Module 1

DEFINITION OF INTERNATIONAL MARKETING

International Marketing can be defined as exchange of goods and services between
different national markets involving buyers and sellers.
According to the American Marketing Association, International Marketing is the multinational process of planning and executing the conception, prices, promotion and
distribution of ideal goods and services to create exchanges that satisfy the individual and
organizational objectives.
CONCEPTS OF INTERNATIONAL MARKETING
Domestic Marketing: Domestic Marketing is concerned with marketing practices within
the marketers home country.
II. Foreign Marketing: It refers to domestic marketing within the foreign country.
III. Comparative Marketing: when two or more marketing systems are studied, the subject
of study is known as comparative marketing. In such a study, both similarities and dissimilarities are identified. It involves an analytical comparison of marketing methods
practiced in different countries.
IV. International Marketing: It is concerned with the micro aspects of a market and takes
the company as a unit of analysis. The purpose is to find out as to why and how a product
succeeds or fails in a foreign country and how marketing efforts influence the results of
international marketing.
V. International Trade: International Trade is concerned with flow of goods and services
between the countries. The purpose is to study how monetary and commercial conditions
influence balance of payments and resource transfer of countries involved. It provides a
macro view of the market, national and international.
VI. Global Marketing: Global Marketing consider the world as a whole as the theatre of
operation. The purpose of global marketing is to learn to recognize the extent to which
marketing plans and programmes can be extended world wide and the extent to which they
must be adopted.
International marketing is the application of marketing principles by industries in one or
more than one country. It is possible for companies to conduct business in almost any
country around the world, thanks to the advances in international marketing.
In simple words, international marketing is trading of goods and services among different
countries. The procedure of planning and executing the rates, promotion and distribution
of products and services is the same worldwide.

In recent times, companies are not restricted to their national

borders, but are open for international marketing. With the
increasing change in customers demands, choices, preferences and
tastes, the economies are expanding and giving way to more
competitive marketing. Thus, organizations need to respond rapidly
to the demands of the customers with well-defined marketing
strategies.
The American Marketing Association defines the term: International marketing is
multinational process of planning and executing the conception, pricing, promotion, and
distribution of ideas, goods, and services to create exchange that satisfy individual and
organisational objectives.
(Only the word international has been added to the definition adopted by the AMA. The
word implies that marketing activities are undertaken in several countries and such
activities should somehow be coordinated across nations)
2. We can define the term as: International marketing means to produce products (goods
and services) for the foreign customers and to make necessary arrangement to supply
them.
The major participants in international marketing are as follows

Multinational Corporations (MNCs) A multinational corporation (MNC) is an

organization that ensures the production of goods and services in one or more
countries other than its home country. Such organizations have their offices, help
desks or industrial set-up across nations and usually have a centralized head office
where they co-ordinate global management.

Exporters They are the overseas sellers who sell products, and provide services
across their home country by following the necessary jurisdiction.

Importers They are the overseas buyers who buy products and services from
exporters by complying with the jurisdiction. An import by one nation is an export
from the other nation.

Service companies A service company generates revenue by trading on services

and not on physical commodities. A public accounting company is the best example
of a service company. Revenue here is generated by preparing returns of income tax,
performing audit services, and by maintaining financial records.

Comparison Chart

Basis for
Comparison
Meaning
Area served
Government
interference
Business
operation
Use of
technology
Risk factor
Capital
requirement
Nature of
customers
Research

Domestic Marketing

International Marketing

Domestic marketing refers

to marketing within the
geographical boundaries of
the nation.
Small

International marketing means the activities

of production, promotion, distribution,
advertisement and selling are extend over the
geographical limits of the country.
Large

Less

Comparatively high

In a single country

More than one country

Limited

Sharing and use of latest technology.

Low

Very high

Less

Huge

Almost same

Variation in customer tastes and preferences.

Required but not to a very

high level.

Deep research of the market is required

because of less knowledge about the foreign
markets.

Difference between International Marketing and

Domestic Marketing
Basis
Definition

Role
Politics

Domestic Marketing
It is concerned with the
marketing practises within
the researchers or Marketers
home country (domestic
market).

International Marketing
It 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.
of Political factors are of minor Political factors play a vital
importance.
role.

Languages
& Cultures

One language and culture.

Many
languages
differences in cultures.

and

Financial
Climate

Uniform financial climate.

Variety of financial climate.

Risk
Involved

Normal risk is involved.

Higher risks of different

nature are involved.

Control of Control
of
marketing Control
of
marketing
Marketing
activities is easy as compared activities is difficult because
Activities
to international activities.
of different factors like
regional, cultural, political,
etc.
Payment
Minimum payment and Considerable payment and
credit risks.
credit risks.
Familiarity

Well
familiarity
domestic market.

Knowledge
Requiremen
t
Product Mix

Management knowledge is Specific

management
required.
knowledge and competence is
required.
Product mix is decided Product mix is decided
keeping
in
view
the according to foreign market.
satisfaction and more sales.

Product
Planning
and
Developmen
t
Focus

Product
planning
and Product
planning
and
development according to development according to
domestic market.
foreign market.

Market
Aspect

Market is much more Different or diverse markets

homogeneous and different fragmented in nature
segments.

Focus of interest is
general information.

with Lack of Familiarity with

foreign markets, research
becomes essential.

on Focus of interest
strategic emphasis.

is

on

We can identify following simple features of international marketing:

1. Marketing activities are undertaken across the borders.
ADVERTISEMENTS:
2. It is directed to facilitate exchange between the firm and the customers of foreign
countries.
3. It is aimed at satisfying needs of international/global customers.
4. International marketing decisions are taken with reference to the global business
environment.
5. It involves two or more nations.

6. Tailor-made marketing mix is necessary for each of the nations.

7. It is more complex and, hence, difficult.
8. Role of international trade agencies seem very critical in marketing products in other
countries.
9. It offers attractive opportunities along with challenges and threats.
10. All other characteristics of modern marketing are also applicable to international
marketing, etc.
Main forces led to need of international marketing are:
1. Unequal distribution of natural resources
2. Specialization and need for marketing surplus
3. Craze for global political empowerment
4. Rapid means of communication and transportation
5. Liberalization
6. Globalization or global thinking
7. Trend for privatization
8. Improved understanding and cooperation among nations for mutual benefits
9. Satisfactory functioning of several international organisations or agencies such as
International Monetary Fund (IMF), World Bank, United Nations Organisation (UNO),
UN Security Council, etc.
10. Growth and Development of Multinational Companies (MNCs)
11. Emergence of global marketing opportunities
12. Technological advancement and transfer of technology.
benefits available due to international marketing:
1. It ensures survival for a company and a country.

2. Nations can get benefits of division of work and specialization.

3. It also helps in balancing unequal distribution of natural resources.
4. Extending product life cycle by selling products in other nations.
5. It is important for controlling inflation and achieving price moderation.
6. Balancing demand and supply.
7. Promotion of invention and innovation globally.
8. Companies can take benefits of taxes and duties.
9. Technological Transmission among countries of the world is easily possible.
10. International marketing can improve standard of living of people.
11. Growth of international marketing results into social and cultural development.
12. Worldwide peace is possible due to interdependency among countries of the world
13. Global employment opportunities can help ease unemployment problems.
14. Growth of overseas market leads to global prosperity.
Importance of International Marketing
1. Important to expand target market Target market of a marketing organisation will be
limited if it just concentrate on domestic market. When an organisation thinks globally, it
looks for overseas opportunities to increase its market share and customer base.
2. Important to boost brand reputation International marketing may give boost to a
brands reputation. Brand that sold internationally is perceived to be better than the brand
that sold locally. People like to purchase products that are widely available. Hence,
international marketing is important to boost brand reputation.
3. Important to connect business with the world Expanding business into an international
market gives a business an advantage to connect with new customers and new business
partners. Apple - the tech giant designs its iPhone in California; outsources its
manufacturing jobs to different countries like - Mongolia, China, Korea, and Taiwan; and
markets them across the world. Apple have not restricted its business to a nation, rather

expanded it to throughout the world. The opportunities for networking internationally are
limitless. The more "places" a business is, the more connections it can make with the world.
4. Important to open door for future opportunities International marketing can also open
door for future business opportunities. International marketing not only increases market
share and customer base, it also helps the business to connect to new vendors, a larger
workforce and new technologies and ways of doing business. For example American
organisations investing in Japan have found programs like Six Sigma and Theory Z
which are helpful in shaping their business strategies.
Nature of International Marketing
1. Broader market is available Unlike domestic marketing the market is not restricted to
national population. Population of other countries can also be targeted in international
marketing.
2. Involves at least two set of uncontrollable variables In domestic marketing the
marketers have to interact with only one set of uncontrollable variables. In international
marketing at least two set of uncontrollable variables are involved or more if the marketing
organization deals in more countries.
3. Requires broader competence Special management skills and broader competence is
required in international marketing/business.
4. Competition is intense An international marketing organization has to compete with
both the domestic competitors and the international competitors. Hence, the competition is
intense in international marketing.
5. Involve high risk and challenges International marketing is prove to various kinds of
risk and challenge like political risk, cultural differences, changes in fashion and style of
foreign customers, sudden war, changes in government rules and regulations,
communication challenges due to language and cultural barriers, etc,.
Scope of International Marketing
1. Export It is a function of international business whereby goods produced in one
country are shipped to another country for further sale or trade.
2. Import Goods or services brought into one country from another for use or sale.
3. Re-export Import of semi-finished goods, further processing, and export of finished
goods.
4. Management of international operations

Operating marketing and sales facilities abroad,

Establishing production or assembly facilities in foreign countries, and

Monitoring the operations and practices of other MNCs and agencies.

8 Reasons Why Most Companies Prefer to Go Global

Explained!
i. Domestic markets are saturated and there is pressure to raise sales and profits. Most
companies have very ambitious sales and profit targets. If such figures have to be realized,
companies have to move out of their domestic markets.
ii. Domestic markets are small. Companies which have ambitions to become big will have to
look for bigger markets outside their boundaries.
iii. Domestic markets are growing slowly. Most companies are no longer content to grow
incrementally. If such companies have to achieve high growth rates, they have to obtain
some of their sales from international markets.
ADVERTISEMENTS:

iv. In some industries like advertising, customers want their suppliers to have international
presence so that suppliers can contribute in most of the markets where the buyer is
operating. For instance, a multinational will choose an advertising agency which has a
presence in all the markets where the multinational is selling its product. The customer
does not want the hassle of hiring a separate advertising agency for each of its markets.
This process will be replicated in more industries.
A multinational company seeking materials and equipments would want its supplier to
supply to all its international manufacturing locations. The supplier is forced to develop
competencies and resources at many international locations to be able to serve the
international manufacturing locations of its buyer.

v. Some companies will have to move out of their domestic markets when their competitors
have done so, if they want to maintain their market share. If the competitor is allowed to
pursue its international growth alone, the competitor is likely to plough back some of the
earnings from its international operations to the domestic market, making it difficult for
the companies which refrained from pursuing international markets, to focus on the
domestic market. In other cases, a domestic player would start operations in the home
country of its global competitor, to divert the attention and resources of its competitor
towards operations at home to safeguard its home market.
vi. Developed markets have high cost structures and companies may move their operations
to regions and countries where costs of production are lower. Once a company starts
operating in a geographical region, it becomes easier and profitable to market their
products in that area.
vii. Countries and regions are at different stages of development, and their growth rates
and potential are different. Companies do not like to concentrate all their efforts in limited
regions and want to spread out their risk. Such companies will look for markets which are
likely to behave differently from their existing ones in terms of economic parameters like
growth rate, size, affluence of customers, stage of market development, etc.
A company would not like all its markets to be under recession or inflation simultaneously,
and would not like all its markets to be in mature stage, or in growth stage. Having
different type of markets will make revenues and profits more consistent. The investment
requirements would also be more balanced.

viii. Even if a company decides to concentrate on its domestic market, it will not be allowed
to pursue its goals unhindered. Multinational companies will enter its market and make a
dent in its market share and profit. The company has no choice but to enter foreign
markets to maintain its market share and growth.
ix. Companies are realizing that it is no longer an option to stay put in ones domestic
market. The ability to compete successfully in domestic markets will depend upon their
ability to match the resources and competencies of multinational companies, with whom
they have to compete in their domestic markets.
1. Stay Competitive: No matter what industry you are involved within today you will find
competition continuing to go international. If you are continually trying to improve your
company then an international plan is essential to your success as well. This doesnt
necessarily mean you have to construct a new headquarter in a foreign country, but should
include operational methods on how to develop relationships and satisfy international
customer needs/desires. In todays world you will always have international customers.
2. Opportunities Abroad: Just as students are taking their educational studies to foreign
countries to gain even more enriching opportunities, companies will find themselves in
similar situations. What you may do successfully within our own countrys border may
reap an even bigger award in another country. This may include new connections,
resources, financial gains, and company enhancements. The opportunities are limitless.
3. Growth As a Company: If a company wants to continue to grow and develop a strong
business culture around themselves then they must leave their cozy nest as home and take
risks into newer territories. As I mentioned earlier in this post companys must look at
developing new channels for their company to improve and teach their employees new
essential skill sets to remain competitive in todays international world. No company wants
to be looked down upon or seen as antique in keeping up with the new standards of todays
modern world.
4. Skilled Personnel: In order for a company to succeed long term they must have a
talented, intelligent, and multicultural workforce that can take them to new levels. A
workforce of different backgrounds and cultures brings forth new ideas, viewpoints, and
knowledge that would have otherwise been unheard of in a workforce of similar
backgrounds. A multicultural workforce is enhancing in many positive aspects and helps
with your companys expansion internationally. Local employees who are knowledge about
the foreign culture give you a great advantage in connections, product development, and
research or long term projects.
5. Take Advantage of Technology: Technology has developed for businesses in ways
unheard of. However, one main important trait it brings is its ability to connect the world.

You can deal with customers abroad, manage projects from a distant country, and hold
meetings over a video conference. With all these highly influential and useful techniques at
your fingerprints why shouldnt your company be looking at ways to utilize these options to
your advantage? Technology continues to develop and that is for people and businesses to
put to good use.
Meaning of Multinational Companies (MNCs):
A multinational company is one which is incorporated in one country (called the home
country); but whose operations extend beyond the home country and which carries on
business in other countries (called the host countries) in addition to the home country.
It must be emphasized that the headquarters of a multinational company are located in the
home country.
Neil H. Jacoby defines a multinational company as follows:
A multinational corporation owns and manages business in two or more countries.

Features of Multinational Corporations (MNCs):

Following are the salient features of MNCs:
(i) Huge Assets and Turnover:

Because of operations on a global basis, MNCs have huge physical and financial assets.
This also results in huge turnover (sales) of MNCs. In fact, in terms of assets and turnover,
many MNCs are bigger than national economies of several countries.
(ii) International Operations Through a Network of Branches:

MNCs have production and marketing operations in several countries; operating through a
network of branches, subsidiaries and affiliates in host countries.

(iii) Unity of Control:

MNCs are characterized by unity of control. MNCs control business activities of their
branches in foreign countries through head office located in the home country.
Managements of branches operate within the policy framework of the parent corporation.
(iv) Mighty Economic Power:

MNCs are powerful economic entities. They keep on adding to their economic power
through constant mergers and acquisitions of companies, in host countries.
(v) Advanced and Sophisticated Technology:

Generally, a MNC has at its command advanced and sophisticated technology. It employs
capital intensive technology in manufacturing and marketing.
(vi) Professional Management:

A MNC employs professionally trained managers to handle huge funds, advanced

technology and international business operations.
(vii)Aggressive Advertising and Marketing:

MNCs spend huge sums of money on advertising and marketing to secure international
business. This is, perhaps, the biggest strategy of success of MNCs. Because of this strategy,
they are able to sell whatever products/services, they produce/generate.
(viii) Better Quality of Products:

A MNC has to compete on the world level. It, therefore, has to pay special attention to the
quality of its products.

Advantages and Limitations of MNCs:

Advantages of MNCs from the Viewpoint of Host Country:

We propose to examine the advantages and limitations of MNCs from the viewpoint of the
host country. In fact, advantages of MNCs make for the case in favour of MNCs; while
limitations of MNCs become the case against MNCs.

(i) Employment Generation:

MNCs create large scale employment opportunities in host countries. This is a big
advantage of MNCs for countries; where there is a lot of unemployment.
(ii) Automatic Inflow of Foreign Capital:
MNCs bring in much needed capital for the rapid development of developing countries. In
fact, with the entry of MNCs, inflow of foreign capital is automatic. As a result of the entry
of MNCs, India e.g. has attracted foreign investment with several million dollars.
(iii) Proper Use of Idle Resources:
Because of their advanced technical knowledge, MNCs are in a position to properly utilise
idle physical and human resources of the host country. This results in an increase in the
National Income of the host country.
(iv) Improvement in Balance of Payment Position:
MNCs help the host countries to increase their exports. As such, they help the host country
to improve upon its Balance of Payment position.
(vi) Technical Development:
MNCs carry the advantages of technical development 10 host countries. In fact, MNCs are
a vehicle for transference of technical development from one country to another. Because of
MNCs poor host countries also begin to develop technically.
(vii) Managerial Development:
MNCs employ latest management techniques. People employed by MNCs do a lot of
research in management. In a way, they help to professionalize management along latest
lines of management theory and practice. This leads to managerial development in host
countries.
(viii) End of Local Monopolies:
The entry of MNCs leads to competition in the host countries. Local monopolies of host
countries either start improving their products or reduce their prices. Thus MNCs put an
end to exploitative practices of local monopolists. As a matter of fact, MNCs compel
domestic companies to improve their efficiency and quality.

