivity on the part of some members South African Development Community/ SADEC The southern African development community (SADC) is the most advanced and viable of Africas regional organizations. Its 14 members encompass a landmass of 6.6 million square kilometers containing abundant natural resources and a population of over 199 million. South Africa the regions dominant economy has a GDP of $176 billion and accounts for 76.8 % of SADC market share. After 11 years of negotiations, 11 members of SADC approved a free trade agreement aimed at phasing out a minimum of 85% of tariffs within 8 years, and all the tariffs by the end of 2012. Activity 6: Discuss very briefly the following major regional integration? a. The North American Free Trade Agreement (NAFTA) b. Southern Cone Free Trade Area (MERCOSUR) c. Central American Common Market and CARICOM d. Association of Southeast Asian Nations /ASEAN e. Asia -Pacific Economic Cooperation (APEC) f. The Andean Pact
g. Regional Trade Blocs in Africa / African Market Groups Addis Ababa university School Of Commerce Page 61

h. East African Community (EAC) i. South African Development Community/ SADEC
Focus On Managerial Implications Currently the most significant developments in regional economic integration are occurring in the EU and NAFTA. Although some of the Latin American trade blocs, APEC and the proposed FTAA may have economic significant in the future at present the EU and NAFTA have more profound and immediate implications for business practice. Accordingly in this section we will concentrate on the business implication of those two groups. Similar conclusions however could be drawn with regard t the creation of a single market anywhere in the world. Opportunities The creation of a single market offers significant opportunities because markets that were formerly protected from foreign competition are opened. For example, in Europe before 1992 the large French and Italian markets were among the most protected. These markets are now much more open to foreign competition in the form of both exports and direct investment. Nonetheless to fully exploit such opportunities it may pay non-EU firms to set up EU subsidiaries. Many major U.S. firms have long had subsidiaries in Europe. Those that do not would be advised to consider establishing them now, lest they run the risk of being shut out of the EU by nontariff barriers. Non-EU firms have rapidly increased their direct investment in the EU in anticipation of the creation of a single market. Between 1985 and 1989, for example, approximately 37 percent of the FDI inflows into industrialized countries were directed at the EC. By 1991, this figure had rise to 66 percent and FDI inflows into the EU has been substantial.
Additional opportunities arise from the inherent lower costs of doing business in a single market as opposed to 15 national markets in the case of the EU or 3 national markets in the case of NAFTA. Free movement of goods across borders harmonized product standards and simplifies tax regimes make it possible for firms based in the EU and NAFTA countries to realize potentially significant cost economies by centralizing product in those EU and NAFTA locations where the mix of factor costs and skills is optimal. Rather than producing a product in each of the 15 EU countries or the 3 NAFTA countries a firm may be able to serve the whole EU or North American market from a single location. This location must be chosen carefully of course with an eye on local factor costs and skills.
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For example in response to the changes created by EU after 1992 the St. Paul-based 3M Company has been consolidating its European manufacturing and distribution facilities to take advantage of economies of scale. Thus a plant in Great Britain now produces 3Ms printing products and a German factory its reflective traffic control materials for the entire EU. In each case, 3M chose a location for centralizing production after carefully considering the likely production costs in alternative locations within the EU. The ultimate goal of 3M chose a location for centralized production after carefully considering the likely production costs in alternative location within the EU. The ultimate goal of 3M is to dispense with all national distinctions, directing R&D, manufacturing, distribution, and marketing for each product group from an EU headquarters. Similarly, Unilever one of Europes largest companies, began rationalizing its production of dishwashing powder for the EU in one plant bath soap in another and so on. Threats Just as the emergence of single markets in the EU and America creates opportunities for business environment it also presents a number of threats. For one thing, the business environment within each grouping will become more competitive. The lowering of barriers to trade and investment between countries is likely to lead to increased price competition throughout the EU and NAFTA. For example before 1992 a Volkswagen Golf cost 55 percent more in Great Britain than in Denmark and 29 percent more in Ireland than in Greece. Over time, such price differentials will vanish in a single market. This is a direct threat to any firm doing business in EU or FANTA countries. To survive in the tougher singlemarket. Activity 7: Discuss the managerial implications of Regional integrations? ______________________________________________________________________________ ______________________________________________________________________________ ____________________________________________________________. 4.6 SUMMARY This chapter pursued three main objectives to examine the economics and political debate surrounding regional economic integration to review the progress toward regional economic integration in Europe the Americas and elsewhere and to distinguish the important implications of regional economic integration for the practice of international business. The chapter made these major points: A number of levels of economic integration are possible in theory. In order of increasing integration they include a free trade area a customs union a common market an economic union and full political union. Addis Ababa university School Of Commerce Page 63

In a free trade area barriers to trade between member countries are removed but each country determines its own external trade policy. In a customs union internal barriers to trade are removed and a common external trade policy is adopted. A common market is similar to a customs union except that a common market also allows factors of production to move freely between countries. An economic union involves even closer integration including the establishment of a common currency and the harmonization to tax rates. A political union is the logical culmination of attempts to achieve ever closer economic integration. Regional economic integration is an attempt to achieve economic gains from the free flow of trade and investment between neighboring countries. Integration is not easily achieved or sustained. Although integration brings benefits to the majority it is never without costs for the minority. Concerns over national sovereignty often slow or stop integration attempts. Regional integration will not increase economic welfare if the trade creation effects in the free trade area are outweighed by the trade diversion effects. The Single European Act sought to create a true single market by abolishing administrative barriers to the free flow of trade and investment between EU countries. The Maastricht Treaty aims to take the EU even further along the road to economic union by establishing a common currency. The economic gains from a common currency come from reducing exchange costs reduced risk associated with currency fluctuations and increased price competition within the EU.\increasingly the European Commission is taking an activist stance with regard to competition policy intervening to restrict mergers and acquisitions that it believes will reduce competition in the EU. Increasingly the European Commission is taking an activist stance with regard to competition policy intervening to restrict mergers and acquisitions that it believes will reduce competition in the EU. Although no other attempt at regional economic integration comes close to the EU in terms of potential economic and political significance various other attempts are being made in the world. The most notable include NAFTA in North America the Andean Pact and MERCOSUR in Latin America ASEAN in Southeast Asia and perhaps APEC. The creation of single markets in the EU and North America means that many markets that were formerly protected from foreign competition are now more open. This creates major investment and export opportunities for firms within and outside these regions.
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The free movement of goods across borders the harmonization of product standards and the simplification of tax regimes make it possible for firms based in a free trade area to realize potentially enormous cost economies by centralizing production in those locations within the area where the mix of factors costs and skills is optimal. The lowering of barriers to trade and investment between countries within a trade group will probably is followed by increased price competition. 4.6 Self-Assessment Questions (SAQs) 4 Please take some 30 minutes and answer the following questions: Part I: True or False Questions Instruction: Write T If the statement is true and F If the statement is false on space provided.
1. ___________Regional economic integration is an attempt to achieve economic gains from the free flow of trade and investment between neighboring countries. 2. __________ The original goal of the International Monetary Fund (IMF) was to provide for fixed exchange rates between member countries. 3. __________The European Union (EU) represents a formidable market size internally and market power externally and is considered an economic bloc. 4. __________Special import authorization, excise duties, discretionary licensing, and trade restriction affecting electronic commerce are examples of trade barriers. 5. _________In order to be successful in international trade, policymakers must be willing to trade off long-term goals to achieve short-term objectives. Part II: Matching Questions Match Column A with Column B by writing the letter of your choice on the space provided. 1. A central political apparatus coordinates the economic, social, and foreign policy of the member states. 2. Involves the free flow of products and factors B. of production between member countries and the adoption of a common external trade policy, a common currency, harmonization of members tax rates, and a common monetary and fiscal policy. The Customs Union A. Free Trade Area
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3. A common external trade policy, and allows C. factors of productions to move freely between members. A Common Market
4.
Establishment of a common external trade D. policy necessitates significant administrative machinery to oversee trade relations with nonmembers.
An Economic Union
5.
All barriers to the trade of goods and services E. among member countries are removed.
Political Union
Part III: Short Answer Question Instruction: Answer the following questions briefly and exhaustively. 1. Discuss briefly the following economic integrations a) The Economic Community of West African States (ECOWAS) b) South African Development Community/ SADEC 2. Identify African regional Market Groups with their member countries a. ________________________________________________________________ b. ________________________________________________________________ c. _________________________________________________________________ d. _________________________________________________________________ e. _________________________________________________________________.
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Chap -5 The Political and Economic Environments of Global Markets Objectives At the end of this chapter, students are expected to: Describe the various types of Political systems Identify which types of political system is more conducive for international trade Describe major indicators of political instability Examine the various strategies of managing political risks Explore various measures to minimize political risks Examine different types of economic systems & their impact on international trade Introduction This Chapter has four sections (sub-titles). The first section deals with the definition of Multiplicity of political environments. The second section gives insights to Types of Political Systems. The third section discusses the Indicators of political instability. The fourth section assesses the Management of political risks. The Fifth Measures to minimize political risks .The Sixth section is concerned Types of economic systems 1. The Political and Economic Environments of Global Markets 1.1 Multiplicity of political environments
The political environment that the MNC faces is a complex one because they must cope with the politics of more than one nation. It is composed of three different types of political environments: Foreign, domestic and international. 1.2 Types Of Political Systems
Governments or political systems can be classified into two major groups: 1. It can be parliamentary ( open ) or 2. absolutist (closed)
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a) Parliamentary system Consult with citizens from time to time for the purpose of learning about opinions and preferences. Government policies are thus intended to reflect the desire of the majority segment of the society. Example. Most industrialized and all democratic nations. b) Absolute system This includes monarchies and dictatorships. In this system the ruling regime dictates governments policy without considering citizens needs or options. Ex. Newly formed nations or those undergoing political transformations. Many countries political systems do not neatly fall into one of these two categories. 2) Number of political systems This classification results in 4 types of Governments: a. b. c. d. Two party Multi party Single party and Dominated one party
a) Two party system There are typically two strong parties that take turns to control the government, although other parties are allowed.Ex. USA and UK. The Republican Party is often viewed as representing business interests, while the democrats represent labor interests as well as the poor and disaffected. b) Multiparty system There are several political parties non- of which is strong enough to gain control of the government. A government must then be formed through coalitions through the various parties, each of which wants to protect its own interests. The longevity of the coalition depends largely on the cooperation of party partners. The coalition is continuously challenged by various opposing parties. A change in a few votes may be sufficient to bring the coalition government down. If the government doesnt survive a vote of no confidence the government is disbanded and a new election is called. Example: Germany, France and Israel. In and Poland (29 parties won seats in 1991 election and no party got more than 13 % of the vote). c) Single party There may be several parties, but one party is so dominant that there is little opportunity for others to elect representatives to govern the country. Example: Egypt has operated under single party rule for three decades. Mexico has been ruled by Addis Ababa university School Of Commerce Page 68

institutional revolutionary party (PRI). Because the ruling party holds support from the vast majority, the system is not necessarily a poor one, especially when it can provide the stability and continuity necessary for rapid growth. d) Dominated one party system The dominant party doesnt allow any opposition, resulting in no alternative for the people. In contrast, a single party system does allow some opposition party. Example: the former Soviet Union, Cuba & Libya. Such a system may easily transform itself into a dictatorship. The party to maintain its power is prepared to use force or any necessary means to eliminate the introduction and growth of other parties. The Soviet Union had repeatedly tried to quell any opposition within its satellite countries. Note: One shouldnt be hasty in making generalizations about the ideal form of government in terms of political stability is a function of economic development.
Italy is particularly unstable developed country. Vietnam is a developing economy & politically more stable than Italy (closed society). India is the largest democracy in the world yet Indias political stability is hampered by regional, ethnic, language, religious and economic problems. Dictatorial systems, monarchies and oligarchies may provide great stability for a country with a relatively closed society; however, dissident groups are waiting for an opportunity to challenge the regime. The risk of widespread disruptions and revolution can be quite high. 1.3 Types of Political Risks
Political risks There are a number of political risks with which marketers must contend. Political risks or action taken by host Governments includes: 1. 2. 3. 4. 5. Confiscation expropriation Nationalization Domestication creeping expropriation
1. Confiscation: is the process of a governments taking ownership of a property without compensation. Example: Chinese governments seizure of American property after the communists took power in 1949.
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2. Expropriation: is a process whereby a company whose property is expropriated agrees to sell its operations not by choice but rather because of some explicit or implied coercion ( unlike confiscation; there is some compensation) 3. Nationalization: involves Government ownership and it is the government that operates the business being taken over. Example: Libyas colonel Gadefies vision of Islamic socialism led him to nationalize all private business in 1981. Czech communists nationalized 100 % of their economy.( rebuilding private markets will be both slow and difficult). 4. Domestication: Foreign companies relinquish control and ownership, either completely or partially to the nationals. The result is that private entities are allowed to operate the confiscated / expropriated property. Example: the French government was not sufficiently proficient to run the banking business and sold 36 French banks. Domestication may be voluntary act that takes place in the absence of confiscation or nationalization. The causes of this action are either poor economic performance or social pressures. Example: When situations worsened in South Africa and political pressures mounted at home, Pepsi sold its South African bottling operation to local investors. 5. Creeping expropriation: is a set of actions whose cumulative effect is to deprive investors of their fundamental rights to the investment. Laws that affect corporate ownership, control, profit and reinvestment can easily be enacted. (Countries can change the rules in the middle of the game) Other scholars like Root have classified political risks into the following Four. 1. General instability risk 2. Ownership risk/ control risk 3. Operation risk and 4. Transfer risk 1. General instability risk: It is related to uncertainty about the future viability of a host countrys political system. (Iranian revolution that overthrow the Shah) 2. Ownership risk/ control risk It is related to the possibility that a host government might take actions expropriations to restrict an investors ownership and control of a subsidiary in that host country.
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3. Operation risk It proceeds from the uncertainty that a host government might constrain the investors business operations in all areas, including production, marketing, and finance. 4. Transfer risk: It applies to any future acts by a host government that might constrain the ability of a subsidiary to transfer payments, capital, or profit out of the host country back to the parent firm.
There are also some other risks like political sanctions, violence and terrorism, cyber terrorism & actions of political activists etc;
1. Political sanctions One or a group of nations may boycott another nation, thereby stopping all trade between the countries, or may issue sanctions against the trade of specific products. History indicates that sanctions are often not successful in reaching desired goals. The only ones who seem to be hurt are the people and companies that get caught in the middle.( the long-term boycott on Cuba, North Korea, Libya, Iran ) 2. Political and social activists The impact of political and social activists (PSAs) can also interrupt the normal flow of trade. PSAs can range from those who seek to bring about peaceful change to those who resort to violence and terrorism to affect change. PSA groups such as Greenpeace, consumers, international, and others have been successful in raising doubts about the safety of genetically modified (GM) foods. PSAs can be a potent force that should not be dismissed, as companies such as Nike, MacDonalds, Nestle, and others know. A PSA group demonstrates in front of WTO meetings, International Banks & international Monetary Fund (IMF). 3. Violence and Terrorism Although not usually government initiated, violence is another related risk for multinational companies to consider in assessing the political vulnerability of their activities. MNCs are targeted to embarrass a government and its relationship with firms to generate funds by kidnapping executives to finance terrorists goals. September 11 has raised the cost of doing business domestically and internationally.
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In the past 30 years, 80 % of terrorist attacks against the USA have been at American businesses. Since September 11, McDonald, Kentucky Fried Chicken, and Pizza Hut together have been bombed in more than 10 countries including Turkey, Saudi Arabia, Russia, Lebanon, and china; most bombings have been linked with militant Islamic groups. 4. Cyber terrorism New on the horizon is the potential for cyber terrorism. Although the internet is a vehicle for terrorist attacks by foreign and domestic antagonists wishing to inflict damage on a company with little chance of being caught. One problem in tracing a cyber terrorist is that it is hard to determine whether a cyber attack was launched by a rogue state, a terrorist, or by a hacker as a prank. The I Love You worm, which caused an estimated $25 billion in damage, was probably just an out-of-control prank. However, the Melissa virus that overloaded the websites of CNN, ZDNet, Yahoo, and Amazon.com with a flood of electronic messages that crippled them for hours was considered to be purposeful attacks on specific targets. Indicators of political risk To assess a potential marketing environment, a company should identify and evaluate the relevant indicators of political difficulty. Potential sources of political complication include social unrest, the attitudes of nationals and the policies of the host Government. 1. Social unrest Social disorder is caused by such underlying conditions as economic hardship, international dissension and insurgency, and ideological, religious, racial, and cultural differences. Example: Lebanon experienced conflict among the Christians, Muslims and other religious groups. The Hindu Muslim conflict in India remains unabated. The breakup of Soviet Union should not come as a surprise. Human nature involves Monastsy- the urge to stand alone as well as systasy- the urge to stand together and the two concepts provide alternative ways of utilizing resources to meet a societys needs. Monasty encourages competition and systasy emphasizes cooperation. The breakup of the Soviet Union underscores the point that a shift toward Monastsy to encourage modernization and competition is inevitably accompanied by the desire of ethnic groups to seek autonomy and freedom. 2. Attitudes of Nationals An assessment of the political climate is not complete without an investigation of the attitudes of citizens and government of the country. The nationals attitude toward foreign enterprises and citizens can be quite inhospitable. Nationals are often Addis Ababa university School Of Commerce Page 72

concerned with foreigners intentions in regard to exploitations and colonialism , and these concerns are often linked to concerns over foreign governments actions that may be seen as improper. Such attitudes may arise out of local socialist or nationalist philosophies, which may be in conflict with the policy of the companys home-country Government. Governments may come and go but citizens hostility may remain. 3. Policies of host Governments Unlike citizens inherent hostility, a governments attitude toward foreigners is often relatively short-lived. The mood can change either with time or change in leadership, and it can change for either the better or the worse. The impact of a change in mood can be quite dramatic, especially in the short run. Government policy formulation can affect business operations either internally or externally. The effect is internal when the policy regulates the firms operation within the home country. The effect is external when the policy regulates the firms activities in another country. Management of political risk To manage political risk, an MNC can pursue a strategy of either avoidance or insurance. 1. 2. Avoidance: means screening out politically uncertain countries. In this, measurement and analysis of political risk can be useful. Insurance: in contrast, a strategy to shift the risk to other parties. Insurance coverage can be obtained from a number of sources. Private insurance: through ignorance, a large number of companies end up as self insurers. Although property expropriation seems to be the most common reason for obtaining political insurance, the policy should include coverage for kidnapping, terrorism, and creeping expropriation. Government insurance: MNCs do not have to rely solely on private insurers. There are nonprofit, public agencies that can provide essentially the same kind of coverage. For example, IN USA OPIC (overseas private investment corporation is a US government agency that assists economic development through investment insurance and credit financing program. OPIC provides several forms of assistance, with political risk insurance as its primary business. It has three types of insurance protection to cover the risk of : Currency inconvertibility
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Expropriation including creeping expropriation, and loss or damage caused by war, revolution, or insurrection & civil strife. 1.4 Indicators of political instability
To assess a potential marketing environment, a company should identify and evaluate the relevant indicators of political difficulty. Potential sources of political complication include social unrest, the attitudes of nationals and the policies of the host Government. 1. Social unrest: Social disorder is caused by such underlying conditions as economic hardship, international dissension and insurgency, and ideological, religious, racial, and cultural differences. Example: Lebanon experienced conflict among the Christians, Muslims and other religious groups. The Hindu Muslim conflict in India remains unabated. The breakup of Soviet Union should not come as a surprise. Human nature involves monastsy- the urge to stand alone as well as systasy- the urge to stand together and the two concepts provide alternative ways of utilizing resources to meet a societys needs. Monastsy encourages competition and systasy emphasizes cooperation. The breakup of the Soviet Union underscores the point that a shift toward monastsy to encourage modernization and competition is inevitably accompanied by the desire of ethnic groups to seek autonomy and freedom. 2. Attitudes of Nationals: An assessment of the political climate is not complete without an investigation of the attitudes of citizens and government of the country. The nationals attitude toward foreign enterprises and citizens can be quite inhospitable. Nationals are often concerned with foreigners intentions in regard to exploitations and colonialism , and these concerns are often linked to concerns over foreign governments actions that may be seen as improper. Such attitudes may arise out of local socialist or nationalist philosophies, which may be in conflict with the policy of the companys home-country Government. Governments may come and go but citizens hostility may remain. 3. Policies of host Governments: Unlike citizens inherent hostility, a governments attitude toward foreigners is often relatively short-lived. The mood can change either with time or change in leadership, and it can change for either the better or the worse. The impact of a change in mood can be quite dramatic, especially in the short run. Government policy formulation can affect business operations either internally or externally. The effect is internal when the policy regulates the firms operation within the home country. The effect is external when the policy regulates the firms activities in another country.
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1.5
Management of political risks
To manage political risk, an MNC can pursue a strategy of either avoidance or insurance. 1. Avoidance: means screening out politically uncertain countries. In this, measurement and analysis of political risk can be useful. 2. Insurance: in contrast, a strategy to shift the risk to other parties. Insurance coverage can be obtained from a number of sources. Private insurance: through ignorance, a large number of companies end up as self insurers. Although property expropriation seems to be the most common reason for obtaining political insurance, the policy should include coverage for kidnapping, terrorism, and creeping expropriation. Government insurance: MNCs do not have to rely solely on private insurers. There are nonprofit, public agencies that can provide essentially the same kind of coverage. For example, IN USA OPIC (overseas private investment corporation is a US government agency that assists economic development through investment insurance and credit financing program. OPIC provides several forms of assistance, with political risk insurance as its primary business. It has three types of insurance protection to cover the risk of : Currency inconvertibility Expropriation including creeping expropriation, and loss or damage caused by war, revolution, or insurrection & civil strife. 1.6 Measures to Minimize political risks Political risk, though impossible to eliminate, can at the very least be minimized. There are several measures that MNCs can implement in order to discourage a host country from taking control of MNC assets. 1. Stimulation of the local economy: One investment strategy calls for a company to link its business activities with the host countrys national economic interests. For example: Brazil expelled Mellone bank because of the banks refusal to cooperate in renegotiating the countrys massive foreign debt. A local economy can be stimulated in a number of different ways: It may involve the companys purchasing local products and raw materials for its production and operations.( it can develop local allies Addis Ababa university School Of Commerce Page 75

who can provide valuable political contacts. A modification of this strategy may subcontracting Sometimes local sourcing is compulsory. Governments may require products to contain locally manufactured components because local contents improves the economy into two ways: a) It stimulates demand for domestic components, and b) It saves the necessity of a foreign exchange transaction. Further investment in local production facilities by the company will please the government that much more. Finally, the company should attempt to assist the host country by being export oriented. 2. Employment of Nationals: Frequently, foreigners make the simple but costly mistake of assuming that citizens of LDCs are poor by choice. It serves no useful purpose for a company to assume that local people are lazy, unintelligent, unmotivated, or uneducated. Such an attitude may become a self-fulfilling prophesy. a. Thus, the hiring of local workers should go beyond the filling of labor positions. b. Firms should also carefully weigh the impact of automation in a cheap labor, high unemployment area. 3. Sharing ownership: Instead of keeping complete ownership for itself, a company should try to share ownership with others, especially with local companies. Say, for example converting a private company to a public one or from a foreign company to a local one. One of the most common techniques for shared ownership is to simply form a joint venture. Any loss of control as a result can, in most cases, be more than compensated for by the derived benefits. Voluntary domestication, in most cases, is not a desirable course of action because it is usually a forced decision. The company should therefore plan for domestication in advance instead of waiting until it is required, because by that time the company has lost much of its leverage and bargaining power. 4. being civic minded: MNCs whose home country is the united sates often encounter the ugly American label abroad and this image should be avoided. It is not sufficient that the company simply does business in a foreign country; it should also be a good corporate citizen there. To shed the undesirable perception, multinationals should combine investment projects with civic projects.
Corporations rarely undertake civic projects out of total generosity, but such projects make economic sense in the long run.
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It is highly desirable to provide basic assistance because many civic entities exist in areas with slight or nonexistent municipal infrastructures that would normally provide these facilities. 5. Political Neutrality For the best long-term interests of the company, it is not wise to become involved in political disputes among local groups or between countries. A company should clearly but discreetly state that it is not in the political business and that its primary concerns are economic in nature. Brazilian firms employ this strategy and keep a low profile in matters related to Central American revolutions and Cuban troops in foreign countries. Brazilian arms are thus attractive to the 3rd world because those arms are free of ideological ties. In such a case, a purchasing country does not feel obligated to become politically aligned with a seller.
6. Behind-the screen lobby Much like the variables affecting business, political risks can be reasonably managed. Companies as well as special interest groups have varying interest and each party will want to make its own opinion known. When the US mushroom industry asked for a quota for imports from china, Pizza Hut come to chinas rescue by claiming that most domestic and other foreign suppliers could not meet its specification. Pizza hut has a great deal at stake because it is one of chinas largest customer as well as a user of half of some nine million pounds of mushrooms for pizzas . 7. Observation of political mood and reduction of exposure Marketers should be sensitive to changes in political mood. A contingency plan should be in readiness. When the political climate turns hostile, measures are necessary to reduce exposure. Some major banks and MNCs took measures to reduce their exposure in France in response to a fear that a socialist communist coalition might gain control of the legislature in the election of 1978. Their concern was understandable, as most of these companies were on the lefts nationalization list. Their defensive strategy included the outflow of capital, the transfer of patents and other assets to foreign subsidiaries, and the sale of equity holdings to foreigners and French nationals abroad. Such activities once concluded made it difficult for the socialist government to nationalize the companys properties. 8. Expanding the investment base Including several investors and banks in financing an investment in the host country is another strategy.
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This has the advantage of engaging the power of the banks whenever any kind of government takeover or harassment is threatened. This strategy becomes especially powerful if the banks have made loans to the host country; if the government threatens expropriations or other types of takeover, the financing bank has substantial power with the government. 9. Licensing A strategy that some firms find eliminates almost all risks is to license technology for a fee. Licensing can be effective in situation where the technology is unique and the risk is high. Of course, there is some risk assumed because the licensee can refuse to pay the required fees while continuing to use the technology. 10. Political payoffs This is an attempt to lessen political risks by paying those in power to intervene on behalf of the multi-national company. Political payoffs, or bribery, have been used to lessen the negative effects of a variety of problems. Paying heads of state to avoid confiscatory taxes or expulsion, paying fees to agents to ensure the acceptance of sales contracts, and provide monetary encouragement to an assortment of people whose actions can affect the effectiveness of a companys programs are decisions that frequently confront multinational managers and raise ethical questions. It may have a short-term political payoffs, but in the long-run the risks are high and bribery should be avoided. 11. Other measures There are a few other steps that MNCs can undertake to minimize political risk. To be a low profile; because it is difficult to please all the time, it may be desirable for a company to be relatively inconspicuous. It should try to adopt a local personality. A practical approach may require that the company blend in with the environment. There is not much to be gained by a company being ethnocentric and trying to westernize the host countrys citizens. A veteran of international business would very likely realize that it is far better to be flexible and adaptable. Most of the US-Based MNCs found that less than 50 % had formal programs to deal with a terrorist attack. Most of the MNCs with the antiterrorist programs focus on security equipment rather than on training executives and their families. Some of the activities included in antiterrorist training are : defensive driving, self defense, kidnapping avoidance, behavior after / during kidnapping, negotiating skills, weapon handling, collecting information from local sources on terrorists, and protection of assets.
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Various defensive precautions can be implemented. Automobile drivers should be trained in how to react a kidnapping attempt; mangers themselves should be instructed in how to deal with the unexpected and taught especially to avoid driving routine routes. Very basic precautions might be undertaken. Ex. EL Salvador, Texas instruments erected protective walls for its facilities and employed extra guards It is better to be safe than sorry. 1.7 Types Of Economic Systems
Types of Government: Economic system Economic system provides another basis for classification of governments. Based on the degree of government control of business activity, the various economic systems can be placed along a continuum with communism at one end and capitalism at the other. Communism: Communist theory holds that all resources should be owned and shared by all the people for the benefit of the society. In practice, it is the government that controls all productive resources and industries and as a result the government determines jobs, production, price , education and just about anything else. There is lack of incentive for workers and managers to improve productivity. No profit motive Socialism: The degree of Government control that occurs under socialism is somewhat less than that under communism. The government owns and operates the basic major industries but leaves small business to private ownership. Capitalism: The philosophy of capitalism provides for a free market system that allows business competition and freedom of choice for both consumers & companies. It is a market oriented system in which individuals, motivated by private gain are allowed to produce goods or services for public consumption under competitive conditions. Product price is determined by demand and supply. This system serves the needs of society by encouraging decentralized decision making, risk taking and innovation. The results include product variety, product quality, and efficiency and relatively lower prices. It was managerial capitalism, in the USA where managers with little ownership ran companies and competed fiercely for markets and products. It was personal capitalism in Britain as owners managed companies. It was cooperative capitalism professional managers were in charge, and companies were urged to share markets and profits among themselves. Even china allows farmers to sell directly to consumers in local markets.
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Note: No nation operates under pure communism or pure capitalism and most countries find it necessary to make some compromise between the two extremes. Western European countries encourage free enterprise but intervene to provide support and subsidize for steel and farm products. Perhaps the only place that bears a great resemblance to an ideal free trade market is Hong Kong. It doesnt even have a central bank and the legal tender notes are issued by private commercial banks. The Washington based Cato institute gave first place to Hong Kong. As the worlds freest economy, Hong Kong has a rating of 9.1 on an economic freedom to open a foreign bank account. Catos index relies on economic variables such as inflation stability, tax rates, government spending and social indicators-legal fairness and freedom to open a foreign bank. The massive historical experience conducted throughout the 20th century that contrasted with the market-oriented and centrally planned economies has ended with the economic failures of communism (Bush) Economic risks Economic risks are an important and recurring part of the political environment that a few international companies can avoid. Exchange controls Exchange controls stem from shortages of foreign exchange held by a country. When a nation faces shortages of foreign exchange or there is a substantial amount of capital leaving the country , controls may be levied over all movements of capital , or selectively against the most politically vulnerable companies to conserve the supply of foreign exchange. Many countries maintain regulations for control of currency, and, in the event an economy should suffer an economic setback or foreign exchange reserves suffer severely, the controls on convertibility are imposed quickly, as was the case in Venezuela. 2. Local content laws In addition to restricting imports of essential supplies to force local purchase, countries often require a portion of any product sold within the country to have local content, that is, to contain locally made parts. In Thailand, all milk products are required to contain 50 % milk from the local dairy farmers. The European community has had a local content requirement as high as 45 % for screwdriver operations, to foreign owned assemblies. NAFTA requires 62 % local content for all cars coming from member countries. 3. Import restrictions Addis Ababa university School Of Commerce Page 80

Selective restrictions on the import of raw materials, machines, and spare parts are fairly common strategies to force foreign industry to purchase more supplies within the host country and thereby create markets for local industry. Although this is done in an attempt to support the development of domestic industry, the result is to hamstring and sometimes to interrupt the operations of established industries. The problem then, becomes critical when there are no adequately developed sources of supplies within the country. 4. Tax controls Taxes must be classified as a political risk when used as a means of controlling foreign investments. In such cases, they are raised without warning & in violation of formal agreements. India taxes Pepsi Cola & coca-cola company 40% on all soda bottled in India. To underdeveloped countries with economies constantly threatened with a shortage of funds, unreasonable taxation of successful foreign investments appeals to some government officials as the handiest and quickest means of finding operating funds. 5. Price controls Essential products that command considerable public interest, such as pharmaceuticals, food, gasoline, and cars, are often subjected to price controls. Such controls during inflationary periods can be used to control the cost of living. They also may be used to force foreign companies to sell equity to local interests. A side effect on the local economy can be to slow or even stop capital investment. 6. Labor problems In many countries, labor unions have strong government support that they use effectively in obtaining special concessions from business. Layoffs may be forbidden, profits may have to be shared, and an extraordinary number of services may have to be provided. In France the belief in full employment is almost religious in fervor, layoffs of any size, especially by foreign-owned companies, are regarded as national crisis. 1.7 Summary An international marketer needs to examine carefully the political environment of a country before making major commitments in that country. The political situation of a country may or may not be conducive to profitable business there. Addis Ababa university School Of Commerce Page 81

Political problems related to foreign business occur mainly because of political sovereignty , a countrys desire to assert its authority, and the political conflict either internal conflicts such as civil war or external ones with another country. Such troubles may lead a country to intervener politically in the affairs of private business, particularly those of foreign firms. Intervention may range from some form of control to complete takeover, or expropriation, which is the official seizure of foreign property by a host country. Other forms of intervention include exchange control, import restrictions, market control, tax control, price control, and labor restrictions. At one time, political intervention mainly occurred in developing countries. Now, even industrially developed countries seek to control foreign enterprises in various ways. The possibility of political intervention makes it necessary for a foreign marketer to carefully analysis the political situation of a country before investing there. This analysis can be made through study of the countrys type of government republic, dictatorship and so forth; stability of government, economic management by Government , frequency of changes in government policy; attitude toward investment , other governments the parent companys home government , foreign managers , and private business ; viability of administrative procedures; and closeness between the government and its people. In the final analysis the host governments willingness to grant concessions to the foreign enterprise would depend on the MNCs bargaining leverage. For example, a host government would be willing to concede to the terms of a multinational enterprise involved in business that is of strategic national importance and that cannot be replaced. On the other hand, a company manufacturing consumer goods such as bar soaps and shampoos may not have much bargaining power with the host governments. The economic environment of a foreign country must be examined before an international marketer decides to enter its market. A country burdened with economic problems may lack stability and become vulnerable to political radicalism. On the other hand, a growing and burgeoning economy usually stimulates business activity and offers new opportunities. Thus, a careful review of economic conditions, both short and long term, is a prerequisite for a decision about entering an overseas market. Addis Ababa university School Of Commerce Page 82