In India, many Indian companies acquired ISO-9000 quality certificates, due to fear of
competition posed by MNCs.
(ix) Improvement in Standard of Living:
By providing super quality products and services, MNCs help to improve the standard of
living of people of host countries.
(x) Promotion of international brotherhood and culture:
MNCs integrate economies of various nations with the world economy. Through their
international dealings, MNCs promote international brotherhood and culture; and pave
way for world peace and prosperity.
Limitations of MNCs from the Viewpoint of Host Country:

(i) Danger for Domestic Industries:

MNCs, because of their vast economic power, pose a danger to domestic industries; which
are still in the process of development. Domestic industries cannot face challenges posed by
MNCs. Many domestic industries have to wind up, as a result of threat from MNCs. Thus
MNCs give a setback to the economic growth of host countries.
(ii) Repatriation of Profits:
(Repatriation of profits means sending profits to their country).
MNCs earn huge profits. Repatriation of profits by MNCs adversely affects the foreign
exchange reserves of the host country; which means that a large amount of foreign
exchange goes out of the host country.
(iii) No Benefit to Poor People:
MNCs produce only those things, which are used by the rich. Therefore, poor people of
host countries do not get, generally, any benefit, out of MNCs.
(iv) Danger to Independence:
Initially MNCs help the Government of the host country, in a number of ways; and then
gradually start interfering in the political affairs of the host country. There is, then, an
implicit danger to the independence of the host country, in the long-run.
(v) Disregard of the National Interests of the Host Country:

MNCs invest in most profitable sectors; and disregard the national goals and priorities of
the host country. They do not care for the development of backward regions; and never
care to solve chronic problems of the host country like unemployment and poverty.
(vi) Misuse of Mighty Status:
MNCs are powerful economic entities. They can afford to bear losses for a long while, in
the hope of earning huge profits-once they have ended local competition and achieved
monopoly. This may be the dirties strategy of MNCs to wipe off local competitors from the
host country.
(vii) Careless Exploitation of Natural Resources:
MNCs tend to use the natural resources of the host country carelessly. They cause rapid
depletion of some of the non-renewable natural resources of the host country. In this way,
MNCs cause a permanent damage to the economic development of the host country.
(viii) Selfish Promotion of Alien Culture:
MNCs tend to promote alien culture in host country to sell their products. They make
people forget about their own cultural heritage. In India, e.g. MNCs have created a taste
for synthetic food, soft drinks etc. This promotion of foreign culture by MNCs is injurious
to the health of people also.
(ix) Exploitation of People, in a Systematic Manner:
MNCs join hands with big business houses of host country and emerge as powerful
monopolies. This leads to concentration of economic power only in a few hands. Gradually
these monopolies make it their birth right to exploit poor people and enrich themselves at
the cost of the poor working class

EPG Model is an international business model including three dimensions ethnocentric,

polycentric and geocentric. It has been introduced by Howard V. Perlmutter within the
journal article "The Tortuous Evolution of Multinational Enterprises" in 1969.[1] These
three dimensions allow executives to more accurately develop their firm's general strategic
profile.

The EPG model is a framework for a firm to better pinpoint its strategic profile in terms of
international business strategy. The authors Wind, Douglas and Perlmutter have later
extended the model by a fourth dimension, "Regiocentric", creating the "EPRG Model".[3]
The importance of the EPG model is mainly in the firm's awareness and understanding of
its specific focus. Because a strategy based mainly on one of the three elements can mean
significantly different costs or benefits to the firm, it is necessary for a firm to carefully
analyze how their firm is oriented and make appropriate decisions moving forward. In
performing an EPG analysis, a firm may discover that they are oriented in a direction that
is not beneficial to the firm or misaligned with the firm's corporate culture and generic
strategy. In this case, it would be important for a firm to re-align its focus in order to
ensure that it is correctly representing the firm's focus.
Each of the three elements of the EPG profile is briefly highlighted in the table below,
showing the main focus for each element, as well as its correlating function, products, and
geography.[2]
Ethnocentrism
Definition

Based on ethnicity

Polycentrism
Based on political
orientation

Geocentrism
Based on
geography

Strategic
Home Country
Host Country Oriented Global Oriented
Orientation/Focus
Oriented
Function
Finance
Marketing
R&D
Product
Industrial products Consumer goods

Geography
Developing countries
US and Europe
Ethnocentric approach underlines host countries superiority. In other words, it is
associated with orientation directed first of all at the home country management, the
home country knows best culture is applied (Bowie and Buttle, 2004). Overseas operations
are considered only as an additional
extension of the local market. Paul pinpoints that in this approach management
philosophy, domestic technology, strategies and even personnel are far more superior to
foreign operations and are a perfect fit for foreign operations as well. Companies oriented
on ethnocentric approach are distinct with their complex structure in home country, while
structure in other countries stays very simple. Such companies do not adapt their products
to the needs and wants of other countries where they have operations. Ranchhod and
Marandi (2006) come up with a good summary of ethnocentric approach, saying that this
international marketing orientation tends to ignore much of the opportunities outside the
domestic market while those that venture outside tend to operate on the basis of
standardized or extension approach marketing and do not engage in adaptation of any
noticeable degree. On one hand this approach sometimes can work as advantage for the
company when it views foreign markets as a means of disposing of surplus domestic
production (Vasudeva, 2006). On the other hand, the company may experience a lot of

difficulties to survive in foreign markets as its brands will not be accepted by consumers of
that country due to cultural differences as they are completely ignored by the
headquarters. In this case the company still will have two choices: to continue its
operations only in its domestic market; or change its international marketing orientation to
a more appropriate one according to nowadays requirements of the international brands
consumers. The example of such change is NISSAN which in the first years of its existence
on international arena was following ethnocentric approach by selling its cars abroad
exactly as they were sold in their domestic market in Japan, after several years of its
international trading the company realized that ethnocentric international marketing
orientation is no longer relevant for some industries including automobile industry in
which they were operating and changed its approach to polycentric (see 2:1:5:2). Vasudeva
(2006) concludes that in todays international business world ethnocentric approach
appears to be one of the biggest threats for international organizations.
Polycentric Approach
A company following this orientation gives an equal importance to every countrys
domestic market, as there is a belief in uniqueness of every market and its need to be
addressed in an individual way. The plans are devised to operate through individually
established businesses, i.e. either by wholly owned subsidiaries or through marketing
subsidiaries, separately in each country, allowing complete autonomy to units to operate as
separate profit centres independent of head office (Paul, 2008).When following this
approach a company has to be a leader in technological leadership, produce high quality
products or its production costs should be very low. It can also concentrate its attention on
foreign markets which have similar consumer needs and conditions similar to domestic
market. Among disadvantages of this orientation is low possibility of the economies of scale,
high prices of products due to high investments in the research of foreign markets and
adaptation of products to the needs and wants of particular countries. Examples of
companies marketing their brands according to this approach are: Ford Motors, Suzuki,
Toyota, General Motors, Nissan, etc. all these companies adapt their brands to specific
needs of each countrys consumer.
Regiocentric Approach
In this approach segmentation of the markets is fulfilled on the basis of similarities in terms
of regions. A company finds economic, cultural or political similarities among regions in
order to cover the similar needs of potential consumers. For example, countries of former
USSR can form one group as needs and tastes of consumers of these countries are very
similar as they were representatives of one nation not so long ago. The same products and
strategies can be used in such set of countries like Denmark, Norway, Finland and Sweden
or Pakistan, Bangladesh and India as they possess a strong regional identity and belong to

the same cultural dimensions. Pepsi and Coca-Cola are examples of international
companies which are successfully using this international marketing orientation.

Geocentric Approach
This orientation favours neither home country nor foreign countries where the company
operates. It is also called a global approach the main idea of which is to target global
consumers who have similar tastes. The main idea of this orientation is to borrow from
every country what is best. The limitation is that it fully depends on constant global market
research, which requires a lot of investment and time. This approach is for companies with
an impressive capital that want to become world leaders , in this quest
manufacturers offer homogeneous, identifiable and often interchangeable services and
products in order to integrate them for worldwide operational efficiency (Paul, 2008). The
European Silicon Structures is a pure example of geocentric international marketing
orientation: the company is incorporated in Luxembourg, its headquarter was established
in Munich, research facilities are in England, and France has its factory; the company went
even further by assigning its eight directors from seven different countries.
Internationalization Philosophies

Domesti
Export
c
Marketin
Marketi
g
ng

Multination
alMarketin
g

Global
Marketing

Low or
no
internatio
nal
commitme
nt
Focus on
domestic
consumer
s and
home
country
environme
nt
Domestic
focus

Limited
internation
al
commitmen
t
Involves
direct or
indirect
export
Ethnocentri
c

Substantial
international
commitment

Extensive internatio
commitment

Focus on
regions
market segments
rather than countrie

Focus on
different
international
countries

Regiocentric
Geocentric

Polycentric

Driving and restraining forces that affect Global Integration

The Drivers are:
Technology, culture, market needs, cost, free markets, economic itegration,peace,
management vision,strategic intent, global strategy and action
The Restraining forces are:
Culture, market differences, costs, national controls, nationalism, war, management
myopia, organisation history, domestic focus
Driving factors
The important forces driving globalisation are as follows:
1.

Liberalisation:

One of the most important factors which have given a great forward

thrust to globalisation since the 1980s is the formation of universal economic policy
resulting in liberalisation of economy in many countries.
liberalisation in globalisation of business.

The immediate result of

Now many business firms can involve

themselves is international trade as the restrictions imposed by various countries is

highly restricted under GATT/WTO.

2.

MNCs: The companies which have taken a complete advantage of trade liberalisation
caused under GATT/WTO are MNCs (Multi National Companies). Sony, Philips, Coco
Cola, Pepsi, Procter & Gamble, etc are some famous examples for MNCs.

These

companies combine their resources and objectives to achieve profit in globel market.
According to the world Investment Report 1997, there were about 44,500 MNCs in the
world with nearly 2.77 lakhs foregin collaborations. Hence MNCs is an important factor
inducing Globalisation.
3. Technology: Technology in a powerful driving force of Globalisation. Once a Technology
is developed, it soon becomes available every where in the world.

(for example) A

hospital in the USA performs the required diagnostics on patients say an X ray or MRI
or C.T Scan. These diagnostic tests represent technology in medical field. In the next
three minutes, a radiologists in Bangolore, India receives the scanned images from USA.
He then sends his report to USA.

This is called as teleradiology. The entire process,

from the time the patient was admitted, has taken Just 20 minutes. The cost of this
work is 30% lower in India compared to the USA.

In short, long distance on line

services made possible by the technological developments have given a forward thrust to
globalisation.
4.

Transportation and Communication revolutions: Technological revolution in several

spheres, like transport and Communication, has given a great impetus to globalisation.
The Microprocessor in computers has created the flow of information from one part of
the globe to another not only fast but also cost effective. It has played a pivotal role in
reducing space and time.

It has made world in to a global village.

Microprocessors

coupled with satellite, optical fibre, wireless technologies, world wide web have made
this World in to a global village. The consumers/ customers has become more global.
By sitting in front of the computer and logging on to world wide web the consumer can
download any type of information from any part of the world.
business.

It determines profit.

Globalisation.

Flow of information is

Hence technology is a strong driving force for

5.

Product development and efforts: The immediate impact of increase of Technology is

the growth of new products due to innovation.

The fast technology hastens product

obsolescence. This has made many firms to invest heavily on R&D activities with cross
border alliances . These companies have to stay in business and survive competition. In
order to achieve this, many companies have crossed their borders and have tie ups to
update their products through research and development with foreign companies. This
causes globalisation.
6.

Rising aspirations and wants:

Because of the increasing levels of education and

exposure to the media, aspirations of people around the world are rising. They aspire for
everything that can make life more comfortable and satisfying. If domestic firms are not
able to meet the wants, they would naturally turn to the foreign firms to satisfy their
aspirations. This promotes Globalisation.
7.

World economic trends: The world economic conditions are changing fast. There, is a
great difference in the growth rates of economies/ markets between developing nations
and developed nations. In developed nations the economies have become stagnant, due
to saturation on the otherhand, the developing nations are experiencing tremendous
growth rate in various business sector. Cheap labour, high investment in research and
development, improvements in technology are some of the factors which have driven the
developing nations towards achieving high growth rate in business.

Hence it is very

common for the developing nations to have a strong international trade links with
developed nations.

Thus difference in world economies between nation causes

gobalisation.
8. Regional Integration: Nowadays many countries are joining hands together to
promote free and fair international trade across the borders. They are forming
separate trade blocks. European Union and North American Free Trade
Agreements are two such classical examples. This promotes globalisation.
9.

Leverages:

Leverage is simply some type of advantage that a company enjoys by

conducting business in more than one country. A global company can experience three
important types of leverages.

Restraining forces On Globalisation

There are also several factors which restrain Globalisation trend. They are
1.

External Factors

2.
1.

Internal Factors
External Factors:

These are government policies and controls which prevents cross-

border business.
2.

Internal Factors: These are collection of factors that exists within the organisation that prevents
Globalisation. One such factor is called as management myopia or near sightedness. The company with an
aim to make immediate profit engage itself in short-term plan and target local markets for business. This is
called as management myopia. This acts against Globalisation of business.

Module 2
Business ethics is complex in the international marketplace because value
judgments differ widely among culturally diverse groups.
What is right and what is wrong poses dilemma for domestic marketers.
What is condemned in one country may not only be accepted in another
country but also expected.
Primarily it is the individual, the consumer, the employee or the human social unit of the society
who benefits from ethics. In addition ethics is important because of the following:
1. Satisfying Basic Human Needs: Being fair, honest and ethical is one the basic human
needs. Every employee desires to be such himself and to work for an organization that is
fair and ethical in its practices.
2. Creating Credibility: An organization that is believed to be driven by moral values is
respected in the society even by those who may have no information about the working
and the businesses or an organization. Infosys, for example is perceived as an
organization for good corporate governance and social responsibility initiatives. This

perception is held far and wide even by those who do not even know what business the
organization is into.
3. Uniting People and Leadership: An organization driven by values is revered by its
employees also. They are the common thread that brings the employees and the decision
makers on a common platform. This goes a long way in aligning behaviors within the
organization towards achievement of one common goal or mission.
4. Improving Decision Making: A mans destiny is the sum total of all the decisions that
he/she takes in course of his life. The same holds true for organizations. Decisions are
driven by values. For example an organization that does not value competition will be
fierce in its operations aiming to wipe out its competitors and establish a monopoly in the
market.
5. Long Term Gains: Organizations guided by ethics and values are profitable in the long
run, though in the short run they may seem to lose money. Tata group, one of the largest
business conglomerates in India was seen on the verge of decline at the beginning of
1990s, which soon turned out to be otherwise. The same companys Tata NANO car was
predicted as a failure, and failed to do well but the same is picking up fast now.
6. Securing the Society: Often ethics succeeds law in safeguarding the society. The law
machinery is often found acting as a mute spectator, unable to save the society and the
environment. Technology, for example is growing at such a fast pace that the by the time
law comes up with a regulation we have a newer technology with new threats replacing
the older one. Lawyers and public interest litigations may not help a great deal but ethics
can.

Ethical Issues
As political, legal, economic, and cultural norms vary from nation to nation, various ethical
issues rise with them. A normal practice may be ethical in one country but unethical in another.
Multinational managers need to be sensitive to these varying differences and able to choose an
ethical action accordingly.
In an international business, the most important ethical issues involve employment practices,
human rights, environmental norms, corruption, and the moral obligation of international
corporations.

Employment Practices and Ethics

Ethical issues may be related to employment practices in many nations. The conditions in a host
country may be much inferior to those in a multinationals home nation. Many may suggest that

pay and work conditions need to be similar across nations, but no one actually cares about the
quantum of this divergence.
12-hour workdays, minimal pay, and indifference in protecting workers from toxic chemicals are
common in some developing nations. Is it fine for a multinational to fall prey to the same
practice when they chose such developing nations as their host countries? The answers to these
questions may seem to be easy, but in practice, they really create huge dilemmas.

Human Rights
Basic human rights are still denied in many nations. Freedom of speech, association, assembly,
movement, freedom from political repression, etc. are not universally accepted.
South Africa during the days of white rule and apartheid is an example. It lasted till 1994. The
system practiced denial of basic political rights to the majority non-white population of South
Africa, segregation between whites and nonwhites was prevalent, some occupations were
exclusively reserved for whites, etc. Despite the odious nature of this system, Western businesses
operated in South Africa. This unequal consideration depending on ethnicity was questioned
right from 1980s. It is still a major ethical issue in international business.

Environmental Pollution
When environmental regulation in the host nation is much inferior to those in the home nation,
ethical issues may arise. Many nations have firm regulations regarding the emission of
pollutants, the dumping and use of toxic materials, and so on. Developing nations may not be so
strict, and according to critics, it results in much increased levels of pollution from the operations
of multinationals in host nations.
Is it fine for multinational firms to pollute the developing host nations? It does not seem to be
ethical. What is the appropriate and morally correct thing to do in such circumstances? Should
MNCs be allowed to pollute the host countries for their economic advantage, or the MNCs
should make sure that foreign subsidiaries follow the same standards as set in their home
countries? These issues are not old; they are still very much contemporary.

Corruption
Corruption is an issue in every society in history, and it continues to be so even today. Corrupt
government officials are everywhere. International businesses often seem to gain and have
gained financial and business advantages by bribing those officials, which is clearly unethical.
Corruption in Japan
In the 1970s, Carl Kotchian, an American business executive who served as the president of
Lockheed Corporation, paid $12.5 million to Japanese agents and government officials to sell

Lockheeds TriStar jet to All Nippon Airways. After the case was discovered, U.S. officials
charged Lockheed with falsification of its records and tax violations.
The revelations created a scandal in Japan as well. The ministers who took the bribe were
charged, and one committed suicide. It even led to the jailing of Japans prime minister. The
Japanese government fell in disgrace, and the Japanese citizens were outraged. Kotchian had,
without doubt, engaged in unethical behavior.

Moral Obligations
Some of the modern philosophers argue that the power of MNCs brings with it the social
responsibility to give resources back to the societies. The idea of Social Responsibility arises due
to the philosophy that business people should consider the social consequences of their actions.
They should also care that decisions should have both meaningful and ethical economic and
social consequences. Social responsibility can be supported because it is the correct and
appropriate way for a business to behave. Businesses, particularly the large and very successful
ones, need to recognize their social and moral obligations and give resources and donations back
to the societies.
Corruption varyingly defined from culture to culture country to country.
Communist countries consider Profits as a kind of corruption,
For Americans individualism is important for others it is exploitation,
China see missionaries and religious movements as potentially dangerous,
During 1997-1998,government leaders in Southeast Asia considered
currency speculation as worst kind of corruption.
WESTERN FOCUS ON BRIBERY

Existence of different levels of corruption, bribery, and fraud

In 1970s, for US companies engaged in international markets,

bribery became a national issue.

Though US had no laws against paying bribes in foreign countries

but Securities and exchange commission rules required accurate
reporting of all expenditures.

The Foreign Corrupt Practices Act 1997: Imprisonment for briber

The Foreign Corrupt Practices Act 1997

Imprisonment for bribery.

America has bowed out of overseas contracts for more than $145
billion dollars rather than paying bribes.

Lockheed Corporation was fined $25 million dollars and banned for
three years for paying a bribe of $1.8 million bribe to an Egyptian
member of parliament in exchange for lobbying for 3 cargo planes
worth $79 m to be sold to military.

Henceforth both sellers and buyers have to maintain high ethical

standard.

The US advocacy of global anti-bribery law motivated other nations

also to maintain high standard of ethical behaviour by OECD, OAS,
UNCAC .

It was realized that bribery creates a major conflict between ethics

and profitability.

To create higher standards Transparency International Corruption

Perception Index(NewZealand 1st & Somalia 180th rank)
Transparency International Bribe Payers Index(Belgium 1st
,Germany ,Japan & UK 5th,India 19th and China 21st is published.

BRIBERY VARIATIONS

Lubrication: Involves a relatively small sum of cash, a gift, or a

service given to a low-ranking official in a country where such
offerings are not prohibited by law.

Subornation: Involves giving large sums of moneyfrequently not

properly accounted fordesigned to entice an official to commit an
illegal act on behalf of the one offering the bribe; involves breaking
the law.

Bribery: Voluntarily offered payment by someone seeking unlawful

advantage.

Extortion: Payments are extracted under duress by someone in

authority from a person seeking only what they are lawfully
entitled.

Agents Fees: An agent may be hired to represent the company in

that country and a portion may be used.

Areas of Ethical and Socially Responsible Decisions

Behaving ethically and socially responsible should be hallmark of every
business person behavior, domestic or international.
1. employment practices and policies,
2. consumer protection,
3. environmental protection,
4. political payments and involvement in political affairs of the
country, and
5. basic human rights and fundamental freedoms

examples
1.The government of Norway has decided to invest its oil profits only in
ethical companies. It withdrew its funds from Walmart, Boeing and
Lockheed companies.
2.Alan Boekmann COE of global construction company fed up with
corruption in his own business has called outside auditors.
3. Alexandra Wrage founded an Annapolis, Mayland that provides
corruption reports about potential foreign clients.
POLITICAL RISK

Political risk is the possibility of a change in a countrys political

environment or government policy that would adversely affect a
companys ability to operate effectively and profitably.

Political risk is a type of risk faced by investors, corporations,

and governments that political decisions, events, or conditions will
significantly affect the profitability of a business actor or the
expected value of a given economic action.

Political risk can deter a company from investing abroad or in

attracting foreign investment.

Perhaps the greatest threats to the operations of global

corporations, and those that are difficult to manage, arise out of the
political environment in which they conduct their business. One
day, a foreign company is a welcome member of the local
community; the next day, opportunistic politicians vilify it.

Two types of political risk

MACRO RISK- adverse actions that will affect all foreign firms. e.g.
expropriation or insurrection.

1.After Fidel Castro's government took control of Cuba in 1959,

hundreds of millions of dollars worth of American-owned assets and
companies were expropriated.

2. In 2008 the Dominican Republic decided to expropriate

Bauxite belonging to U.S mining company Sierra Bauxita
Dominicana.

MICRO RISK-adverse actions that will only affect a certain

industrial sector or business. e.g. corruption and prejudicial actions
against companies from foreign countries.

Safeguard :-

1. Conduct a research on the riskiness of a country. Various sources

can be used that publish up-to-date political risk reports on
individual country markets.
The Economist, the Financial Times, and other business periodicals.
The Economist Intelligence Unit (EIU; www.eiu.com),
the Geneva-based Business Environment Risk Intelligence (BERI;
www.beri.com)
the PRS Group (www.prsgroup.com)

2. Avoiding Investment
3. Adaptation
4. Lobbying
5. Invaluable Status
6. Vertical Integration
7. Local Borrowing
8. Minimizing Fixed Investments
9. Purchase political risk insurance
Cultural, Political, and Legal Environment
Modes of Entry into International Business
A mode of entry into an international business is the channel which your
organization employs to gain entry to a new international market. This lesson
considers a number of key alternatives, but recognizes that alternatives are
many and diverse. There are two major types of entry modes: equity and nonequity modes. The non-equity modes category includes export and contractual
agreements. The equity modes category includes: joint venture and wholly
owned subsidiaries.
Exporting
Exporting is the process of selling of goods and services produced in one
country to other countries. There are two types of exporting: direct and indirect.
Direct Exports
Direct exports represent the most basic mode of exporting, capitalizing on
economies of scale in production concentrated in the home country and
affording better control over distribution. Direct export works the best if the
volumes are small. Large volumes of export may trigger protectionism. Types of
Direct Exporting.
Sales representatives represent foreign suppliers/manufacturers in
their local markets for an established commission on sales. Provide support
services to a manufacturer regarding local advertising, local sales presentations,
customs clearance formalities, legal requirements. Manufacturers of highly
technical services or products such as production machinery, benefit the most
form sales representation.
Importing distributors purchase product in their own right and resell it
in their local markets to wholesalers, retailers, or both. Importing distributors are

a good market entry strategy for products that are carried in inventory, such as
toys, appliances, prepared food.
Advantages of Direct Exporting
1 Control over selection of foreign markets and choice of foreign
representative companies

Notes
1 Good information feedback from target market
2 Better protection of trademarks, patents, goodwill, and other intangible
property
3 Potentially greater sales than with indirect exporting.
Disadvantages of Direct Exporting
1 Higher start-up costs and higher risks as opposed to indirect exporting
2 Greater information requirements
3 Longer time-to-market as opposed to indirect exporting.
Indirect exports: An indirect export is the process of exporting through
domestically based export intermediaries. The exporter has no control over its
products in the foreign market.
Types of Indirect Exporting
1 Export Trading Companies (ETCs) provide support services of the entire
export process for one or more suppliers. Attractive to suppliers that are
not familiar with exporting as ETCs usually perform all the necessary work:
locate overseas trading partners, present the product, quote on specific
enquiries, etc.
2 Export Management Companies (EMCs) are similar to ETCs in the way
that they usually export for producers. Unlike ETCs, they rarely take on
export credit risks and carry one type of product, not representing
competing ones. Usually, EMCs trade on behalf of their suppliers as their
export departments.
3 Export Merchants are wholesale companies that buy unpackaged
products from suppliers/manufacturers for resale overseas under their
own brand names. The advantage of export merchants is promotion. One
of the disadvantages for using export merchants result in presence of
identical products under different brand names and pricing on the market,
meaning that export merchants activities may hinder manufacturers
exporting efforts.
4 Confirming Houses are intermediate sellers that work for foreign buyers.
They receive the product requirements from their clients,
10

Notes
negotiate purchases, make delivery, and pay the suppliers/ manufacturers. An
opportunity here arises in the fact that if the client likes the product it may
become a trade representative. A potential disadvantage includes suppliers
unawareness and lack of control over what a confirming house does with their
product.
Nonconforming Purchasing Agents are similar to confirming houses with
the exception that they do not pay the suppliers directly payments take place
between a supplier/manufacturer and a foreign buyer.
Advantages of Indirect Exporting
1 Fast market access
2 Concentration of resources for production
3 Little or no financial commitment. The export partner usually covers most
expenses associated with international sales
4 Low risk exists for those companies who consider their domestic market to
be more important and for those companies that are still developing their
R&D, marketing, and sales strategies.
5 The management team is not distracted
6 No direct handle of export processes.
Disadvantages of Indirect Exporting
1 Higher risk than with direct exporting
2 Little or no control over distribution, sales, marketing, etc. as opposed to
direct exporting
3 Inability to learn how to operate overseas
4 Wrong choice of market and distributor may lead to inadequate market
feedback affecting the international success of the company
5 Potentially lower sales as compared to direct exporting, due to wrong
choice of market and distributors by export partners.
Those companies that seriously consider international markets as a crucial part
of their success would likely consider direct exporting as the market entry tool.
Indirect exporting is preferred by companies who would want to avoid financial
risk as a threat to their other goals.11

Notes
Licensing
An international licensing agreement allows foreign firms, either
exclusively or non-exclusively to manufacture a proprietors product for a fixed
term in a specific market.
Summarizing, in this foreign market entry mode, a licensor in the home
country makes limited rights or resources available to the licensee in the host
country. The rights or resources may include patents, trademarks, managerial
skills, technology, and others that can make it possible for the licensee to
manufacture and sell in the host country a similar product to the one the
licensor has already been producing and selling in the home country without
requiring the licensor to open a new operation overseas. The licensor earnings
usually take forms of one time payments, technical fees and royalty payments
usually calculated as a percentage of sales.
As in this mode of entry the transference of knowledge between the
parental company and the licensee is strongly present, the decision of making
an international license agreement depend on the respect the host government
show for intellectual property and on the ability of the licensor to choose the
right partners and avoid them to compete in each other market. Licensing is a
relatively flexible work agreement that can be customized to fit the needs and
interests of both, licensor and licensee.
Following are the main advantages and reasons to use an international licensing
for expanding internationally:
1 Obtain extra income for technical know-how and services
2 Reach new markets not accessible by export from existing facilities
3 Quickly expand without much risk and large capital investment
4 Pave the way for future investments in the market
5 Retain established markets closed by trade restrictions
6 Political risk is minimized as the licensee is usually 100% locally owned
7 Is highly attractive for companies that are new in international business.
12

Notes
On the other hand, international licensing is a foreign market entry mode
that presents some disadvantages and reasons why companies should not use it
as:
1 Lower income than in other entry modes
2 Loss of control of the licensee manufacture and marketing operations and
practices dealing to loss of quality
3 Risk of having the trademark and reputation ruined by a incompetent
partner
4 The foreign partner can also become a competitor by selling its production
in places where the parental company is already in.
Franchising
The Franchising system can be defined as: A system in which semiindependent business owners (franchisees) pay fees and royalties to a parent
company (franchiser) in return for the right to become identified with its
trademark, to sell its products or services, and often to use its business format
and system.
Compared to licensing, franchising agreements tends to be longer and the
franchisor offers a broader package of rights and resources which usually
includes: equipments, managerial systems, operation manual, initial trainings,
site approval and all the support necessary for the franchisee to run its business
in the same way it is done by the franchisor. In addition to that, while a licensing
agreement involves things such as intellectual property, trade secrets and
others while in franchising it is limited to trademarks and operating know-how of
the business.
Advantages of the International Franchising Mode
1 Low political risk
2 Low cost
3 Allows simultaneous expansion into different regions of the world
4 Well selected partners bring financial investment as well as managerial
capabilities to the operation.
13

Notes
Disadvantages of the International Franchising Mode
1 Franchisees may turn into future competitors
2 Demand of franchisees may be scarce when starting to franchise a
company, which can lead to making agreements with the wrong
candidates
3 A wrong franchisee may ruin the companys name and reputation in the
market
4 Comparing to other modes such as exporting and even licensing,
international franchising requires a greater financial investment to attract
prospects and support and manage franchisees.
Turnkey Projects
A turnkey project refers to a project in which clients pay contractors to
design and construct new facilities and train personnel. A turnkey project is way
for a foreign company to export its process and technology to other countries by
building a plant in that country. Industrial companies that specialize in complex
production technologies normally use turnkey projects as an entry strategy.
One of the major advantages of turnkey projects is the possibility for a
company to establish a plant and earn profits in a foreign country especially in
which foreign direct investment opportunities are limited and lack of expertise in
a specific area exists.
Potential disadvantages of a turnkey project for a company include risk of
revealing companies secrets to rivals, and takeover of their plant by the host
country. By entering a market with a turnkey project proves that a company has
no long-term interest in the country which can become a disadvantage if the
country proves to be the main market for the output of the exported process.
Wholly Owned Subsidiaries (WOS)
A wholly owned subsidiary includes two types of strategies: Greenfield
investment and Acquisitions. Greenfield investment and Acquisition include both
advantages and disadvantages. To decide which entry modes to use is
depending on situations.14

Greenfield investment is the establishment of a new wholly owned

subsidiary. It is often complex and potentially costly, but it is able to full control
to the firm and has the most potential to provide above average return. Wholly
owned subsidiaries and expatriate staff are preferred in service industries where
close contact with end customers and high levels of professional skills,
specialized know how, and customizations are required. Greenfield investment
is more likely preferred where physical capital intensive plants are planned. This
strategy is attractive if there are no competitors to buy or the transfer
competitive advantages that consists of embedded competencies, skills,
routines, and culture.
Greenfield investment is high risk due to the costs of establishing a new
business in a new country. A firm may need to acquire knowledge and expertise
of the existing market by third parties, such consultant, competitors, or business
partners.
This entry strategy takes much time due to the need of establishing new
operations, distribution networks, and the necessity to learn and implement
appropriate marketing strategies to compete with rivals in a new market.
Acquisition has become a popular mode of entering foreign markets
mainly due to its quick access. Acquisition strategy offers the fastest, and the
largest, initial international expansion of any of the alternative.
Acquisition has been increasing because it is a way to achieve greater
market power. The market share usually is affected by market power. Therefore,
many multinational corporations apply acquisitions to achieve their greater
market power require buying a competitor, a supplier, a distributor, or a
business in highly related industry to allow exercise of a core competency and
capture competitive advantage in the market.
Acquisition is lower risk than Greenfield investment because of the
outcomes of an acquisition can be estimated more easily and accurately. In
overall, acquisition is attractive if there are well established firms already in
operations or competitors want to enter the region.
On the other hand, there are many disadvantages and problems in
achieving acquisition success.
Integrating two organizations can be quite difficult due to different
organization cultures, control system, and relationships. Integration is a complex
issue, but it is one of the most important things for organizations.
By applying acquisitions, some companies significantly increased their
levels of debt which can have negative effects on the firms because high debt
may cause bankruptcy.
Too much diversification may cause problems. Even when a firm is not too
over diversified, a high level of diversification can have a negative effect on the
firm in the long term performance due to a lack of management of
diversification.
Joint Venture
There are five common objectives in a joint venture: market entry,
risk/reward sharing, technology sharing and joint product development, and
conforming to government regulations. Other benefits include political

connections and distribution channel access that may depend on relationships.

Such alliances often are favorable when:
*The partners strategic goals converge while their competitive goals
diverge
*The partners size, market power, and resources are small compared to
the Industry leaders
*Partners are able to learn from one another while limiting access to their
own proprietary skills
The key issues to consider in a joint venture are ownership, control, length
of agreement, pricing, technology transfer, local firm capabilities and resources,
and government intentions. Potential problems include:
1 Conflict over asymmetric new investments
2 Mistrust over proprietary knowledge
3 Performance ambiguity - how to split the pie
16

Notes
1 Lack of parent firm support
2 Cultural clashes
3 If, how, and when to terminate the relationship
Joint ventures have conflicting pressures to cooperate and compete:
1 Strategic imperative: the partners want to maximize the advantage
gained for the joint venture, but they also want to maximize their own
competitive position.
2 The joint venture attempts to develop shared resources, but each firm
wants to develop and protect its own proprietary resources.
3 The joint venture is controlled through negotiations and coordination
processes, while each firm would like to have hierarchical control.
Strategic Alliance
A strategic alliance is a term used to describe a variety of cooperative
agreements between different firms, such as shared research, formal joint
ventures, or minority equity participation. The modern form of strategic alliances
is becoming increasingly popular and has three distinguishing characteristics:
1. They are frequently between firms in industrialized nations
2. The focus is often on creating new products and/or technologies rather
than distributing existing ones
3. They are often only created for short term durations
Advantages of a Strategic Alliance
Technology Exchange
1 This is a major objective for many strategic alliances. The reason for this
is that many breakthroughs and major technological innovations are
based on interdisciplinary and/or inter-industrial advances. Because of
this, it is increasingly difficult for a single firm to possess the necessary
resources or capabilities to conduct

Notes
their own effective R&D efforts. This is also perpetuated by shorter product life
cycles and the need for many companies to stay competitive through
innovation. Some industries that have become centers for extensive cooperative
agreements are:
Telecommunications
Electronics
Pharmaceuticals
Information technology
Specialty chemicals
Global Competition
1 There is a growing perception that global battles between corporations be
fought between teams of players aligned in strategic partnerships.
Strategic alliances will become key tools for companies if they want to
remain competitive in this globalized environment, particularly in
industries that have dominant leaders, such as cell phone manufactures,
where smaller companies need to ally in order to remain competitive.
Industry Convergence
1 As industries converge and the traditional lines between different
industrial sectors blur, strategic alliances are sometimes the only way to
develop the complex skills necessary in the time frame required. Alliances
become a way of shaping competition by decreasing competitive
intensity, excluding potential entrants, and isolating players, and building
complex value chains that can act as barriers.
Economies of Sscale and Reduction of Risk
1 Pooling resources can contribute greatly to economies of scale, and
smaller companies especially can benefit greatly from strategic alliances
in terms of cost reduction because of increased economies of scale.
In terms on risk reduction, in strategic alliances no one firm bears 18

Notes
the full risk, and cost of, a joint activity. This is extremely advantageous to
businesses involved in high risk / cost activities such as R&D. This is also
advantageous to smaller organizations which are more affected by risky
activities.
Alliance as an Alternative to Merger
1 Some industry sectors have constraints to cross-border mergers and
acquisitions, strategic alliances prove to be an excellent alternative to
bypass these constraints. Alliances often lead to full-scale integration if
restrictions are lifted by one or both countries.
Disadvantages of Strategic Alliances
The risks of Competitive Collaboration
Some strategic alliances involve firms that are in fierce competition
outside the specific scope of the alliance. This creates the risk that one or both
partners will try to use the alliance to create an advantage over the other. The
benefits of this alliance may cause unbalance between the parties, there are
several factors that may cause this asymmetry:
The partnership may be forged to exchange resources and capabilities
such as technology. This may cause one partner to obtain the desired
technology and abandon the other partner, effectively appropriating all the
benefits of the alliance.
1 Using investment initiative to erode the other partners competitive
position. This is a situation where one partner makes and keeps control of
critical resources. This creates the threat that the stronger partner may
strip the other of the necessary infrastructure.
2 Strengths gained by learning from one company can be used against the
other. As companies learn from the other, usually by task sharing, their
capabilities become strengthened, sometimes this strength exceeds the
scope of the venture and a company can use it to gain a competitive
advantage against the company they may be working with.
3 Firms may use alliances to acquire its partner. One firm may target
19 20

a firm and ally with them to use the knowledge gained and trust built in the
alliance to take over the other.
Comparison of Market Entry Options
The following table provides a summary of the possible modes of foreign
Comparison of Foreign Market Entry Modes
Mode
Conditions
Advantages
Disadvantages
Favoring this
Mode
Exporting
Limited sales
Minimizes risk
Trade barriers &
potential in
and investment. tariffs add to
target country;
costs.
Speed of entry
little product
Maximizes scale; Transport costs
adaptation
uses existing
Limits access to
required
facilities.
local information
Distribution
Company
channels close
viewed as an
to plants
outsider
High target
country
production costs
Liberal import
policies
High political
risk
Licensing

Import and
investment
barriers

Minimizes risk
and investment.
Speed of entry

Lack of control
over use of
assets.