The economic environment can be divided into macro-and Microeconomic aspects. Macro environment describes the overall economic situation in a country and is analyzed using economic indicators such as population, GNP per capita , index of industrial production , rate of economic growth , inflation rate, balance-of-trade surplus (deficit), interest rates , unemployment data, and the like. The economic system of a country is also part of the macro environment. Two extremes types of economic systems are the capitalist system and state control. The latter is mainly found in socialist countries; most western countries pursue a mixed form of capitalism. Microenvironment refers to economic conditions relevant to a particular product or market. Analysis of microeconomics environment is largely performed with reference to competition. A firm should properly identify different sources of competition and examine its own strengths and weakness relative to major competitors. Equipped with a competitive advantage over its rivals, a firm will be able to develop a workable marketing mix.
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Chapter-6 The Legal Environments of Global Markets Objectives At the end of this chapter, students are expected to: Describe the various types of Political systems Identify which types of political system is more conducive for international trade Describe major indicators of political instability Examine the various strategies of managing political risks Explore various measures to minimize political risks Examine different types of economic systems & their impact on international trade Introduction This chapter has five sections (sub-titles). The first section deals with the basis of the legal frame work of international business environment. The second section gives insights to Types of Jurisdictions in international legal dispute. The third section discusses the International disputes. The fourth section assesses the Protection of intellectual property. The Fifth focuses on Bribes & Gifts offering practices of international business environment in general and countries in particular. 2.1 Basis for Legal Systems There are two major legal systems. These are common law and statute law. a) Common law: There are some 25 common law or British law countries. A common law system is a legal system that relies heavily on precedents and conventions. Judges decisions are guided not so much by statutes as by previous court decisions and interpretations of what certain laws are or should be. The judges ability to interpret laws in a personal way gives the judge deal of power to apply the law as it fits the situation. Addis Ababa university School Of Commerce Page 84

These countries laws tradition oriented. Countries with such a system include the USA, UK, Canada, India, and other British colonies. b) A statue law system or code or civil law It includes most continental European countries and Japan. Most countries over 70 are guided by a statue law legal system as the name implies, the main rules of the law are embodied in legislative codes. Every circumstance is clearly spelled out to indicate what is legal and what is not. There is also a strict and literal interpretation of the law under this system. A judge in a civil law country has a lesser role in using personal judgment. He strictly follows the letter of the law.
Other Basis of Classification of the Legal System There are three heritages basis of the legal system in the world. a) Common Laws derived from the English law and found in England, the USA and Canada and other countries once under English influence. The basis of this law tradition, past practices, and legal precedents set b) by the courts through interpretations of statutes, legal legislations, and past practices. Civil or code law, derived from roman law and found in Germany, Japan, France, and in Non Islamic and Non-Marxist countries. Under this system, the legal system is generally divided into three separate codes: Commercial, civil and criminal. c) Islamic law (sheriah): derived from the interpretation of the Koran and found in Pakistan, Iran, Saudi Arabia, and other Islamic states. The unique aspects of Islamic law are the prohibition against the payment of interest. d) A commercial legal system in the Marxist socialist economies of Russia & the former Soviet Union, Eastern Europe, China and other Marxist Page 85

socialist states whose legal systems centered on the economic, political and social policies of the state. According to Marxist-socialist tenets the law is strictly subordinate to prevailing economic conditions, such fundamental propositions as private ownership, contracts, due process, and other legal mechanisms needed to be developed. 2.2 Jurisdictions in International Legal Disputes Legal disputes can arise in three situations:
1. Between Governments: 2. Between a company and a government and 3. Between two companies.
When international commercial disputes must be settled under the law of one of the countries concerned, the paramount question in a dispute is: The world court can adjudicate disputes between governments whereas the two other must be handled in the courts of the country of one of the parties involved or through arbitration. Unless a commercial dispute involves a national issue between states, the international court of justice or any similar world court does not handle it. Because there is no international commercial law, the international marketer must look to the legal system of each country involved the laws of home country or the laws of the countries within which business is conducted, or both. Jurisdiction is generally determined in one of three ways: On the basis of jurisdictional clauses included in contracts, On the basis of where the contract was entered into, or On the basis of where the provision of the contract were performed. For example, a clause similar to the following establishes jurisdiction in the event of disagreement. That the parties hereby agree that the agreement is made in Maryland, USA, and that any question regarding this agreement shall be governed by the law of the state of Maryland USA. Addis Ababa university School Of Commerce Page 86

This clause establishes that the laws of the state of Maryland would be invoked should a dispute arise. 2.3 International Dispute Resolution When things go wrong in a commercial transaction the buyer refuses to pay, the product is of inferior quality, the shipment arrives late, or any one of the myriad problems that can arise-what recourse does the international marketer have. There are four steps to settle disputes both domestic and international: 1. placate the injured party( Informal talk) 2. if (1) doesnt work, conciliate ( mediate ) 3. Arbitrate and 4. Finally Litigate. 1. Informal Talks: The 1st step the international marketer should do is he has to try to resolve the issue informally, but if that fails the foreign marketer must resort to more resolute actions (step2-4). 2. Conciliation(Mediation) Conciliation is a non-binding agreement between parties to resolve disputes by asking a 3rd party to mediate differences. The function of the mediator is to carefully listen to each party and to explore, clarify and discuss the various practical options and possibilities for a solution with the intent that the parties will agree on a solution. All conferences between parties and the mediator are confidential; the statements made by the parties may not be disclosed or used as evidence in any subsequent litigation or arbitration. Conciliation can be either be formal or informal. The Chinese believes that when a dispute occurs, informal, friendly negotiation should be used first to solve the problem; if that fails, conciliation should be tried.
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3. Arbitration It is the settlement of a dispute by a person or persons chosen to hear both sides and come to a decision. If conciliation is not used or an agreement cant be reached, the next step is arbitration. When all else fails, arbitration rather than litigation is preferred method for resolving international commercial disputes. The usual arbitration procedure is for the parties involved to select a disinterested and informed party or parties as referee to determine the merits of the case and make a judgment that both parties agree to honor Although informal arbitration is workable, most arbitration is conducted under the auspicious one of the more formal domestic and international arbitration groups organized rules for the process and experienced arbitrators to assist. In most countries, decisions reached in formal arbitration are enforceable under the law. The popularity of arbitration has led to a proliferation of arbitral centers established by countries, organizations, and institutions. All have adopted standardized rules and procedures to administer cases, and each has its own strengths and weaknesses. Some of the more active Arbitral centers include the following: The inter-American commercial Arbitration commission The Canadian-American commercial arbitration commission ( For disputes between Canadian and US business) The London court of arbitration ( decisions are enforceable under English Law and English courts) The American Arbitration Association( www.adr.org/) The international chamber of commerce (www.iccwbo.org/; select Arbitration) The procedures used by formal arbitration organizations are similar. Arbitration under the rules of the international chamber of commerce (ICC) affords an excellent example of how most organizations operate. Addis Ababa university School Of Commerce Page 88

A typical arbitration clause is as follows: Any controversy or claim arising out of or relating to this contract shall be determined by arbitration in accordance with the international Arbitration rules of the American Arbitration Association. Note: the number of arbitrators, the place arbitration and the language of the arbitration has to be stated. Arbitration clauses require agreement on two counts: a. The parties agree to arbitrate in the case of a dispute according to the rules and procedures of some arbitration tribunals, and b. They agree to abide by the awards resulting from the arbitration. Difficulty arises when the parties to a contract fail to honor the agreements. Companies may refuse to name arbitrators, refuse to arbitrate, or, after arbitration awards are made, they may refuse to honor the award. More than 120 countries have ratified the convention on the recognition and enforcement of foreign arbitration awards (New York convention). 4. Litigation It is the act of or process of carrying a lawsuit. When all else fails, the final step is to solve the dispute is litigation. Lawsuits in public courts are avoided for many reasons cost, frustrating delays, extended aggravation that these cases produce are by far more oppressive than any matter of comparable size. In India there is a backlog of more than 3 million cases. The best advice is to seek a settlement, if possible, rather than sue. Other deterrents to litigation are the following: Fear of creating a poor image and damaging public relations. Fear of unfair treatment in a foreign court
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Difficulty in collecting judgment that may otherwise have been collected in a mutually agreed settlement through arbitration. The relatively high cost and time required when bringing legal action Loss of confidentiality(Litigation is public unlike arbitration and conciliation)
There is no international law per se that prescribes acceptable and legal behavior of international business enterprises. There are only national laws often in conflict with one another, especially when national politics is involved. Branch versus Subsidiary A branch is the companys extension or outpost at another location. A subsidiary, in contrast, is both physically and legally independent. It is considered a separate legal entity in spite of its ownership by another corporation. Although physically detached, it is not legally separated from its parent. A subsidiary is a company controlled by another company which owns all or majority of its shares. A subsidiary may be either wholly owned or partially owned. The usual practice of Pillsbury, coca-cola, and IBM is to have wholly owned subsidiaries. As a rule, multinationals prefer subsidiaries to branches. FIAT has 432 subsidiaries and minority interests within 130 companies in 60 countries. The question that must be asked is why Fiat, like other MNCs would go through the trouble and expense of forming hundreds of foreign companies elsewhere. Disadvantages of a subsidiary: When compared to the use of branches, the use of subsidiaries adds complexity to the corporate structure. They are also expensive, requiring substantial sales volume to justify their expense. There are several reasons why a subsidiary is the preferred structure. Recruitment of management - titles means a great deal in virtually all parts of the world. A top administrator of an overseas operation wants a prestigious title of president, chief executive, or managing director rather than being merely a branch manager.
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Gaining quick access to a particular market: by acquiring an existing company within the market and making it a subsidiary. In other words, access to an identified consumer market and acquiring a well known brand is made possible. Built-in Flexibility: which may allow the parent company to take advantage of legal loopholes or of opportunity to circumvent certain Government requirements? Since 1987, the USA has oil imports of Iranian crude oil. In reality $ 3.5 to $ 4billion of Iranian oil have found their way into the USA annually by their overseas subsidiaries. Tax benefits: when formed in a foreign country, a subsidiary is considered a local company, enabling it to receive tax benefits granted to other national companies. Moreover, a subsidiary provides the parent company with some flexibility in terms of when the parent has to pay tax on the income generated by its subsidiary. The limited-liability advantage: with this organizational structure, the parent firms liability is limited to its investment in the foreign subsidiary. That is, its maximum loss can be no greater than the assets invested in its subsidiary. Also, the formation of a separate company provides some protection against hostile acts. 2.4 Protection of Intellectual Property Companies spend millions of dollars establishing brand names or trade marks to symbolize quality and design a host of other products features meant to entice customers to buy their brands to the exclusion of others. Individuals and firms have the freedom to own and control the rights to intellectual property (inventions and creative work).The term patent; trade mark, copyright, and trade secret are often used interchangeably. The basic forms of intellectual property of intellectual property include: A trademark relates to any work, name, or symbol which is used in trade to distinguish a product from other similar goods. Example coke. Trademark laws are used to prevent others from making a product with a confusingly similar mark.
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Similar rights may be acquired in marks used in the sale of advertising of services (service marks) A copyright offers protection against unauthorized copying by others to an author or artist for his or her literary, musical, and dramatic and artistic works. And more recently computer software works are included within the protection of copyrights. A patent is a government grant of certain rights given to an inventor for a limited time in exchange for the disclosure of the invention. The most important of these rights is the one under which the patented inventions can be made, used, or sold only with the authorization of the patent owner. A trade secret refers to Know-how manufacturing methods, formulas, plans, and so on that is kept secret within a particular business. Unfair competition is a very broad term defining legal standards of business conduct. It provides protection against such things as simulation of trade packaging, using similar corporate and professional names, misappropriations of trade secrets, and planning off one persons goods as those of another. A mask work is a new type of intellectual property, protected by the semiconductor chip protection Act of 1984. It is, in essence, the design of an electrical circuit, the pattern of which is transferred and fixed in a semi-conductor chip during the manufacturing process. Infringement occurs when there is commercial use (copying or imitating) without owners consent, with the intent of confusing or deceiving the public. Example: Texas instrument charged that eight Japanese firms made memory chips based on its patents after the expiration of license agreements, and the US Company was able to force the Japanese firms to pay nearly $ 300 million in royalties. Prior Use versus registration: In the process of filing for patent protection, it is good idea to make a distinction between common law countries and statute law countries. A common law country determines patent ownership by priority in use. Addis Ababa university School Of Commerce Page 92

A statute law country, in comparison, is determined by priority in registration i.e. is the first file is granted a patent even if an innovation was actually created or used earlier by someone else. Inadequate protection of intellectual property The failure to protect intellectual property rights adequately in the world market place can lead to legal loss of rights in potentially profitable markets. Because patents, processes, trademarks, and copyrights are valuable in all countries, some companies have found their assets appropriated and profitably exploited in foreign countries without license or reimbursement.
The problems of inadequate protective measures taken by the owners of valuable assets stem from a variety of causes: The assumption that takes if the company has established rights in one country, it will be protected around the world. Or the rightful ownership will be established should the need arise. For example McDonalds in Japan. It was only after a lengthy and costly legal action with a trip to the Japanese Supreme Court that McDonald was able to regain the exclusive right to use the trade mark in Japan. After having to buy its trade mark for an undisclosed amount, McDonalds maintains a very active program to protect its trade marks. Counterfeiting and piracy: It is the practice of unauthorized and illegal copying of a product. In essence, it involves an infringement on a patent or trade mark or both. According to the US Lanham Act, a counterfeiting trademark is a spurious trademark which is identical with, or substantially indistinguishable from, a registered trademark. Counterfeiting is a serious business problem. Direct monetary loss, companies face indirect losses as well. Counterfeit goods injure the reputation of companies whose broad names are placed on low-quality product. Addis Ababa university School Of Commerce Page 93

Counterfeit and pirated good come from a wide range of industries apparel, automotive parts, agricultural chemicals, pharmaceuticals, books, records, films, computer software, and baby formula to auto parts. The piracy industry has grown so sophisticated that many counterfeit goods are almost impossible to distinguish from the original.
A true counterfeit product uses the name and design of the original so as to look exactly like the original. On the other hand, some counterfeiters partially duplicate the originals design and or trademark in order to mislead or confuse buyers. International conventions A convention means agreements between persons or nations.etc. Many countries participate in international conventions designed for mutual recognition & protection of intellectual property rights. There are three major international conventions: 1. The Paris conventions for the protection of industrial property, commonly referred to as the Paris convention, includes the USA and other 100 countries. 2. The Inter- American convention includes most of Latin American nations and the USA. 3. The Madrid arrangement, which established the bureau for international registration of trademark, includes 26 European countries. 4. In addition, the world intellectual property organization (WIPO) of the United Nations is responsible for the promotion of the protection of intellectual property and for the administration of the various multilateral treaties through the cooperation among its member states. Market Laws All countries have laws regulating marketing activities in promotion, product development, labeling, pricing, and channels of distribution.
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In some countries, there may be only a few laws with lax enforcement; in others, there may be detailed, complicated rules to follow that are stringently enforced. There often are vast differences in enforcement and interpretation among countries having laws covering the same activities. For example, in Austria, premium offers, free gifts, or coupons are considered as cash discounts and are prohibited. Premium offers in Finland are allowed with considerable scope as long as the word free is not used and consumers are not coerced into buying products. France also regulates premium offers, which are, for all practical purposes, illegal there because it is illegal to sell for less than cost price or to offer a customer a gift or premium conditional on the purchase of another product. Antitrust laws A trust is an industrial or business combination now illegal in USA in which management and control of the member corporations are vested in a single board of trustees who are thus able to control the market fix prices etc; Antitrust is concerned with regulating or opposing trusts; specifically designed to prevent restraints on trade by business monopolies , cartels. Antitrust laws have two purposes in international commerce: To protect a nations consumers by ensuring that they benefit from products, ideas produced both by foreign and domestic competitors and To protect a nations export and investment opportunities against any privately imposed restrictions. With the exception of the USA, antitrust laws have been either nonexistent or not enforced in most of the worlds countries for the better part of the 20th century. Antimonopoly, price discrimination, supply restrictions, and full-line forcing areas in which the European court of justice has dealt severe penalties. However, the EU, Japan and many other countries have begun to enforce the anti-trust laws.
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Foreign Corrupt Act (FCA) This act makes it illegal for companies to pay bribes to foreign officials, candidates, or political parties. Stiff penalties can be assessed against company officials, directors, employees, or agents found guilty of paying a bribe or of knowingly participating in or authorizing the payment of a bribe. However, bribery, which can range from lubrication to extortion, is a common business custom in many countries. For example, a U.S environmental engineering firm was found to have made corrupt payments to an Egyptian government official to assist the company in gaining a contract. The company agreed not to violate the FCPA in the future and agreed to pay a civil fine $ 400,000 and To reimburse the department of justice for the costs of the investigation. Furthermore, the company agreed to establish FCPA compliance procedures and to provide certifications of compliance annually for 5 years. National Security Laws U.S Firms, their subsidiaries, or foreign firms that are the licensees of U.S technology cannot sell a product to a country in which the sale is considered by the U.S government to affect national security. Further, responsibility extends to the final destination of the product regardless of the number of intermediaries that may be involved in the transfer of goods. An extensive export control system was created to slow the spread of sensitive technologies to the former USSR, China, and other communist countries that were viewed as major threats to U.S security. The control of the sale of goods considered to have a strategic and military value was extremely strict. Jurisdiction and Extraterritoriality There is no international law per se that deals with business activities of companies in the international arena.
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There are only national laws that vary from one country to another. In preparing a contract a seller or buyer should stipulate a particular legal system that is to take precedence in resolving any legal contract dispute. The court to be used for legal remedy should also be specified. The company must keep in mind that to earn a legal victory in its home court is one thing, but to enforce a judgment against a foreign party is something else altogether. Enforcement is difficult unless that foreign party has the desire to continue to do business in the country where the judgment is obtained. The contract should contain a contract that allows the company to bring a law suit in either the home country. When a nation attempts to apply its laws extraterritorially, it may upset its trading or political partners. For example, the US has been placed in this awkward position a number of times in the past. The US angered Canada when the US government tried to prevent US firms Canadian subsidiaries from selling products to Cuba. The United States created uproar in Europe when it prohibited European subsidiaries of American firms from participating in a soviet pipeline projects. Having learned from these costly lessons, the USA now attempts to avoid disputes over extraterritoriality. As a rule, American courts will not apply laws beyond their borderextraterritorially unless congress expresses a different intent. Whenever possible and practical, companies should consider commercial arbitration in place of judicial trials. Anti boycott laws Under the ant boycott law, U.S companies are forbidden to participate in any unauthorized foreign boycott; further, they are required to report any request to cooperate with a boycott. The anti boycott law was a response to the Arab league boycott of Israeli businesses. Addis Ababa university School Of Commerce Page 97

The Arab league boycott of Israel has three levels: a. b. c. A primary boycott bans direct trade between Arab states and Israel, A secondary boycott bars Arab governments from doing business with companies that do business with Israel. A tertiary boycott bans Arab governments from doing business with companies that do business with companies doing business with Israel.
When companies do not comply with the Arab leagues boycott directives, their names are placed on a black list and they are excluded from trade with members of the Arab league. For example a hospital supply company that had been trading with Israel was charged with closing a plant to be taken off the Arab black list. After an investigation this supplier was found guilty and was fined to pay $ 6.6 million and was prohibited trading in Syria and Saudi Arabia for 2 years. Cyber law (Unresolved issue) The internet is by its nature a global enterprise in which no political or national boundaries are closed. Although, this is its strength, it also creates problems, when existing law does not clearly address the uniqueness of the internet and its related activities. Existing law is vague or does not completely cover such issues as the protection of domain names, taxes, jurisdiction in cross-border transactions, and contractual issues. The EU, the U.S.A. and many other countries are drafting legislation to address the myriad legal questions not clearly addressed by the current law. But until these laws apply worldwide, companies must rely on individual country laws which may or may not provide protection. Cyber Squatters (CSQ) Unfortunately, the ease with which Web names can be registered and the low cost of registering has led to thousands being registered.CSQ buy and registers descriptive Addis Ababa university School Of Commerce Page 98

nouns, geographic names, ethnic groups, pharmaceutical substances and other similar descriptors and hold them until they can be sold at an inflated price. For example, a cyber squatter sold www.themoortgage.com for $500,000; the record price paid so far is $7.5 million for the domain name www.business.com. If a cyber squatter has registered has registered a generic domain name that a company wants, the only recourse is to buy it. Multiplicity of Legal Environments There are many products that cannot be legally imported into most countries. Examples include counterfeit money, illicit drugs, pornographic materials, and espionage equipment. It is also illegal to import live animals and fresh fruit unless accompanied by the required certificates. Furthermore, many products have to be modified to conform to local laws before these products are allowed to cross the border. The modification may be quite technical from an engineering standpoint or only may be cosmetic, as in the case of certain packaging changes.
A companys production strategy can also be affected by the legal environment. The United States bans the importation of the so called Saturday night specials, cheap, short-barreled pistols because they are often used in violent crime. Curiously, the gun control legislation does prohibit the sale of such inexpensive weapons. Only the import of such weapons is banned. To overcome the ban an Italian gun maker set up a manufacturing company in Maryland.
2.5 Bribery & Gifts

Bribery is both unethical and illegal. There are many questions about what bribery is, how it is used and why it is used. According to the foreign corrupt practices act (FCPA ) of 1977, bribery is the use of interstate commerce to offer , pay, promise to pay, or authorize giving anything of value to influence an act or decision by a foreign government , politician, or political party to assist in obtaining , retaining, or directing businesses to any person, Addis Ababa university School Of Commerce Page 99

A bribe is also known as a pay of, grease money, lubricant, little envelope, morbid or bite (Mexico), and under the table payment, as well as by other terms. A bribe may take the form of cash, gifts, jobs, and free trips. There are several reasons why a bribe is solicited, offered, and accepted. Low salaries of public officials and simple greed may be another. The loyalties and commitments public servants have to their political parties, families, and friends can cause them to ask for favors that will benefit those groups. The proliferation of bureaucratic regulations seems to be another cause. Complex regulations create the opportunity for bribery because by paying a bribe a company can cut through bureaucratic red tape quickly.
Among reasons why some businesspersons are willing and even eager to offer a bribe are: To speed up the required work or processing To secure a contract To avoid the cancellation of the contract To prevent competitors from getting the contract The anatomy of a bribe (Graphical presentation) Bribery is not always an absolute; rather it may be a matter of degree. What may seem like a bribe toe person may not be to another especially to the one who accepts the payment. Questionable payments like political contributions like Gulf oil was forced to contribute $4 million toward the reelection of Koreas President Park. This act is viewed as political contributions by Koreans and as extortions by US Officials The interpretation of legality depends on the particular laws of a particular country. What is illegal in one country is not necessarily so elsewhere.
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In the former Soviet Union, a simple gift-such as clothing for a public officialwas considered a bribe. Unlike US laws, the Laws of France, Japan, Germany, and Great Britain do not specifically deal with foreign bribery. Italy, In contrast, has gone one step further by making it legal for Italian firms to pay foreign officials to acquire business orders. Germany allows a tax deductions for some bribes France considers foreign payments to middlemen to be legitimate business tax deductions. What is unethical in one culture is not necessarily so in another culture. Bribery may thus be acceptable in some countries. In many LDCs the practice of providing bribes is so common that not to do so may be interpreted as an insult or a lack of respect. The Japanese, viewing payments to foreign officials to secure business deals as a normal practice, had a hard time understanding why there was such uproar when an advisor to President Reagan, Richard Allen, accepted a watch as a gift from a Japanese magazine and why he had to resign over this common courtesy. Other side to ethics There is another side to ethics. If a company tries to be ethical by refusing to make questionable payments, it may risk having its cargo left on the dock or in a customs warehouse where its goods can easily be damaged or stolen. Moreover, to refuse giving a bribe may result in the loss of a contract, thus hurting stockholders & employees. Generally, it is a good idea for a company to maintain its integrity. But this task is difficult if the companys efforts are adversely affected by competitors who routinely offer bribes and thus take advantage of the companys ethical conduct. International marketers need to develop strategies to deal with bribery problems.
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a. Developing corporate code of ethics: Good strategies should include having corporate codes of ethics, sensitization of ethics in managers through training and education, and conducting ethics audits. A study of usage and contents of corporate codes of ethics found that significantly fewer European firms than US firms have adopted codes of ethics. b. Developing Country specific code of ethics: All corporate ethics policies should not look alike since a code of ethics developed in a country in which a firms headquarters is located may not match the perceptions of ethical issues of the firms employees in another country. How to present gifts It is not the gift that counts, but how you present it. 1. Japan Do not open a gift in front of a Japanese counterpart unless asked, and do not expect the Japanese to open your gift. Avoid ribbons and bows as part of the gift wrapping. Bows as we know them are considered unattractive, and ribbon colors can have different meanings. Do not offer a gift depicting a fox or badger. The fox is the symbol of fertility, the badger, and cunning. 2. Europe o o o Avoid red roses and white flowers, even numbers and the number 13. Do not wrap flowers in paper. Do not risk the impression of bribery by spending too much on a gift.
3. Arab world Do not give a gift when you first meet someone. It may be interpreted as bribe. Do not let it appear that you contrived to present the gift when the recipient is alone. It looks bad unless you know the person well. Give the gift in front of others in less-personal relationship.
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4. Latin America Do not give a gift after a somewhat personal relationship has developed unless it is given to express appreciation for hospitality. Gifts should be given during social encounters, not in the course of business. Avoid the colors black and purple; both are associated with the catholic Lenten season. 5. China Never make an issue of a gift presentation-publicity or privately. Gifts should be presented privately with the exception of collective ceremonial gifts at banquettes or after speeches. 6. United states Gifts that are too ostentatious can cause too big problem. Transparency International Corruption Perception Index According to Transparency international corruption perception index (TICPI) in 2002 Rank 1 2 3 4 5 5 7 Country Finland Denmark New Zealand Iceland Singapore Sweden Canada CPI 9.7 9.5 9.5 9.4 9.3 9.3 9.0
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8 8 10 11 12 12 14 15 16 17 18 18 20 20 Luxemburg Netherlands United kingdom Australia Norway Switzerland Hong Kong Austria USA Chile Israel Belgium Japan Spain 9.0 9.0 8.7 8.6 8.5 8.5 8.2 7.8 7.7 7.5 7.3 7.3 7.1 7.1
Note: higher numbers correspond to a lower prevalence of bribe-taking. Transparency international bribe players index
Rank 1 2
Country Australia Sweden
CPI 8.5 8.4
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2 4 5 6 6 8 9 9 11 12 13 13 15 15 17 18 19 20 21 Switzerland Austria Canada Belgium Netherlands United kingdom Germany Singapore Spain France Japan United kingdom Hong Kong Malaysia Italy South Korea Taiwan China Russia 8.4 8.2 8.1 7.8 7.8 6.9 6.3 6.3 5.8 5.5 5.3 5.3 4.3 4.3 4.1 3.9 3.8 3.5 3.2
Note: Higher scores correspond to lower levels of bribe paying internationally. 1.6 Summary Addis Ababa university School Of Commerce Page 105

To fully grasp a countrys laws, it is essential to understand the legal philosophy of the country. Countries may follow common law or code law. Common law is based on precedents and practices. England, for example, is a common law country. Code law is based on detailed rules; Mexico is a code law country. The legal basis of a country can affect marketing decisions in multifaceted ways. Another important legal environment aspect is the jurisdiction of laws. The question of which laws will apply in which particular matters must be known. In some instances, those of the country where the agreement was made apply , in others, those of the country where the business was conducted apply. It is desirable to have a judgmental clause in agreements. If there is none, when a conflict of interest occurs, it may either be settled through litigation or be referred for arbitration.
Some international treaties and conventions are concerned with the protection of property such as patents, trademarks, models and the like, in foreign countries. Some international laws have provisions for the encouragement of both worldwide economic cooperation and prosperity and standardization of international products& processes.
If a legal conflict occurs between parties from different countries, one way of resolving it is through arbitration. A number of organizations are available for arbitration of disputes: the international center for investment disputes, the international chamber of commerce etc;
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Chapter -7 The Cultural Environments of Global Markets
Objectives At the end of this chapter , students are expected to: Define culture and its basic features/ characteristics Explores the overall Influence of culture on consumption, thinking & communication process Identifies cultural universals to be observed by an international marketer Distinguishes the significant contributions of verbal and nonverbal communications. Introduction This Chapter has five sections (sub-titles). The first section deals with the characteristics of culture. The second section gives insights to Influence of culture on consumption, thinking & communication process. The third section discusses cultural universe. The fourth section assesses the Communication through verbal Language. The Fifth focuses on relevance and importance of Communication through Nonverbal Language
3.1
Nature & Characteristics Of Culture
Culture is an inclusive term that can be conceptualized in many different ways. Culture is a set of traditional beliefs and values that are transmitted and shared in a given society. Culture is also the total way of life and thinking patterns that are passed from generation to generation. Culture means many things to many people because the concept encompasses norms, values, customs, art, and mores. Characteristics of Culture 1. Culture is prescriptive. It prescribes the kinds of behavior considered acceptable in the society. The prescriptive characteristics of culture simplify a consumers decision making process by limiting product choices to those which are socially
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acceptable. It creates problems for those products not in tune with the consumers cultural beliefs. 2. Culture is socially shared. Culture, out of necessity, must be based on social interaction and creation. It cannot exist by itself. It must be shared by members of a society, thus acting to reinforce cultures prescriptive nature. Example: Chinese parents at one time shared the preference of wanting their girl children to have small feet. Large feet, was viewed as characteristics of peasants and low class people and were scorned. 3. Culture facilitates communication: culture usually imposes common habits of thought and feeling among people. Thus, within a given group culture makes it easier for people to communicate with one another. Culture may also impede communication across groups because of a lack of shared common cultural values. Advertising and promotion require special attention because they play a key role in communicating product concepts and benefits to the target segment. 4. Culture is learned: culture is not inherited genetically. It may be learned and acquired. Socialization or enculturation occurs when a person absorbs or learns the culture in which he /she is raised. In contrast, if a person learns the culture of a society other than the one in which he or she is raised, the process of acculturation occurs. Asian countries are complaining bitterly, about how their cultures are being contaminated by rock-and-roll music and western sexual & social permissiveness. South Korea has been unsuccessful in banning rock-androll music, as was the former Soviet Union. 5. Culture is subjective: people in different cultures often have different ideas about the same object. What is acceptable in one culture may not necessarily be so in another. In this regard, culture is both unique and arbitrary. As a result, the same phenomenon appearing in different cultures can be interpreted in every different manner. It is customary in many cultures for a bridegrooms family to offer a dowry to a brides family, either for the brides future security or to compensate her family for raising her.
6. Culture is enduring: Culture is shared and passed from generation to generation. It is relatively stable and somewhat permanent. Old habits are hard to break, and a people tend to maintain its own heritage in spite of a continuously changing world. The Chinese view a large family as a blessing and assume that children will take care of parents when grown old. They also have a great desire to have sons in order to preserve their family name. The modern Chinese Governments mandate of one child per family has resulted in numerous deaths of firstborn daughters. 7. Culture is dynamic: culture is passed along from generation to generation, but one should not assume that culture is static & immune to change. Culture is constantly changing-it adapts itself to new situations and new sources of Knowledge. Japanese tastes, have been changing from a diet of fish and rice to an accommodation of meat and dairy products.
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3.2 Influence of culture on consumption patterns Consumption patterns, living styles, and the priority of needs are all dictated by culture. Culture prescribes the manner in which people satisfy their desires. The consumption of beef is a good illustration. Some Thai and Chinese do not consume beef at all, believing that it is improper to eat cattle that work on farms. In Japan , the per capita annual consumption of beef has increased to 11 pounds , still a very small amount when compared to more than 100 pounds consumed per capita in the US and Argentina. Food preparation methods are also dictated by culture preferences. Asian consumers prefer their chicken broiled or boiled rather than fried. Consequently, the Chineses in Hong Kong found American style fried chicken foreign & distasteful. Not only does culture influence what is to be consumed, but it also affects what should not be purchased. Muslims do not purchase chickens unless they have been halalled, and like Jews, no consumption of pork is allowed. They also do not smoke or use alcoholic beverages, a habit shared by some strict Protestants. The marketing challenge is to create a product that fits a particular culture. Moussy , a nonalcoholic beer from Switzerland , is a product that was seen as being able to overcome the religious restriction of consuming alcoholic beverages.(this product is successful in Saudi Arabia) Dimensions of Culture, a Synthesis Information-oriented (IO) and relationship oriented (RO) cultural dimensions can be contrasted as follows.
s/n 1. 2. 3. 4.
Information-oriented( IO) Low context Individualism Lower power distance Bribery less common
Relationship oriented (RO) High context Collectivism High power distance(including gender) Bribery more common Page 109

5. 6. 7. 8. 9. 10. Low distance from English Linguistic directness Monochromic time(M-time) Internet Foreground Competition High distance from English Linguistic indirectness Polychromic time (P-time) Face-to-face Background Reduce transaction costs
Note: Note every culture fits every dimensions of culture in a precise way.
For example:
1) America
American culture is a low context, individualistic, low-power distance, obviously close to English, bribery is less common, monochromic time oriented, linguistically direct, fore-ground focused, and its business system uses competition.
2) Japan
Japanese culture is a high - context, collectivistic, high-power distance, far from English, bribery is more common, polychromic (in part), linguistically indirect, background-focused, its business system uses reduction of transaction costs. Influence of culture on communication process A country can be classified as a high context culture or a low-context culture. This classification provides an understanding various cultural orientations and explains how communication is conveyed and perceived. Low - context cultures: North America and Northern Europe (Germany, Switzerland, and Scandinavian countries) are low -context cultures. In these types of society, messages are explicit and clear in the sense that actual words are used to convey the main part of information in communication. The words and their meanings, being independent entities, can be separated from the context in which they occur. What is important, then, is what is said, not how it is said and not in the environment within which it is said. Addis Ababa university School Of Commerce Page 110