Legal protection
possible in
target
environment.

Able to
circumvent
trade barriers

Licensee may
become
competitor.

High ROI

Knowledge
spillovers

Low sales
potential in
target country.
Large cultural
distance
Licensee lacks
ability to
become a
competitor.
Strategic Alliance

License period is
limited

A strategic alliance is a term used to describe a variety of cooperative

agreements between different firms, such as shared research, formal joint
ventures, or minority equity participation. The modern form of strategic alliances
is becoming increasingly popular and has three distinguishing characteristics:
1. They are frequently between firms in industrialized nations
2. The focus is often on creating new products and/or technologies rather
than distributing existing ones
3. They are often only created for short term durations
Advantages of a Strategic Alliance
Technology Exchange
2 This is a major objective for many strategic alliances. The reason for this
is that many breakthroughs and major technological innovations are
based on interdisciplinary and/or inter-industrial advances. Because of
this, it is increasingly difficult for a single firm to possess the necessary
resources or capabilities to conduct

Notes
their own effective R&D efforts. This is also perpetuated by shorter product life
cycles and the need for many companies to stay competitive through
innovation. Some industries that have become centers for extensive cooperative
agreements are:
Telecommunications
Electronics
Pharmaceuticals
Information technology
Specialty chemicals
Global Competition
2 There is a growing perception that global battles between corporations be
fought between teams of players aligned in strategic partnerships.
Strategic alliances will become key tools for companies if they want to
remain competitive in this globalized environment, particularly in
industries that have dominant leaders, such as cell phone manufactures,
where smaller companies need to ally in order to remain competitive.
Industry Convergence
2 As industries converge and the traditional lines between different
industrial sectors blur, strategic alliances are sometimes the only way to
develop the complex skills necessary in the time frame required. Alliances
become a way of shaping competition by decreasing competitive
intensity, excluding potential entrants, and isolating players, and building
complex value chains that can act as barriers.
Economies of Sscale and Reduction of Risk
2 Pooling resources can contribute greatly to economies of scale, and
smaller companies especially can benefit greatly from strategic alliances
in terms of cost reduction because of increased economies of scale.
In terms on risk reduction, in strategic alliances no one firm bears 18

Notes
the full risk, and cost of, a joint activity. This is extremely advantageous to
businesses involved in high risk / cost activities such as R&D. This is also
advantageous to smaller organizations which are more affected by risky
activities.
Alliance as an Alternative to Merger
2 Some industry sectors have constraints to cross-border mergers and
acquisitions, strategic alliances prove to be an excellent alternative to
bypass these constraints. Alliances often lead to full-scale integration if
restrictions are lifted by one or both countries.
Disadvantages of Strategic Alliances
The risks of Competitive Collaboration
Some strategic alliances involve firms that are in fierce competition
outside the specific scope of the alliance. This creates the risk that one or both
partners will try to use the alliance to create an advantage over the other. The
benefits of this alliance may cause unbalance between the parties, there are
several factors that may cause this asymmetry:
The partnership may be forged to exchange resources and capabilities
such as technology. This may cause one partner to obtain the desired
technology and abandon the other partner, effectively appropriating all the
benefits of the alliance.
4 Using investment initiative to erode the other partners competitive
position. This is a situation where one partner makes and keeps control of
critical resources. This creates the threat that the stronger partner may
strip the other of the necessary infrastructure.
5 Strengths gained by learning from one company can be used against the
other. As companies learn from the other, usually by task sharing, their
capabilities become strengthened, sometimes this strength exceeds the
scope of the venture and a company can use it to gain a competitive
advantage against the company they may be working with.
6 Firms may use alliances to acquire its partner. One firm may target
19 20

a firm and ally with them to use the knowledge gained and trust built in the
alliance to take over the other.
Comparison of Market Entry Options
The following table provides a summary of the possible modes of foreign
Comparison of Foreign Market Entry Modes
Mode
Conditions
Advantages
Disadvantages
Favoring this
Mode
Exporting
Limited sales
Minimizes risk
Trade barriers &
potential in
and investment. tariffs add to
target country;
costs.
Speed of entry
little product
Maximizes scale; Transport costs
adaptation
uses existing
Limits access to
required
facilities.
local information
Distribution
Company
channels close
viewed as an
to plants
outsider
High target
country
production costs
Liberal import
policies
High political
risk
Licensing

Import and
investment
barriers

Minimizes risk
and investment.
Speed of entry

Lack of control
over use of
assets.

Legal protection
possible in
target
environment.

Able to
circumvent
trade barriers

Licensee may
become
competitor.

High ROI

Knowledge
spillovers

Low sales
potential in
target country.
Large cultural
distance
Licensee lacks
ability to
become a
competitor.
Economic Environment

License period is
limited

Economic conditions, economic policies and the economic system are the
important external factors that constitute the economic environment of a
business.
The economic conditions of a country-for example, the nature of the
economy, the stage of development of the economy, economic resources, the
level of income, the distribution of income and assets, etc-are among the very
important determinants of business strategies.
In a developing country, the low income may be the reason for the very
low demand for a product. The sale of a product for which the demand is
income-elastic naturally increases with an increase in income. But a firm is
unable to increase the purchasing power of the people to generate a higher
demand for its product. Hence, it may have to reduce the price of the product to
increase the sales. The reduction in the cost of production may have to be
effected to facilitate price reduction. It may even be necessary to invent or
develop a new low-cost product to suit the low-income market.
Thus Colgate designed a simple, hand-driven, inexpensive ($10) washing
machine for low-income buyers in less developed countries. Similarly, the
National Cash Register Company took an innovative step backward by
developing a crank-operated cash register that would sell at half the cost of a
modern cash register and this was well received in a number of developing
countries.
In countries where investment and income are steadily and rapidly rising,
business prospects are generally bright, and further investments are
encouraged. There are a number of economists and businessmen who feel that
the developed countries are no longer worthwhile propositions for investment
because these economies have reached more or less saturation levels in certain
respects.
In developed economies, replacement demand accounts for a
considerable part of the total demand for many consumer durables whereas the
replacement demand is negligible in the developing economies.
The economic policy of the government, needless to say, has a very great
impact on business. Some types or categories of business are favorably affected
by government policy, some adversely affected, while it is neutral in respect of
others. For example, a restrictive import policy, or a policy of protecting the
home industries, may greatly help the import-competing industries.
Similarly, an industry that falls within the priority sector in terms of the
government policy may get a number of incentives and other positive support
from the government, whereas those industries which are regarded as
inessential may have the odds against them.33
In India, the governments concern about the concentration of economic
power restricted the role of the large industrial houses and foreign concerns to
the core sector, the heavy investment sector, the export sector and backward
regions.
The monetary and fiscal policies, by the incentives and disincentives they
offer and by their neutrality, also affect the business in different ways.
An industrial undertaking may be able to take advantage of external
economies by locating itself in a large city; but the Government of Indias policy
was to discourage industrial location in such places and constrain or persuade

industries undertaking, a backward area location may have many

disadvantages. However, the incentives available for units located in these
backward areas many compensate them for these disadvantages, at least to
some extent.
According to the industrial policy of the Government of India until July
1991, the development of 17 of the most important industries were reserved for
the state. In the development of another 12 major industries, the state was to
play a dominant role. In the remaining industries, co-operative enterprises, joint
sector enterprises and small scale units were to get preferential treatment over
large entrepreneurs in the private sector. The government policy, thus limited
the scope of private business. However, the new policy ushered in since July
1991 has wide opened many of the industries for the private sector.
The scope of international business depends, to a large extent, on the
economic system. At one end, there are the free market economies or capitalist
economies, and at the other end are the centrally planned economies or
communist countries. In between these two are the mixed economies. Within
the mixed economic system itself, there are wide variations.
The freedom of private enterprise is the greatest in the free market
economy, which is characterized by the following assumptions:
(i) The factors of production (labor, land, capital) are privately owned,
and production occurs at the initiative of the private enterprise.34
(ii) Income is received in monetary form by the sale of services of the factors
of production and from the profits of the private enterprise.
(iii) Members of the free market economy have freedom of choice in so far as
consumption, occupation, savings and investment are concerned.
(iv) The free market economy is not planned controlled or regulated by the
government. The government satisfies community or collective wants,
but does not compete with private firms, nor does it tell the people
where to work or what to produce.
The completely free market economy, however, is an abstract system
rather than a real one. Today, even the so-called market economies are subject
to a number of government regulations. Countries like the United States, Japan,
Australia, Canada and member countries of the EEC are regarded as market
economies.
The communist countries have, by and large, a centrally planned
economic system. Under the rule of a communist or authoritarian socialist
government, the state owns all the means of production, determines the goals
of production and controls the economy according to a central master plan.
There is hardly any consumer sovereignty in a centrally planned economy,
unlike in the free market economy. The consumption pattern in a centrally
planned economy is dictated by the state.
China, East Germany Soviet Union, Czechoslovakia, Hungary, Poland etc.,
had centrally planned economies. However, recently several of these countries
have discarded communist system and have moved towards the market
economy.

In between the capitalist system and the centrally planned system falls
the system of the mixed economy, under which both the public and private
sectors co-exist, as in India. The extent of state participation varies widely
between the mixed economies.
However, in many mixed economies, the strategic and other nationally
very important industries are fully owned or dominated by the state.35
The economic system, thus, is a very important determinant of the scope
of private business. The economic system and policy are, therefore, very
important external constraints on business.
Political and Legal Environment
Political and government environment has close relationship with the
economic system and economic policy. For example, the communist countries
had a centrally planned economic system. In most countries, apart from those
laws that control investment and related matters, there are a number of laws
that regulate the conduct of the business. These laws cover such matters as
standards of products, packaging, promotion etc.
In many countries, with a view to protecting consumer interests,
regulations have become stronger. Regulations to protect the purity of the
environment and preserve the ecological balance have assumed great
importance in many countries.
Some governments specify certain standards for the products (including
packaging) to be marketed in the country; some even prohibit the marketing of
certain products. In most nations, promotional activities are subject to various
types of controls. Media advertising is not permitted in Libya. Several European
countries restrain the use of children in commercial advertisements. In a
number of countries, including India, the advertisement of alcoholic liquor is
prohibited. Advertisements, including packaging, of cigarettes must carry the
statutory warning that cigarette smoking is injurious to health.
Similarly, advertisements of baby food must necessarily inform the
potential buyer that breast-feeding in the best. In countries like Germany,
product comparison advertisements and the use of superlatives like best or
excellent in advertisements is not allowed In the United States, the Federal
Trade Commission is empowered to require a company to provide the quality,
performance or comparative prices of its products.
What is being asked of the drug industry and of American business in
general is a fuller disclosure of the relevant facts about products. For drugs, food
additives, some cosmetic preparations, and so forth, a full disclosure requires
more knowledge of the long-range side effects of
materials ingested into the complex human body. For American industry
as a whole, greater candour has been called for under such legislation as Truth
in Lending and Fair Packaging Act, under administrative decrees such as the
warning requirement on cigarette packages and advertising, under the threats
of private damage suits using the common-law concepts of warranty, and under
voluntary programmes such as unit pricing and listing nutritional content of
foods. The increasing complexity of products and the variety of product choices
suggest further moves away from caveat emptor or let the buyer beware
doctrines, moves which on the whole should prove a welcome although
sometimes inconvenient challenge for business.

There are a host of statutory controls on business in India. If the MRTP

companies wanted to expand their business substantially, they had to convince
the government that such expansion was in the public interest. Indeed, the
Government in India has an all-pervasive and predominantly restrictive
influence over various aspects of business, e.g, industrial licensing which
decides location, capacity and process; import licensing for machinery and
materials; size and price of capital issue; loan finance; pricing; managerial
remuneration; expansion plans; distribution restrictions and a host of other
enactments. Therefore, a considerable part of attention of a Chief Executive and
his senior colleagues has to be devoted to a continuous dialogue with various
government agencies to ensure growth and profitability within the framework of
controls and restraints.
Many countries today have laws to regulate competition in the public
interest. Elimination of unfair competition and dilution of monopoly power are
the important objectives of these regulations. In India, the monopolistic
undertakings, dominants undertakings and large industrial houses are subject to
a number of regulations which prevent the concentration of economic power to
the common detriment. The MRTP Act also controls monopolistic, restrictive and
unfair trade practices which are prejudicial to public interest. Such regulations
brighten the prospects of small and new firms. They also increase the scope of
some of the existing firms to venture into new areas of business. The special
privileges available to the small scale sector have also contributed to the
phenomenal success of the Nirma.37
Certain changes in government policies such as the industrial policy, fiscal
policy, tariff policy etc. may have profound impact on business. Some policy
developments create opportunities as well as threats. In other words, a
development which brightens the prospects of some enterprises may pose a
threat to some others. For example, the industrial policy liberalizations in India,
particularly around the mid-eighties have opened up new opportunities and
threats. They have provided a lot of opportunities to a large number of
enterprises to diversify and to make their product mix better. But they have also
given rise to serious threat to many existing products by way of increased
competitions; many sellers markets have given way to buyers markets. Even
products which were seldom advertised have come to be promoted very heavily.
This battle for the market has provided a splendid opportunity for the
advertising industry. Advertising billing has been increasing substantially.
Socio-Cultural Environment
The socio-cultural fabric is an important environmental factor that should
be analyzed while formulating business strategies. The cost of ignoring the
customs, traditions, taboos, tastes and preferences, etc., of people could be
very high.
The buying and consumption habits of the people, their language, beliefs
and values, customs and traditions, tastes and preferences, education are all
factors that affect business.
For a business to be successful, its strategy should be the one that is
appropriate in the socio-cultural environment. The marketing mix will have to be
so designed as best to suit the environmental characteristics of the market. In
Thailand, Helene Curtis switched to black shampoo because Thai women felt

that it made their hair look glossier. Nestle, a Swiss multinational company,
today brews more than forty varieties of instant coffee to satisfy different
national tastes.
Even when people of different cultures use the same basic product, the
mode of consumption, conditions of use, purpose of use or the perceptions of
the product attributes may vary so much so that the product attributes method
of presentation, positioning, or method of promoting the product may have to be
varied to suit the characteristics of different 38
markets. For example, the two most important foreign markets for Indian
shrimp are the U.S and Japan. The product attributes for the success of the
product in these two markets differ.
In the U.S. market, correct weight and bacteriological factors are more
important rather than eye appeal, colour, uniformity of size and arrangement of
the shrimp which are very important in Japan. Similarly, the mode of
consumption of tuna, another seafood export from India, differs between the
U.S. and European countries. Tuna fish sandwiches, an American favorite which
accounts for about 80 per cent of American tuna consumption, have little appeal
in high tuna consumption European countries where people eat it right from the
can. A very interesting example is that of the Vicks Vaporub, the popular pain
balm, which is used as a mosquito repellant in some of the tropical areas.
The differences in languages sometimes pose a serious problem, even
necessitating a change in the brand name. Preeti was, perhaps, a good brand
name in India, but it did not suit in the overseas market; and hence it was
appropriate to adopt Prestige for the overseas markets. Chevrolets brand
name Nova in Spanish means it doesnt go. In Japanese, General Motors
Body by Fisher translates as corpse by Fisher. In Japanese, again, 3Ms slogan
sticks like crazy translates as sticks foolishly. In some languages, PepsiColas slogan come alive translates as come out of the grave.
The values and beliefs associated with colour vary significantly between
different cultures. Blue, considered feminine and warm in Holland, is regarded as
masculine and cold in Sweden. Green is a favorite colour in the Muslim world;
but in Malaysia, it is associated with illness. White indicates death and mourning
in China and Korea; but in some countries, it expresses happiness and is the
colour of the wedding dress of the bride. Red is a popular colour in the
communist countries; but many African countries have a national distaste for
red colour.
Social inertia and associated factors come in the way of the promotion of certain
products, services or ideas. We come across such social stigmas in the
marketing of family planning ideas, use of bio-gas for cooking, etc. In such
circumstances, the success of marketing depends, to a very large extent, on the
success in changing social attitudes or value systems.39
There are also a number of demographic factors, such as the age, and sex
composition of population, family size, habitat, religion, etc., which influence the
business.
While dealing with the social environment, we must also consider the
social environment of the business which encompasses its social responsibility
and the alertness or vigilance of the consumers and of society at large.