High - context cultures Japan, France, Spain, Italy, Asia, Africa, and the Middle Eastern Arab nations, in contrast are high-context cultures. In such cultures, the communication may be indirect, and the expressive manner in which the message is delivered becomes critical. Because of the verbal or words part do not carry most of the information, much of the information is contained in the non-verbal part of the message to be communicated. The context of communication is high because it includes a great deal of additional information, such as the message senders values, position, background, and associations in the society. As such the message cannot be understood without its context.
Monochromic vs. polychromic cultures According to Hall, cultures also vary in manner by which information processing occurs. There are two types information processing: Monochromic and polychromic. Monochromic cultures Some cultures handle information in a direct, linear fashion and are thus, monochromic in nature. Schedules, punctuality, and a sense that time forms a purposeful straight line are indicators of such cultures. Being Monochromic however is a matter of degree. Although the Germans, Swiss, and Americans are all monochromic cultures, The Americans are generally more monochromic than most other societies, and their fast tempo and demand for instant responses are often viewed as pushy and impatient. Polychromic cultures In this type of culture people work on several fronts simultaneously instead of pursuing a single task. Both Japanese and Hispanic cultures are good examples of polychromic cultures. The Japanese are often misunderstood and accused by westerners of not volunteering detailed information. The truth of the matter is that the Japanese do not want to be too direct because by saying things directly they may be perceived as being insensitive and offensive. The Japanese are also not comfortable in getting right down to substantive business without first becoming familiar with the other business party. For them, it is premature to discuss business matters seriously without first establishing a personal relationship.
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Cultural universals The failure to consider cultural universals results in a tendency to overemphasize cultural differences. As human beings , regardless of race or religion , all have similar basic needs, it is reasonable certain needs transcend national boundaries.( people everywhere have a love for music and a need for fun) Because of the universality of basic desires, some products can be marketed overseas with little modifications. The need to have fun, for instance, makes it natural for people everywhere to accept video games. The homogeneous desire for beauty and diamonds make s it possible to promote diamonds in basically the same way worldwide. Music is a cultural, but it does not mean the same kind of music is acceptable everywhere. Because musical tastes are not internationally uniform the type of music used must be varied to appeal to a particular country. Some cultural values remain unchanged over time. For products appealing to generic values certain successful products need not be changed. In spite of the changing environment. Such is the case of Readers digests extraordinary success for more than three-quarters of a century. Readers Digest Magazine, founded in 1922, and has maintained a bland, low brow editorial formula. It continues to tell the world that laughter is the best medicine, that difficulties can be overcome, and that the world is a good though not perfect, place. It provides people with sprit lifting stories. It is evidenced that some 100 million people read the magazines 47 editions in 19 languages. It success should remind marketers that, cultural values may be constantly shifting, there are basic or generic values that are universal and constant. Communication through verbal languages Language is a significant part of culture, and communication is impossible without it. The problem is that there are more than 5, 000 spoken languages. Indonesia alone has 250 languages. In china, even though the written language is uniform, there are hundreds of local dialects.
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Unlike English language, which is relatively straightforward, many languages are quite subtle. The Italian language allows several different ways of addressing someone that shows a speakers position and feelings. Likewise, the Japaneses language has literary and conversational styles, male and female styles, young and old styles, and various degrees of politeness. A marketer must be careful even when the same language is used in two or more markets, such as Great Britain and USA. For example, The Americans use apartment and elevator while the British use Flat and lift. People Use subways in New York but they use underground in London. A billion is a thousand million to the Americans but a million million to the Britons. The spelling may vary, even when the same word with the same meaning is used: Color and theater are used in the USA, whereas color and theater are used in Great Brittan. Safe rules of thumb in international communication are: When in doubt , over punctuate Keep ideas separate , making only one point at a time Confirm discussion in writing Write down all figures using the style of the person you are talking too. Adjust your English to the level your foreign counterpart Use visual aids whenever possible Avoid technical, sports, and business jargon. To put it another way, speak to the rest of the world as if you were
answering a slightly deaf, very rich old auntie who just asked you how much to leave you in her will.
Communication through Non-verbal language People do not always communicate solely through the spoken or written word knowingly or not, people routinely communicate with one another in a non-verbal manner. Body language includes movement, appearance, dress, facial expressions, gestures, posture, use of silence, use of touch, timing, distance between speakers and listeners, physical surroundings, tone, and rhythm of speech.
In a popular and often quoted article the silent language in overseas business, Edward T. Hall explains that there is a need to appreciate cultural differences in matters concerning the following: Addis Ababa university School Of Commerce Page 113

1. Language of time
Time has different meanings in different countries. An American and an Asian do not mean the same thing when they say: why dont you come over sometime? In the United States, the statement takes a formal tone, implying that advance notice should be given if the visit is to take place. For an Asian the meaning is exactly what is said-drop in any time without any appointment, regardless of how early or late it may be in the day. Time is cultural, subjective and variable. For example: Time is money. (USA) Those who rush arrive first at the grave. (Spain) The clock didnt invent man. (Nigeria) If you wait long enough, even an egg will walk. ( Ethiopia) Before the time, it is not yet the time, after the time it is too late. ( France) Perception of time is culture bound, and three different perceptions can be identified:
a) Linear-separable time : is common in most European and north American cultures, time is linear in the sense that it has a past , present, and future. Therefore, time is valuable time spent in the past will make some contribution to the future. Linear cultures tend to use reasoned arguments, visual information, and a credible source that addresses viewers directly b) Circular traditional time: life is supposed to follow a cycle, and the future thus cannot be altered. As a result, the future is seen as the past repeated and there is no need to plan because time is not valuable. Advertising cultures with a non-linear perception of time appear to provide scattered and symbolic information without explicit conclusion, and it takes the form of a dramalecture. c) Procedural-traditional time: the activity or procedure is more relevant than the amount of time spent on it. Time and money are separate, and earnings are determined by task rather than time. When one activity ends, the next one can start.
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Americans tend to value time highly-both work time and leisure time- because time is money. Time takes a more leisurely walk in many non-western societies, where people have ample time and see no need why any situation should be urgent. Latin Americans are usually late, while Swedish people are very prompt. Any generalization about punctuality is risky. Asians, for instance, tend not to be punctual, but the Chinese observe strict punctuality for social occasions and appointments. 2. Language of space Space has its own special meaning. Difficulty of communicating severely increases when the distance between the receiver and the sender of a message is great. Space has implication for personal selling. Latin Americans are comfortable .with just a few inches of distance and no physical contact. For Americans, a comfortable distance is something in between those extremes. 3. Language of agreement Americans are both specific and explicit in terms of agreement, making legal contracts common and indispensable. Not surprisingly, lawyers become partners in virtually all business deals. Culture dictates how a disagreement is expressed & resolved. North Americans generally prefer a straight forward approach. Elsewhere, one must be careful in a disagreement never to make someone else lose face. Asians, in particular, are sensitive to affronts and can become violent when loss face results. Public humiliation criticism must thus be avoided in Asia where politeness is valued over blunt truth. Asian cultures do not teach workers to argue point-blank with immediate supervisors. 4. Language of friendship Americans have the unique characteristics of being friendly, even at first meeting. Americans seem to have no difficulty in developing friendship in a very short time and this trait is carried over into business relationship. American business persons are impatient to develop the deep personal ties that are critical overseas.
Quite often, it is necessary for potential business partners to become friends first before business is transacted. In china, the Chinese dine together before talking business, unlike the US approach of talking business before having a meal together if things go well. Likewise, business is a personal matter in turkey where the idea is Let us make friends first and then see if we conduct business.
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The manner of addressing a friend can differ depending on the person being addressed, whether a college, a business acquaintance, or a customer. The quick friendship characteristics of the United States prompt Americans to use first names in social as well as business encounters soon after a first meeting. The American practice of using first names can be very offensive in other countries, where formality and respect are strongly established traditions. Addressing someone by a first name is not common outside of the western hemisphere , unless the first name is accompanied by the proper pronoun or adjective (Mr. or Mrs.). It is thus, very important for a businessperson to remember to address foreign counterparts with formal pronouns unless or until being asked to do something else. A formal last-name approach is used in Europe. When one can switch to first names?
In Australia and in Venezuela the proper waiting time could be 5 minutes; in Argentina, Germany, and France one year; in Switzerland 3 years; and in Japan a decade. 5. Language of Negotiation Negotiation styles vary greatly; Hispanic businesspeople are surprised by Anglos resistance to bargaining. In United States, a lack of eye contact is usually viewed as indication that something is not quite right. But the cultural style of communication negotiation in Japan requires a great deal less eye contact between speakers. Furthermore, in Japan periods of silence are common during interactions, and a response of silence should not come as a surprise. Americans should learn to be more comfortable with this negotiating tactic, instead of reacting by quickly offering either more concessions or new arguments. Americans straightforward style may prove a handicap in business negotiations. Chinese negotiations are generally tough-minded, well-prepared, and under no significant time constraints. They are prepared to use various tactics to secure the best deal. In china, foreigners should expect repetitions and time-consuming negotiations. 6. Language of religion In search of spiritual guidance, people turn to religion. The major religions are familiar to everyone. In some parts of the world, animism (the belief in existence of such things as souls, spirits, demons, magic, and witch craft) may be considered a form of religion.
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Religion affects people in many ways because it prescribes proper behavior, including work habits. The protestant work ethic encourages Christians to glorify God by working hard and being thrifty. Thus, many Europeans and Americans believe that work is a moral virtue and disapprove of the idle. Likewise, Islam exalts work, and idleness is seen as a sign of persons lack of faith in the religion. In contrast, Hinduism and Buddhism, the emphasis is on the elimination of desires because desires cause worrying. No striving brings peace, and a person at peace does not suffer.
Marketers must pay attention to religious activities, Buddhists observe the days associated with the birth and death of Buddha and, to a lesser extent, those days of full moon, half moon, and no moon. The entire month of Ramadan is a religious holyday for Muslims, who fast from dawn to dusk each day during that month. Therefore workers must use part of the normal sleeping time for eating. Furthermore Muslims pray five times a day, and they stop all work to do so. 7. Language of superstition
In the modern world it is easy to dismiss superstition as nonsense. Yet superstitious beliefs play a critical role in explaining personal as well as business behavior in all parts of the world. In Asia, fortune telling, palm reading, dream analysis and interpretations, phases of the moon, birthdates and handwriting analysis, communication with Ghosts, and many other beliefs are parts of everyday life. Physical appearance is often used to judge a persons character. Some westerners may be amused to see foreigners take superstition so seriously. They may not put much credence in animal sacrifices or other ceremonial means used to get rid of evil spirits. But they should realize that their own beliefs and superstitions are just as silly when viewed by foreigners.
Americans Knock on wood, cross their fingers, and feel uneasy when a black cat crosses their path. They do not want to walk under ladders and may be extra careful on Friday the 13th. While the practice may not have scientific value, it does give owners and drivers peace of mind. Instead of belittling or making fun of superstition, one is prudent to show respect for local customs and beliefs. A show of respect will go a long way in gaining friendship and cooperation from local people.
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8. Language of color Flowers and colors have their own language and meaning. Preferences for particular colors are determined by culture. Because of custom and taboo, some colors are viewed negatively. A color deemed positive and acceptable in one culture can be inappropriate in another. According to FTD and inter-flora inc. which send flowers by wire to some 140 countries, the color red is used to cast spells in Mexico, and white bouquet is necessary to lift the spell. In Spain, red roses are associated more with lust than love. In France, a dozen as well as thirteen yellow roses are inappropriate: Yellow suggests infidelity, and cut flowers by the dozen or any other even number are unlucky. A bouquet of 13 is also inappropriate in Latin America, where yellow is associated with death rather than infidelity. In Italy roses serves as tokens of affection when they are sent in odd numbers to women. In Japan, on the other hand men are on the receiving end of Valentines Day. Swiss women do not want flowers with strong scents. To Swedish women, a cactus signals the end of a romance. Other than flowers colors have their own special meanings. Yellow is associated with disease in Africa White is an appropriate color for a wedding gown in the USA, yet white is used alternatively with black for mourning in India, Hong Kong, and Japan. Americans see red when they are angry, but red is a lucky color for the Chinese. It is customary for the Chinese to put money in red envelopes as gifts for employees and children on special occasions, especially on the Chinese New year Day. Marketing managers should be careful in using certain colors with their products, because using the wrong color can make or break a deal. A manufacturer of medical systems lost a large order for CAT (Computerized axial topography) scanners in one Middle East country because of the whiteness of the equipment. Parkers white pens did not fare well in china, where white is the color of mourning. Green pens suffered the same fate in India, where green is associated with bad luck.
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9. Language of Gifts Cultural attitude concerning the presentation of gifts vary greatly across the Globe. Because of varying perceptions of gifts and their appropriateness, good intention can turn into surprises and even embarrassment when particular gifts violate cultural beliefs. Apparel is not commonly given in the United Kingdom, where it is considered too personal a gift, or in Russia, where it is considered a bribe. In France, Russia, Germany, Taiwan, and Thailand, Giving a knife as a gift is inappropriate because it may, cut or wound a friendship. Handkerchiefs should never be given in Thailand, Italy, Venezuelan, and Brazil because such a gift is akin to wishing a tragedy upon the recipient, implying that something distressful will happen in the near future which will necessitate the use of a handkerchief to wipe away the tears. Prudence requires one not to give potted plants for the sick in Japan because the illness may become more severe by taking deeper root. Therefore, a cardinal rule in international gift giving is that, when in doubt, one should study closely the customs of the society. Subculture A subculture is a distinct and identifiable cultural group that has values in common with the overall society but also has certain characteristics that are unique to itself. Thus subcultures are groups of people within a larger society. Although the various subcultures share some basic traits of the wider culture, they also preserve their own customs and lifestyles, making them significantly different from other groups within the larger culture of which they are a part. Intra-country Homogeneity Indonesia has more than 300 ethnic groups with lifestyles and cultures that seem thousands of years apart. In the case of Japan, the society as a whole is remarkably homogeneous. Although some regional and racial diversities as well as differences among income classes are to be found, the differentials are not pronounced. There are several reasons why Japan is relatively a homogeneous country. It is a small country in terms of area making its population geographically concentrated. National pride and management philosophy also help forge a high degree of unity. As a result people work hard together harmoniously to achieve the same common goals. The need to work together was initially fostered by the need to repair the economy after World War II, and the lessons learned from this expense have not been forgotten. Addis Ababa university School Of Commerce Page 119

Canada, in contrast, is a larger country in terms of geography. Its population, though much smaller than that of Japan, is more geographically dispersed and regional differences exist among the provinces, each having its own unique characteristics. Furthermore, ethnic differences are clearly visible to anyone who travels across Canada. Canadas social environment makes it possible for ethnic groups to be active members of the Canadian society while having the freedom to pursue their own native customs. The environment thus accommodates what is known as Ethnic pluralism Canadians not only tolerate but even encourage diversity in ethnic customs. Ethnically speaking, two prominent subcultures emerge: English - speaking and French-speaking. Studies have repeatedly shown that the French speaking and Englishspeaking households differ from each other significantly in terms of demographics, subculture, and consumption habits. French-Canadians consumer behavior is a cross between that of North American and that of the continental French. Quebecers are more direct, less dramatic, and less formal, Compared to other English Canadians, Quebecers move far less often and thus have far less need to make long distance phone calls to relatives and friends. Subcultures may provide an effective basis for market segmentation. In the case of the United States, African Americans, Hispanic Americans and Asian Americans spend $ 750 billion annually and deserve marketing attention. Business customs Business customs can be grouped into three as discussed below. 1. Cultural imperatives These are business customs and expectations that must be met and conformed to/accommodated or avoided, if relationships are to be successful. There is no substitute for establishing friendship in some cultures before effective business negotiations can begin. Example: it is never acceptable to lose your patience, raise your voice, or correct someone in public, no matter how frustrating the situation. In china, to raise your voice, to shout at a Chinese in public, or to correct them in front of their peers causes them to loss face. 2. Cultural electives
These are customs to which adaptation is helpful, but not necessary. It is related to areas of behavior or to customs that cultural aliens may wish to conform to or participate in but that are not required. Addis Ababa university School Of Commerce Page 120

The majority of customs fit into this category. One need not greet another man with a kiss-a custom in some countries, eat foods that disagree with the digestive system-so long as the refusal is gracious or drink alcoholic beverages if for health, personal or religious reasons. For example, in some cultures one can accept or tactfully and politely reject an offer of a beverage, while in other cases the offer of a beverage is a special ritual and to refuse it is an insult. In Czech Republic an aperitif or other liqueur offered at the beginning of business meeting, even in the mourning, is a way to establish good will and trust. 3. Cultural exclusives Business customs in which an outsider must not participate. Customs or behavior patterns reserved exclusively for the locals and from which the foreigner is barred. For example, a Christian attempting to act like a Muslim would be repugnant to a follower of Mohammed. Equally offensive is a foreigner criticizing or joking about a countrys politics, mores, and peculiarities peculiar to the foreigner even though locals may among themselves, criticize such issues. There is truth in the old adage, I will curse my brother, but if you curse him, youll have a fight. Cultural Adaptation As a guide to adaptation, there are ten basic criteria that all who wish to deal with individuals, firms, or authorities in foreign countries should be able to meet. open tolerance flexibility humility justice/ fairness ability to adjust to varying tempos curiosity or interest Knowledge of the country liking for others ability to command respect and Ability to integrate oneself into the environment In short, add the quality of adaptability to the qualities of the good executives for a composite of the successful international marketer. Social Institutions Social institutions including family, religion, school, the media, government and corporations all affect the ways in which people relate to one another, organize
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their activities to live in harmony with one another, teach acceptable behavior to succeeding generations and govern themselves. 1) Family: Its forms and functions vary substantially around the world, even around the country. For example, individualism is learned the first night an American infant is tucked into her own separate bassinettes. Values for egalitarianism are learned the first time Dad washes the dishes in front of the kids or Mom heads off to work or the toddler learns that both Grandpa and little brother are properly called you. 2) Religion In most cultures the first social institutions infants are exposed to outside the home takes the form of a church, mosque, shrine, or temple. The impact of religion on the value systems of society and the effect of value systems on marketing must not be underestimated. For example Protestants believe that ones relationship with God is a personal one, and confessions are made directly through prayers. Alternatively, Catholics confess to priests, setting up a hierarchy within the church. There are between 800 million and 1.2 billion people in the world who embrace Islam, yet major multinational companies often offend Muslims. The French fashion house of Chanel unwittingly desecrated the Koran by embroidering verses from the sacred book of Islam on several dresses shown in the summer collections. Chanel certainly had no intention of offending Muslims because some of its most important customers embrace Islam.( The designer may not be familiar with other religions) 3) School Education affects all aspects of the culture, from economic development to consumer behavior. The literacy rate of a country is a potent force in economic development Numerous studies indicate a direct link between the literacy rate of a country and its capability for rapid economic growth. According to the World Bank, no country has been successful economically with less than 50% literacy. It is also easier to communicate with a literate market than to one in which the marketer has to depend on symbols and pictures to communicate. 4) The Media Media time and increasingly the internet have replaced family time. American kids spend only 180 days per year in school. Contrast that with 251 days in china, 240 days in Japan, and 200 days in Germany. Indeed, Chinese officials are recognizing the national disadvantage of too much school-narrow minds.
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Likewise, Americans more and more complain about the detrimental effects of too much media. 5) Government Most often governments try to influence the thinking and behavior of their citizens for the citizens own good. For example, the French governments have been urging to procreate since the time of the Napoleon. Now they are offering a new birth bonus of $ 800 given to women in their 7th month of pregnancy this despite France having the 2nd highest fertility rate in the EU behind only Ireland. Governments affect ways of thinking indirectly, their support of religious organizations and schools. Governments also influence thinking and behavior through the passage, promulgation, promotion, and enforcement of a variety of laws affecting consumption and marketing behaviors. The Irish Government is newly concerned about its citizens consumption of Guinness and other alcohol products which costs the country 2 % of its GDP. 6) Corporations Most innovations are introduced to societies by companies (Mostly by MNCs). Indeed, merchants and traders throughout history were the primary conduit for the diffusion of innovations, whether it is over the Silk road via todays air freight and /or the internet. Through the efficient distribution of new products and services based on these new ideas, cultures are changed and new ways of thinking are stimulated. Companies are change agents. Elements of Culture The five main elements: values, rituals, symbols, beliefs and thought processes. International marketers must design products, distribution systems and promotional programs with due consideration of each of the five elements. 1) Cultural values Studying more than 90, 000 people in66 countries, Geert Hofstede found cultures of nations studied differed along 4 primary dimensions. The four dimensions are a) Individualism/collectivism index (IDV): it refers to the preference for behavior that promotes ones self-interest. Cultures that scores high on IDV reflect an I mentality and tend to reward and accept individual initiative, whereas those low in
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individualism reflect a we mentality and generally subjugate the individual to the group. Individualism pertains to societies in which the ties between individuals are loose; everyone is expected to look after himself or herself and his or her immediate family. Collectivism pertains to societies in which people from birth onward are integrated into strong, cohesive groups, which throughout peoples life times continue in exchange for unquestioning loyalty. Power distance index (PDI) It measures the tolerance of social inequality, i.e. power inequality between superiors and subordinates within a social system. Cultures with high PDI scores tend to be hierarchical, with members citing social role, manipulation, and inheritance as sources of power and social status. Those with low scores, on the other hand, tend to value equality and cite knowledge and respect as sources of power. A low score reflects more egalitarian views. c) Uncertainty avoidance index (UAI) It measures the tolerance of uncertainty and ambiguity among members of society. Cultures with high UAI scores are highly intolerant of ambiguity and as a result tend to be distrustful of new ideas or behavior. They tend to have a high level of anxiety and stress and a concern with security and rule following. Cultures scoring low in uncertainty avoidance are associated with a low level of anxiety and stress, a tolerance of deviance and dissent, and a willingness to take risks. d) Masculinity and femininity index (MAS) Masculinity is having qualities regarded as characteristics of men and boys, as strength, vigor, boldness etc; mainly, virile. Femininity , on the other hand, is having qualities regarded as characteristics of women and girls, as gentleness , weakness, delicacy, modesty, womanly etc; It is not pertinent to discuss it here. Cultures values and consumer behavior In both Japan and France, where values favor group activities, face-toface conversions with stockbrokers and neighbors might be preferred to impersonal electronic communications. Perhaps the most interesting application of cultural values and consumer behavior regards a pair of experiments done with American and Chinese students.
b)
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Both groups were shown print ads using other focused emotional appeals- couples pictured having fun on the beach versus selffocused emotional appeals-an individual fun on the beach. The researchers predicted that the individualistic Americans would respond more favorably to the self-focused appeals, and the collectivistic Chinese to the other-focused appeals. 2) Rituals Means a practice, service or ceremonial forms or procedures done as rite especially at regular intervals. Rite is a ceremonial or formal solemn act observance or procedure in accordance with prescribed rule or custom, as in religious use. Life is filled with rituals, or patterns of behavior and interaction that are learned and repeated. The most obvious rituals are associated with major events in life. Very often these rituals differ across cultures. For example Marriage and funerals. Perhaps, best is the monsoon wedding, grooms on white horses and edible flowers are apparently part of the ceremony for high-income folks in New Delhi. Little rituals includes dinner at a restaurant, or a visit to a department store, or even grooming before heading off to work or class in the morning. Walking into the department store in the USA often yields a search for an employee to answer questions. It is not so in Japan where the help bows at the door you walk in. Rituals are important because they coordinate everyday interactions and special occasions. 3) Symbols Learning to correctly interpret the symbols that surround us is the key part of socialization. This learning begins immediately after birth as we begin to hear the language spoken and see the facial expressions and feel the touch and taste of the milk of our mothers. For examples languages are expressed in symbols. Language: The relationship between language and international marketing is related to the concept called linguistic distance. Linguistic distance is an important factor that determines the amount of trade between countries. The idea is that crossing wider language differences increases transaction costs. For example, Spanish, Italian, French, and Portuguese are all classified as romance languages because of their common roots in Latin. Distance can be measured on these linguistic trees. Addis Ababa university School Of Commerce Page 125
a)

If we assume English to be the starting point, German is one branch away, Danish two, Spanish three , Japans four, Hebrew five, Chinese six, and Thai seven. For example, tea cups are sold in sets of Five in Japan not in four because the word shi is also the Japanese word for death. b) Aesthetic as symbols Without a culturally correct interpretation of a countrys aesthetic values, a whole host marketing problems can arise. Product styling must be aesthetically pleasing to be successful, as must advertisements and packaging designs. Insensitive to aesthetic values can offend, create a negative impression, and generally render marketing ineffective. Strong symbolic meanings may be overlooked if one is not familiar with cultures aesthetic values. Wonderful symbolic systems represented in aesthetics are the arts, folklore, music, drama, and dance. 4) Beliefs Much of what we learn to believe comes from religious training For example, in parts Asia, ghosts, fortune telling, palmistry, blood types, head-bump reading, phases of the moon, faith healers, demons, and soothsayers can all be integral elements of society. It is a mistake to discount the importance of myths, beliefs , superstitions, or other cultural beliefs , however, strange may appear, because they are an important part of cultural fabric of a society and influence all manner of behavior. For the marketer, it can be expensive mistake to make light of superstitions in other cultures when doing business there. 5) Thought processes Richard Nesbit, in his wonderful book, the geography of thought broadly discusses differences in Asian and western thinking. Asians tend to see the whole pictures and can report details about the background and foreground Westerners alternatively focus on the foreground and can provide great detail about central figures, but see almost nothing in the background. This difference in perception-focus versus big picture-is associated with a wide variety of differences in values, preferences, and expectations about future events.
Conclusion:
Each of the five cultural elements must be evaluated in light of how they might affect a proposed marketing program.
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Newer products and services and more extensive programs involving the entire cycle from product development through promotion to final selling require greater consideration of cultural factors. Moreover, the separate origins and elements of culture presented interact, often in synergistic ways. Therefore, the marketer must also take a step back and consider larger cultural consequences of marketing consequences.
Cultural Knowledge
There are two kinds of knowledge about cultures. a) Factual Knowledge: It is part of culture that is obviously learned. Different meanings of colors, different tastes, and other traits indigenous to a culture are facts that a marketer can anticipate study and absorb. b) Interpretive knowledge: Interpretive knowledge is an ability to understand and to appreciate fully the nuances of different cultural traits and patterns. For example, the meaning of time, attitude toward other people and certain objects , the understanding of ones role in society , and the meanings of life can differ considerably from one culture to another and may require more than factual knowledge to be fully appreciated . Cultural sensitivity and tolerance It is concerned with being attuned to the nuances of culture so that a new culture can be viewed objectively, evaluated, and appreciated. Cultural sensitivity or cultural empathy must be carefully cultivated. The recognition that cultures are not right or wrong, better or worse; they are simply different. For every amusing, annoying, or repulsive cultural traits we find in a country, there is a similarly amusing, annoying, or repulsive trait others see in our culture. For example, we bath, perfume and deodorize our bodies in daily rituals that are seen in many cultures as compulsive, while we become annoyed with those cultures less concerned with natural body orders. Just because a culture is different does not make it wrong. Marketers must understand how there own cultures influence their assumptions about another culture. The more exotic the situation, the more sensitive, tolerant, and flexible one need to be. Cultural change Addis Ababa university School Of Commerce Page 127

Culture is a dynamic in nature; it is a living process. More commonly, change is a result of a society seeking ways to solve the problems created by changes in its environment. Culture is the accumulation of a series of the best solutions to problems faced in common by members of a given society. Culture is the means used in adjusting to the environment al and historical components of human existence. Accident has provided solutions to some problems; an invention has solved many others. However, societies usually have found answers by looking to other cultures from which they can borrow ideas. Cultural borrowing is a responsible effort to learn from others cultural ways in the quest for better solutions to a societys particular problems. Although each society has a few truly unique situations facing it such as stomach cancer in Japan, most problems confronting all societies are similar in nature. Resistance to culture A characteristic of human culture is that change occurs. The peoples habits, tastes, styles, behavior, and values are not constant but are continually changing can be verified by reading 20 year old magazines. However, this gradual cultural growth does not occur without some resistance; new methods, ideas, and products are considered suspect, before they are accepted, if ever. For example, the resistance to genetically modified (GM) food some call it Frank food. European ethnocentrism certainly entered into the equation early- they protested in the streets about the introduction of products such as tomatoes genetically designed to ripen slowly. Planned and unplanned change a) Planned change: The steps in a planned change in a society are 1. To determine which cultural factors conflict with an innovation, thus creating resistance to its acceptance. 2. To make an effort to change those factors from obstacles into stimulants for change( gaining acceptance for hybrid grains, better sanitations methods, improved farming methods , improving farming techniques, or protein rich diets among the peoples of underdeveloped societies) can be adopted by marketers to achieve marketing goals. Addis Ababa university School Of Commerce Page 128

3. To deliberately set out to change those aspects of the culture offering resistance to predetermined marketing goals. Marketers have two options when introducing an innovation to a culture: They can wait: hopeful waiting for eventual cultural changes that prove their innovations to be of value to the culture ii) They can cause a change: involves introducing an idea or product and deliberately setting about to overcome resistance and to cause change that accelerates the rate of acceptance. b) Unplanned change Involves with introducing the product and hope for the best. Consider how the Japanese diet has changed since the introduction of milk and bread soon after World War II. Most Japanese, who were predominantly fish eaters, have increased their intake of animal fat and protein to the point that fat and protein now exceed vegetable intake. The westernized diet has caused many Japanese to become overweight. To counter this, the Japanese are buying low calories, low-fat foods to help shed excess weight are flocking to health clubs. American Hamburgers are replacing many Japanese traditional foods. i)
Cultural congruence In fact, much successful and highly competitive marketing is accomplished by a strategy of cultural congruence. Essentially this involves marketing products similar to ones already on the market in a manner as congruent as possible with existing cultural norms, thereby minimizing resistance. 2.6 Summary
The cultural traits of a country have a profound effect on peoples lifestyle and behavior patterns and these are reflected in the market place. Culture is a complex term, and its precise definition is difficult. Broadly defined, it refers to all learned behavior of all facets of life and living transmitted from generation to generation. Cultural differences among countries can be striking or subtle and should be zealously examined by the international marketer. The study of culture includes material life- the means and artifacts people use for livelihood ; social interactions between individuals and groups in formal and informal situations; language spoken/written words, symbols,and physical expressions that people use to communicate ; aesthetics-art, drama music; religion and faith; pride and prejudices; and ethics and mores. Cultural traits account for such differences among nations as color preferences, concepts of time, and authority patterns. Addis Ababa university School Of Commerce Page 129

Cultural differences have impact on marketing decision regarding product, price, distribution, and promotion. One framework for analyzing culture is provided by Engels questions used to seek information on the cultural differences of national societies. To conduct business successfully across national boundaries, marketers must adapt their products and promotion to local cultures. A four-step process for facilitating cultural adaptations guides the international marketer to avoid the influence of selfreference criterion(SRC).The tendency toward SRC reinforces the idea that what is good at home is good and relevant anywhere else as well. This type of thinking poses a big stumbling block to cultural adaptation. A discussion of culture must also deal with cultural change. Cultures do change, though change is usually slow. Industrialization is an important factor behind cultural change. MNCs through involvement in the industrialization process serve as a change agent in foreign cultures. Cultural change also takes place as a result of advertising media and the internationalization of business education.
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Chapter- 8 Market Analysis & and Foreign Market Entry Strategies
Objectives At the end of this chapter, students are expected to: Describe the various variables that need to be considered in market analysis. Undertake a preliminary country analysis overseas market Identify alternative strategies to enter into a foreign market along with inherent benefits and limitations. Explore the relevance and importance of Free trade Zones established in different countries Introduction This Chapter has four sections (sub-titles). The first section deals with relevant variables to be considered in market analysis of an international business environment. The second section gives insights to issues that need to be considered in a preliminary country analysis to enter into a host country. The third section discusses alternative overseas market entry strategies. The fourth section assesses the Free trade Zone areas in international Trade and their relevance for entering into an overseas market. 4.1 Market Analysis Marketing opportunities exist in all countries regardless of the level of economic development. In assessing market opportunities, there is no single ideal criterion. A marketer must therefore employ a set of criteria that is relevant to the market opportunity under consideration. Economic variables that should be considered include GNP, population, GNP/capital, Income, and personal consumption. 1. Gross National product (GNP): is a measure of the value all the goods and before entering an
services produced by a nation. As such, GNP in effect measures the size of the economy. GNP range from a mere $140 million for the Maldives to $6.4 Trillion Addis Ababa university School Of Commerce Page 131

for the United States. Although a higher GNP is generally regarded as an indicator of a better market, GNP alone does not accurately reflect market potential. Indias GNP of 1.7 Trillion is much higher than Austrias $134 billion, yet the larger number doesnt necessarily mean that India is a better market.
By dividing a countrys GNP by its population, the result achieved is the GNP/capita, which measures market intensity. This figure can help a company establish country priorities since it is a measure of the richness of a market. Degree of concentrated purchasing power. A country with a higher GNP/capita generally has a more advanced economy than a country with a lower figure. In the case of Austria and India a $17,000 GNP/capita is much more attractive in terms of wealth than India, whose GNP/capita is only $ 1,300. 2. Size of a countrys population: On this score china is the foremost market
because its population exceeds 1 billion. Because of Chinas strict birth control program, there is a chance that in the future India May take this distinction away from China.
According to the private, nonprofit population reference bureau, by the year 2025, 83 % of the worlds population will live in Africa, Asia, and Latin America. Population size is a good indicator of market opportunity for low unit -value products or necessities. Much like GNP, a larger population generally indicates a more attractive market. Still population by itself, Unlike GNP, can be misleading when high-priced products or luxuries are involved. Switzerlands 7.1 million populations does not seem impressive at first when compared to the 128 million population of Bangladesh, But GNP/capita reveals a totally different picture Switzerlands GNP/capita of $21,300 is about 20 times greater than Bangladeshs $1,100. Therefore, a larger population doesnt necessarily indicate a better market opportunity. It is inadequate to assess markets by relying only on each countrys total population without considering its land area. From this stand point the level of population density should be examined. Whereas total population indicates the Addis Ababa university School Of Commerce Page 132

overall size of the market, population density determines the ease in reaching that market. As the population in a certain area becomes dense or more concentrated the efficiency of distribution & promotion increase as well. In this regard the Java is of Indonesia is an ideal market. In addition to Indonesias large total population, 2/3 of more than 204 million in Indonesias live on java, an island that constitutes only 7 % of the countrys land area. Javas population density is 740 persons per square kilometer-a big difference from the countrys average density of 83 persons. In contrast, Canada has a vast land are and a relatively small population, suggesting that the country could not be an attractive market. A closer examination, however, reveals that Canadas population density is actually a positive attribute since its three largest cities Toronto, Montreal, and Vancouver contains 29 % of the population, which controls 33 % of the countrys buying power. As a point of reference, the largest cities in the USA (New York, Los Angeles, and Chicago) have only 11 % of the countrys population and 12 % of its buying power. 3. Personal income: income can reflect the degree of attractiveness of a market because consumption generally rises as income increases. Income however should not be strictly considered as in absolute terms. Consumers in LDCs may have low incomes but may still have ample buying power. Because costs of living in these countries may be relatively low due to low food and heating costs. As a result, consumers in these countries can still have adequate disposable or discretionary income. How the income is spent will provide another clue to market potential. If a large portion of a persons income must go toward purchases of essentials, market opportunity for luxuries may be limited. The Japanese spent 25 % of their disposable income for food while their American counterparts, are much more fortunate, spending only 15 % of their income and leaving them more discretionary income for nonessentials. Income should never be considered by itself as a determinant of market attractiveness. China for example is the 9 th largest economy in the world. Yet its per capita income is $350, a figure that does not differ much from that of either Haiti or Guinea. Per capita income assumes
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everyone gets an equal share of the nations wealth. To overcome this weakness, a marketer should examine the distribution of income. When income is evenly distributed across the populous segments, a firms product is likely to be suitable for all individuals. In contrast, the product may be unsuitable for certain segments if income varies significantly from one group of consumers to another. According to the US Bureau of the census, the top 12 % of the US population accounts for 38 % of the national wealth, and the poorest 26 % accounts for only 10% of the income. In Brazil, dual economies are much more pronounced because the top 20 % of the population has accumulated 61.5 % of the nations income, Leaving 3.5 % of the income for the poorest 20%. Exporters should pay attention to the income elasticitys of imports and exports of target countries, because these coefficients indicate how imports & exports are influenced by consumers income changes in each country. 4.2 Preliminary Country Analysis A Country note book is a guide for developing a marketing plan. The first stage in the planning process is a preliminary country analysis. The marketer needs basic information to: Evaluate a country markets potential, Identify problems that would eliminate a country from further consideration, Identify aspects of the countrys environment that need further study, Evaluate the components of the marketing mix for possible adoption, and Develop a strategic marketing plan. One further use of the information collected in the preliminary analysis is as a basis for a country notebook. Many companies, large and small, have a country notebook for each country in which they do business. The country notebook contains information a marketer should be aware of when making decisions involving a specific country market. As new information is collected, the country notebook is continually updated by the country or product manager. Whenever a marketing decision is made involving a country, the country notebook is the first database consulted. New product introductions, changes in advertising programs, and other marketing program decisions begin with the Addis Ababa university School Of Commerce Page 134

country notebook. It also serves as a quick introduction for new personnel assuming responsibility for a country market. This section presents four separate guidelines for collection and analysis of market data and preparation of a country notebook: Guideline for cultural analysis, Guideline for economic analysis, Guideline for market audit and competitive analysis, and Guideline for preliminary marketing plan. These guidelines suggest the kinds of information a marketer can gather to enhance planning. The points in each of the guidelines are general. They are designed to provide direction to areas to explore for relevant data. In each guideline, specific points must be adapted to reflect a companys products. The decision as to the appropriateness of specific data and the depth of coverage depends on company objectives, product characteristics, and the country market. Some points in the guidelines are unimportant for some countries or some products and should be ignored. I. Cultural Analysis The data suggested in the cultural analysis include information that helps the marketer make market planning decisions. However, its application extends beyond product and market analysis to being an important source of information for someone interested in understanding business customs and other important cultural features of the country. The information in this analysis must be more than a collection of facts. Whoever is responsible for the preparation of this material should attempt to interpret the meaning of cultural information. That is, how does the information help in understanding the effect on the market? For example, the fact that almost all the populations of Italy and Mexico are Catholic is an interesting statistic but not nearly as useful as understanding the effect of Catholicism on values, beliefs, and other aspects of market behavior. Furthermore, even though Addis Ababa university School Of Commerce Page 135

both countries are predominantly Catholic, the influence of their individual and unique interpretation and practice of Catholicism can result in important differences in market behavior. Guideline I: Introduction: Include short profiles of the company, the product to be exported, and the country with which you wish to trade. II. Brief discussion of the countrys relevant history III. Geographical setting Location Climate Topography IV. Social institutions Family Education Political system Legal system Social organizations V. Religion and aesthetics Religion and other belief systems Aesthetics VI. Living conditions Diet and nutrition Housing Clothing Recreation, sports, and other leisure activities Social security Addis Ababa university School Of Commerce Page 136

Health care VII. Language Official language(s) Spoken versus written language(s) Dialects VIII. Executive summary After completing all of the other sections, prepare a two-page (maximum length) summary of the major points and place it at the front of the report. The purpose of an executive summary is to give the reader a brief glance at the critical points of your report. Those aspects of the culture a reader should know to do business in the country but would not be expected to know or would find different based on his or her SRC should be included in this summary.
IX. Sources of information. X. Appendixes II. Economic Analysis The reader may find the data collected for the economic analysis guideline are more straightforward than for the cultural analysis guideline. There are two broad Categories of information in this guideline: general economic data that serve as a basis for an evaluation of the economic soundness of a country, and information on channels of distribution and media availability. As mentioned earlier, the guideline focuses only on broad categories of data and must be adapted to particular company and product needs. Guideline I. Introduction II. Population
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Total Distribution of population III. Economic statistics and activity Gross national product (GNP or GDP) Personal income per capita Average family income Distribution of wealth Minerals and resources Surface transportation Communication systems Working conditions Principal industries Foreign investment International trade statistics Trade restrictions Extent of economic activity not included in cash income activities Labor force Inflation rates IV. Developments in science and technology Current technology available (computers, machinery, tools, etc.) Percentage of GNP invested in research and development Technological skills of the labor force and general population V. Channels of distribution (macro analysis) This section reports data on all channel middlemen available within the market. Later, you will select a specific channel as part of your distribution strategy. Retailers Wholesale middlemen Import/export agents Warehousing Addis Ababa university School Of Commerce Page 138

Penetration of urban and rural markets VI. Media This section reports data on all media available within the country or market. Later, you will select specific media as part of the promotional mix and strategy. Availability of media Costs Agency assistance Coverage of various media Percentage of population reached by each of the media VII. Executive summary After completing the research for this report, prepare a two-page (maximum) summary of the major economic points and place it at the front VIII. Sources of information IX. Appendixes III. Market Audit and Competitive Market Analysis Of the guide line presented, this is the most product or brand specific information in the other guidelines is general in nature, focusing on product categories, whereas data in this guideline are brand specific and are used to determine competitive market Conditions and market potential.
Two different components of the planning process are reflected in this guideline. Information in Parts I and II, Cultural Analysis and Economic Analysis, serve as the basis for an evaluation of the product or brand in a specific country market. Information in this guideline provides an estimate of market potential and an evaluation of the strengths and weaknesses of competitive marketing efforts. The data generated in this step are used to determine the extent of adaptation of the company's
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marketing mix necessary for successful market entry and to develop the final step, the action plan. The detailed information needed to complete this guideline is not necessarily available without conducting a thorough marketing research investigation. Thus another purpose of this part of the country notebook is to identify the correct questions to ask in a formal market study. Guideline I. Introduction II. The product Evaluate the product as an innovation as it is perceived by the intended market Major problems and resistances to product acceptance based on the preceding evaluation III. The market Describe the market(s) in which the product is to be sold Compare and contrast your product and the Market size Government participation in the marketplace IV Executive summary V. Sources of information VI. Appendixes IV. Preliminary Marketing Plan: Information gathered in guidelines I through III serves as the basis for developing a marketing plan for your product or brand in a target market. How the problems and opportunities that surfaced in the preceding steps are overcome or exploited to produce maximum sales and profits are presented here. The action plan reflects, in your judgment, the most effective means of marketing your Addis Ababa university School Of Commerce Page 140

product in a country market. Budgets, expected profits and losses, and additional resources necessary to implement the proposed plan are also presented. Guideline I. The marketing plan A. Marketing objectives Product adaptation or modification-Using the product component model as your guide, indicate how your product can be adapted for the market. Promotion mix Distribution: From origin to destination Channels of distribution (micro analysis) Price determination Terms of sale Methods of payment II. Pro forma financial statements and budgets Marketing budget III. Resource rquipements IV Executive summary After completing the research for this report, prepare a two-page (maximum) summary of the major points of your successful marketing plan, and place it at the front of the report. V Sources of information VI. Appendixes The intricacies of international operations and the complexity of the environment, within which the international marketer must operate, create an extraordinary demand for information. When operating in foreign markets, the need for thorough information as a substitute for uninformed opinion is equally as important as it is in Addis Ababa university School Of Commerce Page 141

domestic marketing. Sources of information needed to develop the country notebook and answer other marketing questions are available as an appendix. Source: Cateora Graham (2005), International marketing, 12th ed. PP.592-600. 4.3 Foreign Market Entry Strategies There are many Foreign market entry strategies and are discussed below. 1. Exporting: is a strategy in which a company is, without any marketing or production organization overseas, exports a product from its home base. Often the exported product is fundamentally the same as the one marketed in the home market. Advantages of This Strategy Ease in implementing the strategy- risks are minimized because the company simply exports its excess production capacity when it receives orders from abroad. As a result, the international marketing effort is causal at best. This is the most likely approach to enter to an overseas market for small firms. Disadvantage of This Strategy The problem with using an exporting strategy, that it is not always an optimal strategy. A desire to keep international activities simple, together with a lack of product modification , make a companys marketing strategy inflexible and unresponsive. The exporting strategy functions poorly when the companys homecountry currency is strong. In 1970s, the Swiss Franc was so strong that Swiss companies found it exceedingly difficult to export and sell products in the US Market. Swiss companies discovered that they had to resort to investing abroad in order to reduce the effects of strong franc. Foreign Market Entry Strategies There are many Foreign market entry strategies and are discussed below. 1. Exporting: is a strategy in which a company is, without any marketing or production organization overseas, exports a product from its home base. Often the exported product is fundamentally the same as the one marketed in the home market. Addis Ababa university School Of Commerce Page 142

Advantages of this strategy Ease in implementing the strategy- risks are minimized because the company simply exports its excess production capacity when it receives orders from abroad. As a result, the international marketing effort is causal at best. This is the most likely approach to enter to an overseas market for small firms. Disadvantage of this strategy The problem with using an exporting strategy, that it is not always an optimal strategy. A desire to keep international activities simple, together with a lack of product modification , make a companys marketing strategy inflexible and unresponsive. The exporting strategy functions poorly when the companys homecountry currency is strong. In 1970s, the Swiss Franc was so strong that Swiss companies found it exceedingly difficult to export and sell products in the US Market. Swiss companies discovered that they had to resort to investing abroad in order to reduce the effects of strong franc. 2. Licensing When a company finds exporting ineffective but is hesitant to have direct investment abroad, licensing can be a reasonable compromise. Licensing is an agreement that permits a foreign company to use industrial property (patents, trademarks, and copyrights, technical Know-how and skills (Feasibility studies, manuals, technical advice, etc ;), architectural & engineering designs, or any combination of these in a foreign market. Essentially, a licensor allows a foreign company to manufacture a product for sale in the licensees country and sometimes in other specified markets. For example: Penthouse magazine, likewise, has Japanese and Brazilian versions under license in addition to those in Spain, Australia, and Italy. German speaking countries account for penthouses largest overseas edition. Some 50 % of the drugs sold in Japan are made under license from European and US Companies. Licensing is not only restricted to tangible products. A service can be licensed as well. Advantages of Licensing
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1. It allows a company to spread out its research-and development and
investment costs, while enabling it to receive incremental income with only negligible expenses.
2. In addition, granting a license protects the companys patent and/or trademark

against cancellation for nonuse.
3. This protection is especially critical for a firm that, after investing in production
and marketing facilities in a foreign country, decides to leave the market either temporarily or permanently.
4. A manufacturer should consider licensing when capital is scarce, when import

restrictions discourage direct entry, and when a country is sensitive to foreign ownership.
5. The method is flexible because it allows a quick and easy way to enter the
market.
6. Licensing also works well when transportation cost is high, especially relative to
product value. Disadvantage of Licensing
1. 2.
Licensing may be the least profitable of all entry strategies. By granting a license to a foreign firm, a manufacturer may be nurturing a competitor in the future-someone who is gaining technological and product knowledge. Texas instruments had to sue several Japanese manufacturers to force them to continue paying royalties on its patents on memory chips.
3.
Poor performance of the licensee-to attempt to terminate the contract may be easier said than done. Once licensing is in place, the agreements can also prevent the licensor from entering that market directly. Japanese laws give a Addis Ababa university School Of Commerce Page 144

licensee virtual control over the licensed product and such laws present a monumental obstacle for an investor wishing to regain the rights to manufacture and sell the investors own product.
4.
Inconsistent product quality across countries caused by licensees lax quality control can injure the reputation of a product on a worldwide basis. Even when exact product formulations are followed, licensing can still damage the reputation of the firm psychologically.
5.
Many
LDCs
force
patent holders
to
license
their
products
to
other
manufacturers or distributors for a royalty fee that may or may not be fair. Canada, owing to consumer activism, is the only industrialized nation requiring compulsory licensing for drugs.
3. Joint Venture
The joint venture is simply a partnership at corporate level, and it can be domestic or international. Joint ventures, like licensing, involve certain risks as well as certain advantages over other forms of entry into a foreign market. In most cases, company resources, circumstances, and the reasons for wanting to do business overseas will determine if joint ventures is the most reasonable ways to enter the overseas market. There are two separate overseas investment processes that describe how joint ventures tend to evolve. a. Natural , Nonpolitical Investment Process : In this case, a technology supplying firm gains a foothold in an unfamiliar market by acquiring a partner that can contribute local knowledge and marketing skills. Technology tends to provide dominance to the technology supplying firm. As the technology partner becomes more familiar with the market , it buys up more or equity in the venture or leaves the venture entirely A contributor of technology, however, is not likely to reduce its share in a joint venture while remaining active in it.
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b. The local firms political leverage, through government persuasion, halts or reverses the natural economic process. In this case, a technology-supplying partner remains engaged in the venture without strengthening its ownership position, the consequence being a gradual takeover by the local parties. Advantages of Joint Ventures 1. A joint venture substantially reduces the amount of resources (money & personnel) that each partner must contribute. 2. Frequently, the joint venture strategy is the only way, other than through the licensing, that a firm can enter a foreign market. This is especially true when wholly owned activities are prohibited in a country. Generally planned economies, in particular usually limit foreign firms entry to some sort of cooperative arrangements. China has made it clear that only those automakers with long-term commitments will be allowed to assemble foreign models with local partners. Foreign manufacturers must agree to have less than 50% control of joint ventures. 3. Sometimes, social rather than legal circumstances require a joint venture to be formed .Joint ventures often have social implications. The familial and tightly knit relationship between suppliers and middlemen is prevalent in many countries. In Japan, this relationship is known as Keiretsu, which means that family like businesses groups are linked by cross-ownership of equity. Such customs and business relationships make it difficult for a new supplier to gain entry. Even in the event that the new supplier is able to secure some orders, the orders may be terminated as soon as a member of the family is able to supply the product in question. 4. A joint venture can also simultaneously work to satisfy social, economic, and political circumstances, since these concerns are highly related. In any kind of international business undertaking, political risks always exist. And a joint venture can reduce such risks while it increases market opportunities. In this sense, a joint venture can make the difference between securely entering a foreign market or not entering at all. Most American firms seek Saudi partners to establish joint ventures so that they can deal
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effectively with Saudi Arabias political demands. Mexico has stringent mexicanaisation rules requiring majority local ownership. Limitations of Joint Ventures 1. If the partners to the joint ventures have not established clear-cut decision making policy and must consult with each other on all decisions, then the decision-making process may delay a necessary action when speed is essential. For example, Fujitsu, Japans largest computer maker formed a joint venture with the US computer service company- TRWs POS (point-of-sale) terminal business. The Sales organization was not ready for the product adaptation required for the joint effort to move ahead effectively. Fujitsu finally bought out TRWS 49 % ownership in order to have sole ownership of the decision process in the fast moving market. 2. Wherever two individuals or organizations work together , there are bound to be conflicts because of cultural problems , divergent goals, disagreements over production and Marketing strategies, and weak contributions by one or the other partner. Although the goals may be compatible at the outset, goals and objectives may diverge over time, even when joint ventures are successful. For example, Dow-Badische was set up in the USA with BASF providing the technology to make chemical raw materials and fibers and Dow supplying the marketing expertise. A split eventually occurred despite good profits when BASF wanted to expand the fiber business. Dow felt that the venture was moving away from Dows main stream chemical business. BASF ultimately bought out Dow and made the business its own wholly owned subsidiary.
3. The matter related to control. By definition a joint venture must deal with double management. If a partner has less than 50 % ownership, that partner must in effect let the majority partner make decisions. If the board-of-directors has a 5050 split, it is difficult for the board to make a decision quickly or at all For example, Dows experience with its Korea Pacific chemical joint ventures illustrates this point. When prices plunged the joint venture lost $60 million. To stem the loss, Dow wanted to improve efficiency but was opposed by its Korean partner. The Government appointed directors boycotted board meetings and a Addis Ababa university School Of Commerce Page 147

decision could not be reached. Both sides eventually ended up bringing lawsuits against each other. 4. Manufacturing The manufacturing process can be employed as a strategy involving all or some manufacturing in a foreign country. IBM, for example, has 16 plants in the US and 18 more in other countries. One kind of manufacturing called Sourcing, involves manufacturing operations in a host country, not so much to sell but for the purpose of exporting to the home country or any other country or other countries. The goal of manufacturing strategy may be to set up a production base inside a target market country as a means of invading it. There are several variations on this method (complete manufacturing, contract manufacturing with local manufacturer and partial manufacturing). Reasons for investing in manufacturing facilities abroad The reason for investing in manufacturing abroad includes: Either gaining access to raw materials or to take advantage of resources for its manufacturing operations.(backward vertical integration)
To take advantage of lower labor costs or other abundant factor of production (labor, energy, and other inputs, transportation costs).
It can make the companys product more price competitive because the company can avoid or minimize high import taxes, as well as other trade barriers. Factors to be considered in manufacturing abroad 1. Incentive : Incentive preferences of MNCs and absence of restrictions on intercompany payments to be the most important determinant (No controls on dividend remittances, import duty concessions, guarantees against expropriations and tax holidays) Addis Ababa university School Of Commerce Page 148

2. Product image: From the marketing stand point product image deserves
attention. Winston cigarettes made in Venezuela with the same tobaccos and formulas as the Winston cigarettes in the US are cheaper than the US made Winston. However, the Venezuelas prefer the more expensive US made Winston. 3. Competition: to a great extent competition determines potential profit. The resources of various countries should be compared to determine each countrys comparative advantage. The comparison should include production consideration including production facilities, raw materials, equipment, real estate, water, power, and transport. Human resource as an integral part of the production factor must be available at reasonable cost. 4. Absolute and relative changes in labor cost: Manufacturers should pay attention to absolute as well as relative changes in labor costs. A particular country is more attractive as plants location if the wages there increases more slowly than those in other countries. Example: the increase in labor costs in Germany led GMS Opel to switch its production facilities to Japan and led Rollei to move its production to Singapore. Many Japanese firms have been attracted by the $ 1 hourly wage rate in Mexico. 5. Type of product: A manufacturer must weigh the economies of exporting a standardized product against the flexibility of having a local manufacturing plant that is capable of tailoring the product for local preferences. 6. Taxation: countries commonly offer tax advantages among other incentives to lure foreign investment. Puerto Rico does well on this score. In addition, there is no exchange problem since the currency is the US Dollar. In Puerto Rico no Quotas, no high labor costs, No shipping delays, No language barrier, No high rent and no import duties. 7. Investment climate: the investment climate is determined by geographic and climatic conditions, market size and growth potential as well as the political atmosphere. Political, economic and social motives are highly related. 8. Market Size: The number of manufacturing establishments in a state is strongly associated with the locational decisions of foreign manufacturers. Addis Ababa university School Of Commerce Page 149

Note: less experienced service firms tend to enter foreign markets that are similar to their home country and they choose less similar markets after gaining more experience. 5. Assembly Operations
An assembly operation is a variation on a manufacturing strategy. Assembly means the fitting or going together of fabricated components. The methods used to join or fit together solid components may be welding, soldiering, riveting, gluing, laminating, and sewing. In this strategy, parts or components are produced in various countries in order to gain each countrys comparative advantage. Capital intensive parts may be produced in advanced nations and labor intensive assemblies may be produced in an LDC, where labor is abundant and labor costs are low. This strategy is common among manufacturers of consumer electronics. When a product becomes mature and faces intense price competition, it may be necessary to shift all of the labor-intensive operation to LDCS. An assembly operation also allows a company to be price competitive against cheap imports and this is a defensive strategy. Assembly operations also allow a companys product to enter many markets without being subject to tariffs and quotas. 6. Management Contracts In some cases, Governments pressures and restrictions force a foreign company either to sell its domestic operations or to relinquish control. In such a case the company must formulate a way to generate revenue given up. One way to generate revenue is to sign a management contract with the Government or the new owner in order to manage the business for the new owner. The new owner may lack technical and managerial expertise and may need the former owner to manage the investment until local employee is trained to manage the facility. In past years, Sears has transferred a great deal of technology to Latin America. Management contracts do not have to be used only after the company is forced to sell Addis Ababa university School Of Commerce Page 150

its ownership interest. Such contracts may be used as a sound strategy for entering a market with a minimum investment and minimum political risks. 7. Turnkey Operations A turnkey operation is an agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyers personnel, who will be trained by the seller. In international marketing, the term is usually associated with giant projects that are sold to Governments or government-run companies.
Large-scale
plants
requiring
technology
and
large-scale
construction
process
unavailable in local markets commonly use this strategy. Such large-scale projects include building steel mills; cement, fertilizer, and chemical plants; and those related to such advanced technologies as telecommunications. Owing to the magnitude of giant turnkey project, the winner of the contract can expect to reap huge rewards. Thus, it is important that the turnkey construction packaged offered to a buyer is an attractive one. Such a package involves more than just offering the latest technology, since there are many other factors important to LDCs in deciding on a particular turnkey project. 8. Acquisition When a manufacturer wants to enter a foreign market rapidly and yet retain maximum control, direct investment through acquisition should be considered. The reason for wanting to acquire a foreign company includes product / geographical diversification, acquisition of expertise (technology, marketing and management) and rapid entry. For Example, Renault acquired a controlling interest in American motors in order to gain the sales organization and distribution network that would otherwise have been very expensive and time consuming to build from the ground up. Acquisition is viewed in a light different from other kinds of foreign direct investment. A government generally welcomes foreign investment that starts up a new enterprise called-Greenfield enterprise,. Greenfield enterprise increases employment and enlarges to tax base. An acquisition fails to do this, since it displaces domestic ownership. Addis Ababa university School Of Commerce Page 151
Therefore, acquisition is very likely to be perceived as exploitation or below to national pride. It stands a good chance of being turned down. Because of the sensitive nature of acquisition, there are more legal hurdles to surmount. In Germany, the Federal Cartel office may prohibit or require divestiture of those mergers and acquisitions that could strengthen or create market domination. The value of a currency may either reduce or increase the costs of an acquisition. A buyer whose home currency is getting weaker will see its costs go up but will benefit if its currency becomes stronger. International mergers and acquisitions are complex, expensive and risky. The problems are numerous: Finding a suitable company Determining a fair price Acquisition debt Merging two management teams Language and cultural differences Employee resentment Geographic distance, etc.
9. Strategic Alliance: is a relatively new organizational form of market entry and competitive cooperation. There is no one way to form strategic alliance. Strategic alliance may be the result of mergers, acquisitions, joint ventures and licensing agreements. Joint ventures are naturally strategic alliances, but not all strategic alliances are joint ventures.
Unlike joint ventures which require two or more parties to create a separate entity, a strategic alliance does not necessarily require a new legal entity. As such it may not require partners to make arrangements to share equity. Instead of being an equitybased investment, a strategic alliance may be more of a contractual arrangement Addis Ababa university School Of Commerce Page 152

whereby two or more partners agree to cooperate with each other and utilize each partners resources and expertise to achieve rapid global market penetration. Examples: Most US chip companies have multimillion-dollar deals with Japanese chip makers. Advanced micro-devices inc and Fujitsu not only jointly have a $ 750 million flash-memory factory but have also agreed to buy stock to each other. Texas instruments Inc. and Hitachi are code developing 64 mega bite dynamic, randomaccess memory chips (DRAMS). There are at least three types of strategic alliances. 1) Shared Distribution: Chryslers distribution of Mitsubishi cars in the USA and shared routes of SAS, KLM, Austrian Air and Swiss Air. 2) Licensed Manufacturing: Matshushitas manufacturing of IBM Pcs (enabling the partners to fill unused capacity while avoiding an investment in a new plant and equipment). 3) Research and development: An alliance between Sony and Philips which competed with one another led by Toshiba in developing digital videodisks. The underlying motives or reasons for companies to enter into strategic alliance include: Access to new markets Accelerating the entry pace A more complete product line Learning new skills and Sharing of R & D, manufacturing and marketing costs. Analysis of entry strategies To enter a foreign market, a manufacturer has a number of strategic options, each with its own strengths and weaknesses.
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Many companies employ multiple strategies. Example IBM has employed strategies ranging from Licensing, Joint ventures and strategic alliance. Likewise, Mc Donalds uses joint ventures in the Far East while licensing its name without putting up equity capital in the Mideast. One would be nave to believe that a single entry strategy is suitable for all products or in all countries. There are a number of characteristics that determine the appropriateness of entry strategies and many variables affect which strategy is chosen. The characteristics include: Political risks Regulations Type of country Type of product and Other competitive and market characteristics. 1) Political risks: Issues of sovereignty, differing political philosophies, and nationalism are a manifestation of host government actions that enhance the risks of global business. Risks can range from confiscation, the harshest, to many lesser but still significant government rules and regulations such as exchange controls, import restrictions, and price controls that directly affect the performance of business activities. Of all the political risks, the most costly are those actions that result in a transfer of equity from the company to the government with or without adequate compensation. 2) Regulations: There are four categories of government policy which affects market imperfections and foreign direct investment.
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i. Policies that increase market imperfections and foreign direct investment include a host of governments protectionists import policies and undervalued currency and a home governments overvalued currency. ii. Policies that decrease market imperfections and increase foreign direct investment include a host governments privatization of government-owned enterprises and liberalization of restrictions on inbound foreign direct investment as well as a home governments liberalization of capital controls on outbound foreign direct investment. iii. Policies that increase market imperfection and decrease foreign direct investment include a host governments overvalued currency as well as a home governments undervalued currency and wage controls. iv. Policies that decrease both market imperfection and foreign direct investment include a vigorous enforcement of arms length transfer pricing by both the host and home governments. 3) Type of Country: The type of country chosen dictates the entry strategy to be used. There are different ways of classifying countries: The degree of control exerted on the economy by the Government, with capitalism at the one extreme and communism at the other Other systems are classified somewhere in between depending on the freedom allowed of private citizens in conducting their business activities In controlled economies, the option is limited. Until recently, the most frequent trade entry activity in controlled economies was exporting, followed by licensing for Eastern Europe. 4) Type of product: A product that must be customized or that requires some services before and after the sale cannot easily be exported to another country. In fact, a service or a product whose value is largely determined by an accompanied service cannot be practically distributed outside of the producing country. Any portion of the product that is service-oriented must be created at the place of consumption. As a result, service-intensive products require particular modes of market entry. The options include a management contract to sell service to a foreign customer, licensing so that another local company (franchisee) can be trained to Addis Ababa university School Of Commerce Page 155

provide that service and local manufacturing by establishing a permanent branch or subsidiary there. A product that is basically a commodity may require local production in order to reduce labor & shipping costs. There are two schools of thought that explain how multicultural corporations select ownership structures for subsidiaries. a) What the firm wants: - MNCs want structures that minimize the transaction costs of doing business abroad. Factors affecting what the firm wants include the capabilities of the firm, its strategic needs, and transactions costs of different ways of transferring capabilities.(Whole ownership) b) What the firm can get: what the firm wants may be different from what it can get. In this case, ownership structures are determined by negotiations, whose outcomes depend on the relative bargaining power of the firm and that of the host government.(Joint venture) 4.4 Free Trade Zone (FTZ)
When entering a market, a company should go beyond an investigation of market entry modes. An FTZ can be use regardless of whether the entry strategy is exporting or local manufacturing. According to Federal regulation, a free trade zone is A free trade zone is an isolated, enclosed, and political area, operated as a public utility, in or adjacent to a port of entry, with facilities for loading, unloading, handling, sorting, manipulating, manufacturing and exhibiting goods, and for reshipping them by land, water, or air. Any foreign and domestic merchandise may be brought into a zone without being subject to the customs laws of the United States governing the entry of goods or the payment of duty there on .. the merchandise may be exported, destroyed, or sent into customs territory from the zone, in the original package or otherwise. It is subject to customs duties if sent into the customs territory, but not if re-shipped to foreign points.
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For example, there are 172 FTZs (General purpose zones) in the USA. With additional sub zones in the USA. Some countries, due to political reasons, are not able to open up their economies completely. Instead they have set up export processing zones, a special type of FTZ. 1.5 Summary
Most companies become gradually involved in international markets, though some are born global. A variety of internal and external factors expose them to the international market. Employees and management serve as particularly important change agents. After becoming aware of international marketing opportunities, companies progress through the corporate export stages, and may choose to retreat to a purely domestic focus or to increase the scope of their international activities through a variety of different means. Firms may employ third parties, such as export management companies or trading companies, or they may break into the Global marketplace using the technology of the internet. If a firm wants to establish an international prescience it can also license its products , open global franchises , or directly invest into a region of the world . These expansion alternatives involve varying degrees of control that a company may exercise over its international ventures. Firms involvement in international markets may also be legally limited by the extent to which a country allows foreign ownership of assets. Companies looking to go abroad need to consider a variety of factorssuch as mechanics , corporate structures, strategic goals, logistics, cost ,and regulations before they expand. Firms go international due to proactive and reactive stimuli. Proactive stimuli include profit advantages, unique products, and technological advantage, and exclusive information, economies of scale and market size. on the other hand reactive stimuli to internationalize includes ports. competitive pressure, overproduction, declining domestic sales, excess capacity, saturated domestic markets and proximity to customers and
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Foreign market entry strategies takes many forms such as exporting, licensing, franchising, joint ventures, manufacturing, assembly operations, manufacturing agents acquisitions and strategic alliances. There are many change agents that may emanate from the internal and external environment. Internal agents may consist of enlightened management, new management and significant internal even. On the other hand external change agents may include demand, competition, domestic distributers, services firms, business associates, governmental activities, export intermediaries which in turn may consist of export management companies and trading companies.
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Chapter - 9 Product Strategies in International Marketing Objectives

At the end of this chapter , students are expected to: Define product definitions provided by different scholars. Identify and describe the various stages of new product development Process. Describe the various Theories of international product lifecycle. Compare adaptation. Examine the various levels of branding decisions. Scrutinize the various types of Packaging decisions. Introduction This chapter has six sections (sub-titles). The first section defines what a product is. The second section describes the major stages of a new product development process. The third section discusses Theory of international product lifecycle. The fourth section compares & contrasts product standardization against product adaptation. The Fifth section deals various levels of Brand Decisions. The sixth section is concerned with Packaging decisions. 1. Definition Of Product What is a product? : A product is a bundle of utilities or satisfactions. 2. New Product Development There are six distinctive steps in product development. Step 1: generation of new product ideas: - ideas can come from salespersons, employees, competitors, governments, marketing research firms, customers etc; Step 2: the screening of ideas:-ideas must be acknowledged and reviewed to determine their feasibility. A new product concept may be presented to potential users Addis Ababa university School Of Commerce Page 159 and contrast product standardization versus product

or an advertisement based on the product can be drawn and shown to focus groups to elicit candid ideas. For example Japanese manufacturers of consumer goods Kao Corporation are guided by the following five principles of product development:
1. a new product should be truly useful to society, not only now but also in the
future
2. it should make use of Kaos own creative technology or skill 3. it should be superior to the new products of competitors, from the
standpoint of both cost and performance,
4. it should be able to stand exhaustive product tests at all stages before it is

commercialized, and
5. It should be capable of delivering its own message at every level of

distribution.
Step 3: Business Analysis: a necessary analysis to estimate product features, cost, demand, and profit. Step 4: product development: - involves lab and technical tests as well as manufacturing pilot models in small quantities. At this stage the product is likely to be handmade or produced by existing machinery rather than by any new specialized equipment. Ideally, engineers should receive direct feedback from customers and dealers. Step 5: test marketing: - potential marketing problems and the optimal marketing mix will be determined. Step 6: Full-Scale Commercialization: - going through with full-scale production and marketing. Market segmentation: is the process of dividing an entire market into different submarkets based on certain common criterias. The most important reason behind the utilization of market segmentation is market homogeneity/ heterogeneity. Addis Ababa university School Of Commerce Page 160