The societal environment has assumed great importance in recent years.

As Barker observes, business traditionally has been held responsible for
quantities-for the supply of goods and jobs, for costs, prices, wages, hours of
works, and for standards of living.
Today, however, business is being asked to take a responsibility for the
quality of life in our society. The expectation is that business- in addition to its
traditional accountability for economic performance and results will concern
itself with the health of the society, that it will come up with the cures for the ills
that currently beset us and, indeed, will find ways of anticipating and preventing
future problems in these areas.
As Stern succinctly points out, the more educated the society becomes,
the more interdependent it becomes, and the more discretionary the use of its
resources, the more marketing will become enmeshed in social issues.
Marketing personnel are at interface between company and society. In this
position, they have the responsibility not merely for designing a competitive
marketing strategy, but for sensitizing business to the social, as well as the
product demand of society.
Demographic Environment
Demographic factors like the size, growth rate, age composition, sex
composition, etc. of the population, family size, economic stratification of the
population, educational levels, languages, caste, religion etc. Are all factors that
are relevant to business?
Demographic factors such as size of the population, population growth
rate, age composition, life expectancy, family size, spatial dispersal,
occupational status, employment pattern etc, affect the demand
for goods and services. Markets with growing population and income are
growth markets. But the decline in the birth rates in countries like the United
States have affected the demand for baby products. Johnson and Johnson have
overcome this problem by repositioning their products like baby shampoo and
baby soap, promoting them also to the adult segment, particularly to the
females.
A rapidly increasing population indicates a growing demand for many
products. High population growth rate also indicates an enormous increase in
labour supply. When the Western countries experienced the industrial revolution,
they had the problem of labour supply, for the population growth rate was
comparatively low. Labour shortage and rising wages encouraged the growth of
labour-saving technologies and automation.
But most developing countries of today are experiencing a population
explosion and a situation of labour surplus. The governments of developing
countries, therefore, encourage labour intensive methods of production. Capital
intensive methods, automation and even rationalization are apposed by labour
and many sociologists, politicians and economists in these countries. The
population growth rate, thus, is an important environmental factor which affects
business. Cheap labour and a growing market have encouraged many
multinational corporations to invest in developing countries.

The occupational and spatial mobility of population have implications for

business. If labour is easily mobile between different occupations and regions,
its supply will be relatively smooth, and this will affect the wage rate.
If labour is highly heterogeneous in respect of language, caste and
religion, ethnicity, etc., personnel management is likely to become a more
complex task. The heterogeneous population with its varied tastes, preferences,
beliefs, temperaments, etc. gives rise to differing demand patterns and calls for
different marketing strategies.
References to a number of demographic factors that have business
implications have already been made under socio-cultural environment.41
Natural Environment
Geographical and ecological factors, such as natural resource
endowments, weather and climatic conditions, topographical factors, locational
aspects in the global context, port facilities, etc., are all relevant to business.
Differences in geographical conditions between markets may sometimes
call for changes in the marketing mix. Geographical and ecological factors also
influence the location of certain industries. For example, industries with high
material index tend to be located near the raw material sources.
Climatic and weather conditions affect the location of certain industries
like the cotton textile industry. Topographical factors may, affect the demand
pattern. For example, in hilly areas with a difficult terrain, jeeps may be in
greater demand than cars.
Ecological factors have recently assumed great importance. The depletion
of natural resources, environmental pollution and the disturbance of the
ecological balance has caused great concern. Government policies aimed at the
preservation of environmental purity and ecological balance, conservation of
non-renewable resources, etc., have resulted in additional responsibilities and
problems for business, and some of these have the effect of increasing the cost
of production and marketing. Externalities have become an important problem
the business has to confront with.
Physical and Technological Environment
Physical Factors, such as geographical factors, weather and climatic
conditions may call for modifications in the product, etc., to suit the
environment because these environmental factors are uncontrollable. For
example, Esso adapted its gasoline formulations to suit the weather conditions
prevailing in different markets.
Business prospects depend also on the availability of certain physical
facilities. Some products, like many consumer durables, have certain use facility
characteristics. The sale of television sets, for example, is limited by the extent
of the coverage of the telecasting. Similarly, the
demand for refrigerators and other electrical appliances is affected by the
extent of electrification and the reliability of power supply. The demand for LPG
gas stoves is affected by the rate of growth of gas connections.
Technological factors sometimes pose problems. A firm, which is unable to
cope with the technological changes, may not survive. Further, the differing
technological environment of different markets or countries may call for product
modifications. For example, many appliances and instruments in the U.S.A. are
designed for 110 volts but this needs to be converted into 240 volts in countries

which have that power system. Technological developments may increase the
demand for some existing products. For example, voltage stabilizers help
increase the sale of electrical appliances in markets characterized by frequent
voltage fluctuations in power supply. However, the introduction of TVs, Fridges
etc, with in built voltage stabilizer adversely affects the demand for voltage
stabilizers.
Advances in the technologies of food processing and preservation,
packaging etc., have facilitated product improvements and introduction of new
products and have considerably improved the marketability of products.
The television has added a new dimension to product promotion. The
advent of TV and VCP/VCR has, however, adversely affected the cinema
theatres.
The fast changes in technologies also create problems for enterprises as they
render plants and products obsolete quickly. Product-market-technology matrix
generally has a much shorter life today than in the past. It is particularly so in
the international marketing context. It may be interesting to note that almost
half of Hindustan Levers 1980 export business did not exist in 1987. In fact, as
much as a third of the companys 1987 turnover was from products and
markets, which were under three years of age.

Balance of payment:The balance of payments position of the country reflects on its economic
health.
The balance of payments theory is the modern and most satisfactory
theory of the determination of the exchange rate. It is also called the
demand and supply theory of exchange rate.
The term 'balance of payments' is used in the sense of a market balance

If the demand for a country's currency falls at a given rate of

exchange, we can speak of a deficit in its balance of payments.

A deficit balance of payments leads to a fall or depreciation in the

external value of the country's currency.

If the demand for a country's currency rises at a given rate of

exchange, we can speak of surplus in its balance of payments.

A surplus balance of payments leads to an increase or appreciation

in the external value of the country's currency.

The balance of payments includes all payments made by the

foreigners to the nationals as well as all payments made by the
nationals to the foreigners.

The incoming payments are credits and outgoing payments are

debits.
Balance of Payments (BOP)is an accounting record of a countrys
trade in goods, services, and financial assets with the rest of the
world during a particular time period (year or quarter).

Current Account
The current account includes all transactions which give rise to or use up national
income. The current account consists of two major items, namely, (a) merchandise
export and imports and (b) invisible imports and exports.

Merchandise exports i.e. sale of goods abroad, are credit entries because all
transactions giving rise to monetary claims on foreigners represent credits. On
the other hand, merchandise imports, i.e. purchase of goods abroad, are debit
entries because all transactions giving rise to foreign money claims on the home
country represent debits. Merchandise exports and imports form the most
important international transactions of most of the countries.

Invisible exports i.e. sale of services, are credit entries and invisible imports i.e.
purchase of services are debit entries. Important invisible exports include sale
abroad of services like insurance and transport etc. while important invisible
imports are foreign tourist expenditures in the home country and income received
on loans and investment abroad (interests or dividends).

Transfers payments refer to unrequited receipts or unrequited payments which

may be in cash or in kind and are divided into official and private transactions.
Private transfer payments cover such transactions as charitable contributions and
remittances to relatives in other countries. The main component of government
transfer payments is economic aid in the form of grants.

Capital Account

The capital account separates the non monetary sector from the monetary one,
that is to say, the trading or ordinary private business element in the economy
together with the ordinary institutions of central or local government, from the
central bank and the commercial bank, which are directly involved in framing or
implementing monetary policies. The capital account consists of long term and
short term capital transactions. Capital outflow represents debit and capital
inflow represent credit. For instance, if an American firm invests rupees 100
million in India, this transaction will be represented as a debit in the US BOP and
a credit in the BOP of India.

Other Accounts
The IMF account contains purchases (credits) and repurchases (debits) from the
IMF. SDRs Special Drawing Rights are a reserve asset created by the IMF and
allocated from time to time to member countries. Within certain limitations it can
be used to settle international payments between monetary authorities of
member countries. An allocation is a credit while retirement is a debit. The
Reserve and Monetary Gold account records increases (debits) and decreases
(credits) in reserve assets. Reserve assets consist of RBIs holdings of gold and
foreign exchange (in the form of balances with foreign central banks and
investment in foreign government securities) and governments holding of SDRs.
Errors and Omissions is a statistical residue. Errors and omissions (or the
balancing item) reflect the difficulties involved in recording accurately, if at all, a
wide variety of transactions that occur within a given period of (usually 12
months). It is used to balance the statement because in practice it is not possible
to have complete and accurate data for reported items and because these cannot,
therefore, ordinarily have equal entries for debits and credits.

Balance of Payments Always in Equilibrium?

Balance of payments always balances means that the algebraic sum of the net credit and debit
balances of current account, capital account and official settlements account must equal zero.
Balance of payments is written as.
B = Rf -Pf
B =where, represents balance of payments,

Rf receipts from foreigners,

Pf payments made to foreigners.
When = Rf- Pf = 0, the balance of payments is in equilibrium.
When Rf Rf > 0, it implies receipts from foreigners exceed payments made to foreigners and there
is surplus in the balance of payments. On the other hand, when R f Pf < 0 or Rf < Pf there is deficit
in the balance of payments as the payments made to foreigners exceed receipts from foreigners.
If net foreign lending and investment abroad are taken, a flexible exchange rate creates an excess of
exports over imports. The domestic currency depreciates in terms of other currencies.
The export becomes cheaper relatively to imports. It can be shown in equation form:
X + = M + If
Where X represents exports, M imports, 1, foreign investment, foreign borrowing
or X-M= If -B
or (X-M)-(If -B) = 0
The equation shows the balance of payments in equilibrium. Any positive balance in its current
account is exactly offset by negative balance on its capital account and vice versa. In the accounting
sense, the balance of payments always balances. This can be shown with the help of the following
equation:
C + S + T= C + I + G + (X-M)
or Y=C + I + G + (X M) [. Y = + S + T]
where represents consumption expenditure, S domestic saving, T tax receipts, I investment
expenditures, G government expenditures, X exports of goods and services, and M imports of goods
and services.
In the above equation
+ S + T is GNI or national income (Y), and
+ I + G =A,
where A is called absorption.
In the accounting sense, total domestic expenditures ( + I + G) must equal current income (C + S +
T) that is A = Y. Moreover, domestic saving (Sd) must equal domestic investment (7d). Similarly, an
export surplus on current account (X > M) must be offset by an excess of domestic savings over
investment (Sd > Id). Thus the balance of payments always balances in the accounting sense,
according to the basic principle of accounting.

In the accounting system, the inflow and outflow of a transaction are recorded on the credit and
debit sides respectively. Therefore, credit and debit sides always balance. If there is a deficit in the
current account, it is offset by a matching surplus in the capital account by borrowings from
abroad or/and withdrawing out of its gold and foreign exchange reserves, and vice versa. Thus, the
balance of payments always balances in this sense also.
4. Measuring Deficit or Surplus in Balance of Payments

If the balance of payments always balances, then why does a deficit or surplus arise in the balance
of payment of a country? It is only when all items in the balance of payments are included that
there is no possibility of a deficit or surplus. But if some items are excluded from a countrys
balance of payments and then a balance is struck, it may show a deficit or surplus.
There are three ways of measuring deficit or surplus in the balance of payments:
First, there is the basic balance which includes the current account balance and the long-term
capital account balance.
Second, there is the net liquidity balance which includes the basic balance and the short-term
private non-liquid capital balance, allocation of SDRs, and errors and omissions.
Third, there is the official settlements balance which includes the total net liquid balance and shortterm private liquid capital balance.
If the total debits are more than total credits in the current and capital accounts, including errors
and omissions, the net debit balance measures the deficit in the balance of payments of a country.
This deficit can be settled with an equal amount of net credit balance in the official settlements
account.
On the contrary, if total credits are more than total debits in the current and capital accounts,
including errors and omissions, the net debit balance measures the surplus in the balance of
payments of a country. This surplus can be settled with an equal amount of net debit balance in the
official settlements account.
. Disequilibrium in Balance of Payments

Disequilibrium in the BOP of a country may be either a deficit or a surplus. A deficit or surplus in
BOP of a country appears when its autonomous receipts (credits) do not match its autonomous
payments (debits). If autonomous credit receipts exceed autonomous debit payments, there is a
surplus in the BOP and the disequilibrium is said to be favourable. On the other hand, if
autonomous debit payments exceed autonomous credit receipts, there is a deficit in the BOP and the
disequilibrium is said to be unfavourable or adverse.
Causes of Disequilibrium:

There are many factors that may lead to a BOP deficit or surplus:
1. Temporary Changes (or Disequilibrium):
There may be a temporary disequilibrium caused by random variations in trade, seasonal
fluctuations, the effects of weather on agricultural production, etc. Deficits or surpluses arising
from such temporary causes are expected to correct themselves within a short time.
2. Fundamental Disequilibrium:
Fundamental disequilibrium refers to a persistent and long-run BOP disequilibrium of a country. It
is a chronic BOP deficit, according to IMF.
It is caused by such dynamic factors as: (1) Changes in consumer tastes within the country or
abroad which reduce the countrys exports and increase its imports. (2) Continuous fall in the
countrys foreign exchange reserves due to supply inelasticitys of exports and excessive demand for
foreign goods and services. (3) Excessive capital outflows due to massive imports of capital goods,
raw materials, essential consumer goods, technology and external indebtedness. (4) Low
competitive strength in world markets which adversely affects exports. (5) Inflationary pressures
within the economy which make exports dearer.
3. Structural Changes (or Disequilibrium):
Structural changes bring about disequilibrium in BOP over the long run.
They may result from the following factors:
(a) Technological changes in methods of production of products in domestic industries or in the
industries of other countries. They lead to changes in costs, prices and quality of products.
(b) Import restrictions of all kinds bring about disequilibrium in BOP.
(c) Deficit in BOP also arises when a country suffers from deficiency of resources which it is
required to import from other countries.
(d) Disequilibrium in BOP may also be caused by changes in the supply or direction of long-term
capital flows. More and regular flow of long-term capital may lead to BOP surplus, while an
irregular and short supply of capital brings BOP deficit.
4. Changes in Exchange Rates:
Changes in foreign exchange rate in the form of overvaluation or undervaluation of foreign
currency lead to BOP disequilibrium. When the value of currency is higher in relation to other
currencies, it is said to be overvalued. Opposite is the case of an undervalued currency.
Overvaluation of the domestic currency makes foreign goods cheaper and exports dearer in foreign
countries. As a result, the country imports more and exports less of goods. There is also outflow of
capital. This leads to unfavourable BOP. On the contrary, undervaluation of the currency makes
BOP favourable for the country by encouraging exports and inflow of capital and reducing imports.

5. Cyclical Fluctuations (or Disequilibrium):

Cyclical fluctuations in business activity also lead to BOP disequilibrium. When there is depression
in a country, volumes of both exports and imports fall drastically in relation to other countries. But
the fall in exports may be more than that of imports due to decline in domestic production.
Therefore, there is an adverse BOP situation. On the other hand, when there is boom in a country
in relation to other countries, both exports and imports may increase. But there can be either a
surplus or deficit in BOP situation depending upon whether the country exports more than imports
or imports more than exports. In both the cases, there will be disequilibrium in BOP.
6. Changes in National Income:
Another cause is the change in the countrys national income. If the national income of a country
increases, it will lead to an increase in imports thereby creating a deficit in its balance of payments,
other things remaining the same. If the country is already at full employment level, an increase in
income will lead to inflationary rise in prices which may increase its imports and thus bring
disequilibrium in the balance of payments.
7. Price Changes:
Inflation or deflation is another cause of disequilibrium in the balance of payments. If there is
inflation in the country, prices of exports increase. As a result, exports fall. At the same time, the
demand for imports increase. Thus increase in export prices leading to decline in exports and rise in
imports results in adverse balance of payments.
8. Stage of Economic Development:
A countrys balance of payments also depends on its stage of economic development. If a country is
developing, it will have a deficit in its balance of payments because it imports raw materials,
machinery, capital equipment, and services associated with the development process and exports
primary products. The country has to pay more for costly imports and gets less for its cheap
exports. This leads to disequilibrium in its balance of payments.
9. Capital Movements:
Borrowings and lendings or movements of capital by countries also result in disequilibrium in BOP.
A country which gives loans and grants on a large scale to other countries has a deficit in its BOP on
capital account. If it is also importing more, as is the case with the USA, it will have chronic deficit.
On the other hand, a developing country borrowing large funds from other countries and
international institutions may have a favourable BOP. But such a possibility is remote because these
countries usually import huge quantities of food, raw materials, capital goods, etc. and export
primary products. Such borrowings simply help in reducing BOP deficit.
10. Political Conditions:
Political condition of a country is another cause of disequilibrium in BOP. Political instability in a
country creates uncertainty among foreign investors which leads to the outflow of capital and
retards its inflow. This causes disequilibrium in BOP of the country. Disequilibrium in BOP also
occurs in the event of war or fear of war with some other country.