Based on the national boundary can be vertical (homogeneous within the same country) or horizontal (homogeneous across countries). Therefore, two countries exhibiting the lack of vertical homogeneity within their borders may still be homogeneous horizontally when a particular segment of one country is similar to an equivalent segment of another country.
Product Positioning: - is a marketing strategy that attempts to occupy an appealing space in a consumers mind in relation to the space s occupied by other competitive products. The mind is like a computer in that it has slots or positions and each bit of information is placed and retained in the proper slot. The mind screens and accepts information according to prior experience. When a product is incorrectly positioned or the original position loses its appeal, a firm should reposition the product. In theory and practice segmentation and positioning should be used together to reinforce each other. A study of how Americans and Japanese firms compete in the British market found that the Japanese have clear market segmentation and positioning strategies. Regarding market segments, the Japanese first entered the low end of the market before moving on to the mass market and eventually the high value-added end. Regarding positioning, the Japanese have a clear focus on quality, service, and innovation. In comparison, British firms emphasize traditional brand names, while American firms, emphasize product range and technology and are less likely to adapt to local market conditions. Product adoption: - in breaking into a foreign market, marketers should consider factors that influence product adaptation. There are at least six factors, according to diffusion theory, having a bearing on diffusion on the adoption process.
1. Relative Advantage: - for a product to gain acceptance, it must demonstrate

its relative advantage over existing alternatives. Products emphasizing cleanliness and sanitation may be unimportant in places where people are poor and struggle to get by one day at a time. Wool coats are not are needed in hot Addis Ababa university School Of Commerce Page 161

country, and products reducing static cling (cling free) useless in a humid country. Dishwashing machines do not market well in countries where manual labor is readily available and inexpensive.
2. Compatibility: - a product must also be compatible with local customs and

habits. A freezer would not find a ready market in Asia, where people prefer fresh food. In Asia, and such European countries like France and Italy, people like to sweep and mop floors daily, and thus there is no market for carpet or vacuum cleaners. Dryers are unnecessary in countries where people prefer to hang their clothes outside for sunshine freshness.
3. Trilability/ divisibility: - a new product has an advantage if it is capable of

being divided and tested in small trial quantities to determine its suitability and benefits. Disposable diapers and blue jeans lend themselves to Trialability rather well. When a product is large, bulky, and expensive, consumers are much more apprehensive about making a purchase. Washers, dryers, refrigerators and automobiles do not lend themselves well to Trialability.
4. Observation: - observation of a product in public tends to encourage social

acceptance and reinforcement, resulting in the products being adopted more rapidly and with less resistance. If a product is used privately, other consumers cannot see it, and there is no prestige generated by its possession. Blue jeans, quartz watches, and automobiles are used publicly and are highly observable products. Japanese men flip their ties so that the labels show.
5. Complexity: - complexity of a product or difficulty in understanding a

products qualities tends to slow its market acceptance. Perhaps that factor explains why ground coffee has had a difficult time in making headway to replace instant coffee in many countries. Likewise, 3M tried unsuccessfully in foreign markets to replace positive-acting printing plates with presensitized negative subtractive printing plates, which are very popular in the USA.It failed to convert foreign printers because the sales and technical service costs of changing printers beliefs were far too expensive. Computers are also complex but have been gradually gaining more and more acceptance. The first four variables are positively related to the adoption process. Like complexity, price is negatively related to product adoption. 3. Theory of international product lifecycle Addis Ababa university School Of Commerce Page 162

The international product life cycle (IPLC) theory, developed and verified by economists to explain trade in a context of comparative advantage, describes the diffusion process of innovation across national boundaries. The life cycle begins when a developed country, having a new product to satisfy consumer needs, wants to exploit its technological breakthrough by selling abroad. Other advanced nations soon start up their own production facilities, and before long LDCs do the same. Efficiency/comparative advantage shifts from developed countries to developing nations. Finally advanced nations, no longer cost-effective, import products from their former customers. The moral of this process could be that an advanced nation becomes a victim of its own creation. International product life cycle theory has the potential to be a valuable framework for marketing planning on a multinational basis. IPLC stages and characters There are five distinct stages (stage 0 through stage 4). Stage 0-Local Innovation: Stage 0, depicted as time 0 on the left of the vertical importing/ exporting axis, represents a regular and highly familiar product life cycle in operation within its original market. Innovations are most likely to occur in highly developed countries because consumers in such countries are efficient and have relatively unlimited wants. From the supply side, firms in advanced nations have both the technological knowhow and abundant capital to develop new products. Stage 1- Overseas Innovation As soon as the new product is well developed, its original market well cultivated, and local demands adequately supplied, the innovating firm will look to overseas markets in order to expand its sales and profit. Thus, this stage is known as a pioneering or international introduction stage. The technological gap is first noticed in other advanced nations because of their similar needs and high income levels. Countries with similar cultures and economic conditions are often perceived by exporters as posing less risk and thus are approached first before proceeding to less familiar territories. Production cost tends to be decreasing at this stage because by this time Addis Ababa university School Of Commerce Page 163

the innovating firm will normally have improved the production process. Supported by oversea sales, aggregate production costs tend to decline further because of increased economies of scale. A low introductory price overseas is usually not necessary because of the technological breakthrough; a low price is not desirable because of the heavy and costly marketing effort needed in order to educate consumers in other countries about the new product. Stage 2- Maturity Growing demand in advanced nations provides an impetus for firms there to commit themselves to starting local production, often with the help of their governments protective measures to preserve infant industries. Thus, these firms can survive and thrive in spite of relative inefficiency Development of competition does not mean that the initiating countrys export level will immediately suffer. The innovating firms sales and export volumes are kept stable because LDCs are now beginning to generate a need for the product. Introduction of the product in LDCs helps offset any reduction in export sales to advanced countries. Stage 3- Worldwide Imitation This stage means tough times for the innovating nation because of its continuous decline in exports. There is no more new demand anywhere to cultivate. The decline in the innovating firms economies scale, and its production costs thus begin to rise again. Consequently, firms in other advanced nations use their lower prices to gain more consumer acceptance abroad at the expense of the innovating firm. As the product becomes more and widely disseminated imitation picks up at a faster pace. Stage 4- Reversal Not only must all good things end, but misfortunes frequently accompany the end of a favorable situation. The major functional characteristics of this stage are product standardization and comparative disadvantage. The innovating countrys comparative advantage has disappeared, and what is left is comparative disadvantage. This disadvantage is brought about because the product is no longer capital-intensive or technology-intensive but instead has become labor-intensive a strong advantage possessed by LDCs. Addis Ababa university School Of Commerce Page 164
Thus, LDCs-the last imitators establish sufficient productive facilities to satisfy their own domestic needs as well as to produce for the biggest market in the world. Blackand-white television sets, are no longer manufactured in the United States because many Asian firms can produce them much less expensively than any US firm. Consumers price sensitivity exacerbates this problem for the initiating country. International Product Life Cycle Curves
IPLC Curves Marketing Strategy Firms should understand the implications of the IPLC so that they can adjust marketing strategies accordingly. 1. Product policy The innovating firm must keep its product cost effective. One way is to cut labor costs through automation and robotics. Once in the maturity stage, the innovators comparative advantage is gone, and the firm should switch from producing simple versions to producing sophisticated models or new technologies in order to remove itself from cut-throat competition. For a relatively high-tech product, an innovator may find it advantageous to get its product system to become the industrys standard, even if it means lending a helping hand to competitors through the licensing of product knowledge. Otherwise, there is always a danger that competitors will persevere in inventing an incompatible and superior system.
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2. Pricing policy Initially, an innovating firm can afford to behave as a monopolist, charging a premium price for its innovation. But this price must be adjusted down ward in the second and third stage of IPLC to discourage potential newcomers and to maintain market share. In the last stage of the IPLC, it is not practical for the innovating firm to maintain low price because of competitors cost advantage. 3. Promotion Policy Promotion and pricing in the IPLC are highly related. The innovating firms initial competitive edge is its unique product, which allows it command a premium price. To maintain this price in the face of subsequent challenges from imitators, uniqueness can only be retained in the form of superior quality, style or services. The innovating marketer must plan for a non price promotional policy at the outset of production diffusion. A new product should be promoted as a premium product with a highquality image. By starting out with a high-quality reputation , the innovating company can trade down later with a simpler version of the product while still holding on to the high-priced , most profitable segment of the market. 4. Place or Distribution Policy A strong dealer network can provide the innovating firm with a good defensive strategy. Because of its near-monopoly situation at the beginning, the firm is in a good position to be able to select only the most qualified agents/ distributors, and the distribution network should be expanded further as the product becomes more diffused. A firm must also watch closely for the development of any alternative channel that may threaten the existing channel. 4. Product standardization Vs. product adaptation Product standardization means that a product originally designed for a local market is exported to other countries with virtually no change, except perhaps for the translation of words and other cosmetic changes. Arguments for standardization Addis Ababa university School Of Commerce Page 166

1. It is an easy process for executives to understand and implement, and it also is cost effective. If cost is the only factor being considered, then standardization is clearly a logical choice because economies of scale can operate to reduce production costs. 2. When consistent company or product image is needed, product uniformity is required. The world wide success of Mc Donalds is based on consistent product quality and services. 3. Some products by their very nature are not and cannot be easily modified. For example, Musical recordings and works of art are products difficult to differentiate. 4. With regard to high-technology products, both users and manufacturers may find it desirable to reduce confusion and promote compatibility by introducing industry specifications that make standardization possible. 5. A condition that may support the production and distribution of standardized products exists when certain products can be associated with particular cultural universals. That is when consumers from different countries share similar need characteristics and therefore want essentially identical products. 6. More technology-intensive firms standardized their marketing strategies more than did less technology intensive firms, probably as a result of high cost of adapting high-technology products. Arguments for Adaptation Product adaptation is necessary under several conditions. Some are mandatory while others are optional. For example, according to the big-car syndrome, Americans marketers, assume that products designed for Americans are superior and will be preferred by foreign consumers. U.S automakers believe or used to believe that the Americans desire for big cars means that only big cars should be exported to overseas markets. The left-hand drive syndrome is a corollary to the big car syndrome. Americans drive on the right side of the road, with the steering wheel on the left side of the automobile. But many Asians and European countries have traffic laws requiring drivers to drive on the left side of the road, and cars with the steering wheel on the left present a serious safety problem. Yet exported U.S cars are the same left-hand drive models as are sold in the U.S.A for the right-hand-traffic patterns. American exporters Addis Ababa university School Of Commerce Page 167

have failed time and time again to realize that when in Rome one should do as the Romans do. On the other hand Japanese automakers have not shown the same kind of indifference to market needs; Japanese firms have always adapted their automobiles to American driving customs. I. Mandatory Product Modification The mandatory factors affecting product modification are the following:
1. Governments mandatory standards i.e. countrys regulation.

To gain entry into a foreign market, certain requirements must be satisfied. Regulations are usually specified and explained when a potential customer requests a price quotation on a product to be imported. For example, Starting 1996, Switzerland banned the use of phosphates in detergents. Added vitamins in margarine, forbidden in Italy, are compulsory in the UK and Holland.
2. Electrical Current Standards

Frequently products must be modified to compensate for difference in electrical current standards In many countries, there may even be variations in electrical standards within the country. The different electrical standards (phase, frequency, and voltage) abroad can easily harm products.
3. Measurement Standards
Like electrical standards, measurement systems also vary from country to country. For example the US has adopted the English (imperial) system of measurement-feet, pounds ,etc; while most countries employ the metric system , and product quantity should be or must be expressed in metric units. Many countries even go so far as to prohibit the sale of measuring devices with both metric and English markings. One New England Company was
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ordered to stop selling its laboratory glassware in France because the markings were not exclusively metric.
4. Product Standards and Systems

Some products must be modified because of different operating systems adopted by various countries. Television systems provide a good example. There are three different TV operating systems used in different parts of the world. The American NTSC ( National Television systems committee), the French SECAM (system electroniques pour couleur avec memoire), and the German PAL (phone alternating lines) When differences in product operating systems exist, a company unwilling to change its products must limit the number of it can enter, unless proper modification is undertaken for other market requirements. The conditions dictating product modification mentioned so far are mandatory in the sense that without adaptation a product either cannot enter a market or is unable to perform its functions there. Such mandatory standards make the adaptation decision easy: a marketer must either comply or remain out of the market. II. Optional Product Modification A more complex and difficult decision is optional modification which is based on the international marketers discretion in taking action. For example, NES Caf in Switzerland tastes quite different from the same brand sold just a short distance across the French border. Conditions used for optional modifications include the following: 1. Physical distribution Involves the facilitation of product transportation at the lowest cost. Since freight charges are assessed on either a weight or a volume basis, the carrier may charge on the basis of whichever is more profitable. The marketer may be able to reduce delivery costs if the products are assembled and then shipped. Addis Ababa university School Of Commerce Page 169

Many countries have narrow roads, doorways, stairways, or elevators that can cause transit problems when products are large or are shipped assembled. 2. Local use conditions including climatic conditions. The hot/cold, humid /dry conditions may affect product durability or performance. In Brazil, automobiles are designed to run on low quality gas, to withstand the countrys rough dusty roads, and to weather its sizzling temperatures. Certain changes may be required in Gasoline formulations. If the heat is intense, gasoline requires a higher flash point to avoid vapor locks and engine stalling. Lipstick line for a hot and humid climate too. 3. Space constraint Searss refrigerators were redesigned to be smaller in dimensions without sacrificing the original capacity, So that they could fit the compact Japanese home. Philips, similarly, had to reduce the size of its coffee maker. Us mills resisted japans repeated demands by cutting plywood dimensions according to Japanese specifications 3 by 6 fit. (USA plywood dimensions are 4 by 8 ft.) 4. Consumer demographics as related to physical appearance Philips downsized its shaver to fit the smaller Japanese hand. Even a doll may have to be modified to better resemble the physical appearance of local people. British comforters do not fit American beds.
5. Users habit
Since the Japanese prefer to work with pencils-a big difference from the typed business correspondence common in the USA-copiers require special characteristics that allow the copying of light pencil lines. Addis Ababa university School Of Commerce Page 170

Microsofts plant in Ireland was characterized with the task of localizing Windows 95 into more than 50 languages. 6. Environmental characteristics Detergents should be reformulated to fit local water conditions. IBM had to come up with a completely new design so that its machine could include Japanese word-processing capability. 7. Price Price may influence a products success or failure in the market places. For example, US products tend to be expensive, but foreign consumers incomes tend to be at lower levels than Americans. To solve this problem, American companies can reduce the contents of the product or remove any nonessential parts or do both. 8. Limiting product movement across national boundaries The rational for this desire to discourage gray marketing is that some countries have price controls and other laws that restrict profits and prices. When other nearby countries has no such laws, marketers are encouraged to move products into those nearby countries where a higher price can be charged. In spite of authoritys efforts to prevent companies from keeping lowerpriced goods out of higher priced countries, marketers may do so anyway as long as they do not get caught. 9. Historical preference, or local customs and culture Product size, color, speed, grade, and source may have to be redesigned in order to accommodate local preference. Asians and Europeans by tradition prefer to shop on a daily basis, and thus they desire smaller refrigerators in order to reduce cost and electrical consumption. When products clash with a culture, the likely loser is the product, not the culture. Strong religious beliefs make countries of the Middle East insist on halalled chickens. Addis Ababa university School Of Commerce Page 171

Kodak altered its film to cater to Japanese idea of attractive skin tones. Product changes are not necessarily related to functional attributes such as durability, quality, operation method, maintenance, and other engineering aspects. Frequently, aesthetic or secondary qualities must also be taken into account. Marketing of Services Internationally, the invisible trade is responsible for 1/5th of the value of world exports. Trade services are very likely to continue to expand rapidly. There are two major categories of services: Consumer and business services. Business services that are exported include advertising, construction and engineering, insurance, legal services, data processing, and banking. Among the consulting and technical services are personnel training and supervision, research. Services have several unique characteristics: they are intangible, personoriented, and perishable. Still virtually all marketing concepts and strategies used to market tangible products are relevant to the marketing of services. Regarding market entry modes, a service firms unique characteristics low capital intensity and the inseparability of production and consumption may have some impact on entry-mode choice. In general, service firms prefer full-control modes. But firms with low asset specificity, in responding to the rising costs of integration or the diminishing ability to integrate, may have to relinquish control and seek shared-control ventures. In practice, service firms can use virtually all market entry strategies when they are appropriate. For example, in the financial service industry, American firms have entered into partnership and joint venture agreements with European and Japanese firms. Addis Ababa university School Of Commerce Page 172 management of facilities, and economic and business

5. Branding Decisions 1. Branding vs. No branding decisions No .unbranded commodity Does the product have production Consistency and salient attributes which can be differentiated? Yes
Branding 2. Manufacturing own brand vs. private brand decision No private brand Is the manufacturer the least dependent person? Yes Manufacturers own brand 3. Global brand vs. local brand decision No Global brand Are there inter market differences (Demographically and or psychhographically)? Yes Local brands 3. Single brand vs. multiple brands decision No single brand Are there inter market differences (Demographically and or psychhographically)? Yes Market segmentation & multiple brands Branding Levels and Alternatives
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There are four levels of branding decisions: 1. No brand versus brand
2. private brand versus manufacturers brand 3. single brand versus multiple brand 4. local brand versus worldwide brand 1. No Brand Versus Brand
No brand (Generic or brand less product) Lower production cost Lower marketing cost Lower legal cost More flexibility in quality and quantity control possibility of less rigidity in control Good for commodities-undifferentiated items. Brand (Branded Product) Better identification Better awareness Better chance for product differentiation Better chance for repeat sales Possible premium pricing removal from price competition Possibility of making demand more price inelastic 2. Private brand versus manufacturers brand
Private Brand (Private Label) ease in dealers acceptance possibility of larger market share no promotional hassles and expenses good for manufacturer with unknown brand and identity 2.2 Manufacturers Brand better control of products and features better price because of more price inelasticity Addis Ababa university School Of Commerce Page 174

retention of brand loyalty better bargaining power assurance of not being bypassed by channel members 3. Single Brand versus Multiple Brands (Single Markets) 3.1 Single Brand better marketing impact permitting more focused marketing brand receiving full attention reduction of advertising costs because of better economies of scale and lack of duplication elimination of brand confusion among employees, dealers , and consumers good for product with good reputation and quality ( halo effect) 3.2 Multiple Brand Utilization of market segmentation techniques Creation of excitement among employees Creation of competitive spirits Avoidance of negative connotation of existing brand Gain of more retail shelf space Retention of customers who are not brand loyal Allowance of trading up or down without hurting existing brand 4 Local Brand Versus Worldwide Brand (Multiple Markets) 4.1 Local Brand Legal necessity name already used by someone else in local market Elimination of difficulty in pronunciation Allowance for more meaningful names-more local identification Elimination of negative connotations Avoidance of taxation on international brand Quick market penetration by acquiring local brand Allowance of variations of quantity and quality across markets 4.2 Worldwide brand /Global brand /international / universal brand
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Better marketing impact and focus Reduction of advertising costs Elimination of brand confusion Good for culture-free product Good for prestigious brand Easy identification/recognition for international travelers Good for well known designer Brand Protection The job of branding cannot be considered done just because a name has been chosen. The brand must be protected. The first protection step is to obtain trade mark registration. Because of the cost involved, it may be neither practical nor desirable to register the name in all countries, especially in places where demand seems weak. It is inexcusable, however, not to do so in major markets. There are international arrangements that simplify the registration process. 1. The Paris convention ( international convention for the protection of industrial property) is the most significant multilateral agreement owner to obtain the same protection on trade mark rights because it establishes reciprocity, which allows a foreign trademark in other convention member countries as in the owners home country. 2. The Madrid convention, nationals of the participating countries can have simultaneous trademark filing among all member countries . 3. The trade mark registration treaty (TRT) allows a company to file for trademark protection with the international bureau of the world intellectual property (WIPO) without being required, as in the case of the Madrid Agreement, to have a prior home registration.
4. Other treaties include the Central American arrangement and the African intellectual property organization (OAPI). For example, the USA has two registers: the principal & the supplemental. Addis Ababa university School Of Commerce Page 176

The principal register provides federal protection, a benefit not provided by the supplemental register. The supplemental register is still useful for a US marketer who must obtain registration in the home country before becoming eligible to do the same in host countries. 6. Packaging Decisions If a product is not manufactured locally and has to be exported to another country, extra protection is needed to compensate for the time & distance involved. A countrys adverse environment should also be taken into account. When moisture is a problem, a company may have to wrap pills in foil or put food in tin boxes vacuum-sealed cans. Still the type of package chosen must be economical. In Mexico, where most consumers can not afford to buy detergents in large packages, detergent suppliers found it necessary to use plastic bags for small packages because cardboard would be too expensive for that purpose. From the stand point of marketing, the promotional function of packaging is just as critical as the functional aspect. Package Modification A package change may be either mandatory or at the discretion of the marketers. I. Mandatory Package Modification A mandatory change is usually necessitated by government regulations. Sometimes, it is for safety and other reasons. Sometimes, packaging regulations are designed more for protection against imports than for consumer protection. Several countries require bilinguality i.e. French and English in Canada and French and Flemish in Belgium).These requirements may force the manufacturer to increase package size or shorten messages and product name, as a bilingual package must have twice the space for copy communications. In some cases modification is dictated by mechanical or technical difficulties, such as unavailability of certain typographic fonts or good advertising typographers. Packaging and labeling are highly related. Packages may be required to describe contents, quantity, manufacturers name and address, and so on in letters of designated sizes. Addis Ababa university School Of Commerce Page 177

Any pictorial illustration that is used should not be misleading. In Singapore, certain foods must be labeled to conform to defined standards. When vitamins are used that imply added vitamins or minerals enriched, fortified, vitaminised, packages must show the quantities of vitamins or minerals added per metric unit. In addition if the product is hazardous in any way, marketers should adopt the united Nations recommendations for labeling and packaging of hazardous materials. Exports of textile products must conform to countries varying regulations. Spain has specific and extensive requirements concerning fiber content, labeling, and packaging. In addition to its inflammability requirements, Swedens labeling regulations include size, material, care and origin. Venezuela requires all packaged goods to be labeled in metric units while specifically prohibiting dual labeling to show both metric and nonmetric units. Different measurement systems may necessitate some form of product modification, and necessity applies to packaging as well. In Germany, liquid products must be bottled or packaged in standard metric sizes. Interestingly, the USA, a non metric nation, has the same requirements for liquor products. II. Optional Package Modification Optional modification of package, although not absolutely necessary, may have to be undertaken for marketing impact or for facilitating marketing activities. Through accidents and history, users in many countries have grown accustomed to particular type of packages. Mayonnaise, cheese, and mustard come in tubes in Europe, but mustard is sold in jars in USA. Orange bottles are popular in Netherlands, while nonDutch beer drinkers all over the world readily recognize a green Heineken bottle, the domestic Heineken beer comes in a brown bottle. In selecting or modifying a package, a marketer should consider local conditions related to purchasing habits. Products conventionally sold in packs in the USA are not necessarily sold that way elsewhere and may require further bulk break. This phenomenon is in part the result of lower income levels overseas and in part the result of a lack of unit pricing, which makes it difficult for buyers to see any savings derived from the purchase of a bigger package. In addition to conditions of use, other cultural factors should be taken into consideration because such factors often determine and influence consumer preference.
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Although the Ultra-high-temperature (UHT) process for packaging milk and juices in unrefrigerated cartons has long been popular in Europe, it took quite a while for American consumers who were accustomed to fresh products to start accepting aseptic packaging. Symbols and colors of packages may have to be changed to be consistent with cultural norms. If packages are offensive, they must be made more acceptable if the product is to be marketed successfully. In Japan, because manufacturers of condoms have female customers in mind, packaging tends to be cute. One brand for example, has a pink box with two dancing pigs and the words BuBu friend. In many countries, bottles are manufactured in metric sizes because of Government regulations. The containers must be made of glass, because consumers abroad regard plastic throw-away bottles as being wasteful. Therefore, both mandatory and optional packaging changes should be considered at the same time. 1.7 Summary
Decisions about products involve such issues as what products and product lines to introduce in various countries , to what extent a product should be adapted to local customs and characteristics , whether new products should be introduced , where the R & D effort unrelated should be concentrated , whether the firm should diversify into eliminated., how products should be areas, which products should be
packaged, what brand policy to pursue , what after-sale service to offer, and what warranties the company should provide on various products. Products means a bundle of attributes put together to satisfy a customer need. The product objective for each country or market should be defined separately and be based on 1) overall corporate objectives and 2) the concerns of the individual national governments , product planning decisions, both immediate and strategic are based on product objectives. Product design is a major strategic issue. A company can either offer a slandered product worldwide or adapt it to local requirements. Adaptation can prompt by physical requirements or cultural requirements. The decision to standardize or adapt Addis Ababa university School Of Commerce Page 179

is directed by the nature of the product, market development, cost/benefit considerations, legal requirements, competition, support system, physical environment, and market conditions.
To operate overseas successfully, periodic review of the product line is necessary. Product line development essentially involves three alternatives. a) Extending the domestic line, which refers to the introduction of domestic products to overseas markets b) adding products to the overseas line even if the company does not carry those products to overseas markets? and c) adding new products. New products for international markets can be either developed internally or acquired. Decisions involving the addition of new products and the procedure for undertaking new product development are complex. Products review may result in product elimination as well as product improvement. There are four alternative brands: using one name worldwide, using one name with adaptation for each market, using different names in different markets, and using the company name as a family name for all brands. The diffusion of innovations overseas involves adoption and diffusion processes that are affected by a series of factors. In fact, the diffusion process itself may have an impact on new products. International packaging is influenced by such considerations as customs, distribution channels, shippers, and host governments. The service /warranty component provides a company with an important opportunity to differentiate its product from the competition.
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Chapter - 10 Pricing Strategies in International Marketing
Objectives At the end of this chapter, students are expected to: Define pricing Identify various pricing setting approaches in international trade Describes various terms of sales in international trade Explores various forms of Countertrade and their importance in international trade Examines various forms of payment in international trade Introduction This chapter has five sections (sub-titles). The first section defines what a price is. The second section describes the Pricing Decisions/Pricing Approaches /Pricing Strategies. The third section discusses various forms of Terms of sale. The fourth section examines Counter Trade In international trade. The Fifth section explores various methods of Financing and Means of payment in international trade. 2.1 Definition of Pricing
Pricing as an active instrument of accomplishing marketing objectives: the company uses price to achieve a specific objective, whether a targeted return on profit, a targeted market share, or some other specific goal. Pricing as a static objectives: Probably exports only excess inventory, places a low priority on foreign business, and views its export sales as passive contributions to sales
2.2
Pricing Decisions/Pricing Approaches : The pricing approaches include the following:
2.1
Full-Cost Versus Variable-Cost Pricing
Full-Cost Pricing
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Companies following the full-cost pricing philosophy insist that no unit of a similar product is different from any other unit in terms of cost and that each unit must bear its full share of the total fixed and variable cost. This approach is suitable when a company has high variable costs relative to its fixed costs. In such cases, prices are often set on a cost-plus basis, that is, total costs plus a profit margin. Both variable-cost and full-cost policies are followed by international marketers.
2.2
Variable-Cost Pricing/ Marginal-Cost The firm is concerned only with the marginal or incremental cost of producing goods to be sold in overseas markets. Such firms regard foreign sales as bonus sales and assume that any return over their variable cost makes a contribution to net profit. They may be subject to charges of dumping. These firms may be able to price most competitively in foreign markets, but because they are selling products abroad at lower net prices than they are selling them in the domestic markets In that case, they open themselves to antidumping tariffs or penalties that take away from their competitive advantage. Nevertheless, variable cost pricing is a practical approach to pricing when a company has high fixed costs and unused production capacity. Any contribution to fixed cost after variable costs are covered is profit to the company.
2.3
Skimming Versus Penetration Pricing Skimming Pricing A company uses skimming when the objective is to reach a segment of the market that is relatively price insensitive and thus willing to pay a premium price for the value received. If limited supply exists, a company may follow a skimming approach in order to maximize revenue and to match demand to supply. When a company is the only seller of a new or innovative product, a skimming price may be used to maximize profits until competition forces lower prices. Skimming often is used in those markets where there are only two income levels: the wealthy and the poor. Addis Ababa university School Of Commerce Page 182

2.4 A Penetration Pricing Policy It is used to stimulate market growth and capture market share by deliberately offering products at low prices. Penetration pricing most often is used to acquire and hold share of market as a competitive maneuver. However, in country markets experiencing rapid and sustained economic growth, and where large shares of the population are moving into middleincome classes, penetration pricing may be used to stimulate market growth even with minimum competition. Penetration pricing may be a more profitable strategy than skimming if it maximizes revenues and builds market share as a base for the competition that is sure to come. Approaches to Lessening Price Escalation There are three methods used to reduce costs and lower price escalation. 1. Lowering Cost Of Goods If the manufacturers price can be lowered, the effect is felt throughout the chain. Manufacturing in a 3rd country is an attempt to reduce manufacturing costs and thus price escalation. The impact can be profound if you consider that the hourly cost of skilled labor in a Mexico is less than $3 an hour including benefits, compared with more than $ 10 in the U.S.A. 2. Lowering Tariffs When tariffs account for a large part of the escalation, as they often do, companies seek ways to lower the rate. Some products can be reclassified into a different, and lower, customs classification. An American faced a 25 % tariff that affected the price competitiveness of its products. It persuaded the Australian government to change the classification for the type of product s the company sells from computer equipment (25 % tariff) to telecommunication equipment (3 % tariff).How a product is classified is often a judgment call. The difference between an item being classified as jewelry or art means paying no tariff for art or a 26 % tariff for Jewelry. 3. Lowering Distribution Costs Shorter channels can help keep prices under control. Designing a channel that has fewer middlemen may lower distribution costs by reducing or eliminating Addis Ababa university School Of Commerce Page 183

middleman markup. Besides eliminating markups, fewer middlemen may mean lower overall taxes. Goods are taxed each time they change hands. The tax may be cumulative or non-cumulative. A cumulative value added tax is based on total selling price and is assessed every time the goods change hands. Obviously, in countries where value-added tax is cumulative, tax alone provides a special incentive for developing short distribution channels.
2.3 Counter Trade in International Trade Counter trade is goods-for- goods deal. Counter trade being one of the oldest forms of trade; it is the government mandate to pay for goods and services with something other than cash. There are three primary reasons for counter trade. Counter trade provides a trade financing alternative to those countries
that have international debt and liquidity problem Counter trade relationships may provide LDCS and MNCS with access to new markets and Counter trade fits well exceptionally with the resurgence of bilateral trade agreements between governments. Advantages of Counter Trade It moves inventory for both a buyer and a seller. Other than the tax advantage, the seller is able to sell the product at full price and can convert the inventory to an account receivable. The cash-tight buyer that lack hard currency is able to use any cash received for other operating purposes. Types of Counter Trade There are several types of counter trades, including barter, counter purchase, compensation trade, switch trading, offsets, and clearing agreements. Barter Trade: is a onetime direct and simultaneous exchange of products of equal values (one product for another) by removing money as a medium of exchange. Addis Ababa university School Of Commerce Page 184

Counter Purchase / Parallel Purchase: occurs when there are two contracts or a set of contra/ parallel cash sales agreements, each paid in cash. Unlike barter, which is a single transaction with an exchange price only implied, a counter purchase involves two separate transactions each with its own cash value by removing money as medium of exchange, barter makes it possible for cash tight countries to buy and sell. Thus, the buyer pays with hard currency, whereas the supplier agrees to buy certain products within a specified period. Therefore, money does not need to change hands. In effect, the practice allows the original buyer earn back the currency. For example, GE won a contract worth $ 300 million to build air craft engines for Swedens JAS fighters for cash only after agreeing to buy Swedish industrial products over a period of time in the same amount. Compensation Trade (buyback): Requires a company to provide machinery, factories, or technology and to buy products made from this machinery over an agreed on period. For example, a Japanese company sold sewing machines to china and received payment in the form of 300, 000 pairs of pajamas. Example Russia welcomes buyback. Switch Trading: It requires a triangular rather than bilateral trade segment. When goods, all or part, from the buying country are not easily usable or salable, it may be necessary to bring in a 3rd party to dispose of the merchandise. The 3rd party pays hard currency for the unwanted merchandise at a considerable discount. A hypothetical example could involve Italy having a credit of $ 4 million for Austrias hams, which Italy cannot use. A 3 rd party company may decide to sell Italy some desired merchandise worth $3 million for a claim on the Austrian hams. The price differential / margin is accepted as being necessary to cover the costs of doing business this way the company then sells the acquired hams to Switzerland for Swiss francs , which are freely convertible to francs. Offset: In an offset, a foreign supplier is required to manufacture /assemble the product locally and /or purchase local components as an exchange for the right to sell its products locally. In effect the supplier has to manufacture at a location that may not be optimal from an economic standpoint. Offsets are often found in purchase of air craft and military equipment. Addis Ababa university School Of Commerce Page 185

Clearing Agreement : transaction required With a line of credit being established in the central banks of the two countries , the trade in this case is continuous, and the exchange of products between two governments is designed to achieve an agreed on value or volume of trade tabulated or calculated in nonconvertible clearing account units. The contract set forth goods, ratio of exchange , and time length for completion Any imbalances after the end of the year will be settled by credit into next year, acceptance of unwanted goods, payment of penalty, or hard currency payment. Problems and Opportunities Counter trade has been criticized on several fronts. Counter trade is considered by some as a form of protectionism that poses a new threat to world trade. Some countries as Sweden, Australia, Spain, Brazil, Indonesia and much of Eastern Europe demand reciprocity in order to impose a discipline on their balance of payments. Counter trade product is alleged to be nothing but covert dumping To another compensate any supplying partners for the nuisance of taking products away at a discount. Counter trade is alleged to increase overhead costs and ultimately the price of a product. Counter trade involves time, personnel, and express in selling a customers product often a discount. Price Quotations A quotation describes a specific product, states the price for that product as well as a specified delivery location, sets the time of shipment, and specifies payment terms. It is clearing account barter with no currency
as payment, a counter trading country frequently trades its
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When a company receives an enquiry from abroad, the quotation must be very detailed in terms of weight, volume, and so on because of the customers unfamiliarity with foreign products, places, and terms. Since the time of shipment is critical, the prepared quotation should clearly specify whether the time mentioned is from the factory or the port of export and whether it includes the estimated inland transit time. Furthermore, price quotation should state explicitly that they are subject to change without notice. It is a good idea to specify the precise period during which a specific price or offer remains valid. A pro forma invoice may have to be prepared and supplied with or instead of the quotation. A pro forma invoice should be marked pro forma invoice, and it should include a statement certifying that the pro forma invoice is true and correct as well as a statement describing the country of origin of the products. The buyer uses it to apply for an import license or arranging for funds. A quotation describes the product, its price, time of shipment, and terms of sale, and terms of payment. A good quotation should include the following: Buyers name and address Buyers reference number and date of enquiry Brief description of requested products Price of each item Gross and net shipping weight Total public volume and dimensions packed for export. Trade discount Delivery point Terms of sale Terms of payment Insurance and shipping costs Validity period for quotation Total charges to be paid by customer Estimated shipping date to factory or U.S. port. Estimated date of shipment arrival. Addis Ababa university School Of Commerce Page 187

2.4 Terms of Sale
There are different terms of sale appropriate for international business. 1. Ex Works (EXW) or Ex-Named Point Of Origin: Ex means from and the price quoted is calculated from the point of origin. There are several variation of the term and they include ex factors, ex warehouse, ex works, Ex mill, ex plantation, and ex mine. Under these terms, the seller makes goods available to the buyer at a specific time and place, usually at the sellers place of business. The buyer takes delivery at the sellers premises and bears all risks and expenses from that point on. 2. FAS-Named Port of Shipment: FAS stand for Free along Side Ship. Under this term, the price includes delivery of goods alongside the vessel or other mode of transportation and the seller pays all charges up to that point. This term does not include the cost of loading. It is customary to use the port of export as the point of origin for this transaction. The sellers legal responsibility ends once it has obtained a clear wharf age receipt. 3. FOB-Named Point: FOB stands for Free ON Board. Like the other terms within the Quotations, the point where the price is applicable must be mentioned. There are a number of classes, and the point in question may be any one of these: the named inland carrier at the named inland point of departure, the named inland carrier at the named point of exportation, the named port of shipment, and the named inland point in the country of importation. Nevertheless the point used for quotation is usually the port of export. In this case the price includes local delivery & loading. The sellers responsibility does not end until goods have actually been placed aboard the ship and a bill of loading issued. The buyer arranges for overseas transportation and bears all costs and risks from the time the goods are placed on board (passes the ships nail). C & F- To Named Point of Destination: C & F stands for cost and freight. Usually, this term will name the overseas port of import as the point in question. The price generally includes the cost of transportation to the named point of debarkation. The buyer, in turn, is expected to pay for insurance. Like FOB, the risk of loss or damage to the goods is
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transformed from the seller to the buyer when the goods pass the ships rail. CIF-to named point of destination: CIF stands for cost, insurance, and Freight. Again, the point used for quotation can be any location. But the international chamber of commerce recommends that this point should be the destination. The CIF price includes the cost of goods, insurance, and all transportation charges to the point of debarkation (destination).The delivery costs are thus extended beyond the country of export. Although the price covers more items or activities than FOB, the sellers obligations still end at the same stage-when goods are aboard or loaded. The seller pays for insurance, and the sellers insurance company assumes responsibility once the goods are loaded. Firms exporting to the European Union should note that duties are imposed on the CIF value of the shipment. Ex-Dock- Named Port Of Importation: Ex-Dock means from the dock at the import point. The variation of this term include ex quay (EXQ), ex pier & ex ship (EXS).Ex-dock goes one step beyond CIF and means that the seller is responsible for placing goods on the dock at the named overseas port with the appropriate duty paid, if any. Although used principally in the US import trade, ex dock is seldom, if ever, used in American export practice, and its use in quotation for export is not recommended. DDP-Delivered Duty Paid: An example of this kind of quotation is duty paid landed U.S. With the payment of this price, the seller undertakes the delivery of goods to the place named in the country of import, most likely the buyers warehouse, with all costs and duties paid. The seller obtains an import license if required and arranges for an overseas customhouse broker to clear the merchandise through customs and to act as a freight forwarder by forwarding the goods locally to the final destination. Variations of terms: CPT- carriage paid to & CIP- carriage and insurance paid to a named place of destination are used in place of C& F and CIF, respectively for shipment by modes other than water. In the case of FCA (free carrier) to a named place, the term FOB named inland Addis Ababa university School Of Commerce Page 189

port and may be used for multimodal transport, container stations, and any mode of transport (including air). 2.5 Methods of Financing and Means of Payment
1. Cash in Advance: The seller may want to demand cash in advance when: The buyer is financially weak or unknown credit risk. The economic/political conditions in the buyers country are unstable. The seller is not interested in assuming credit risk, as in the case of consignment and open account sales. Because of the immediate uses of money and the maximum protection, sellers prefer cash in advance. The problem, of course is that, the buyer is not eager to tie up its money, especially if the buyer has some doubt about whether it receive the goods as ordered. By insisting on cash in advance, the seller shifts the risk completely to the buyer, but the seller may end up losing the sale by this insistence. 2. Bill of Exchange (Draft): A means of financing international transaction is through a bill of exchange or draft, which is a request for payment. The request is unconditional order in writing from one person (drawer) requiring the person to whom it is addressed (drawee) to pay the payee or bearer on demand or at a fixed or determinable time. The drawer, usually, the exporter, is the maker or originator of the draft requesting payment. The drawee, usually the buyer, is the party responsible for honoring or paying the draft. The payee may be the exporter, the exporters bank, the bearer, or any specified person. In short, a draft is a request for payment. It is a negotiable instrument that contains an order to pay a payee. There are two types of bill of exchange: Sight and time draft. a. Sight Draft: A sight draft as the name implies, is drawn at sight, meaning that it is paid when it is first seen by the drawee sight draft is commonly used for either credit reasons or for the purpose of title retention. b. A Time Draft or Usance or Date Draft: It is drawn for the purpose of financing the sale or temporary storage of specified goods for a specified number of days after sight ( 30, 60, 90 or longer days).It Addis Ababa university School Of Commerce Page 190

specifies payment of a stated amount at maturity. As such, it offers less security than a sight draft since the sight draft demands payment prior to the release of shipping documents. The time draft allows the buyer to obtain shipping documents to obtain merchandise when accepting the draft, even though the buyer can actually defer payment. Other Variations If bills of lading, invoices, and the like accompany the draft, this is known as documents against payment (D/P).If financial documents are omitted to avoid stamp tax charges against such documents or if bills of lading come from countries where drafts are not used, this type of collection is known as Cash against documents. Frequently, the draft terms may read 90 days sight D/A or documents against acceptance. 1. Bankers Acceptance: A bankers acceptance assists in the expansion of credit financing. A bankers acceptance is a time draft whose maturity is usually less than six months. The draft becomes a bankers acceptance when the bank accepts it; that is, the bank on which the draft is drawn stamps and endorses it as accepted. Drafts drawn on and accepted by nonblank entities are called trade acceptances. An acceptance becomes the accepting Banks obligation, and once accepted it becomes a negotiable instrument that can be bought or sold in the market like a certificate of deposits (CD) or commercial paper. Daily news papers usually list the daily prices of bankers acceptance in the financial section. The acceptance commission is the reason that a bank lends its name, integrity, and credit rating to the instrument. The discount charge is computed at the current prime bankers acceptance rate from date of purchase to maturity. The bank has primary responsibility for payment to the acceptance holder at maturity. But the draft originator still has secondary liability in case the accepting bank does not honor the claim.
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4. Letter Of Credit: An alternative to the sight draft is a sight letter of credit (L/C). As a legal instrument, it is a written undertaking by a bank through prior agreement with its client to honor a withdrawal by a 3rd party for goods and services rendered. The document, issued by the bank at the buyers request in favor of the seller, is the banks promise to pay an agreed amount of money on its receipt of certain documents within the specified time period. Usually the required documents are the same as those used with the sight draft. In effect, the bank is being asked to substitute its credit for that of the buyers. The bank agrees to allow one party to the transaction (the seller, creditor, or exporter) to collect payment from that partys correspondent bank or branch abroad. Drafts presented for payment under the L/C are thus drawn on the bank. The importer can repay the bank by either making an appropriate deposit in cash or borrowing all or part of the money from the bank. The drawee (buyer) is usually responsible for the collection charges by banks at home and overseas. Several banks may be involved in the process. a. The issuing bank, as, a rule, issues letters of credit for its present customers only, even if collateral is offered by someone else. The issuing bank forwards the L/C to the advising bank its foreign correspondent, which is usually selected for its proximity to the beneficiary. b. The advising bank is the bank that notifies the exporter that an L/C has been issued. c. The confirming Bank provides the same services as the advising bank but also it becomes liable for payment. Types of Letters Of Credit 1. Revocable Letter Of Credit: With revocable L/C, the issuing bank has the right to revoke its commitment to honor the draft drawn on it. Without prior warning or notification to the seller, the bank can cancel or modify its obligation at any time before payment-even after shipment has already been made. Since the banks commitment is not legally binding, the protection to the seller is minimal. Exporters generally do not want to accept a revocable L/C.
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2. Irrevocable letter of credit: This type of L/C is much preferred to the revocable letter of credit. In this case, once the L/C is accepted by the seller, it cannot be amended in any way or cancelled by the buyers bank without all parties approval. It is possible, however, for the buyer who receives proper documents but unsuitable goods because of fraud to obtain an injunction preventing the banker from paying fraudster. 3. Confirmed Letter Of Credit: For the exporter , it is highly desirable for the L/C to be confirmed through a bank in the exporter s country because the exporter then receives an additional guarantee of payment from a second bank- the confirming bank. The advising bank sends a cover letter along with the original L/C to the exporter, stating that the L/C has been confirmed. Naturally, a confirmed L/C is more desirable when payment is guaranteed by two banks instead of one, especially if there is some doubt about the issuing foreign banks ability to pay. Moreover, since the confirming bank is located in the same country as the exporter, the exporter is able to receive payment more readily by presenting documents to the confirming bank then issuing bank abroad. 4. Unconfirmed Letter Of Credit: When the L/C is not confirmed by a bank in the sellers country, the certainty is less and payment slower. An unconfirmed letter of credit may still be acceptable as long the foreign bank that issues it is financially strong. In fact, some multinational banks are so well known that they prohibit letters of credit issued by them to be confirmed because they believe that confirmation would tarnish their prestige. However, letters of credit can still be confirmed confidentially. 5. Standby Letter of credit (Bid or performance L/C): Unlike the purpose of a commercial L/C , which is trade-related, the purpose of a standby L/C special purpose , or bid or performance L/C is to guarantee a sellers obligation under a contract or agreement. In this case, it is the buyer that requires the seller to open an L/C naming the buyer as a beneficiary, instead of the other way around. The reason for this arrangement is that subsequent failures of the seller to fulfill the agreement can be quite damaging to the buyer , since a period of time has elapsed and the buyer has to seek a new supplier all over again. Because of the Addis Ababa university School Of Commerce Page 193

possibility of a loss of profit as a result of a delay or failure of the seller , the buyer needs to be assured that the seller is indeed capable of delivering goods or completing the project as promised. 6. Back To Back Letter Of Credit: When the seller is a trading firm or middleman who must pay a supplier before asking the supplier to deliver goods to a foreign customer , the middleman may have to obtain an L/C naming the supplier as the beneficiary. This can become a problem, if the middleman has inadequate resources to obtain a loan or an L/C from a bank. What the intermediary can do is to use the commitment of the customers issuing bank to collaterize issuance of the 2nd L/C by the intermediarys bank in favor of, say, the supplier. This is an entirely separate transaction from the original or master L/C. The intermediary (seller) assigns the proceeds of the original L/C to its bank, which in turn issues the banks own L/C in favor of the supplier for an amount not exceeding the original L/C. Because a back-to-back L/C is a transaction entirely separate from the original or master L/C, the bank issuing back-to-back credit is liable for payment to the supplier even if there is a failure to complete the requirements of the original credit. Not surprisingly, many banks are reluctant to be involved with back-to-back transactions, preferring to handle the transferable credit option instead. 7. Transferable Letter Of Credit: Again, when the seller is an agent or broker for the supplier of the goods, it is difficult for the agent to have an L/C issued to the supplier if the agents credit standing is weak or unknown. To solve the problem, the agent or broker may request a transferable L/C from the buyer. The type of L/C allows the beneficiary (agent) to transfer once rights in part or in full to another party. The agent as the 1st beneficiary requests the issuing or advising bank to transfer the L/C to its supplier -2nd beneficiaries. The transferring bank receives a commission for doing so. A reduction in the amount, unit price, shipment period, and validity period are allowed. Since the agent receives a fee or commission for the selling effort , the bank will pay the supplier based on the suppliers invoices for the transferred-lesser amount. The agent then receives the difference between the full price the agents Own invoice and the lesser amount the supplier invoice. The transferee supplier, after making the shipment, submits documentation to receive payment.
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After this is completed , the original beneficiary agent obtains a commission by substituting its invoice with any other documents evidencing price for the total value of the sale. The beneficiary presents a draft for the difference between the suppliers draft and sales value covered under the credit. The dilemma for the agent is that, unlike back-to-back L/C, there is a possibility that the transferable L/C may reveal the identity of the supplier to the agents customer and vice versa. Once the buyer learns of this identity, the buyer may elect to contact the supplier directly in the future to avoid paying a commissioner to the agent. If the original beneficiary agent does not want the buyer to be identified, the beneficiarys name or a neutral forwarders name may be substituted for the buyers name.
The failure of the agent to provide the bank with substitute documents immediately will defeat the whole purpose, since the bank has the right to deliver the transferees documents to the issuing bank. Advantages of Letters Of Credit The letter of credit offers several advantages both to the seller and the buyer. a) To The Seller: It offers security while minimizing risk The banks acceptance of the payment obligation is a better credit instrument than a bill of exchange that has been accepted by the buyer. An L/C creates a better relationship with the buyer since all terms are specified and both parties are protected. In addition, the exporter can receive payment before maturity by discounting the L/C. An L/C can be discounted at a lower rate because it offers greater security than a bill of exchange . The discount charge is usually computed at the current prime bankers acceptance rate from date of purchase to maturity. b) To The Buyer The buyer can buy now and pay later
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The L/C offers the assurance of prompt delivery. There is also an expired date for credit, and no payment is made until the goods are placed in the possession of a transport carrier for shipment. In addition, the seller must complete the terms specified in the L/C before payment is released. The buyer may receive a better price since the seller does not have to adopt unnecessary safeguards or to sell the L/C at deep discount. The buyer, as a result, may even qualify for the sellers cash discount. Disadvantages of Letter Of Credit The letter of credit offers several disadvantages both to the seller and the buyer. 1. The instrument lacks flexibility, is cumbersome, and is the most complex method obtaining payment. Any changes in the terms require an amendment to the L/C. Although suitable for a routine transaction, the L/C does not work well when the transaction is unusual and require flexibility. 2. It can also be expensive for the buyer if the government requires a prior deposit before establishing the L/C. For example, Lebanon government requires banks to have their customers make a 15 % deposit on documentary letters of credit on goods to be sold in Lebanon. 3. It Entails Credit Exposure As such, the buyers credit must be approved in advance by the buyers bank. This is understandable because the L/C is issued on an unsecured basis and the buyer applicant only pays when the issuing bank is called on to make payment. Without satisfactory credit standing, the bank may require cash or other collateral for its own protection. In fact a cash deposit may not even be acceptable if the importer has financial difficulties or an unknown credit reputation, since prior creditors may later lay claim to that amount of money in the event of the importer s bankruptcy.
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As a result, the bank will treat a request for an L/C as a request for a loan or line of credit. As such, the practice will tie up a portion of the buyers available line of credit Furthermore, L/C fees may range from 1 % to 3 % , or perhaps even higher, of the L/C amount. These fees, of course, add to the importers costs. 4. The seller must examine such items as: The description of the merchandise , Trade terms Price, Delivery date, Required documents The party responsible for insurance Departure and entry points & so on. 5. The seller must also determine whether the L/C received is confirmed and irrevocable if requested as such.
6. The seller should not accept an L/C requiring that the inspection certificate be signed by a particular individual because if that individual, because of death or other reasons, cannot sign the certificate, the exporter is unable to fulfill all the requirements and cannot collect payment. 7. A precautionary measure may be to insist that the certificate be issued by a particular inspection company rather than a specific person associated with the company. 2.6 Summary In making any pricing decisions, the following factors deserve consideration: Pricing determines the total revenue and to a large extent the profitability of any business. Because of the crucial importance of pricing, top management often plays a significant role in making pricing decisions. Top management must decide the strategic significance of pricing in the marketing. Further, top managements goals must Addis Ababa university School Of Commerce Page 197

determine the extent to which uniform versus differentiated prices are set world wide. It is argued usually that dissimilar conditions in overseas markets favor differentiated prices. Yet standardized pricing is believed to increase overall corporate effectiveness. Finally, top management assigns the pricing responsibility either to headquarters or to substitutes, or jointly between them. Pricing objectives, cost, competition, customer, and government regulations. In international marketing, these factors must be examined both at home and in the host country. Each Factor comprises a number of components that vary in each nation, both in importance and in interaction. Prices in overseas business are set by following either a cost approach or a market approach. The cost approach involves computing all relevant costs adding a profit mark up to determine the price. The market approach examines price setting from the customers view point. If the price that appears satisfactory to the potential customer does not meet the companys profit goal, either the business is given up or the price is increased. Thus either approach brings a viable decision on price. Export pricing is affected by three additional considerations: the price destinations, the nature of the product, and the currency used in completing the transaction. Usually companies prepare separate price lists for different overseas markets. The price list contains a profit margin that the price to be adjusted to local market conditions, including competitive price, the governments export incentives in some countries ,and the flexibility for competitive reduction of the price. Price escalation is an important consideration in export retail pricing. The retail price of exports usually is much higher than the domestic retail price for the same good. This difference can be explained by the added costs associated with exports, such as transportation, customs duty, and distributer margin. To counteract the excessive escalation of export prices, a variety of strategic alternatives is available to management. Price setting is one strategy. Multinational marketers in foreign markets follow essentially the same procedure for price setting as practical in domestic markets .Internationally; however, a few additional factors become important. The price in various regions of the world should be kept relatively uniform to avoid competition for
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company units from unrelated dealers in the home market. Further it may not always be desirable to purchase short-term pricing goals in foreign markets. Two important issues in international pricing are dumping and leasing. Dumping refers to the practice of pricing exports at lower levels than the Domestic price for the same goods. As dumping may adversely affect domestic industry, many nations have legislated antidumping laws. As an alternative to outright purchase, leasing is slowly emerging in importance in international marketing. While setting prices presents difficulties for various reasons, it nevertheless provides a good entry into markets otherwise inaccessible because of capital shortage.
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Chapter- 11 Distribution Strategies in International Marketing
Objectives At the end of this chapter , students are expected to: Define Distribution Management Distinguish various channels of distribution Identify and evaluate different forms of channel choices Discusses factors affecting choice of channels. Learn on how to locate, select, and motivate channel members. Explores various forms of Countertrade and their importance. Assess the nature of physical distribution & documentation. Introduction This chapter has eight sections (sub-titles). The first section deals with the definition of distribution management. The second section describes the structure of distribution channels. The third section discusses various alternative middlemen available for international marketers. The Fourth discusses various basis of classifying channels and channel development. The fifth section is concerned with channel decisions. The six sections describe factors affecting choices of channels. The seventh sections examine methods of locating, selecting and motivating channel members. The Eight sections describe physical distribution and various forms of documentation. 3.1 Definition of Distribution
Distribution is defined as a process which involves all activities related to time, place, and ownership utilities for industrial and ultimate consumers. Distribution channels are the link between producers and customers. Basically an international marketer distributes either directly or indirectly. Direct Distribution amounts to dealing with a foreign firm. Indirect distribution means through a domestic firm that serves as an intermediary. The choice of a particular channel link will be explained in the later section of this unit.
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3.2 Channel of Distribution Structures
Selling channels: Companies use two principal channels of distribution when marketing abroad:
1. Indirect Selling: It is also known as the local or domestic channel. It is

employed when a manufacturer, say, in the US markets its products through another US firm that acts as the manufacturers sales intermediary (middleman).As such, the sales intermediary is just another local or domestic channel for the manufacturer because there are no dealings abroad with a foreign firm. By exporting through an independent local middleman, the manufacturer has no need to set up an international department. The intermediary may be a domestic agent if it does not take title to the goods, or it may be a domestic merchant if it does take title to the goods. Advantages of Indirect Selling The channel is simple and inexpensive. The manufacturer incurs no start up cost for the channel and is relived of the responsibility of physically moving the goods overseas. The intermediary represents several clients who can help share distribution costs and the cost of moving the goods is further reduced. Disadvantage of Indirect Selling The manufacture has been relieved of any immediate marketing costs but, in effect, has given up control over the marketing of its product to another firm. This situation may adversely affect the products success in the future. If the chosen intermediary is not aggressive, the manufacturer may become vulnerable, especially in the case where competitors are careful about their distribution practices. The indirect channel may not necessarily permanent; the intermediary can easily discontinue handling a manufacturers product if there is no profit or if a competitive product offers a profit potential. better
2. Direct Selling
It is employed when a manufacturer develops an overseas channel. This channel requires that the manufacturer deal directly with a foreign party without going through an intermediary in the home country. The manufacturer must set up the Addis Ababa university School Of Commerce Page 201

overseas channel to take care of the business activities between the countries being responsible for shipping the product to foreign markets itself - the manufacturer exports through its own internal export department or organization. Advantages of Direct Selling 1. It is active market exploitation; since the manufacturer is more directly committed to its foreign markets. 2. Greater control. The channel improves communication because approval does not have to be given to a middleman before a transaction is completed. Therefore, the channel allows the companys policy to be followed more uniformly. Disadvantages of Direct Selling 1. It is a difficult channel to manage if the manufacturer is unfamiliar with the foreign market. 2. The channel is time consuming and expensive. Without a large volume of business, the manufacturer may find it too costly to maintain the channel. Distribution Patterns Associated With Channels There are several types of domestic and foreign intermediaries associated with both direct and indirect channels. Direct Channel There are many types of direct channels: 1. Foreign Distributor A foreign distributor is a foreign firm that has exclusive rights to carry out distribution for a manufacturer in a foreign country or specific area. The possible benefits of using a foreign distributor include: Unlike agents, the distributor is a merchant who buys and maintains merchandise in its own name. This arrangement simplifies the credit and payment activities for the manufacturer.
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The manufacturer, still, must be careful in selecting a foreign distributor or it may end up with a distributor who is deficient in marketing and servicing the product. 2. Foreign Retailer: If a foreign retailer is used, the product in question must be a consumer product rather than an industrial product. There are several means by which a manufacturer may contact foreign retailers and interest them in carrying a product, ranging from a personal visit by the manufacturers representatives to mailings of catalogs, brochures, and other literature to prospective retailers. The use of personal sales selling or a visit , although expensive because of travel costs and effective commission for the manufacturers representative , provides for a more
presentation as well as for better screening
of retailers for the distribution
purposes. The use of a direct mail, although less expensive, may not sufficiently catch the retailers attention. For such high-ticket items as automobiles or for high-volume products, it may be worthwhile for a manufacturer to sell to retailers without going through a foreign distributor. 1. State-Controlled Company: For some products, particularly utility and
telecommunication equipments, a manufacturer must contact and sell to statecontrolled companies. In addition, many countries, especially those in Eastern Europe, have state-controlled trading companies, which are companies that have a complete monopoly in the buying and selling of goods. Reasons for this limitation include shortage of foreign exchange, an emphasis on self-sufficiency, and the central planning systems of the communist and socialist countries. 2. End user: Sometimes, a manufacturer is able to sell directly to foreign end users with no intermediary involved in the process. This direct channel is a logical and natural choice for costly industrial products. For most consumer products, the approach is only practical for some products and in some countries. A significant problem with consumer purchases can result from duty and clearance problem. A consumer may place an order without understanding his or her countrys import regulations. When the merchandise arrives, the consumer may not be able to claim it. As a result, the product may be seized or returned on a freight- collect basis. Continued occurrence of this problem could become expensive for the manufacturer. Addis Ababa university School Of Commerce Page 203

Indirect Channel For a majority of products, a manufacturer may find it impractical to sell directly to the various foreign parties. With an indirect channel, a manufacturer does not have to correspond with foreign parties to foreign countries. Instead, the manufacturer deals with one or more domestic middlemen, who in turn move and /or sell the product to foreign middlemen or final users. Some agents represent the manufacturers interest and others represent the buyers interest. Agents Who Look after the Manufacturers Interest Those who represent the manufacturers interest include the following: 1. Export Broker: The function of an export broker is to bring a buyer and a seller together for a fee. The broker may be assigned some or all foreign markets in seeking potential buyers. It Negotiates the best terms for the seller but cant conclude the transaction without the principals approval of the arrangement. As a representative of the manufacturer the export broker may operate under its own name or that of the manufacturer. The export broker is useful because of its extensive knowledge of the market supply, demand, and foreign customers. This knowledge enables the broker to negotiate the most favorable terms for the principal. The broker is also a valuable associate for highly specialized goods and seasonal products that do not require constant distribution. An export broker may be used on a onetime basis by small manufacturers with limited financial resources. 2. Manufacturers Export agent or sales representative: This is an independent business person who usually retains his or her own identity by not using the manufacturers name. Having more freedom than the manufacturers own sales person, a sales representative can select when, where, and how to work within the assigned territory. Working methods include presenting product literature and samples to potential buyers. The manufacturers export agent works for commission. The manufacturers agent does not offer all services. Such services as advertising, credit assistance, repair, and installation may be excluded. An export agent may take possession but not title to the goods and thus assumes no risk- the risk of loss remains with the manufacturer. The manufacturer relinquishes control Addis Ababa university School Of Commerce Page 204

over marketing activities, and this can hurt a manufacturer whose volume is too small to receive the agents strong support. Under certain circumstances, it may not be justifiable for a small manufacturer to set up its own sales force and distribution network. Such circumstances include the following: When the manufacturer has a geographically widespread market-the usual case in international marketing. When some overseas markets are too thin. When the manufacturers product is new and the demand is uncertain. When the manufacturer is inexperienced in interpersonal marketing. When the manufacturer wants to simplify business activities. A manufacturer can avoid fixed costs associated with having its own sales and distribution organization when it employs an agent, since the commission is paid only when sales are made. 3. Export Management Company (EMC): An export management company
manages, under contract, the entire export program of a manufacturer. An EMC is also known as a combination export manager (CEM) because it may function as an export department for several allied but non competing manufacturers. When compared with export brokers and manufacturers, export agents, the EMC has greater freedom and considerable authority. The EMC provides extensive services, ranging from promotion to shipping arrangements and documentation. Moreover, the EMC handles all, not just a portion, of its principals products. In short, the EMC is responsible for all of the manufacturers international activities. Foreign buyers usually prefer to deal directly with the manufacturer rather than through a 3rd party. Therefore, an EMC usually solicits business in the name of the manufacturer and may even use the manufacturers letterhead. Identifying it as the manufacturers export department or international division, the EMC signs correspondence and documents in the name of the manufacturer. This may be an advantageous arrangement for small and medium sized firms that lack the expertise and adequate human and financial resources to obtain exports. The EMC, on the other hand, faces a dilemma because of a double risk: It can easily be dropped by its clients either for doing a poor job or for making the manufacturers products too successful.
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4. Cooperative exporter: A cooperative exporter is a manufacturer with its own export organization that is retained by other manufacturers to sell in some or all foreign markets. Except for the fact that this intermediary is also a manufacturer, the cooperative exporter functions like any other export agent. The usual arrangement is to operate as an export distributor for other suppliers, sometimes acting as a commission representative or broker. Because the cooperative exporter arranges shipping, it takes possession of goods but not little. The cooperative exporters motive in representing other manufacturers primarily involves its own financial interests. Having fixed costs for the marketing of its own products, the cooperative exporter desires to share its expense and expertise with others who want to sell in the same markets abroad. Because of these activities, a cooperative exporter is often referred to as a mother hen, a piggyback exporter, or an export vender. The relationship between the cooperative exporter and its principal is a long term one. The arrangement provides an easy, low-risk way for the principal to start marketing overseas, and the relationship should ordinarily continue as long as unrelated or non competitive products are involved. A problem may arise if the principal decides to market a new product that competes directly with cooperative exporters own product or those of the exporters other clients. 5. Webb-Pomerene Association: A Webb-pomerene Association is formed when two or more firms, usually in the same industry, join together to market their products overseas. Basically, a Webb-pomerene association is an export cartel. The Webbpomerene association performs several useful functions. It provides information to member firms, set prices, allocates orders, and sell products. It arranges shipping of the merchandise by providing for freight consolidation, rate negotiation, and ship chartering or booking. The association thus takes possession of goods and makes all necessary arrangements but without taking title of the goods. This type of organization works in USA properly, though it is not serving the service sector. Agents who look after the interests of the buyer Agents Buyer who look after the interests of the buyer includes the following:
Purchasing/buying agents or offices, country-controlled buying agent and Resident
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1. Purchasing/Buying Agents or Offices: An export agent represents a seller or manufacturer: the purchasing/ buying agent represents the foreign buyer. By residing and conducting business in the exporters country, the purchasing agent is in a favorable position to seek a product that matches the foreign principals preferences and requirements. Operating on the overseas customers behalf, the purchasing agent acts in the interest of the buyer by seeking the best possible price. Therefore, the purchasing agents client pays a fee or, commission for the services rendered. The purchasing agent is also known by such names as commission agent, buyer for export, export commission house, and export buying agent. This agent may also become an export-confirming house when confirming payment and paying the seller after receiving invoice and title documents for the client. 2. Country-Controlled Buying Agent: A variation on the purchasing agent is a country-controlled buying agent. This kind of agent performs exactly the same function as the purchasing/buying agent, the only distinction being that the country-controlled buying agent is essentially a foreign governments agency or quasi-governmental firm. The country-controlled buying agent is empowered to locate and purchase goods for its country. This agent may have a permanent office location in countries that are major suppliers, or the countrys representative may make formal visits to supplier countries when the purchasing need arises. 3. Resident Buyer: As implied by the name, the resident buyer is an independent agent that is usually located near highly centralized production industries. Although functioning much like a regular purchasing agent , the resident buyer is different because it is retained by the principal on a continuous basis to maintain a search for new products that may be suitable. The long-term relationship makes it possible for the resident buyer to be compensated with a retainer and a commission for business transacted. The resident buyer provides many useful services for a manufacturer. It can offer a favorable opportunity for a supplier to maintain a steady and continuous business relationship as long as the supplier remains competitive in terms of price, service, style, and quality. The resident buyer uses its judgment to make decisions for its overseas client, which does not have the time to send someone to visit production sites or firms or Addis Ababa university School Of Commerce Page 207

which cannot wait to examine samples. The resident buyer can make certain that delivery is made as promised. A late delivery can make the purchase meaningless, especially in the case of seasonable or fashion products. If the foreign client decides to visit manufacturing plants or offices, the residing buyer can assist by making hotel reservations, announcing the visit to suppliers, arranging vendor appointments, and so on. 3.3 Analysis Of Alternative Middlemen There are three alternatives of middlemen when middle men are analyzed: Home -country middlemen; Foreign-country middlemen & Government affiliated middlemen 1. Home -Country Middlemen/ Domestic Middlemen It is located in the producing firms country; provide marketing services from a domestic base. By selecting domestic middlemen as intermediaries in the distribution processes, companies relegate foreign-market distribution to others. Advantages of domestic middlemen They offer advantages to: Companies with small international sales volume Those inexperienced with foreign markets Those not wanting Those wanting to to become immediately involved sell abroad with minimum with the and complexities of international marketing, and financial management commitment. Major Trade Off Of Domestic Middlemen A major trade of when using home country middlemen is Limited control over the entire process. They are most likely to be used when the marketer is uncertain or desires to minimize financial and management investment. A brief discussion of the more frequently used types of domestic middlemen is presented here in under. Manufacturers retail stores: an important channel of distribution for a large number of manufacturers is the owned, or perhaps franchised, retail store. Many Italian luxury goods makers take this approach. Addis Ababa university School Of Commerce Page 208