Implications of Disequilibrium:
A disequilibrium in the balance of payments whether a deficit or surplus has important
implications for a country. A deficit in the combined current and capital accounts is regarded as
undesirable for the country. This is because such a deficit has to be covered by borrowing from
abroad or attracting foreign exchange or capital from abroad. This may require paying high
interest rates.
There is also the danger of withdrawing money by foreigners, as happened in the case of the Asian
crisis in the late 1990s. An alternative may be to draw on the reserves of the country which may also
lead to a financial crisis. Moreover, the reserves of a country being limited, they can be used to pay
for BOP deficit upto a limit.
But the above analysis of a combined current and capital account deficit is not correct in practice.
The reason being that a current account deficit is the same thing as a capital account surplus.
However, it is beneficial for a country to have a current account deficit even if it equals capital
account surplus in BOP. Given the national income accounting identity
Y=C+I+G+X
where Y is national income or GDP, C is consumption spending, I investment, G
government spending, and X is net exports or the current account, we can rearrange this identity
as:
YCG=S=I+X
where Y C G is national income less consumption less government spending, which we can
call national saving S. Thus, saving equals the sum of investment and the current account.

National Saving, Investment and the Current Account

Rearranging further, we get:

X=S-I

This states that if domestic saving exceeds investment, there will be a current
account surplus.
A CA surplus means country has high demand for its export. This creates high demand for
local currency. An appreciation of currency makes exports cheaper.

A country that spends more than its income

(I > S) will experience a current account deficit.

Government can use two methods to fix Current Account deficit

1.DEVALUATE CURRENCY

Devaluate currency to make imported products more expensive and exports more attractive
to overseas buyers on the condition that the combined elasticitys of demand for imports
and exports is greater than one.(The Marshall Learner Condition)

Devaluation can lead to imported inflation. Imports will be more expensive. Higher inflation
can reduce the countries competitiveness. Therefore the improvement in the current
account might only be temporary.

Policies aiming at reducing the growth of aggregate demand and reducing inflation. They can
include a tightening of fiscal policy or monetary policy, this will reduce aggregate demand.
2a.Monetary policy
Tight monetary policy involves increasing interest rates

Higher interest rates will increase the cost of debt and mortgage repayments and leave
people with less money to spend. Therefore, this will reduce their consumption of imports,
improving the current account.

Also, higher interest rates will cause a fall in AD and therefore reduce economic growth.
This will reduce inflation and help to make exports more competitive.

Deflationary policies will also put pressure on manufacturers to reduce costs and this will
lead to more competitive exports and so exports may increase in the long run because of this
effect.

However an increase in interest rates will tend to cause hot money flows and therefore an
appreciation in the exchange rate. This appreciation makes exports less competitive, and
imports more attractive.

2b.Deflationary fiscal policy

An alternative to using monetary policy is to use fiscal policy.

For example, the government could increase income tax. This would reduce consumer
discretionary income and reduce spending on imports.

It would not have an adverse effect on the exchange rate and higher income tax would also
improve government finances.

However this policy will conflict with other macroeconomic objectives with lower aggregate
demand, growth is likely to fall causing higher unemployment.

3.Supply Side Policies

They are government policies which seek to increase the productivity and efficiency of the
economy.

They can involve interventionist supply side policies (e.g. government spending on
education &training) or free market supply side policies (e.g. Deregulation,
privatisation),infrastructural development, ease of doing business.

However they take long time to materialize.

4.Lower wages

Used by many Eurozone economies facing a large current

account deficit (but unable to devalue within single currency)
is to reduce wages. Lower wages will reduce costs of
production and improve competitiveness. ex. Greece

However, lower wages will also lead to lower aggregate

demand and could lead to deflation and low growth.

Reducing wages is also known as internal devaluation.

5.Protectionism
The government could increased tariffs on imports or even
impose quotas. Both these measures would have the impact of
reducing imports and therefore improve the current account.
However:

Protectionism may lead to retaliation with other countries

placing tariffs on our exports so exports could decrease.

Protected by tariffs domestic industries may become

uncompetitive, because there is less incentive to cut costs.

MODULE-3

Protectionism is a policy of protecting the domestic businesses from foreign competition by

applying tariffs, import quotas, or many types of other restrictions attached to the imports of
foreign competitors goods and services.
There are many protectionist policies in place in many nations despite the fact that there is a
popular consensus that the world economy, as a whole, benefits from free trade.

Government-levied tariffs The best form of protectionist measure is the governmentlevied tariffs. The common practice is raising the price of the imported products so that
they cost more and hence become less attractive than the domestic products. There are
many believers that protectionism is a helpful policy for the emergent industries in the
developing nations.

Import quotas Import quotas are the other forms of protectionism. These quotas limit
the amount of products imported into a country. This is considered to be a more effective
strategy than protective tariffs. Protective tariffs do not always repel the consumers who
are ready to pay higher prices for imported goods.

Mercantilism Wars and recessions are the major reasons behind protectionism. On the
other hand, peace and economic prosperity encourage free trade. In 17th and 18th
centuries, the European monarchies used to rely heavily on protectionist policies. This
was due to their aim to increase trade and improve the domestic economies. These
(currently discredited) policies are called mercantilism.

Reciprocal trade agreements Reciprocal trade agreements limit the protectionist

measures in lieu of eliminating them fully. However, protectionism still exists and is
heard when economic hardships or joblessness is aggravated by foreign competition.

Currently, protectionism is in a unique form. Economists term the form as administered

protection. Most rich nations have fair trade laws. The announced purpose of Free Trade Laws is
twofold

First is to make sure that foreign countries do not subsidize exports so that market
incentives are not distorted and hence efficient allocation of activity among the countries
is not destroyed.

The second purpose is to assure that international companies do not dump their exports in
an aggressive manner.

These mechanisms are meant to augment free trade.

End of Protectionism in History
Great Britain started to end the protective tariffs in the first half of the 19th century after
achieving industrial leadership in Europe. Britains removal of protectionist measures and
acceptance of free trade was symbolized by the repeal of the Corn Laws (1846) and various other
duties on imported grains.
Europes protectionist policies became relatively mild in the latter half of the 19th century.
However, France, Germany, and many other nations imposed customs duties to shelter the
improving industrial belts from British competition. Customs duties fell sharply in Western
world by 1913, and import quotas were almost never used.
The damage and displacement in World War I inspired an increasing raise of customs barriers in
Europe in the 1920s. Great Depression of the 1930s resulted in record levels of unemployment
which led to an epidemic of protectionism.
The United States was also a protectionist country, and the levied tariffs reached the top during
1820s and the Great Depression. The Smoot-Hawley Tariff Act (1930) raised the average tariff
on imported goods by about 20 percent.
US protectionist policies started getting vanished by the middle of the 20th century. By 1947, the
United States became one of the 23 nations to sign reciprocal trade agreements (the General
Agreement on Tariffs and Trade - GATT). GATT, which was amended in 1994, was taken over
by the World Trade Organization (WTO) in Geneva (1995). WTO negotiations have led to
reduced customs tariffs by most of the major trading nations

Policies of Protectionism
A variety of policies have been claimed to achieve protectionist goals. These include:
Tariffs: Typically, tariffs (or taxes) are imposed on imported goods. Tariff rates usually vary
according to the type of goods imported. Import tariffs will increase the cost to importers, and
increase the price of imported goods in the local markets, thus lowering the quantity of goods
imported. Tariffs may also be imposed on exports, and in an economy with floating exchange
rates, export tariffs have similar effects as import tariffs. However, since export tariffs are often
perceived as 'hurting' local industries, while import tariffs are perceived as 'helping' local
industries, export tariffs are seldom implemented.
Import quotas: To reduce the quantity and therefore increase the market price of imported goods.
The economic effects of an import quota are similar to that of a tariff, except that the tax revenue
gain from a tariff will instead be distributed to those who receive import licenses. Economists
often suggest that import licenses be auctioned to the highest bidder, or that import quotas be
replaced by an equivalent tariff.

Administrative barriers: Countries are sometimes accused of using their various administrative
rules (e.g. regarding food safety, environmental standards, electrical safety, etc.) as a way to
introduce barriers to imports.
Anti-dumping legislation: Supporters of anti-dumping laws argue that they prevent "dumping" of
cheaper foreign goods that would cause local firms to close down. However, in practice, antidumping laws are usually used to impose trade tariffs on foreign exporters.
Direct subsidies: Government subsidies (in the form of lump-sum payments or cheap loans) are
sometimes given to local firms that cannot compete well against foreign imports. These subsidies
are purported to "protect" local jobs, and to help local firms adjust to the world markets.
Export subsidies: Export subsidies are often used by governments to increase exports. Export
subsidies are the opposite of export tariffs, exporters are paid a percentage of the value of their
exports. Export subsidies increase the amount of trade, and in a country with floating exchange
rates, have effects similar to import subsidies.
Exchange rate manipulation: A government may intervene in the foreign exchange market to
lower the value of its currency by selling its currency in the foreign exchange market. Doing so
will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade
balance. However, such a policy is only effective in the short run, as it will most likely lead to
inflation in the country, which will in turn raise the cost of exports, and reduce the relative price
of imports.

This Essay is

a Student's Work

This essay has been submitted by a student. This is not an example of the work written by our
professional essay writers.

International patent systems: There is an argument for viewing national patent systems as a cloak
for protectionist trade policies at a national level. Two strands of this argument exist: one when
patents held by one country form part of a system of exploitable relative advantage in trade
negotiations against another and a second where adhering to a worldwide system of patents
confers "good citizenship" status despite 'de facto protectionism'.

Methods And Mechanism Used To Protect Business

Interests Commerce Essay
Published: 23, March 2015
According to investopedia, government actions and policies that restrict or restrain international
trade, often done with the intent of protecting local businesses and jobs from foreign
competition. Typical methods of protectionism are import tariffs, quotas, subsidies or tax cuts to
local businesses and direct state intervention. Protectionism is the economic policy of restraining
trade between states through methods such as tariffs on imported goods, restrictive quotas, and a
variety of other government regulations designed to discourage imports and prevent foreign takeover of domestic markets and companies (source: Wikipedia).
Protectionism, policy of protecting domestic industries against foreign competition by means of
tariffs, subsidies, import quotas, or other restrictions or handicaps placed on imports of foreign
competitors. (source: Britannica Encyclopedia)

PROTECTION OF LOCAL INDUSTRIES

Why do nations impede free trade when the inhibition is irrational? One reason why
governments interfere with free marketing is to protect local industries, often at the expense of
local consumers as well as consumers worldwide. Regulations are created to keep out or hamper
the entry of foreign-made products. Arguments for the protection of local industries usually take
one of the following forms:
Keeping money at home
Reducing unemployment
Equalizing cost and price

Enhancing national security

Protecting infant industry

Keeping Money at Home

Trade unions and protectionists often argue that international trade will lead to an outflow of
money, making foreigners richer and local people poorer. This argument is based on fallacy of
regarding money as the sole indicators of wealth. Other assets, even products, can also be
indicators of wealth. Also, this protectionist argument assumes that foreigners receive money
without having to give something of value in return. Whether local consumers buy locally made
products or foreign products, they will have to spend money to pay for such products.

Reducing Unemployment
It is a standard practice for trade unions and politicians to attack imports and international trade
in name of job protection. The argument is based on the assumption that import reduction will
create more demand for local products and subsequently create more jobs.

Equalizing Cost and Price

Some protectionists attempt to justify their actions by invoking economic theory. They argue that
foreign goods have lower prices because of lower production costs. Therefore, trade barriers are
needed to make prices of imported products less competitive and local items more competitive.

Enhancing National Security

Protectionists often present themselves as patriots. They usually claim that a nation should be
self-sufficient and even willing to pay for inefficiency in order to enhance national security.
Opponents of protectionism however dismiss appeals to national security. A nation can never be
completely self-sufficient because raw materials are not found in the same proportion in all areas
of the world.

Protecting infant industry

The necessity to protect an infant industry is perhaps the most credible argument for protectionist
measures. Some industries need to be protected until they become viable. Here South Korea
serves as a good example. It has performed well by selectively protecting infant industries for
export purpose.
(Source: adopted from Sak Onkvisit, John J.Shaw, International Marketing: Analysis and
Strategy)

Reasons for protectionism:

(source: adopted from econessays.com)

1. Infant industry argument: - small firms need to be protected so as to have time to expand and
gain economies of scale so as to be able to compete on an international basis later on.
However so far this has happened only in big industries such as the steel industry and it
gives a motive for firms to remain lazy because they know they don't have to compete on an
international level e.g. steel industry in the USA.
2. Dumping to prevent firms from selling goods at a loss to destroy the domestic industry. By
allowing free trade there is guarantee for low prices indefinitely because the moment one
firm becomes inefficient more efficient ones will enter the market and take it away.
3. Raise revenue for the government through tariffs.
4. Prevent overspecialization and diseconomies of scale in other words over production in a
country due to the need to export goods because this will also lead to misallocation of
resources which is what we are trying to prevent by free trade.
5. To remove a balance of payments deficit without however tackling the problem at its root
this is inefficiency

Arguments against Protectionism

Levels: A Level

Exam boards: AQA, Edexcel, OCR, IB, Other

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What are some of the main economic and social arguments against trade protectionist policies?
1. Market distortion and loss of allocative efficiency: Protectionism can be
an ineffective and costly means of sustaining jobs.

Higher prices for consumers: Tariffs push up the prices for consumers
and insulate inefficient sectors from genuine competition. They
penalise foreign producers and encourage an inefficient allocation of
resources both domestically and globally.

Reduction in market access for producers: Export subsidies depress

world prices and damage output, profits, investment and jobs in many
lower-income developing countries that rely on exporting primary and
manufactured goods for their growth.

2. Loss of economic welfare: Tariffs create a deadweight loss of consumer

and producer surplus. Welfare is reduced through higher prices and restricted
consumer choice. The welfare effects of a quota are similar to those of a tariff
prices rise because an artificial scarcity of a product is created.
3. Extra costs for exporters: For goods that are produced globally, high tariffs
and other barriers on imports act as a tax on exports, damaging economies,
and jobs, rather than protecting them
4. Regressive effect on the distribution of income: Higher prices from
tariffs hit those on lower incomes hardest, because the tariffs (e.g. on
foodstuffs, tobacco, and clothing) fall on products that lower income families
spend a higher share of their income.
5. Production inefficiencies: Firms that are protected from competition have
little incentive to reduce their production costs. This can lead to X-inefficiency
and higher average costs.
6. Trade wars: There is the danger that one country imposing import controls
will lead to retaliatory action by another leading to a decrease in the volume
of world trade. Retaliatory actions increase the costs of importing new
technologies affecting LRAS. Students should mention game theory when
discussing the risks of retaliation with countries embroiled in trade disputes.
7. Negative multiplier effects: If one country imposes trade restrictions on
another, the resultant decrease in trade will have a negative multiplier effect
affecting many more countries because exports are an injection of demand
into the global circular flow of income.
8. Second best approach: Protectionism is a second best approach to
correcting for a country's balance of payments problem or the fear of
structural unemployment. Import controls go against the principles of free
trade. In this sense, import controls can cause government failure.

Different forms of protectionism

1. Tariffs - a tax or duty that raises the price of imported products and causes a contraction
in domestic demand and an expansion in domestic supply. For example, until recently,

Mexico imposed a 150% tariff on Brazilian chicken. The United States has an 11%
import tariff on imports of bicycles from the UK.
2. Quotas these are quantitative (volume) limits on the level of imports allowed or a limit
to the value of imports permitted into a country in a given time period. Until 2014, South
Korea maintained strict quotas on imported rice. It has now replaced an annual import
quota with import tariffs designed to protect South Korean rice farmers. Quotas do not
normally bring in any tax revenue for the government
3. Voluntary Export Restraint this is where two countries make an agreement to limit
the volume of their exports to one another over an agreed time period. Sometimes this is
enforced by a government for example the USA enforced VER on Japan during the late
1980s
4. Intellectual property laws e.g. patents and copyright protection
5. Technical barriers to trade including product labeling rules and stringent sanitary
standards. These increase product compliance costs and impose monitoring costs on
export agencies. Huge vertically integrated businesses can cope with these non-tariff
barriers but many of the least developed countries do not have the some technical
sophistication to overcome these barriers.
6. Preferential state procurement policies this is where a government favour
local/domestic producers when finalizing contracts for state spending e.g. infrastructure
projects or purchasing new defence equipment
7. Export subsidies - a payment to encourage domestic production by lowering their costs.
Soft loans can be used to fund the dumping of products in overseas markets. Well known
subsidies include Common Agricultural Policy in the EU, or cotton subsidies for US
farmers and farm subsidies introduced by countries such as Russia. In 2012, the USA
government imposed tariffs of up to 4.7 per cent on Chinese manufacturers of solar panel
cells, judging that they benefited from unfair export subsidies after a review that split the
US solar industry.
8. Domestic subsidies government help (state aid) for domestic businesses facing
financial problems e.g. subsidies for car manufacturers or loss-making airlines.
9. Import licensing - governments grants importers the license to import goods.
10. Exchange controls - limiting the foreign exchange that can move between countries
this is also known as capital controls
11. Financial protectionism for example when a national government instructs banks to
give priority when making loans to domestic businesses

12. Murky or hidden protectionism - e.g. state measures that indirectly discriminate against
foreign workers, investors and traders. A government subsidy that is paid only when
consumers buy locally produced goods and services would count as an example.
Deliberate intervention in currency markets might also come under this category.
Quotas, embargoes, export subsidies and exchange controls are examples of non-tariff barriers
Examiners tip: the tariff is frequently examined. Ensure that you can analyse the removal as
well as the imposition of a tariff.

Advantages:
> More variety of goods available to consumers.
> Protection of domestic industries and employment.
> Prevention of 'Dumping'.

> Protection of the country's industries.

Disadvantages:
> Retaliations from the other countries, hurting the export and import
sections.
> It raises costs
> It damages the trading system
Following are the disadvantages of Trade protectionism:
- The customers are not able to get the competitive prices. Instead they would have
to buy what the home industry is producing.
- Quality of products suffer as there is no competition.
- Home industry gets extremely non-competitive.
- Trade protectionism is a great barrier for companies that are willing to expand to
other countries and are stopped due to these barriers.
- Smuggling and other unfair means tend to get boost as people like smuggled
better quality products

The main disadvantages of protectionism are:

The local firms are being protected and they are competing on price not the quality

The artificial protection can work well for the products inside the country while it is of
new use when the products will be exported; its a false sense of security.

The consumers will be denied an easy access to high quality products.

It is against the principle of free market.

MODULE-5

Market segmentation is a marketing strategy which involves separating a wide target market
into subsets of customers, enterprises, or nations who have, or are perceived to have, common
requirements, choices, and priorities, and then designing and executing approaches to target
them.
Market segmentation approaches are basically used to identify the target clients, and provide
assisting data for marketing plan components like positioning to get certain marketing plan
objectives.

Businesses may discover product differentiation approaches, or an undifferentiated approach,

including specific goods or product lines relying on the precise demand and attributes of the
target segment.
The most common forms of market segmentation practices are as follows

Geographic Segmentation
Dealers can segment market according to geographic criterion that is nations, states, regions,
countries, cities, neighborhoods, or postal codes. The geo-cluster strategy blends demographic
information with geographic data to discover a more precise or specific profile. For example, in
rainy areas dealers can easily sell raincoats, umbrellas and gumboots. In winter regions, one can
sell warm clothing.
A small business product store focuses on customers from the local neighborhood, while a larger
departmental store focuses its marketing towards different localities in a larger city or region.
They neglect customers in other continents. This segmentation is very essential and is marked as
the initial step to international marketing, followed by demographic and psychographic
segmentation.

Demographic Segmentation
Segmentation on the basis of demography relies on variables like age, gender, occupation and
education level or according to perceived advantages which an item or service may provide.
An alternative of this strategy is called firmographic or character based segmentation. This
segmentation is widely used in business to business market. Its estimated that 81% of business
to business dealers use this segmentation.
According to firmographic or character based segmentation, the target market is segmented
based on characteristics like size of the firm in terms of revenue or number of employees, sector
of business or location like place, country and region.

Behavioral Segmentation
This divides the market into groups based on their knowledge, attitudes, uses and responses to
the product.
Many merchants assume that behavior variables are the best beginning point for building market
segments.

Psychographic Segmentation
Psychographic segmentation calls for the division of market into segments based upon different
personality traits, values, attitudes, interests, and lifestyles of consumers.

Psychographics uses peoples lifestyle, their activities, interests as well as opinions to define a
market segment.
Mass media has a dominating impact and effect on psychographic segmentation. To the products
promoted through mass media can be high engagement items or an item of high-end luxury and
thus, influences purchase decisions.

Occasional Segmentation
Occasion segmentation is dividing the market into segments on the basis of the different
occasions when the buyers plan to buy the product or actually buy the product or use the product.
Some products are specifically meant for a particular time or day or event. Thus, occasion
segmentation helps identify the customers various reasons to buy a particular product for a
particular and thus boosts the sale of the product.

International Marketing Planning

Any company on the marketing platform is expected to have a detailed analysis of the choices
and preferences of the customers in the target market. That is where the company will be selling
the products. This will help the company produce the products according to the demands of the
customers and this will eventually lead to a win-win situation between the buyer and the seller.
The plan that leads to the analysis is a step by step approach wherein the analysis is done on
cultural, economic, and political situation prevailing in the target market or the country.
The different steps in the planning process are as follows

Phase 1 Identifies the target market and builds relative priorities for resource
allocation.

Phase 2 Fixes the positioning approach for each target market. The aim is to match the
requirements with the needs based on the analysis.

Phase 3 Includes the preparation of the marketing plan. It consists of examining the
situation, aim, objectives, approach and tactics, budgets and forecasts, and action
programs.

Phase 4 The plan is executed and managed. Results are checked and strategies adjusted
when required to improve results.

Even though the international marketing planning process is very much similar to planning
domestic marketing strategies but the environment is far more complicated, knotty and uncertain
in international markets.

International Marketing - Market Selection

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After the decision has been made to expand the business internally, a preliminary examination
and analysis of the firm is done. The first question to be answered is how to select the market or
markets in which to begin the transactions or functions and where should an entrepreneurs
marketing efforts be focused on.
Proper selection of the markets after completely examining the platform where we want to export
our product and services is one of the most important aspects towards the achievement of the
internationalization process and in some cases one can choose the future viability of the
expansion strategy.
This is a basic but major decision because of the impact on resources and effort included, mainly
in the case of small and medium-sized enterprises.
For a company to expand its business into every country in the world, it is suggested that the
global market should be analyzed properly. The initial selection for analyzing the global market
can be conducted with the help of the following criteria

Environment and market analysis

It is an essential step in understanding the external, local, national or international forces that
might affect your small business. This also ensures concentration on the target countries.

Analysis of the competition

It is very important to identify the main competitors and their description. How the competitors
economically evolved over the past few years should also be analyzed. The price structure of
their products, their networks, market maturity, financial position, plans and expansion strategies
and development potential should also be analyzed.

Distribution channels
The entrepreneur should gain complete information regarding the supply chain of the product.
From the beginning to the end, consumer should be clear about who the intermediate operators
are and the rates they are charging.
Therefore, the existing sales structure in the country should be analyzed in order to select the
type of distribution that best adapts to the characteristics of your product or service and the
market. The choice of distribution channel will determine the expansion of the company in the
market.

Demand analysis
The entrepreneur should perform an examination of the present and potential demand regarding
the product and service would have in source markets. Its profile and its expected evolution,
among other aspects should also be examined.
All this data should be utilized to assure that the pre-selection process was successful. The
market or markets selected are suitable for launching the products and/or services of business.

The exporter has to make an important decision in respect of entry in overseas markets. The
exporter needs to follow a certain procedure in the selection of overseas markets. The market
selection process is as follows:
1.
Determine Export Marketing Objectives: Before entry in overseas market, the exporter
must list out export marketing objectives. The export marketing objectives may be as follows:
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Increase in market share.

Increase in profits.

Building firms goodwill, etc.

2.
Collection of Information: The exporter must collect relevant information from the
overseas markets. The information may be in respect of the following:

Demand for the product.

Competition.

Nature of consumers.

Political situation.

Import regulations.

Infrastructure facilities, etc.

3. Analysis of Information: The exporter has to analyze the collected information in respect
of overseas markets. Such analysis is required to shortlist the overseas markets. For instance, the
exporter has to analyze the likes and dislikes of the buyers, the purchasing power, buying pattern,
etc.
4.
Short Listing of Markets: After analysis of the overseas markets, the exporter must
shortlist the markets. The main objective of short listing is to arrive at a list of few markets/
countries, which promise good returns not only in the short term but also from the long term
point of view.
5.
Detailed Investigation of Short Listed Markets: The exporter should undertake detailed
investigation of the short listed markets. The detailed investigation is in respect of competition,
demand, consumers, government policies, availability of intermediaries, etc. The exporter may
even visit the short listed overseas markets to conduct detailed investigation.

6.
Selection of Markets: After detailed investigation of the short listed markets, the exporter
would then proceed to select the overseas markets. The exporter should eliminate such markets
which are subject to high rate of inflation, government instability, high trade barriers, and so on.
The exporter may select only those markets or countries, which would provide a good return
investment not only in the short run but also from the long term point of view.
7.
Entry in Overseas Markets: The exporter then makes necessary arrangements to enter in
the overseas markets. He-may appoint the required sales people, and intermediaries. He should
complete all other formalities regarding the entry in overseas markets. He would then produce
the goods as per the requirements of overseas buyers.
8.
Follow-up: The exporter should undertake a review of the performance in the overseas
markets. Such review would enable the exporter to know which markets are performing well,
and which ones are not. He would then find out the reasons for the same, and if there are
problems, he would try to resolve such problems, or exit from such markets that do not provide
good potential.

Direct Export

The organisation produces their product in their home market and then sells them to customers
overseas.
Indirect Export

The organisations sells their product to a third party who then sells it on within the foreign
market.
Licensing

Another less risky market entry method is licensing. Here the Licensor will grant an organisation
in the foreign market a license to produce the product, use the brand name etc. in return that they
will receive a royalty payment.
Franchising

Franchising is another form of licensing. Here the organisation puts together a package of the
successful ingredients that made them a success in their home market and then franchise this
package to overseas investors. The Franchise holder may help out by providing training and
marketing the services or product. McDonalds is a popular example of a Franchising option for
expanding in international markets.

Contracting

Another of form on market entry in an overseas market which involves the exchange of ideas is
contracting. The manufacturer of the product will contract out the production of the product to
another organisation to produce the product on their behalf. Clearly contracting out saves the
organisation exporting to the foreign market.
Manufacturing Abroad

The ultimate decision to sell abroad is the decision to establish a manufacturing plant in the host
country. The government of the host country may give the organisation some form of tax
advantage because they wish to attract inward investment to help create employment for their
economy.
Joint Venture

To share the risk of market entry into a foreign market, two organisations may come together to
form a company to operate in the host country. The two companies may share knowledge and
expertise to assist them in the development of company, of course profits will have to be shared
between the two firms.

MODULE-7
Dumping

charging foreign buyers a lower price than domestic buyers for an

identical product
also called international price discrimination

Under the (WTO) Agreement, dumping is condemned (but is not

prohibited) if it causes or threatens to cause material injury to a do

The term has a negative connotation, as advocates of competitive

markets see "dumping" as a form of protectionism. mestic industry
in the importing country.

From this usage it was a natural outcome to speak of selling in a distant market at reduced prices
as dumping , but the word used in this sense appeared not to have entered into the literature of
economics until the first years of the twentieth century. In 1903 and 1904, the tariff question was
the dominant political issue in Great Britain, and in a huge output of polemical literature which
marked the tariff controversy. The term became well established and appeared with or without
apologetic quotation marks in book after book.
The term dumping has since found its way into the economic terminology of the French,
German, Italian and probably other languages. Initially, it had a vague and uncertain
meaning, and is still used indiscriminately for such diverse pricepractices such as severe

competition, customs undervaluation, bargain , sacrifice or slaughter sales , local

pricecutting and selling in one national market at a lower price than in another.
Types of Dumping9
1. Sporadic Dumping: Occasional sale of a commodity at below cost in order to unload an
unforeseen and temporary surplus of the commodity such as cheese, milk, wheat etc. in the
international market without reducing domestic prices.
2. Predatory Dumping: Temporary sale of a commodity at below its average cost or a lower price
abroad in order to derive foreign producers out of business, after which prices are raised to take
advantage of the monopoly power abroad.
3. Persistent Dumping: Continuous tendency of a domestic monopolist to maximize total
profits by selling the commodity at a higher price in the domestic market than internationally
(to meet the competition of foreign rivals)
Causes of Dumping10
Dumpig usually occurs because of the following reasons:
(1) Producers in one country are trying to stay competitive with producers in another country,
(2) Producers in one country are trying to eliminate the producers in another country and gain a
larger share of the world market,
(3) Producers are trying to get rid of excess stuff that they can't sell in their own country,
(4) Producers can make more profit by dividing sales into domestic and foreign markets, then
charging each market whatever price the buyers are willing to pay.

The U.S. Congress has defined dumping as an unfair

trade practice that results in injury, destruction, or
prevention of the establishment of American
industry.
Dumping occurs when imports sold in the U.S. market
are priced either at levels that represent less than
the cost of production plus an 8 percent profit margin
or at levels below those prevailing in the producing
country.

The U.S. Commerce Department is responsible

for determining whether products are being dumped
in the United States; the International Trade
Commission (ITC) then determines whether the
dumping has resulted in injury to U.S.firms.

 In 2000, the U.S. Congress passed the so-called Byrd

Amendment; this law calls for antidumping revenues
to be paid to U.S. companies harmed by imported
goods sold at below market prices.
In Europe, the European Commission administers
antidumping policy.
A simple majority vote by the Council of Ministers is
required before duties can be imposed on dumped
goods.
Six-month provisional duties can be imposed; more
stringent measures include definitive,5-year duties.
Low-cost imports from Asia have been the subject of
dumping disputes in Europe.
Another issue concerns $650 million in annual imports
of unbleached cotton from China, Egypt, India,
Indonesia, Pakistan, and Turkey.

Ibid, p17.
p19.
16 Anti-Dumping-guide, Ministry of Commerce sourced from
http://commerce.nic.in/traderemedies/Anti_Dum.pdf visited on 5th October, 2012.
14

15 Ibid,

Anti-Dumping in India: Legal Framework16

1. The principle of imposition of anti-dumping duties was propounded by the Article VI of
General Agreement on Tariffs & Trade (GATT) 1994 Uruguay Round
2. Indian legislation in this regard is contained in Section 9A and 9B (as amended in 1995) of
the Customs Tariff Act, 1975
3. Further regulations are contained in the Anti-Dumping Rules [Customs Tariff
(Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and
for Determination of Injury) Rules, 1995]
4. The Designated Authority for conducting investigations pertaining to Anti-Dumping issues
and on basis thereof, for forwarding its recommendations is the Ministry of Commerce,
Government of India.
5. The responsibility for Imposition and Collection of duties as imposed /recommended by
the Adjudicating authority is imposed upon the Ministry of Finance, Government of India.
Section 9A of the Customs Tariff Act, 1975 (hereinafter referred to as the Act ) as amended
in 1995 and the Customs Tariff (Identification, Assessment and Collection of Anti-dumping
Duty on Page 19 of 35

Dumped Articles and for Determination of Injury) Rules, 1995 (hereinafter referred to as
the Rules) framed there under form the legal basis for anti-dumping investigations and for
the levy of anti-dumping duties. These are in consonance with the WTO Agreement on antidumping measures. These rules form the legislative framework for all matters relating to
dumping of products, which include the substantive rules, rules relating to practice,
procedure, regulatory mechanism and administration.
4.4 Anti-Dumping in India: Regulatory Framework17

17 Section

3(1) of The Custom Tariff Act, 1975.

Anti-dumping, anti-subsidies & countervailing measures in India are administered by the

Directorate General of Anti-dumping and Allied Duties (DGAD ) functioning in the
Department of Commerce in the Ministry of Commerce and Industry and the same is headed by
the Designated Authority. The Central Government may, by notification in the Official
Gazette, appoint a person not below the rank of a Joint Secretary to the Government of India or
such other person as that Government may think fit as the Designated Authority. In India, there is
a single authority DGAD designated to initiate necessary action for investigations and
subsequent imposition of anti-dumping duties.
The Designated Authority is a quasi-judicial authority notified under the Customs Act, 1962. A
senior level Joint Secretary and Director, four investigating officers and four costing officers
assist the DGAD. Besides, there is a section under the DGAD headed by the Section-Officer to
deal with the monitoring and coordination of die functioning of the DGAD.
The Designated Authoritys function, however, is only to conduct die anti-dumping/anti subsidy
& countervailing duty investigation and make recommendation to the Government for imposition
of anti-dumping or anti subsidy measures. Such duty is finally imposed/ levied by a Notification
of the Ministry of Finance. Thus, while the Department of Commerce recommends the Antidumping duty, it is the Ministry of Finance, which levies such duty.
The law provides that an order of determination of existence, degree and effect of dumping is
appealable before the Customs, Excise and Gold (Control) Appellate Tribunal (CEGAT) a
judicial tribunal. It reviews final measures and is independent of administrative authorities. Page
20 of 35
This is consistent with the WTO provision of independent tribunals for appeal against final
determination and reviews. No appeal will lie against the preliminary findings of the Authority
and the provisional duty imposed on the basis thereof. The appeal to the CEGAT should be filed
within 90 days.

Leasing

Leasing is used as an alternative to purchase in countries where there

is a shortage of capital available to purchase high-priced capital and
industrial goods.

Usually the rental fee will cover servicing and the costs of spares too,
and so the problem of poor levels of maintenance, which is often
associated with high technology and capital equipment in LDCs, can be
overcome.

Leasing arrangements are attractive in countries where investment

grants and tax incentives are offered for new plant and machinery, in
which case the leaser can take advantage of the tax provisions in a
way that the lessee cannot, and share some of the savings.

Leasing system is an important selling technique to alleviate high

prices and capital shortages for capital equipment.

An estimated $50 billion worth (original cost) of U.S.-made and foreignmade equipment is on lease in Western Europe.

Terms of the leases usually run one to five years, with payments made
monthly or annually.

Legal issues

If a company exports a product at a price that is lower than the price it normally charges in its
own home market, or sells at a price that does not meet its full cost of production, it is said to be
"dumping" the product. It is a sub part of the various forms of price discrimination and is
classified as third-degree price discrimination. Opinions differ as to whether or not such practice
constitutes unfair competition, but many governments take action against dumping to protect
domestic industry.[3] The WTO agreement does not pass judgment. Its focus is on how
governments can or cannot react to dumpingit disciplines anti-dumping actions, and it is often
called the "anti-dumping agreement". (This focus only on the reaction to dumping contrasts with
the approach of the subsidies and countervailing measures agreement.)
The legal definitions are more precise, but broadly speaking, the WTO agreement allows
governments to act against dumping where there is genuine ("material") injury to the competing
domestic industry. To do so, the government has to show that dumping is taking place, calculate
the extent of dumping (how much lower the export price is compared to the exporters home
market price), and show that the dumping is causing injury or threatening to cause injury.

INTERNATIONAL PRICING

Two basic factors determine the boundaries within which prices

should be set.

The first is product cost, which establishes a price floor, or minimum

price--in export markets can invite dumping investigations.

Second is prices for comparable substitute products create a price

ceiling, or maximum price.

Between the lower and upper boundary there is an optimum price,

which is a function of the demand for the product as determined by
the willingness and ability of customers to buy it.

In international markets pricing decisions are much more complex,

because they are affected by a number of additional external
factors, such as fluctuations in exchange rates, accelerating inflation
in certain countries and the use of alternative payment methods
such as leasing, barter and counter-trade.