Global Retailers: Among others Wal- Mart, with 1,028 stores in nine foreign markets, is an attractive entry point to international markets for U.S suppliers. For example, pacific connections, a California manufacturer of handbags with $ 70 million in sales, ventured into overseas markets in Argentina , brazil, Canada, and Mexico through its ties to Wal- Mart. Export management companies (EMC): are important middlemen for firms with relatively small international volume or for those unwilling to involve their own personnel in the international function. EMC range in size from 1 person upward to 100 and handle about 10 % of the manufactured goods exported. For example, the Washington based company that has exclusive agreements of orthopedic equipment and markets these products on a worldwide basis. Trading companies: trading companies have a long and honorable history as important intermediaries in the development of trade between nations. These companies accumulate, transport, and distribute goods from many countries. Large established trading companies generally are located in developed countries; they sell manufactured goods to developing countries and buy raw materials and unprocessed goods. Japanese trading companies date back to the early 1700s and operate both as importers and exporters. U.S export trading companies: The export trading company (ETC) act allows producers of similar products to form export trading companies. A major goal of the ETC act was to increase U.S. exports by encouraging more efficient export trade services to producers and suppliers in order to improve the availability of trade finance and to remove antitrust disincentives to export activities. Through such joint ventures, U.S. firms can take advantage of economies of scale, spread risk, and pool their expertise. Complementary marketers/ piggy backing: Companies with marketing facilities or contacts in different countries with excess marketing capacity or a desire for a broader product line sometimes take on additional lines for international distribution. Most piggyback arrangements are undertaken when a firm wants to fill out its products line or to keep its seasonal distribution channels functioning throughout the year. The selection
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process for new products for piggyback distribution determines whether: The product relates to the product line and contributes to it, The product fits the sales and distribution channel presently employed, There is an adequate margin to make undertaking worthwhile, and The product will find market acceptance and profitable volume. Manufacturers Export Agent (MEA): The MEA is an individual agent middleman or an agent middleman firm providing a selling service for manufacturers. Unlike the EMC, the MEA does not serve as the producers export department but has a short-term relationship, covers only one or two markets, and operates on a straight commission basis. MEAS do business in their own names rather than in the name of the client. Home-country brokers: The term broker is a catchall for a variety of middlemen performing low-cost agent services. The term is typically applied to import-export brokers who provide the intermediary function of bringing buyers and sellers together and who do not have a continuing relationship with their clients. They are specializing in one or more commodities. Buying offices: a variety of agent middlemen may be classified simply as buyers or buyers for export. Their common denominator is a primary function of seeking and purchasing merchandise on request from principals; as such, they do not provide a selling service. Their chief emphasis is on flexibility and the ability to find merchandise from any source. They do not often become involved in continuing relationships with domestic suppliers and do not provide a continuing source of representation. Selling Groups: several types of arrangements have developed in which various manufacturers or producers cooperate in a joint attempt to sell their merchandise abroad. This may take the form of complementary exporting or of selling to a combined business such as a Webb-Pomerene
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export association. Both are considered agency arrangements when the exporting is done on a fee or commission. Webb-pomerene export associations (WPEAs): The Webb-pomerene export act of 1918 made it possible for American business firms to join forces in export activities without being subject to the Sherman Antitrust Act. WPEA offer four major benefits: Reduction of export costs Demand expansion through promotion, Trade barrier reductions, and Improvement of trade terms through bilateral bargaining. Foreign sales corporation (FSC) is a sales corporation set up in a foreign country or U.S. possession that can obtain a corporate tax exemption on a portion of the earnings generated by the sale or lease of export property. Manufacturers and export groups can form FSC. WPEAs include some Americas blue-chips companies in agricultural products, chemicals and raw material, forest products, pulp and paper, textiles, rubber products, motion pictures, and television . Export merchants: are essentially domestic merchants operating in
foreign markets. As such, they operate much like the domestic wholesaler. Specifically, they purchase goods from a large number of manufacturers, ship them to foreign countries, and take full responsibility for their marketing. Sometimes they utilize their own organizations, but more commonly they sell through middlemen. They may carry competing lines, have full control over prices, and maintain little loyalty to suppliers, although they continue to handle products as long as they are profitable. Export Jobbers: deal mostly in commodities: they do not take physical possession of goods but assume responsibility for arranging transportation. Because they work on a job-lot basis, they do not provide a particularly attractive distribution alternative for most producers. II. Foreign-Country Middlemen Using foreign-country middlemen moves the manufacturer closer to the market and involves the company more closely with problems of language, physical distribution, communications, and financing. Foreign middlemen may be agents or Addis Ababa university School Of Commerce Page 211

merchants, they may be associated with the parent company to varying degrees, or they may be temporarily hired for special purposes. Some of foreign country middlemen are manufacturers and foreign distributors are discussed here in under: 1. Manufacturers representatives: are agent middlemen who take
responsibility for a producers goods in a city, regional market area, entire country, or several adjacent countries. When responsible for an entire country, the middleman is often called a sole agent. Foreign manufacturers representatives have a variety of titles, including sales agent, resident sales agent, exclusive agent, commission agent, and an indent agent. They take no credit, exchange or market risk but deal strictly as field sales representatives. They do not arrange for shipping or for handling and usually do not take physical possession. 2. Distributors: this intermediary often has exclusive sales rights in a specific country and works in close cooperation with the manufacturer. The distributor has a relatively high degree of dependence on the supplier companies, and arrangements are likely to be on a long-run, continuous basis. Working through distributors permits the manufacturer a reasonable degree of control over prices, promotional effort, inventories, servicing, and other distribution functions. 3. Foreign country brokers: are agents who deal largely in commodities and food products. The foreign brokers are typically part of small brokerage firms operating in one country or in a few contiguous countries. Their strength is in having good continuing relationships with customers and providing speedy market coverage at a low cost. A typical, but still are part of this category, art auction houses as those in china and the Netherlands. 4. Managing agents and compradors: a managing agent conducts business within a foreign nation under an exclusive contract arrangement with the parent company. The agent in most cases operates under a contract with the parent company. Compensation is usually on the basis of cost plus a specified percentage of the profits of the managed company.
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5. Dealers: represents anyone who has a continuing relationship with a supplier in buying and selling good. Dealers are more specifically middlemen selling industrial goods or durable consumer goods direct to customers; they are the last step in the channel of distribution. Dealers have continuing, close working relationships with their suppliers and exclusive selling rights for their producers products within a given geographic area. Finally, they derive a large portion of their sales volume from the products of a single supplier firm. 6. Import jobbers, wholesalers, and retailers: import jobbers purchase
goods directly from the manufacturer and sell to wholesalers and retailers and to industrial customers. Large and small wholesalers and retailers engage in direct importing for their own outlets and for redistribution to smaller middlemen. The combination retailer-wholesaler is more important in foreign countries than in the United States. It is not uncommon to find large retailers wholesaling goods to local shops and dealers. III. Government Affiliated Middlemen Marketers must deal with governments in every country of the world. Products, services, and commodities for the governments own use are always procured through government purchasing offices at federal, regional, and local levels. In the Netherlands, the states purchasing office deals with more than 10, 000 suppliers in 20 countries. About 1/3rd of the products purchased by that agency are produced outside the Netherlands. 3.4 Channel Development The suitability of a particular channel depends greatly upon the country in which it is used. A particular type of intermediary that works in one country may not work elsewhere nor may loss effectiveness over time. This does not necessarily mean that each country requires a unique channel. But a company must find a country classification system. Classification based on environmental characteristics, according to Litvak and Banting, includes the following: political stability Market opportunity Addis Ababa university School Of Commerce Page 213

Economic development and performance Cultural unity Legal barriers/ restrictions Physiographic barriers, and Geocultural distance. Based on these characteristics, countries may be classified as hot, moderate or cold. Classification is a means of to an end, and the purpose of the country temperature gradient is to determine which intermediary should be used in a given country. A hot country is one that scores high on the first four characteristics and low on the last three. For a hot country, environmental forces may be so hot that new institutional structures arise. Middlemen who fail to adjust will be bypassed and go out of existence. The survival of a channel member is thus, a function of the ability to adapt to changing environmental conditions because the channel member cannot hide behind local regulations for protection For example, in the UK, either the principal or the intermediary can terminate an agency relationship provided there is a reasonable notice. A cold country is exactly the opposite of a hot country. In a cold country, competitive pressures on institutional change are not dynamic. Legal restrictions can prevent or slow down new distribution
innovations. For example, in Egypt, only persons born of Egyptian fathers or Egyptian legal entities can represent foreign principals. A moderate one is medium on all seven characteristics. 3.5 Channel Decisions The international market requires a marketer to make at least three channel decisions: a. Channel length-is concerned with the number of times a product changes hands among intermediaries before it reaches the final consumer. The channel
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is short when the product has to change hands just once or twice. If the manufacturer elects to sell directly to final consumers, the channel is direct. b. Channel width: is related to the number of middlemen at a particular point or step in the distribution channel. Channel width is a function of the number of whole sellers and the different kinds that are used, as well as a function of the number and kind of retailers used. As more intermediaries or more types are used at a certain point in the channel, the channel becomes wider and more intensive. If only qualified intermediaries are needed to provide proper product support at a particular level or at a specific location. The channel is selective. The distribution becomes exclusiveif only one intermediary of one type used in that particular area. c. Number of Distribution channels: In some circumstances, the manufacturer may employ many channels to move its product to consumers. The manufacturer, in some circumstances, it may use a long channel and direct channel simultaneously. The use of dual distribution is common if the manufacturer has different brands intended for different kinds of consumers. The manufacturer may use multiple channels by setting up its own sales force in a foreign market where the manufacturer cant remove the original channel or agent for strategic or legal reasons. Determinant of Channel Types There is no single across-the board solution for all manufacturers channel decisions. Factors that must be taken into account include: 1. Legal Regulations: A country may have specific laws that rule out the use of particular channels or middlemen. France, for example, prohibits the use of door-to-door selling. Iraqi legislation prohibits state enterprise from dealing with 3rd party intermediaries. 2. Product Image: The product image desired by a manufacturer can dictate the manner in which the product is distributed. A product with a low-price image
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requires intensive distribution. On the other hand, it is not necessary or even desirable for a prestigious product to have wide distribution. 3. Product Characteristics: The type of product determines how that product should be distributed. For low-priced, high-turnover convenience products, the requirements is for an intensive distribution network. The intensive distribution of ice-cream is an example. 4. Middlemens loyalty and Conflict: One ingredient for an effective channel is satisfied channel members. As the channel widens and as the number of channels increases, more direct competition among channel members is inevitable. Some members will perceive large competing members and selfservice members as being unfair. Some members will blame the manufacturers for being motivated by agreed when setting up a more intensive network. In effect, intensive distribution reduces channel members cooperation and their loyalty as well as increase channel conflict. 5. Local Customs: Local business practices, whether outmoded or not, can interfere with efficiency and productivity and may force a manufacturer to employ a channel of distribution that is longer and wider than desired. Because of Japans multi tired distribution system, which relies on numerous layers of middlemen, companies often find it necessary to form a joint venture with a Japanese firm. The rule of thumb in Hong Kong is that there should be no more than two layers between a US exporter of finished goods and Hong Kong consumers 6. Power and Coercion: The least-dependent-person hypothesis states that the one party with resources and alternatives can demand more because it needs the other party less. As such, the least dependent member of the channel has more power and may be able to force other channel members to accept the plan. This hypothesis explains why it has been difficult for Japanese and Korean semiconductor manufacturers to recruit US distributors to reach customers who are too small to buy directly from computer-chip manufacturers. The major US semiconductor manufacturers have long adopted manufacturers a tacit policy of not allowing their distributors to sell Japanese competitors products.
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7. Control: If it has a choice, a manufacturer that wants to have better control over its product distribution may want to both shorten and narrow its distribution channel. Apparently, manufacturers want to get closer to final customers. 3.6 Factors Affecting Choice of Channels
The international marketer needs a clear understanding of market characteristics and must have established operating policies before beginning the selection of channel members. The following points should be addressed prior to the selection process. 1. Identify specific target markets within and across countries. 2. Specify marketing goals in terms of volume, market share, and profit margin requirements. 3. Specify financial and personnel commitments international distribution 4. Identify control , length of channels , terms of sale , and channel ownership Although the overall marketing strategy of the firm must embody the companys profit goals in the short and long run, channel strategy itself is considered to have six specific strategy goals: These goals can be characterized as the six Cs of channel strategy: 1. Cost: There are two types of channel cost: a) the capital or investment cost of developing the channel and b) The cost of continuing cost of maintaining it. The latter can be in the form of direct expenditure for the maintenance of the companys sales force or in the form of margins, markup, or commissions of various middlemen handling the goods. The cost of middlemen include transporting and storing the goods, breaking bulk, providing credit, and local advertising, sales representation, and negotiations. 2. Capital requirements: The financial ramifications of a distribution policy are often overlooked. Critical elements are capital requirements and cash flow patterns associated with using a particular type of middle men. Maximum investment is usually required when a company establishes its own internal Addis Ababa university School Of Commerce Page 217 to the developments of

channels, that is, its own sales force. Use of distributors or dealers may lessen the capital investment, but manufacturers often must provide initial inventories on consignment, loans, floor plans, other arrangements. 3. Control: The more involved a company is with the distribution, the more control it exerts. A companys own sales force affords the most control, but often at a cost that is not practical. Each type of channel arrangement provides a different level of control, as channels grow longer, the ability to control price, volume, promotion, and type of outlets diminishes. If a company cannot sell directly to the end user or final retailer, important selection criteria for middlemen should be the amount of control the marketer can maintain. 4. Coverage: The goal of full-market coverage is to gain the optimum volume of sales obtainable in each market, secure a reasonable market share, and attain satisfactory market penetration. Coverage may be assessed by geographic or market segments, or both. Adequate market coverage may require changes in distribution systems from country to country or time to time. Coverage is difficult to develop both highly developed in highly developed areas and in sparse markets the former because of heavy competition and the latter because of inadequate channels. To achieve coverage , a company may have to use many different channels-its own sales force in one country, manufacturers agents in another, and merchant wholesalers in still another. 5. Character: The channel of- distribution system selected must fit the character of the company and the markets in which it is doing business. Some obvious product requirements, often the 1st considered, relate to perishability or bulk of the product, complexity of sale, sales service required, and value of the product. Channel commanders must be aware that channel patterns change; they cannot assume that once a channel is developed to fit the character of the company and market, no need be done. 6. Continuity: Channel of distribution often poses longevity problems. Most agent middlemen firms tend to be small institutions. When one individual retires or moves out of a line of business, the company may find it has lost its distribution in that area. Wholesalers and especially retailers are not noted for their continuity in business either. Most middlemen have little loyalty to their vendors. They handle brands in good times when the line is making money, but quickly reject Addis Ababa university School Of Commerce Page 218

such products within a season or a year if they fail to produce during that period. Manufacturers must attempt to build brand loyalty downstream in a channel lest middlemen shift allegiance to other companies or other inducement. 3.7 Locating, Selecting, and Motivating Channel Members The actual process of building channels for international distribution is seldom easy, and many companies are stopped in their efforts to develop international markets by their utility to construct a satisfactory system of channels. Construction Of The Middleman Network Includes: seeking out potential middlemen, Selecting those who fit the companys requirements and establishing working relationships with them. 1. Locating Middlemen: The search for prospective middlemen should begin with the study of the market and determination of criteria for evaluating middlemen servicing that market. The checklist of criteria differs according to the type of middlemen being used and the nature of their relationships with the company. Basically, such lists are built around four subjects areas: Productivity or volume, financial strength, Managerial ability & capability and the nature and reputation of the business 2. Selecting Middlemen: Finding prospective middlemen is less a problem than determining which of them can perform satisfactorily. Steps in Selecting Middlemen includes: a) Screening: The screening and selection process itself should include the following actions. an exploratory letter product information and distributor requirements including
in the native language
sent to each prospective middlemen; A follow-up-to the best respondents for more specific information concerning lines handled , territory covered, size of firm, number of sales people, and other background information; Check of credit and references from other clients and customers of the prospective middleman; and If possible, a personal check of the most promising firms. Experienced exporters suggest that the only way to select a middleman is to go personally to the country and talk to ultimate users of your product to find who they consider to be the best distributors. b) Addis Ababa university School Of Commerce The Agreement: Once a Page 219

potential middleman is found and evaluated, there remains the task of detailing the arrangements with the middleman. So far the company is in a buying position; now it must shift into a selling and negotiating position to convince the middleman to handle the goods and accept a distribution agreement that is workable for the company. Agreements must spell out specific responsibilities of the manufacturer and the middleman, including an annual sales minimum. The sales minimum serves as a basis for evaluation of the distributor, failure to meet sales minimums may give the exporter the right of termination. Some experienced exporters recommend that initial contracts be signed for one year. 3. Motivating Middlemen: The level of distribution and the importance of the individual middleman to the company determine the activities undertaken to keep the middleman motivated. On all levels there is a clear correlation between the middlemans motivation and sales volume. Motivational techniques that can be employed to maintain middleman interest and support for the product may be grouped into five categories: a) Financial Rewards: Financial rewards must be adequate for any middleman to carry and promote a companys product. Without a combination of adequate margin and adequate volume, the middleman cant afford to give much attention to a products. b) Psychological Rewards. Being human, middlemen and their salespeople respond to psychological rewards and recognition of their efforts. A trip to the US or to the parent companys home or regional office is great honors. c) Communication: the Company should maintain a continuing flow of communication in the form of letters, newsletters, and periodicals to all its middlemen. The more personal these are the better. d) Company Support: More and better contact naturally leads to less conflict and smoother working relationships. d) Corporate Rapport: Considerable attention must be paid to the establishment of close rapport between the company and its middlemen. 4. Terminating Middlemen: When middlemen do not perform up to standards or when market situations change, requiring a company to restructure its distribution. Competent Legal advice is vital when entering distribution contracts with middlemen. The best rule is to avoid the need to terminate distributors by screening all prospective middlemen carefully. Addis Ababa university School Of Commerce Page 220

5. Controlling Middlemen: The extreme length of channels typically used in international distribution makes control of middlemen especially important. Marketing objectives must be spelled out both internally and to middlemen as explicitly as possible. Standards of performance should include sales volume objective, market share in each market, inventory turnover ratio, number of accounts per area, growth objective, price stability objective,, and quality of publicity. Cultural differences enter into all these areas of management. 3.8 Physical Distribution & Documentation Physical Distribution The availability of transportation is one important factor affecting a companys site selection. To move a product both within and between countries; there are three modes of transportation air, water (Ocean and inland), and land (rail & truck). The appropriate mode of transport depends on: 1. Market Location: contagious markets can be solved by rail or truck and such as the case when goods are shipped from the U.S.A to Canada or Mexico to move goods between continents; ocean or air transportation is needed. 2. Speed: when speed is essential air transport is without question the preferred mode of transportation. 3. Cost: is directly related to speed a quick delivery costs more. But there is a trade off between the two in terms of other kinds of savings. Cargo and Transportation Insurance To protect against loss or damage and to avoid disputes with oversea buyers, exporters should obtain marine insurance. 1. Marine Cargo Insurance It is an insurance that covers loss or damage at sea, though in practice it also applies to shipments by mail, air, and ship. It is similar to domestic cargo insurances but provides much broader coverage .The purpose of this insurance is to insure export shipments against loss or damage in transit. There are two basic forms of marine insurance coverage. Addis Ababa university School Of Commerce Page 221

Special (One -Time Coverage): It is a onetime policy that insures a single specific shipment. It is relatively expensive because the risk cannot be spread over a number of shipments. Nevertheless, it is a practical solution if a sellers export business is infrequent. Open (Blanket Coverage): An open policy is an insurance contract issued to a firm in order to cover all its shipments as described in the policy within named geographic regions. The policy is open in the sense that it is continuous by automatically providing coverage on all cargo moving at the sellers risk. The policy is also open in the sense that the values of the individual shipments cant be known in advance. Under this policy, no reports of individual shipments are required, although the insured must declare all shipments to the underwriter. The underwriter agrees to insure all shipments at the agreed rates within the terms and conditions of the policy. Open marine cargo policies are written only for a specified time period. A single premium is charged for this time period, based on the insureds estimated total value of goods to be shipped under the policy during the term of the contract. The contract has no predetermined termination date, though it may be cancelled by either party. Packaging It May be viewed as consisting of two distinct types: a. Industrial or exterior: the aim of industrial packaging is to prepare and protect merchandise for shipment and storage, and it accounts for seven cents of each retail dollar as well as 30% of total packaging costs. b. Consumer or Interior: this type of packaging is designed for the purpose of affecting sales acceptance. Packing is more critical for overseas shipment than domestic shipment because of the longer transit time & greater number of hazards. Packing Problems There are four common packing problems, some of which are in direct conflict with one another. Addis Ababa university School Of Commerce Page 222

a. Weight: over packing not only directly increase packing cost but also increases the weight & size of cargo. Any undue increase in weight or size only serves to raise freight charges.
b. Breakage: although over packing is undesirable, so is under packing because the latter allows a product to be susceptible to breakage or damage. The breakage problem is present in every step of ocean transport. In addition to normal domestic handling, ocean cargo is loaded aboard a vessel by use of a sling, conveyor, chute, or other methods, all of which put added stress and strain on the package. One universal packing rule is pack for the toughest leg of the journey. To accommodate this rule, cargo should be unitized or palletized, whenever possible. Palletizing is the assembly of one or more packages on a pallet base and the securing of the load on the pallet. Unitizing is the assembly of one or more items into a compact load, secured together and provided with skids and cleats for ease of handling. c. Moisture & Temperature: certain products can easily be damaged by moisture and temperature. Such products are subject to condensation even in the hold of a ship equipped with air conditioning and or dehumidifying equipment. Or the cargo may be unloaded in the rain. Many foreign ports have no covered storage facilities, and the cargo may be left in the open subject to heat, rain, cold or other adverse elements. One effective means of eliminating moisture is shrink wrapping, which involves sealing merchandise in a plastic film. There are several steps to ensure the proper way of packing to minimize moisture and breakage problems.
Place water barrier material on interior sides and roof Use vertical sheathing Block, brace, and tie down heavy items
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Use new ,clear, dry lumber and provide adequate disposals Unitize multiple similar items Use waterproof tape to deal fiberboard boxes Palletize shipping bags Use proper gauge, type, and number of straps.
d. Pilferage & Theft: Cargo should be adequately protected against theft. Pilferage levels are consistently high in Bangladesh and substantial in India. Theft can be discouraged by using shrink wrapping, seals, or strapping, gummed sealing tapes with patterns. Freight Forwarders and customhouse Broker There are two intermediaries whose services are quite essential in moving cargo for their principals, across countries as well as within countries. a. Freight Forwarders: a freight forwarder generally works for exporters. A freight forwarder is a person responsible for the forwarding of freight locally as well as internationally. He or she is an independent businessperson who handles shipments for compensation. A foreign freight forwarder is an exporters agent who performs virtually all aspects of physical distribution necessary to move cargo to oversee destinations in the most efficient an economic manner. b. Custom House Brokers: a customhouse broker works for the importer. Customhouse is the counterpart of the freight forwarder. A person or firm employed by an importer to take over the responsibility of clearing the importers shipments through customs on a Fee basis. The customer house broker is indispensable in the receipt of goods from overseas. The services are valuable because the requirements for customs clearance are complicated. This middleman handles the voluminous paperwork required in international trade and is highly specialized in: 1. Traffic operations ( methods of shipping) 2. Government export regulations 3. Overseas import regulations and Addis Ababa university School Of Commerce Page 224

4. Documents connected with foreign trade and customs clearances. The freight forwarders major contribution too exporter is his /her ability to provide traffic and documentation responsibilities for international freight movements. Documentation It is not exaggeration to say that paper moves cargo. To move cargo, documentation is necessary. There are many kinds of documents, and they are grouped under two broad categories: shipping and collection documents. a) Shipping documents Shipping documents are prepared to move shipment through customs, allowing the cargo to be loaded, shipped, and unloaded. There are several kinds of shipping documents. Such documents include export license, and shippers declaration forms, among others. 1. Export License: An export license is a permit allowing merchandise to be exported. A general license is a license for which no application is required for which documents or written authorization is granted. 2. Shippers export declaration (SED) form: SEDs are required to be filed for virtually all shipments, including hand carried merchandise, and they must be deposited with an exporting carrier regardless of the type of export license. It helps to compile basic statistical information on export shipments. These data are compiled and published monthly and show the types of commodities exported and the countries that imported them. 3. Report of request for restrictive Trade or boycott: The restrictive trade practice report is a form used to report illegal requests regarding the boycott practices received from one country against another. 4. Certificate of Registration: The certificate of registration is used to register a shipment with customs. This certificate is desirable for shipments that were originally imported and are now being returned to the country of origin for repair, replacement, alteration, or processing. 5. Hazardous certificate: The export hazardous cargo, an exporter must use a shippers certification or declaration of dangerous cargo. This document, required for all hazardous shipments, is used to describe the contents by Addis Ababa university School Of Commerce Page 225

providing the details and qualities of the items being shipped, their prior classification, required labels, and so on. This declaration must always be completed by the shipper and signed by the shipper. 6. Packing List: A packing list is a document that lists the type and number of pieces, the contents, weight, and measurement of each, as well as the marks and numbers. Its purpose is to facilitate customs clearance, keep track of inventory of goods, and assist in tracing lost goods. For insurance purposes the packing list can be used in determining the contents of a lost piece. Furthermore, it is also useful in estimating shipping cost prior to export. 7. Shippers Letter Of Instructions: The shippers letter of instructions is a form provided to the freight forwarded from the shipper giving all pertinent information and instruction regarding the shipment and how it is to be handled. When signed by the shipper, it also authorizes the forwarder to issue and sign documents on behalf of the shipper. 8. Dock Receipt: A dock receipt is proof of delivery for goods received at the dock or warehouse of the steamship line. This document is required shipments sailing from ports b) Collection Documents Collection documents are submitted to a customer or the customers bank for payment. The buyer requires such documents to protect itself and to satisfy its Governments requirements. 1. Commercial invoice: To collect payment, an invoice is needed. There are two kinds of invoice: Pro Forma: A proforma invoice is an invoice provided by a supplier prior to the shipment of merchandise. The purpose of this invoice is to inform the buyer of the kings and quantities of goods to be sent, their value, and important specifications (weight, size, and so on).The buyer may also need the pro forma invoice in order to be able to apply for an import and/or a letter of credit. Commercial: A Commercial invoice is a document that provides an itemized list of goods shipped and other charges. As a complete record of the business transaction between two parts, it provides a complete description of merchandise, quantity, price, and shipping and payment terms. It is desirable that this invoice contain a breakdown of charges, such as those related to Addis Ababa university School Of Commerce Page 226 for

inland transportation, loading, insurance, freight, handling, and certification. Because the invoice is required to clear goods through customs, all necessary information required by the buyers government must be included. 2. Foreign Customs Invoice: A customs invoice is a special format invoice required by customs officials in some countries in lieu of the commercial invoice, as those officials may not recognize the commercial invoice, for customs purpose. This type of invoice generally contains the same information as the commercial invoice and may also contain certifications with regard to value and origin of the shipment. 3. Consular Invoice: In addition to the regular commercial invoice, several countries notably those in Latin America, require legalized or visited documents that often include a special kind of invoice known as a consular invoice. A consular invoice is a detailed document prepared by a seller in the importing countrys language on an official form supplied by the importers government. 4. Certificate of Origin: A certificate of origin is a document prepared by the exporter and used to identify or declare that the merchandise originated in a certain country. It assures the buyer or importer of the country of manufacturer. This document is necessary for tariff and control purposes. Some countries may require statement of origin to establish possible preferential rates of import duties under the most favored nation arrangements. This certificate also prevents the inadvertent importation of goods from prohibited or unfriendly countries. 5. Inspection certificate: An inspection certificate is a document certifying that the merchandise was in good condition immediately prior to shipment. Many foreign buyers protect themselves by requiring a shippers affidavit or an independent inspection firm to certify quality and quantity and conformity of goods in relation to the order, as well as to ensure that the goods contracted for has actually been shipped. This certificate is normally prepared by an independent firm other than the exporter, attesting to the quality or quantity of goods being shipped. 6. Special purpose Documents: As in the case of an inspection certificate, an importer may request other special documents, such as a certificate of weight/measurement and certificate of analysis in order to protect the Page 227

importers interest. A certificate of weight/ measurement is issued by an independent party attesting to the weight or measurement of the merchandise to be shipped. A certificate of analysis contains an experts report on the findings or grading of the substance or composition of the product shipped. The document assures the buyer that the goods are those that an exporter contracted for shipment. 7. Insurance certificate: A certificate of insurance is negotiable is a negotiable document issued to provide coverage for a specific shipment. It briefly describes the transaction and its coverage. Usually, an insurance certificate is issued as an open coverage policy to protect any and all shipments and transportation as long as a certificate is filed for each shipment. Generally the policy will cover most losses sustained during transit. Not restricted only to ocean shipments is a marine insurance policy, which covers all modes of transportation. 8. Air way bill: An air way bill is basically a bill of lading issued by air carriers for air shipments. This transport instrument is not a negotiable document. As a result, a carrier will release goods to a designed consignee without the waybill. 9. Bill Of Lading: A bill of lading is a document issued to record shipment transportation. Usually prepared by a shipper on the shippers carriers forms, this document serves three useful functions. As a document of title , it is a certificate of ownership that allows a holder or consignee to claim the merchandise described A receipt of goods, it is issued by the carrier to the shipper for goods entrusted to the carriers care for transportation. A bill of lading is thus proof of the carriers possession of the freight. As a contract of carriage, the bill of lading defines the contract terms between the shipper and his carrier. The conditions under which the goods are to be carried and the carriers responsibility for the delivery are specified. 3.9 Summary
An international marketer has a broad range of alternatives for developing an economical, efficient, high-volume international distribution system. Careful analysis of the functions performed suggests more similarity than differences between Page 228

international and domestic distribution system ; in both cases the three alternatives are using agent middlemen, merchant middlemen , or government affiliated middlemen. In many instances, all three types of middlemen are employed on the international scene, and the channel structure may vary from nation to nation or from continent to continent. The employee company in international marketing can gain strength from the knowledge that information and advice are available relative to the structuring of international distribution of goods. Although international middlemen are more numerous , more reliable , and more sophisticated within the past decade , traditional channels are being challenged by the internet , which is rapidly becoming an important alternative channel to many market segments . Such growth and development offer an ever-wider range of possibilities for entering foreign markets.
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Chapter- 12 Promotion Strategies in International Marketing
Objectives At the end of this chapter , students are expected to: Define Promotion Management Examine international personal sales staffs recruitment, selection, orientation, placement ,compensation, motivation & maintenance dimensions Assess the various sales promotion techniques to be applied in order to increase international sales volume. Discuss the importance of public relation activity to enhance the global image of a company. Define advertising, explores the various media options available, and evaluates available Medias, selects and placing messages either standardized or localized to target markets. Introduction This Chapter has five sections (sub-titles). The first section deals with the nature and definition of promotion Management. The second section defines personal selling, recruitment, selection placement, training compensation and motivating international sales personnel. The third section discusses various forms of sales promotion tools to be used in international marketing. The fourth section examines the nature, definition and various tools used by public relation practioners to enhance the image of an international company. The Fifth section defines advertising, media mixes /options available for international advertising as well as makes a brief assessment on the three schools of standardized advertising.
4.1 Promotion Management Definition Addis Ababa university School Of Commerce Page 230

Promotion means communication with the customer. The creation of awareness, interest, desire, and action is the universal aim of the promotion mix. The quality, availability, and scheduling of promotional tools all influence the degree of success realized by a product or service. To communicate with and influence customers, several promotional tools are availble. The promotional mix contains: personal selling, publicity, and sales promotion & advertising. The four promotional components are not mutually exclusive, and it can be difficult, at times, to determine which one of the four activities a particular promotional tool may be. 4.2 Personal selling According to the American marketing association, Personal selling is an oral sensation in a conversation with one or more prospective purchasers for the purpose of making sales. Personal selling is more commonly known as salesmanship outside the United States. Personal selling should be used when certain conditions are met. Industrial buying or large volume purchases, characterized by large amount of money being involved, justifies personal attention. Effective when the market is concentrated or when a salesperson must develop a measure of confidence in the customer for the purchase. It is also a function of product type. In general personal selling works well with high unit value and infrequently purchased products. Such products usually require a demonstration, are custom made or fitted to an individuals need, or involve trade-ins. Recruiting Marketing and Sales: The number of marketing management personnel from the home country assigned to foreign countries varies according to the size of the operation and the availability of qualified locals. The largest personnel recruitment abroad for most companies is the sales force, recruited from three sources: Addis Ababa university School Of Commerce Page 231

Expatriates Local nationals & third country nationals Sales and marketing executives can be recruited via the traditional media of advertising including-newspapers, magazines, job fairs, and the internet, employment agencies or executives search firms, and all the important personnel referrals. The last source is crucial in many foreign countries, particularly the relationship-oriented ones. 1. Expatriates: Are sales persons from the home country? When products are highly technical, or when selling requires an extensive background of information and application an expatriate sales force remains the best choice. He /she has the advantage of greater technical training, better knowledge of the company and its product line, and proven dependability. Since they are not locals, expatriates add to the prestige of the product line in the eyes of foreign customers. Expatriates usually are able to effectively communicate with and influence headquarters personnel. The chief disadvantages of the expatriates sales force is the high cost, cultural and legal barriers, and the limited number of high-caliber personnel willing to live abroad for extended period. Expatriates commit to foreign assignments for varying lengths of time, from a few weeks or months to a lifetime. Some expatriates have one-time assignments after which they are returned to the parent company, others are essentially professional expatriates, working abroad in country after country. Still another expatriate assignment is a career-long assignment to a given country or region, which leads to the assimilation of a foreign culture to such an extent he resembles a local than an expatriate. Because expatriates are likely to cost more than locals, a company must be certain their effectiveness. The internet and other advances in communication technologies, along with the growing reluctance of executives to move abroad, are creating a new breed of expatriates called. Virtual expatriates: There is a substantial increase in short-term, commuter, and virtual assignments since 1997.Virtual expatriates manage operations in other countries but do not move there. They stay in hotels, make long visits, and maintain their families at home. Some spend up to 75 % of their working time traveling. None leave home without the ubiquitous laptop and cell phone. Addis Ababa university School Of Commerce Page 232