Pricing decisions include setting the initial price as well as changing

the established price of products from time to time.

Pricing policy is an important strategic and tactical competitive

weapon, is highly controllable and inexpensive to change and
implement.

It should be integrated with the other elements of the global

marketing mix.

INTERNATIONAL PRICING AXIOMS

1
The "right" price is what the customer will pay, not what you want to charge. Base
prices on market factors
Wherever possible, quote in the customer's own currency
Protect yourself against foreign exchange risk
Price is only relatively important, greater emphasis should be placed on non-price
factors
The price-quality relationship is important

There are many ways to price a product. Let's have a look at some of them and try to
understand the best policy/strategy in various situations.
Premium Pricing
Use a high price where there is a uniqueness about the product or service. This approach is
used where a a substantial competitive advantage exists. Such high prices are charge for
luxuries such as Lexus.
Penetration Pricing
The price charged for products and services is set artificially low in order to gain market
share. Once this is achieved, the price is increased. This approach was used by France
Telecom in order to attract new corporate clients.

Economy Pricing
This is a no frills low price. The cost of marketing and manufacture are kept at a
minimum. Supermarkets often have economy brands.

Factors Influencing Pricing Strategy

Competition
A competitive pricing strategy, where prices for a product or service are set based primarily on
the prices of the competition, is best suited for a price-sensitive and highly competitive market.
Whether you use this type of strategy or not, you should always take your competitions pricing
into account when setting your own pricing, unless you hold a monopoly. If consumers perceive
your product and your competitions as having equal value, you could lose out in a big way if
your competitors price is lower than yours is.

Market Demand
The laws of supply and demand should always come into play when setting your pricing. If a
product is in high demand, particularly if demand exceeds supply, then the market can bear a
higher price. Conversely, if demand dwindles, consumers will not be willing to pay higher prices.
Your pricing should remain relatively stable over time, but you can put promotions in place to
discount the price when needed.

Brand Strategy
Setting your prices without a thorough grasp of your brand objectives can destroy any brandbuilding efforts. Your price is a part of your brand image. Think about Walmart, which has built
its entire brand around low pricing, or Tiffany & Co., whose consumers expect high-end pricing.
If your products prices are not in line with your brand image, you will most likely confuse
consumers instead of convert them.

Cost of Goods Sold

If you want to make a profit on the sale of your products, you must charge a higher price than
what it cost you to actually produce and transport them. The cost of goods sold almost always
plays an integral role in any pricing strategy. The exception to this is if you are promoting your
product as a loss leader. A loss leader is a product that is sold below cost as an incentive for
consumers to purchase other products at normal prices. Many mobile carriers, for example, sell
cell phones at hugely discounted rates so that consumers will sign on for one of their cell phone
service packages.

The Economy and Government Laws and Regulations

The economy also has a tremendous effect on pricing decisions. In Chapter 2 "Strategic
Planning" we noted that factors in the economic environment include interest rates and
unemployment levels. When the economy is weak and many people are unemployed, companies
often lower their prices. In international markets, currency exchange rates also affect pricing
decisions.
Pricing decisions are affected by federal and state regulations. Regulations are designed to
protect consumers, promote competition, and encourage ethical and fair behavior by businesses.
For example, the Robinson-Patman Act limits a sellers ability to charge different customers
different prices for the same products. The intent of the act is to protect small businesses from
larger businesses that try to extract special discounts and deals for themselves in order to
eliminate their competitors. However, cost differences, market conditions, and competitive
pricing by other suppliers can justify price differences in some situations. In other words, the
practice isnt illegal under all circumstances. You have probably noticed that restaurants offer
senior citizens and children discounted menus. The movies also charge different people different
prices based on their ages and charge different amounts based on the time of day, with matinees
usually less expensive than evening shows.
Pricing Strategy

One of the four major elements of the marketing mix is price. Pricing is an important strategic
issue because it is related to product positioning. Furthermore, pricing affects other marketing
mix elements such as product features, channel decisions, and promotion.
While there is no single recipe to determine pricing, the following is a general sequence of steps
that might be followed for developing the pricing of a new product:
1. Develop marketing strategy - perform marketing analysis, segmentation, targeting, and
positioning.
2. Make marketing mix decisions - define the product, distribution, and promotional
tactics.
3. Estimate the demand curve - understand how quantity demanded varies with price.
4. Calculate cost - include fixed and variable costs associated with the product.
5. Understand environmental factors - evaluate likely competitor actions, understand
legal constraints, etc.

6. Set pricing objectives - for example, profit maximization, revenue maximization, or

price stabilization (status quo).
7. Determine pricing - using information collected in the above steps, select a pricing
method, develop the pricing structure, and define discounts.
These steps are interrelated and are not necessarily performed in the above order. Nonetheless,
the above list serves to present a starting framework.
Marketing Strategy and the Marketing Mix

Before the product is developed, the marketing strategy is formulated, including target market
selection and product positioning. There usually is a tradeoff between product quality and price,
so price is an important variable in positioning.
Because of inherent tradeoffs between marketing mix elements, pricing will depend on other
product, distribution, and promotion decisions.
Estimate the Demand Curve

Because there is a relationship between price and quantity demanded, it is important to

understand the impact of pricing on sales by estimating the demand curve for the product.
For existing products, experiments can be performed at prices above and below the current price
in order to determine the price elasticity of demand. Inelastic demand indicates that price
increases might be feasible.
Calculate Costs

If the firm has decided to launch the product, there likely is at least a basic understanding of the
costs involved, otherwise, there might be no profit to be made. The unit cost of the product sets
the lower limit of what the firm might charge, and determines the profit margin at higher prices.
The total unit cost of a producing a product is composed of the variable cost of producing each
additional unit and fixed costs that are incurred regardless of the quantity produced. The pricing
policy should consider both types of costs.
Environmental Factors

Pricing must take into account the competitive and legal environment in which the company
operates. From a competitive standpoint, the firm must consider the implications of its pricing on
the pricing decisions of competitors. For example, setting the price too low may risk a price war
that may not be in the best interest of either side. Setting the price too high may attract a large
number of competitors who want to share in the profits.

From a legal standpoint, a firm is not free to price its products at any level it chooses. For
example, there may be price controls that prohibit pricing a product too high. Pricing it too low
may be considered predatory pricing or "dumping" in the case of international trade. Offering a
different price for different consumers may violate laws against price discrimination. Finally,
collusion with competitors to fix prices at an agreed level is illegal in many countries.
Pricing Objectives

The firm's pricing objectives must be identified in order to determine the optimal pricing.
Common objectives include the following:

Current profit maximization - seeks to maximize current profit, taking into account
revenue and costs. Current profit maximization may not be the best objective if it results
in lower long-term profits.

Current revenue maximization - seeks to maximize current revenue with no regard to

profit margins. The underlying objective often is to maximize long-term profits by
increasing market share and lowering costs.

Maximize quantity - seeks to maximize the number of units sold or the number of
customers served in order to decrease long-term costs as predicted by the experience
curve.

Maximize profit margin - attempts to maximize the unit profit margin, recognizing that
quantities will be low.

Quality leadership - use price to signal high quality in an attempt to position the product
as the quality leader.

Partial cost recovery - an organization that has other revenue sources may seek only
partial cost recovery.

Survival - in situations such as market decline and overcapacity, the goal may be to
select a price that will cover costs and permit the firm to remain in the market. In this
case, survival may take a priority over profits, so this objective is considered temporary.

Status quo - the firm may seek price stabilization in order to avoid price wars and
maintain a moderate but stable level of profit.

For new products, the pricing objective often is either to maximize profit margin or to maximize
quantity (market share). To meet these objectives, skim pricing and penetration pricing strategies
often are employed. Joel Dean discussed these pricing policies in his classic HBR article entitled,
Pricing Policies for New Products.

Skim pricing attempts to "skim the cream" off the top of the market by setting a high price and
selling to those customers who are less price sensitive. Skimming is a strategy used to pursue the
objective of profit margin maximization.
Skimming is most appropriate when:

Demand is expected to be relatively inelastic; that is, the customers are not highly price
sensitive.

Large cost savings are not expected at high volumes, or it is difficult to predict the cost
savings that would be achieved at high volume.

The company does not have the resources to finance the large capital expenditures
necessary for high volume production with initially low profit margins.

Penetration pricing pursues the objective of quantity maximization by means of a low price. It
is most appropriate when:

Demand is expected to be highly elastic; that is, customers are price sensitive and the
quantity demanded will increase significantly as price declines.

Large decreases in cost are expected as cumulative volume increases.

The product is of the nature of something that can gain mass appeal fairly quickly.

There is a threat of impending competition.

As the product lifecycle progresses, there likely will be changes in the demand curve and costs.
As such, the pricing policy should be reevaluated over time.
The pricing objective depends on many factors including production cost, existence of
economies of scale, barriers to entry, product differentiation, rate of product diffusion, the firm's
resources, and the product's anticipated price elasticity of demand.
Pricing Methods

To set the specific price level that achieves their pricing objectives, managers may make use of
several pricing methods. These methods include:

Cost-plus pricing - set the price at the production cost plus a certain profit margin.

Target return pricing - set the price to achieve a target return-on-investment.

Value-based pricing - base the price on the effective value to the customer relative to
alternative products.

Psychological pricing - base the price on factors such as signals of product quality,
popular price points, and what the consumer perceives to be fair.

In addition to setting the price level, managers have the opportunity to design innovative pricing
models that better meet the needs of both the firm and its customers. For example, software
traditionally was purchased as a product in which customers made a one-time payment and then
owned a perpetual license to the software. Many software suppliers have changed their pricing to
a subscription model in which the customer subscribes for a set period of time, such as one year.
Afterwards, the subscription must be renewed or the software no longer will function. This
model offers stability to both the supplier and the customer since it reduces the large swings in
software investment cycles.
Price Discounts

The normally quoted price to end users is known as the list price. This price usually is
discounted for distribution channel members and some end users. There are several types of
discounts, as outlined below.

Quantity discount - offered to customers who purchase in large quantities.

Cumulative quantity discount - a discount that increases as the cumulative quantity

increases. Cumulative discounts may be offered to resellers who purchase large quantities
over time but who do not wish to place large individual orders.

Seasonal discount - based on the time that the purchase is made and designed to reduce
seasonal variation in sales. For example, the travel industry offers much lower off-season
rates. Such discounts do not have to be based on time of the year; they also can be based
on day of the week or time of the day, such as pricing offered by long distance and
wireless service providers.

Cash discount - extended to customers who pay their bill before a specified date.

Trade discount - a functional discount offered to channel members for performing their
roles. For example, a trade discount may be offered to a small retailer who may not
purchase in quantity but nonetheless performs the important retail function.

Promotional discount - a short-term discounted price offered to stimulate sales

International marketing framework

Strategies for pricing new product

Standardized versus Differentiated pricing

8 Risks in the Banking Industry Faced by Every Bank

September 29, 2015

By : Aboli

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The financial industry in the US is the most liquid and the largest market in the world. In 2014,
finance and insurance represented 7.2 percent of U.S. GDP. The banking industry in the US
supports the worlds largest economy with the greatest diversity in banking institutions and
concentration of private credit. The banking industry has awakened to risk management,
especially since the global crisis during 2007-08. But what are the day to day risks and the long
term risks faced by banks? Why do dedicated risk management practices at companies like FIS
Global even exist? Which risks are their risk management products and services meant for?
Heres the list of 8 risks faced by banks:
Credit risk
According to the Bank for International Settlements (BIS), credit risk is defined as the potential
that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed
terms. Credit risk is most likely caused by loans, acceptances, interbank transactions, trade
financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and
in the extension of commitments and guarantees, and the settlement of transactions. In simple
words, if person A borrows loan from a bank and is not able to repay the loan because of
inadequate income, loss in business, death, unwillingness or any other reasons, the bank faces
credit risk. Similarly, if you do not pay your credit card bill, the bank faces a credit risk.
Hence, to minimize the credit risk on the banks end, the rate of interest will be higher for
borrowers if they are associated with high credit risk. Factors like unsteady income, low credit
score, employment type, collateral assets and others determine the credit risk associated with a
borrower. As stated earlier, credit risk can be associated with interbank transactions, foreign
transactions and other types of transactions happening outside the bank. If the transaction at one
end is successful but unsuccessful at the other end, loss occurs. If the transaction at one end is
settled but there are delays in settlement at the other end, there might be lost investment
opportunities.
Look at it like person A sending US dollars to his family in India at the rate of 60 INR (Indian
Rupee) per dollar. The person B, who is the recipient however receives the payment late and
doesnt get the exchange rate of 60 INR. Instead he receives the money at the exchange rate of

58 INR. This means they incurred a loss in the transaction. Similar situations occur during big
transactions in banks. If the bank is not able to settle a transaction at an expected time or during
an expected time duration, they may incur a credit risk. However, this kind of risk is called
Settlement Risk and it is closely associated with credit risk. It depends on the timing of the
exchange of value, payment/settlement finality and the role of intermediaries and clearing
houses.
While some credit risk is a result of macro forces affecting the economy or specific markets or
even specific individuals, there is another important risk that can be classified under credit risk:
this is the risk of deliberate fraud that is usually borne by the banks who issue credit products
such as credit cards.
Market risk
McKinsey defines market risk as the risk of losses in the banks trading book due to changes in
equity prices, interest rates, credit spreads, foreign-exchange rates, commodity prices, and other
indicators whose values are set in a public market. Bank for International Settlements (BIS)
defines market risk as the risk of losses in on- or off-balance sheet positions that arise from
movement in market prices. Market risk is prevalent mostly amongst banks who are into
investment banking since they are active in capital markets. Investment banks include Goldman
Sachs, Bank of America, JPMorgan, Morgan Stanley and many others.
Market risk can be better understood by dividing it into 4 types depending on the potential cause
of the risk:

Interest rate risk: Potential losses due to fluctuations in interest rate

Equity risk: Potential losses due to fluctuations in stock price

Currency risk: Potential losses due to international currency exchange rates

(closely associated with settlement risk)

Commodity risk: Potential losses due to fluctuations in prices of agricultural,

industrial and energy commodities like wheat, copper and natural gas
respectively

Operational risk
According to the Bank for International Settlements (BIS), operational risk is defined as the risk
of loss resulting from inadequate or failed internal processes, people and systems or from
external events. This definition includes legal risk, but excludes strategic and reputation risk.
Operational risk can widely occur in banks due to human errors or mistakes. Examples of

operational risk may be incorrect information filled in during clearing a check or confidential
information leaked due to system failure.
Operational risk can be categorized in the following way for a better understanding:

Human risk: Potential losses due to a human error, done willingly or

unconsciously

IT/System risk: Potential losses due to system failures and programming

errors

Processes risk: Potential losses due to improper information processing,

leaking or hacking of information and inaccuracy of data processing

Operational risk may not sound as bad but it is. Operational risk caused the decline of Britains
oldest banks, Barings in 1995. Since banks are becoming more and more digital and shifting
towards information technology to automate their processes, operational risk is an important risk
to be taken into consideration by the banks.
Security breaches in which data is compromised could be classified as an operational risk, and
recent instances in this area have underlined the need for constant technology investments to
mitigate the exposure to such attacks.
Liquidity risk
Investopedia defines liquidity risk as the risk stemming from the lack of marketability of an
investment that cannot be bought or sold quickly enough to prevent or minimize a loss. However
if you find this definition complex, the term liquidity risk speaks for itself. It is the risk that
may disable a bank from carrying out day-to-day cash transactions.
Look at this risk like person A going to a bank to withdraw money. Imagine the bank saying that
it doesnt have cash temporarily! That is the liquidity risk a bank has to save itself from. And this
is not just a theoretical example. A small bank in Northern England and Ireland was taken over
by the government because of its inability to repay the investors during the 2007-08 global crisis.
Reputational risk
The Financial Times Lexicon defines reputation risk as the possible loss of the organisations
reputational capital. The Federal Reserve Board in the US defines reputational risk as the
potential loss in reputational capital based on either real or perceived losses in reputational
capital. Just like any other institution or brand, a bank faces reputational risk which may be
triggered by banks activities, rumors about the bank, willing or unconscious non-compliance
with regulations, data manipulation, bad customer service, bad customer experience inside bank

branches and decisions taken by banks during critical situations. Every step taken by a bank is
judged by its customers, investors, opinion leaders and other stakeholders who mould a banks
brand image.
Business risk
In general, Investopedia defines business risk as the possibility that a company will have lower
than anticipated profits, or that it will experience a loss rather than a profit. In the context of a
bank, business risk is the risk associated with the failure of a banks long term strategy, estimated
forecasts of revenue and number of other things related to profitability. To be avoided, business
risk demands flexibility and adaptability to market conditions. Long term strategies are good for
banks but they should be subject to change. The entire banking industry is unpredictable. Long
term strategies must have backup plans to avoid business risks. During the 2007-08 global crisis,
many banks collapsed while many made way out it. The ones that collapsed didnt have a
business risk management strategy.
Systemic risk and moral hazard are two types of risks faced by banks that do not causes losses
quite often. But if they cause losses, they can cause the downfall of the entire financial system in
a country or globally.
Systemic risk
The global crisis of 2008 is the best example of a loss to all the financial institutions that
occurred due to systemic risk. Systemic risk is the risk that doesnt affect a single bank or
financial institution but it affects the whole industry. Systemic risks are associated with
cascading failures where the failure of a big entity can cause the failure of all the others in the
industry.
Moral hazard
Moral hazard is a risk that occurs when a big bank or large financial institution takes risks,
knowing thatsomeone else will have to face the burden of those risks. Economist Paul Krugman
described moral hazard as any situation in which one person makes the decision about how
much risk to take, while someone else bears the cost if things go badly. Economist Mark Zandi
of Moodys Analytics described moral hazard as a root cause of the subprime mortgage crisis of
2008-09