2. Local Nationals: The historical preference for expatriates managers and salespeople from the home country is giving way to a preference for local nationals. They are more knowledgeable about a countrys business structure than an expatriate. Furthermore, now, there are pools of qualified foreign personnel available at lower cost than a staff of expatriates. The main disadvantage of hiring local nationals is the tendency of headquarters personnel to ignore their advice. Another is lack of their availability. Recruitment locals became much more difficult in foreign countries as sales representatives tend to be on the bottom rung of the social ladder. Thus, it can be very difficult to recruit the brightest people to fill sales positions in foreign operations. 3. Third Country Nationals: The internationalization of business has created a pool of third-country nationals (TCNs), expatriates from their own countries working for a foreign company in a third country. TCNs are a group whose nationality has little to do with where they work or for whom. An example would be a German working in Argentina for a US company. Historically, there were a few expatriates or TCNs who spent the majority of their careers abroad, but now a truly global executive has begun to emerge. Overall the development of TCN executives reflect s not only a growing internationalization of business but also an acknowledgement that personal skills and motivations are not the exclusive property of one nation. TCNs often are sought because they speak several languages and know an industry or foreign country well. More and more companies feel that talent should flow to opportunity regardless of ones home country. Host-Country Restrictions The host governments attitude toward foreign workers often complicates selecting an expatriate. Concerns about foreign corporate domination, local unemployment, and other issues Cause some countries to restrict the number of non-nationals allowed to work within the country. Most countries have specific rules limiting work permits for foreigners to positions that cannot be filled by a national. Further the law often limits such permits to periods just long enough to train a local for a specific position.
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Selecting Sale and Marketing Personnel Effective executives and sales people, regardless of what foreign country they are operating in, share certain personal characteristics, skills and orientations.
1. Maturity:
is a prime requisite for expatriate and third country personnel.
Managers and sales personnel working abroad typically must work more independently than their domestic counterparts. The company must have confidence in their ability to make decisions and commitments without constant recourse to the home office or they can not individually effective.
2. Emotional stability: regardless of locations these people are living in cultures

dissimilar to their own; to some extent they are always under scrutiny and always aware that they are official representative of the company abroad. They need sensitivity to behavioral variations in different countries, but they cannot be hypersensitive that their behavior is adversely affected.
3. Considerable breadth of knowledge: they should have considerable knowledge

of many subjects both on and off the job; the ability to speak one or more other languages is always preferable.
4. Positive outlook on international assignment: people who do not like what

they are doing and where they are doing stands little chance of success, particularly in a foreign country. Failures are usually the result of overselling the assignment, showing the bright side of the picture, and not warning about the bleak side.
5. High level of flexibility: an international sales person must have a high level
of flexibility whether working in a foreign country or at home. They must be particularly sensitive to the habits of the market. Those working at home for a foreign company must adapt to the requirements and ways of the parent company.
6. Cultural Empathy: is clearly an integral part of the basic orientation because

it is unlikely that anyone can be effective if antagonistic or confused about the environment.
7. Energetic and enjoying travel: many international sales representatives spend

about 2/3rds of their nights in hotels rooms around the world. Going through
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line of the customs and immigration after a 15 hour flight requires a certain kind of stamina not commonly encountered.
Most of the traits can be assessed during interviews and perhaps during role playing exercises. Paper and pencil ability tests, biographical information, and reference checks are of secondary importance. Note: selection mistakes are costly. When an expatriate assignment does not work out, hundreds of thousands of dollars are wasted in expenses and lost time. Training for International Marketing The nature of training program depends largely on whether expatriate or local personnel are being trained for overseas position. Training for the expatriates focuses on the customs and the special foreign sales problems that will be encountered, whereas local personnel require greater emphasis on the company, its products, technical information, and selling methods. In training either type of personnel, the sales training activity is burdened with problems stemming from long - established behavior and attitudes. Local personnel, for instance, cling to habits continually reinforced by local cultures. Nowhere is the problem greater than in china or Russia, where the legacy of the communist tradition lingers. The attitude that whether you work hard or not, you get the same rewards must be changed if training is going to stick. Expatriates are also captives of their own habits and patterns. Before the training can be effective, open-minded attitudes must be established. Motivating Sales Personnel Motivation is complicated because the firm is dealing with different cultures, different sources, and different philosophies. Marketing is a business function requiring high motivation regardless of the location of the practcioner. Marketing managers and sales managers typically work hard, travel extensively and have day-to-day challenges. Selling is hard competitive work whenever undertaken and a constant flow of information is needed to keep personnel functioning at an optimal level. National differences must be considered in motivating the marketing force. Communications important in maintaining high levels of motivation, foreign mangers need to know that Addis Ababa university School Of Commerce Page 235

the home office is interested in their operations, and in turn, they want to know what is happening in the country. Everyone performs better when well informed. Designing Compensation Systems Developing an equitable and functional compensation plan that combines balance, consistent motivation, and flexibility is extremely challenging in international operations. Perhaps the most valuable information gained during IBMs process of revamping its sales compensation scheme was the following list of the Dos and Donts of the global compensation. Do involve representative s from key countries Do allow managers to decide the mix between bas & incentive pay. Do use consistent performance measures-results paid for and emphasis on each measure. Do allow local countries flexibility in implementations Do use consistent communication and training themes worldwide. Dont design the plan centrally and dictate to local offices. Dont create a similar framework for jobs with different responsibilities Dont require consistency on every performance measure within the incentive plan Dont assume cultural differences can be managed through the incentive plan. Dont proceed without the support of senior sales executive worldwide. Developing Cultural Awareness Much business focuses on the functional skills needed in international marketing, overlooking the importance of cultural knowledge. Cultural skills can be learned. People with cultural skills can:
1. Communicate respect and convey verbally and nonverbally a positive regard

and sincere interest in people and their
2. Tolerate ambiguity and cope with cultural differences and the frustration that
frequently develops when things are different and circumstances change. Addis Ababa university School Of Commerce Page 236

3. Display empathy by understanding other peoples needs and differences from
their point of view.
4. Remain nonjudgmental about the behavior of others, particularly with

reference to their own value standards
5. Recognize and control the self-reference criteria, that are, recognize their own
culture and values as an influence on their perceptions, evaluations, and judgment in a situations.
6. Laugh things off-a good sense of humor helps when frustration levels rise and
things do not work as planned. 4.3 Sales Promotions in International Markets A product, no matter how superior it is, should not be expected to sell itself. It must be promoted so that prospects can learn about the benefits provided by the product. Sales promotion is marketing activities that stimulate consumer purchases and improve retailer or middlemen effectiveness and cooperation. Sales promotions is short -term efforts directed to the consumer or retailer to achieve such specific objectives as consumer-product trial or immediate purchase , consumer introduction to the store, gaining retail-point of purchase displays, encouraging stores to stock the product, and Supporting and augmenting advertising and personal sales efforts. Sales promotion is effective when: When a product is introduced to market. It also works well with existing products that are highly competitive and standardized, especially when they are of low unit value and have high turnover. Under such conditions, sales promotion is needed to gain that extra competitive advantage.
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Restrictions Although sales promotion is generally received enthusiastically in LDCs, the activity is still largely underutilized , which may be due more to legal barriers than psychological barrier. European countries have a larger number of restrictions than the USA. Certain sales promotion is affected by local regulations: 1. Premium and Gifts: Most Europeans countries have a limit on the value of the premium given. A gift is usually subject to the same restriction as a premium. Colgate was sued by the local manufacturer in Greece for giving away razor blades with shaving cream. Austria considered premiums to be a form of discriminatory treatment towards buyers. In France, it is illegal to offer premiums that are conditional on the purchase of another product. In Finland premiums can be allowed as long as the word free is not used with them. Compared to the united states and the united kingdom , which are very lenient, Belgium , Germany, and Scandinavia have strict laws concerning promotion owing to their desire to protect consumers from being distracted from the true value of a given product or service. Argentina, Austria, Norway, and Venezuela virtually ban the use of merchandise premiums. 2. Price Reductions, Discounts, And Sales: Austria has a discount law prohibiting cash reductions that give preferential treatments to different groups of customers. Discounts in Scandinavia are restricted. In France, it is illegal to sell a product for less than its cost. In Germany, Marketers must notify authorities in advance if they plan to have a sale. Unlike the USA, where there are all kinds of sales for all occasions, a sale in Germany is limited to such events as going out of business, giving up a particular product line. Both Austria and Germany are similar in the sense that special sales may be made only under certain circumstances or during specified periods of time-seasonal sales. Moreover, discounts for payment on delivery may not exceed 3%, and any quantity discounts must be within the applicable industrys usual numerical range. 3. Samples: In Russia, tobacco firms freely distribute samples. The lucky strike girls, move around in Moscow bars to offer patrons a smoke and light. Due to Addis Ababa university School Of Commerce Page 238

public criticism, Philip Morris has stopped the sampling practice in the united sates. Also the US does not allow alcoholic beer to be offered as a free sample, this law also holds for taste tests. Germany restricts door-to-door free samples that limit population coverage as well as the size of the sample pack. 4. Sweepstakes, Games, and contests: For a sweepstakes to be legal in France, an entry form must be separate from an order form. Germany permits sweepstakes as long as they do not create psychological pressure on customer. Also they cannot be misleading, and they must not offer a prize of substantial value. Lotteries tend to be illegal in many countries-France, England, and USA.A lottery has three elements-chance, consideration, and price. For a sweepstakes, game, or contest not to become an illegal lottery, a company must make certain that at least one of these one of these three elements is missing. Overseas Product Exhibitions One of sales promotion that can be highly effective is the exhibition of a product overseas. This type of promotion may be very important because advertising and sales letters and brochures may not be adequate. For certain products, quality can be judged only by physical examination, and product exhibition can facilitate this process. There are more than 800 international trade fairs each year. Trade fairs allow thousands of firms from many countries to set up temporary stores and offices right in the market place to display their products. An exhibitor should notice and respect cultural differences in dress formality and the exchange of business cards. Trade shows overseas are serious affairs, and only business people and buyers not the general public are allowed. Because of the high cost of overseas exhibitions, exporters should consult with their Governments concerning their assistance and the other related promotional activities. It is not unusual for governments to sponsor official participation in certain major international exhibitions. 4.4 International Public Relations (Publicity) Publicity is the non-personal stimulation of demand that is not paid for by a sponsor that has released news to the media.
a. The role of public relation is creating good relationships with the

popular press and other media to help companies communicate Addis Ababa university School Of Commerce Page 239

messages to their publics-customers, the general public and Governmental regulations.
b. The job consists of not only encouraging the press to cover positive
stories about companies but also of managing unfavorable rumors, stories, and events. Publicity offers several advantages.
a. In addition to the low cost, the material presented is not recognized

as paid advertising per se because it appears in an editorial staff; thus, the material has more credibility & consumers tend to accept it as news information rather than as advertising.
b. This perception is particularly useful in countries where it is difficult

to buy commercial time or advertising space. There are several methods that can be used to gain publicity. Such methods include the following:
a. Contribution of prizes; b. Sponsorship of civic activities; c. Release of news about the companys product; d. Announcements of the companys promotional campaign, especially
with regard to such sales-promotion techniques as games & contests.
For example, Nike was able to overtake Adidas in the USA with effective publicity and sales promotion campaigns. In addition to asking athletes to help design shoes, Nike signed professional athletes to exclusive promotional contracts involving cash, free shoes, and promotion appearances. Shoes were given to top college teams, and the company gained additional exposures when these teams appeared on TV. Moreover, it sponsored running clinics, sporting events, and womens pro tennis events. The Management of Publicity Proper management is required for all publicity campaigns. Every campaign must first have a well-defined objective. Without a precise objective, it is difficult to coordinate activities, and conflicting messages or items of little news value might be released. Addis Ababa university School Of Commerce Page 240

Confusion usually follows. A person responsible for a publicity campaign should keep the needs of the media in mind. Any request for information should be handled promptly because any requested information should be handled promptly because any requested information is likely to be used. In most countries, magazines have small editorial budgets and are under staffed. A publicity placement is more likely to be accepted if it is submitted in the form that is ready to be used. For example, Photos and materials Camera -ready relieve the publication of budget and time constraints. The effectiveness of publicity is not measured by the number of news release or publication space and air time generated. The effectiveness of publicity, like other components of promotion, should be measured by sales enquires and changes in the attitude or response pattern of the public. For example, Pepsi, a minor brand in Japan, wanted to become known as a major international brand. To achieve this objective, the company tied its promotion campaign to Michael Jacksons 13 concerts in Japan. Pepsi buyers could send proof of purchase seals to apply for tickets, Jackets, T-shirts, and Key chains. The publicity campaign went well, as evidenced by the high morale of the companys personnel as well as a 100 % increase in summer sales. 4.5 International Advertising (Advertising) International advertising is the practice of advertising in foreign or international media when advertising campaign is planned, directly or indirectly, by an advertiser from another country. LDCs and socialist/communist countries, emphasizing production & distribution efficiency, usually attack advertising as a wasteful practice where primary purpose is to create unnecessary want. Yet advertising serves very useful purpose-Consumers everywhere, irrespective of their countries political systems and level of economic development, need useful product information. The marketing of a product overseas underscores the necessity for the adaptation of communication. To advertise internationally, a firm cannot simply repeat the same message indiscriminately in all markets. A message that elicits a favorable response in one country can easily fail to communicate with an audience in another
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country. To complicate the matter, there are constraints on advertising that preclude the use of certain kinds of media in certain countries. Patterns of Advertising Expenditures: In one study, advertising to sales ratio varied across 15 countries, with ratios ranging from 0.95 for Yugoslavia to 7.62 for Australia. These ratios were not related to population size, number of directly competing brands within the firm, or number of directly competing brands outside the firm. According to a well-publicized Advisor Models, the size of advertising budget is a function of: a. b. c. d. e. f. sales( + ) Number of users and other participants (+ ) Customer concentration (- ) Fraction of sales made to order ( - ) Stage in life cycle (- ) and product plans
The size of the marketing budget is a function of: 1. Prospect customer attitude differences (- ) 2. Proportion of direct sales (+ ) and 3. Product complexity (- )
It should be pointed out that the importance of particular predictor variables is not uniform across countries.
Table 1, 2, 3, and 4 provide information on budgeting methods, Media allocations, measures of advertising effectiveness, and compensation methods. Table 1: Methods of Budgeting By Country
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Budgeting methods Percentage of respondents Using this method Objective and task 64 Sweden (36%) Argentina (44%) Canada 87 % Singapore 86% Major differences Lowest percentages Highest percentages
Percent of sales
48
Yugoslavia 22%) Germany (31%)
Brazil (73%) Hong Kong (70 %) USA (64 %) Denmark 51%) Brazil 46 %) Great Britain (46 %)
Executive judgment
33
Finland (8%) Germany (8%) Yugoslavia (13%)
All-you-can-afford
12
Argentina (0% ) Israel (0 (%)
Sweden (30%) Germany (25%) Great Britain (24 %)
Matched competitors
12
Denmark (0 %) Israel (0% )
Germany (33%) Sweden (33%) Great Britain (22%)
Same as last year plus a little more Same as last year other
Israel (0%)
3 10 Finland (%), Israel (0%) Germany (0 %) Canada (24 %) Mexico (21%)
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Total exceeds1005becauserespondentscheckedallbudgeting methods that they used. Source: Nicolas E. Synodinos, Charles F.keown, and Laurence w.jacobs,transional Advertising Practice: A survey of leading Brand Advertisers in 15 countries, Journal of advertising research 29 (April/may1989) Table 2: Allocation of Advertising Budget by Media
Advertising Frequency of use (Percentage) Standard Deviation Lowest percentages Television 44 38 Denmark (0%) Sweden (0%) Israel(1) Newspaper 19 26 USA (3%) Brazil (4%) Denmark (40%) Magazine 19 25 Australia (5%) Singapore (6%) Argentina (7%) Germany (45%) Denmark (43%) Sweden (38%) Mexico (17%) Radio 6 13 Denmark (0%) Sweden (0%) Finland (0%) Australia (72%) Great Britain (68%) USA (68%) Sweden (43%) Singapore (41%) highest percentages Major differences
Billboard
10
Israel (18%)
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Cinema Transit other 1 1 6 5 5 16 Germany (0%) Australia (1%) Mexico (14%) Denmark (12%) Israel (11%)
Percentages do not addto100% exactly because of rounding. Source: Synodinos, Keown, and Jacobs, transnational advertising practice,47. Table 3: Measures of Advertising Effectiveness
Measures effectiveness of Percent respondents this method of using Lowest percentages Highest percentages Major differences
Sales
82
Germany (56%)
Australia (96%) Israel (94%)
Awareness
66
Israel (6%)
Australia (92%) Hong Kong(84%)
Recall
45
Israel (13%) Mexico (13%) Yugoslavia (17%)
Germany (67%) Australia (65%)
Executive judgment
35
Finland (10%) Israel (13%)
Brazil (62%) Great Britain (54%)
Intention to buy
27
Argentina (8%) Great Britain (14%)
Australia (42%) USA (39%) Israel (38%)
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Profitability 21 Israel (6%) Hong Kong (7%) Argentina (0%) Finland (53%) Yugoslavia (39%)
Coupon return
15
Argentina (0%) Brazil (0%)
Denmark (27%) Hong Kong (25%) Sweden (25%)
other
18
Yugoslavia (4%) Denmark (5%) Israel (6%)
Percentages do not add to 100% because respondents checked all measures of effectiveness that they used. Source: Synodinos, kewwn, and Jacobs, Transnational Advertising Practice 47 Table 4: Compensation to Advertising Agencies
Compensation method Frequency of use (percentage) Standard deviation Major difference Lowest percentage Commissions-from media 49 46 Sweden (10%) Finland (13%) Yugoslavia (17%) USA (79% ) Brazil (17%) Singapore (75%) Highest percentage
Fee for service
30
43
Sweden (71%) Yugoslavia (50%)
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Finland (49%) Cost-plus-a-fixedpercentage 9 26 Hong Kong(23% )
Barter or trade other
2 6
12 23
Argentina (17%) Finland (36%) Yugoslavia (17%)
Total is only 96% because some respondents did not sum their categories to 100%. Source: Synodinos, Keown, and Jacobs, transitional Advertising practice, 49. Advertising Media To advertise overseas, a company must determine the availability or unavailability of advertising media. Media may not be readily available in all countries or in certain areas within the countries. Furthermore, the techniques used in media overseas can be vastly different from the ones from the ones employed in another country. 1. Television: In most countries, television is not available on a nationwide basis because of the lack of TV stations, relay stations, and cable TV. Color TV, for the poor, is a rarity. Nevertheless, the viewing habits of people of lower income should not be underestimated because of the group viewing. For example, a TV set in a village hall can attract a large number of viewers, resulting in a great deal of interaction among the villagers in terms of conversation about the advertised product. In many countries, TV stations are state controlled and government operated because of military requirements. As such the stations are managed with the public welfare rather than a commercial objective in mind. The programming and advertising are thus closely controlled. Commercial TV time is usually extremely difficult to buy overseas. This is true even in Europe and Japan, where television is wide spread. Advertisers sometimes use television stations in one country to reach consumers in another country. Canada is a prime example,. More than 75 % of Canadians are clustered within 100 miles of the US border, and 95 %
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are within 200 miles. Thus nearly all Canadians are within the broadcast range of US stations. US Advertisers often use US TV stations to communicate with Canadian consumers. Cable TV and satellite TV are also often used as an international media in the sense that they reach multiple countries outside the country where the broadcast originates. The problem with this technology has been that, when an advertisement is aired, consumers in all countries are exposed to an identical message. Broadcasting time for advertising is expensive. It is advisable to use shorter commercial time. Moreover, purchase TV time well in advance. For example, TV advertising time in the Netherlands must be booked with a years notice-with a waiting list of 100 companies. 2. Radio: It retains its status in many countries as the only truly national medium. For example, in Mexico, radio provides coverage for 83% of the country. It is popular for several reasons: a) a radio set is an inexpensive and affordable-even among poor people. It is virtually a free medium for listeners; the programs are free and the costs of operating and maintaining a radio set are almost negligible b) Illiteracy poses no problem for this advertising medium.c) As a communication medium, radio is entertaining, up-to-date, and portables. d) The medium penetrates from the highest to the lowest socio-economic levels, with FM stations being preferred by high-income and better-educated listeners. In many countries, a radio stations have not become specialized in a particular program format and see no need to be selective in order to attract the listening audience. Radio stations commonly vary their programming format throughout the day, sometimes as often as every half hour. An audience shift should thus be expected, and a consequence of this practice is that it may not be easy to reach the target market effectively. 3. Newspaper: In virtually all urban areas of the world, the population has access to daily newspapers. Infact, the problem for the advertiser is not one of having too few newspapers but rather one of having too many of them. Newspapers in communist countries are controlled by the government and are thus used for propaganda purposes. Chinas newspapers, for example tend to carry news items that the government deems to express some moral and social value. Many countries have English-language newspapers in addition to the local-language newspapers. The English-language newspapers are patterned with an emphasis on world, government, and business news. This vehicle would be appropriate for an Addis Ababa university School Of Commerce Page 248

advertiser to reach government and business leaders, educated readers, upperclass people, and those with influence. There are several problems associated with advertising in foreign newspapers. The purchase of space is monumental problem. The general unavailability of space is the result of overseas newspapers having a fixed and small number of pages for each edition, including the Sunday paper. Furthermore, with so many news papers dividing a small market, it is expensive to reach the entire market. There are some 380 and 800 newspaper s in turkey and Brazil, respectively. With the advertisement s in just one paper, the reach would be quite inadequate. Advertising in several papers, on the other hand, is also practical. It is fortunate for advertisers that people often read or subscribe to two or more dailies and often share newspapers. 4. Magazines: Marketers of international products have the option of using international magazines that have regional editions (Time, business week, Newsweek, life etc ;) A trade magazine about china, for example, is suitable vehicle for all types of industrial products of interest to the Chinese government. In Europe; the number of business publications is seven times as high as that in the United States. There are more than 1,000 technical and trade journals in Scandinavia. Canada, in contrast, usually has only one trade magazines for each market segment, making it easier to cover the entire Canadian market. In Brazil, there are few magazines, and people real all three or four of them. 5. Direct Mail: Confusion usually arises when such terms as direct mail, direct advertising, direct marketing, and mail order are discussed. It is important to understand that direct marketing is a broad term that encompasses the other related terms. According to the Direct marketing Association (DMA) , direct Marketing is the total of activities by which products and services are offered to market segments in one or more media for informational purposes or to solicit a direct response from a present or prospective customer or contributor by mail, telephone , or personal visit.Direct marketers can promote their products through all advertising media. As a system, direct marketing has two distinct components: a) Promotion Methods: Direct marketers can promote their products through all advertising media. Frequently; marketer relies on direct advertising in media created for that purpose. These media consist of direct mailings and all forms of print advertisements distributed directly to prospects Addis Ababa university School Of Commerce Page 249

through a variety of methods (advertising materials distributed door-to-door, on the street, or inside the store or those placed inside shopping bags and on auto windshields. Direct mail is thus only one kind of direct advertising medium, which is in turn a part of general-advertising media or the promotional methods or direct marketing. b) Ordering/delivery method: Buyers can place orders by telephone often with a toll free number, through a personal visit, or by mail. An order that is sent in by mail and fulfilled by mail delivery is called a mail order. Thus, mail order is not a medium; rather it is just one of several means that can be used to place and handle orders. 6. Out Door: Outdoor advertising includes posters, billboards, painted bulletins, roadside and store signs, and electric spectaculars large illuminated, electric signs with special lighting and animated effects. Outdoor advertising is frequently used overseas because of the low cost of labor in painting and erecting with displays. In addition, it is considered a free medium, because an advertiser can simply place its posters on any available wall, bus stop, shelter, tree, or fence without paying for it. The practice also encourages one advertiser to replace other advertisers posters with one of its own. When using Outdoor advertising, certain rules should be followed. a) Illustrations should be large, and words should be kept to a minimum). b) A rule of thumb is to say what must be said and what can be said.c) Simple, contracting colors should be used: white on black or red seems to work. c) The right type is critical; certain typefaces are difficult to read. Having all letters in capitals can be equally as difficult and should be avoided 7. Screen (Cinema): Virtually in all countries, the cinema is a favorite activity for social gathering. People are avid moviegoers because of the limited television broadcasting. Cinemas or theaters are classified as first-class, or second-class and sometimes even third-class. Theaters usually open at noon during the weekdays and earlier on weekends, and they usually operate on a reserved seat basis, with advance reserve bookings being highly encouraged. Cinemas sell commercial time agencies or advertisers. The usual practice is for a theater is to begin with a showing of slides of advertised products, and this slide show is followed by commercials. Advantages Cinema advertising has several advantages. Addis Ababa university School Of Commerce Page 250

It has an impact of outsider advertising without the drawback of being stationary. It has sight and sound like television but with bitter quality Furthermore, cinema advertising ha s a true captive audience. Disadvantages Some moviegoers may resent having to watch commercials. But such resentment is likely a minor problem, since moviegoers are usually in a positive and receptive mood. The more serious problem is that patrons, Knowing that there will be some commercials shown first, take their time in showing up and may be wondering begins. 8. Directories: Directories are books that provide listings of people, profession, and institution. The yellow-page telephone directories, with a listing of various types of companies, are a prime example. Directories may be sold or given away free of charge. Because the telephone is not widely available in many areas and the information is not accurate, this medium has been underutilized in many countries. 9. Rural Media: In Marketing to LDCs, marketers must understand the use of rural media. Mobile units, for example, can be sent to areas lacking access to mass media. Such Vehicles can play recorded music and advertising messages over amplifiers or loudspeakers attached to the vehicles rooftops. A marketer can also attract an audience by arranging for some type of festival advertising held at a temple or school. A free out door-movie can be shown during the festival while advertising is broadcast through loudspeakers to the captive audience. 10. Stadium: Stadium Advertising is also appropriate, especially in soccer stadiums, because soccer-football is the most popular and passionate sport in the world. Signs can be displayed on stadium walls, and the advertising rules for outdoor advertising should be applied. The objective of this advertising is not so much to communicate with in a basketball or football stadium but rather to communicate with TV viewers. For nonstop games like soccer and hockey, a broadcaster can show the entire game while including logos or brief advertising messages on the Addis Ababa university School Of Commerce Page 251 into and about the theater until the main feature

edges of the screen-at the top, bottom, side, or all around, with the game being shown in the middle part of the screen. Cigarette marketers are major sponsors of sports and cultural events. For example, Billiards, horse-racing, rugby, and symphony orchestras in England because these events receive extensive TV coverage. In effect, the prominent display of names and logos allows companies to associate their brands with glamour, health, vitality, and success. 11. Other Media: There are several other advertising media that are traditional and common in LDCs and elsewhere. Some of these media are i. Advertising Specialties: a variety of inexpensive items like pens, calendars, letter openers carrying advertisers name, address, and a short messages. In spite of the cost these items are durable. Because of their attractive appearance and low production cost. ii. Internet: the internet is a global in nature, creating both worldwide opportunities and problems. It is unknown whether the law governing an internet promotion should be the law of the upload site or that of the download site. Media MIX There is no one single advertising medium that is suitable for all countries and products. The media mix has to vary from one target market to another. The basic principle s of media selection applies in all markets. In general, an advertising medium should be selective and cost effective in reaching a large number of the intended audience. It should deliver the kind of reach, frequency, and impact desired, assuming that there are no particular legal restrictions. Standardized International Advertising Standardized international Advertising is the practice of advertising the same product in the same way everywhere in the world. The controversy of the standardization of global advertising centers on the appropriateness of the variations within advertising content from country to country. The technique has generated a heated and lively debate for more than 30 years and has been both praised and condemned-passionately.
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Strictly speaking, a standardized advertisement is an advertisement that is used internationally with virtually no change in its theme, copy, or illustration. The issue of advertising standardization, without doubt, has far reaching implications. If it is a valid strategy, international business managers should definitely take advantage of the accompanying benefits of decision simplification, cost reduction, and efficiency. On the other hand, if the premise of this approach is false, the indiscriminate application of standardized advertising in the market place will cause more harm than good since it can result in consumers misinterpreting the intended messages. Consequently, the important function of advertising to facilitate a consumers search process can be seriously impaired.
Three schools of thought There are three schools of thought on the issue of standardized advertising. Standardization, Individualization & compromise . I. Standardization: the standardization school, also known as the universal, internationalized, common, or uniform approach, questions the traditional belief in the heterogeneity of the market and the importance of the localized approach. This school of thought assumes that better and faster commercialization has forged a convergence of art. Literature, media availability, tastes, thoughts, religious beliefs, culture, living conditions, language, and, therefore, advertising. Even when people are different, their basic physiological and psychological needs are still presumed to remain the same. Therefore, success in advertising depends on motivation patterns rather than on geography. Jain has proposed a framework for determining marketing program standardization. Standardization is more practical and effective under these conditions. 1. Markets are economically alike
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2. Worldwide customers, not countries, are the basis for identifying the segments to serve. 3. Countries have similar customer behavior and lifestyle. 4. The product has cultural compatibility across countries 5. There is a great degree of similarity in the firms competitive position in different markets. 6. The firm competes against the same adversaries with similar share positions in different markets. 7. Product is industrial or high-tech (versus consumer product) 8. Home-market-positioning strategy is meaningful in the host market 9. Countries have similar marketing physical, political, and legal environments 10. There are similar marketing infrastructures in the home & host countries. 11. Firm possesses key managers who share a common world view. 12. Strategic consensus exists among parent-subsidiary managers. 13. Authority for setting policies and allocating resources is centralized. (This belief is held Elinder, Roostal, Fatt, Strouse, and Levitt, among others) Guidelines to Use Standardized Advertising Keegan provides a set of guidelines that can help in determining when it is appropriate to use standardized advertising. According to Keegan there are five international product and promotion strategies. 1. One Product, One Message, Worldwide: This strategy is feasible if both the need and use conditions are uniform across countries. Coke and Pepsi, diamond, Chivas, regal scotch, and BMW automobiles, Israel Uzi submachine guns, French Exocet missiles, Russian Kalashnikov rifles, and nuclear weapons are cited as an example. 2. Product Extension Communication Adaptation: A product may be extended to other countries because of uniform use conditions, but the promotional message very likely must be changed because needs vary. Example: People in north of England and in French-speaking areas of Canada use toothpaste primarily for breath control, making the appeal of fluoride toothpastes rather limited. Addis Ababa university School Of Commerce Page 254

3. Product adaptation-communication extension: When use condition differs but need remains constant across markets, modifications of product but not promotion is necessary. Examples: The tool everywhere looks the same on outside but inside it is another matter, especially for markets in which the variations in electrical outlets and voltages require different circuits and cords. 4. Dual Adaptation: Both the product and promotion have to be changed for a foreign market owing to variations in need as well as use conditions in various countries. Example: Refrigerators made in USA must be modified to accommodate 220-volta and 50Hz electricity overseas. The large refrigerator and its large freezer compartment do not appeal to countries where shopping for fresh food is done daily and where a refrigerator is used mainly for shortterm storage. Additionally, with the high cost of electricity in virtually all markets outside the USA, the advertising appeal must be based on low electricity consumption, durability, reliability, and compactness. 5. Product invention: This strategy may have to be used if the existing product is too expensive for foreign consumers. A brand new product with different features may have to be designed in order to make it affordable. Keegans guidelines, although useful, are quite general. Thus, one must consider other relevant factors and treat them explicitly. For example: Feasibility and desirability, Research and empirical evidence II.Individualization: This is the opposite of standardization school. This schools also known as the non-standardization, specificity, localization, or customization approach. This conventional school of thought holds that advertisers must particularly make note of the differences among countries-culture, taste, media, discretionary income. These differences make it necessary to develop specific advertising programs to achieve impact in the local markets. (Authorities sharing this view include Nielsen, Lenormand, Lipson, and Lamont.) III.Compromise Between these two extreme schools is the compromise school of thought. While recognizing local differences and cautioning against a wholesale automatic use of
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standardization, this middle-of-the road school holds that it may be possible. And in certain cases even desirable. (Those with moderate view include Dunn, Keegan, Peebles, Ryans, and Veron.) 4.6 Summary
The promotion of goods and services is an important part of the marketing Mix. The purpose of promotion is to inform, persuade, and remind the customer that certain goods and services are available. The four ingredients of promotion are advertising, personal selling, sales promotion, and publicity. An important decision for international advertisers is to make whether the advertising campaign should be standardized worldwide or localized. Arguments for standardized Advertising are: a) a successful campaign in one country is likely to be effective in another nation as well and standardized advertising is economical. The arguments against standardization is that advertising are not always effective in some countries are not always effective in other countries, because of differences in cultural traits, language, economic life, and the like. For example, a female ad model is not likely to be acceptable in a Muslim. In final analysis, the choice between standardized & Localized advertising should be based on such environmental consideration as levels of education , experience and competence of personnel in the foreign agency, degree of nationalism and rate economic growth in the country eating patterns and customs of the country , attitudes toward authority, and independence government control. Personal selling is an important ingredient of any marketing program. The three of media from
sources of sales personnel are expatriates, natives and third country nationals. In the realm of international business, most personal selling jobs are handled by the local management. Sales promotion and public relations are also relevant in international marketing. An appropriate sales promotion program should be geared to the local environment. For example a country where retailing organizations are small and scattered, may be difficult to use the equivalent of cents-off coupons.
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Public relation provides a justification and an identity for the foreign enterprise in the economic sphere of the host country. It is desirable to hire the services of a public relations firm with relevant experience in order to get started on a solid program. Publicity programs , which give the firm and its products broad exposure to customers and prospects as well as third-party endorsement by the media, provide a cost efficient use of a limited promotional budget.
References
Albaum. G. and et al. (2006), International Marketing and Export Management, 5th ed. Pearson Education. Arikan, Akin, Multi National Marketing: Metrics And Methods For On And Offline Success: Hobokin, NJ: Sybex, 2008. Arnold, David, Mirage of Global Markets: How globalizing companies can succeed as markets to localize. Englewood Cliffs, NJ: Prentice Hall, 2003. Braken, Steven and Hary Garretson, Foreign Direct Investment and the Multinational Enterprise, Cambridge, MA: MIT press, 2008 Conner, John M. Global Price Fixing, Springer, Berlin: 2009. Czinkota, Michael R. Ilkka A. Ronkainen, and Marta Ortiz- Buonafina . The Export Marketing Imperatives, Mason, OH: Thomson/South western, 2004. Dent, Julian, Distribution Channels: Understanding and Managing Channels To Markets: London, Kogan Page, 2008. Finger, Michael J. Institutions and Trade Policy Northampton MA: Edward Elgar, 2002. Graham Cateora (2005), International Marketing, 12 editions, Tata McGraw Hill. Hill (2009), Global Business Today, 6th Ed. Mc Graw Hill International Edition. Hollis, Nigel, The Global Brand: How To Create And Develop Lasting Brand Value In The World Market, New York: Palgrave Macmillan, 200 Lee Catherine, The new Rules of international Negotiation: Building relationships, earning Trust, and creating influence around the world, Franklin Lakes, New Jersey: career press, 2007. Li Jian, and Alan Paisey, International Transfer Pricing New York: Palgrave McMillan, 2008. Monroe, Kent B. pricing: Making Profitable Decisions. New York : McGraw Hill, 2003. Addis Ababa university School Of Commerce Page 257

Nelson, Carl, Import Export: How to take Your Business across Boarders, Columbus, Ohio, McGraw Hill, 2008. Onkvisit S. and Shaw J.J (2006), International Marketing: Analysis & Strategy, 3rd edition, prentice Hall of India private limited Rugman, A. & Hodgets R.M (2005), International Business, 3rd edition, Pearson Education Ltd. Rushton, Alan and Steve Walker, International Logistics And Supply Chain Outsourcing: From Local To Global, London Kogan: Kogan Page, 2007. Weiss, Kenneth D. Building on Import/Export Business. Hoboken, NJ: Wiley, 2007. Zurawicki, Leon, International Counter Trade, New York: Pergamum Press, 2003.
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