International Marketing : Theory and Practice from Developing Countries [1 ed.] 9781443819275, 9781443899543

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International Marketing: Theory and Practice from Developing Countries

International Marketing: Theory and Practice from Developing Countries Goodluck Charles and Wineaster Anderson

International Marketing: Theory and Practice from Developing Countries By Goodluck Charles and Wineaster Anderson This book first published 2016 Cambridge Scholars Publishing Lady Stephenson Library, Newcastle upon Tyne, NE6 2PA, UK British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Copyright © 2016 by Goodluck Charles and Wineaster Anderson All rights for this book reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. ISBN (10): 1-4438-9954-2 ISBN (13): 978-1-4438-9954-3

TABLE OF CONTENTS

List of Exhibits .......................................................................................... vii List of Figures............................................................................................. ix List of Tables .............................................................................................. xi List of Abbreviations ................................................................................ xiii Preface ..................................................................................................... xvii Acknowledgements .................................................................................. xxi About the Authors .................................................................................. xxiii Chapter One ................................................................................................. 1 Nature and Scope of International Marketing Chapter Two .............................................................................................. 13 International Trade Theories Chapter Three ............................................................................................ 41 International Marketing Environment Chapter Four .............................................................................................. 91 Foreign Market Entry Strategy Chapter Five ............................................................................................ 127 International Product Decisions Chapter Six .............................................................................................. 149 Promotion in International Marketing Chapter Seven.......................................................................................... 169 International Pricing Strategy

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Table of Contents

Chapter Eight ........................................................................................... 193 International Channels of Distribution Chapter Nine............................................................................................ 207 Financing International Marketing Transactions and Commercial Documentation Bibliography ............................................................................................ 225 Glossary ................................................................................................... 229

LIST OF EXHIBITS

Exhibit 1.1: Excess Capacity of Cloves from Zanzibar State Trading Corporation ............................................................................................ 6 Exhibit 2.1: World Trade Trends ............................................................... 14 Exhibit 2.2: Absolute Advantage and Comparative Advantage ................ 18 Exhibit 2.3: Kenya Commercial Bank Spreads to Geographically and Psychically Close Markets ............................................................ 25 Exhibit 2.4: Vicfish Limited: A Born-Global Firm. .................................. 31 Exhibit 2.5: Internationalization for SMEs in Tanzania ............................ 34 Exhibit 3.1: External Payment Arrears Scandal: Whose Money Was “Spent”? ............................................................................................... 45 Exhibit 3.2: Trade Barriers Affecting Imports and Exports....................... 47 Exhibit 3.3: Classification of Non-Tariff Measures .................................. 49 Exhibit 3.4: The Continued Threat of Protectionism ................................. 51 Exhibit 3.5: Global Shock Shifting Business Trends................................. 65 Exhibit 3.6: Port of Dar es Salaam: Deteriorating Capacity ...................... 67 Exhibit 3.7: World Urbanization: A Blessing or a Curse?......................... 68 Exhibit 3.8: Halal Practices by Sumbawanga Agricultural and Animal Food Industries Ltd. ............................................................................. 72 Exhibit 3.9: Political Risks are Frustrating!............................................... 79 Exhibit 3.10: The Impact of the Arusha Declaration on Sisal Exportation from Tanzania .................................................................. 80 Exhibit 3.11: Is the Global Legal and Regulatory Environment Improving? ........................................................................................... 82 Exhibit 3.12: Conflict Resolutions between Foreign Direct Investors and Tanzania ........................................................................................ 84 Exhibit 4.1: Tanzania Breweries Limited and East African Breweries Limited ............................................................................................... 105 Exhibit 4.2: Power Food Limited Introduces Plumpy’Nut Through Franchising ........................................................................................ 109 Exhibit 4.3: Tanzania Market Entry: American Embassy Advice to US Investors ............................................................................................. 111 Exhibit 4.4: The Divorce between Air Tanzania Corporation and South African Airways: What Went Wrong? ............................................... 112 Exhibit 4.5: Tanzania Investment Centre’s Incentives to Attract FDI ..... 116

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List of Exhibits

Exhibit 4.6: FDI Trends in Emerging Economies and Developing Countries ............................................................................................ 118 Exhibit 4.7: Bakhresa Group Goes Abroad Gradually ............................ 119 Exhibit 4.8: The Coca-Cola Company Merges SABMiller and CocaCola Sabco to Form Coca-Cola Beverages Africa ............................. 120 Exhibit 5.1: Counterfeit Industry in Tanzania Tops $525 Million Annually ............................................................................................ 138 Exhibit 6.1: Dar es Salaam International Trade Fair in Tanzania: A Generic Trade Fair ......................................................................... 163 Exhibit 7.1: FastJet – Africa’s Low-Cost Airline .................................... 170 Exhibit 7.2: Price Controls by the Energy Water Utilities Regulatory Authority (EWURA) in Tanzania ...................................................... 172 Exhibit 7.3: Why Has China Devalued its Currency? ............................. 180 Exhibit 8.1: Oryx Energies (Tanzania): Distribution Functions and Channels ............................................................................................ 195 Exhibit 8.2: Bulk Procurement of Fuel in Tanzania Has Brought Significant Benefits............................................................................ 199 Exhibit 9.1: Export Procedures and Documentation in Tanzania ............ 216 Exhibit 9.2: Import Procedures in Tanzania ............................................ 220 Exhibit 9.3: Procedures for Payment of Duty and Taxes on PSI Consignments in Tanzania ................................................................. 221

LIST OF FIGURES

Figure 2.1 Porter’s Diamond Model .......................................................... 29 Figure 2.2 Africa’s Exports by Broad Category ........................................ 34 Figure 3.1 Composition of the socio-cultural environment of an international firm ................................................................................. 75 Figure 4.1 Systematic selection of international markets .......................... 95 Figure 4.2 Market entry strategy alternatives ............................................ 98 Figure 7.1 Retrograde Pricing Method .................................................... 175 Figure 7.2 Incoterms Responsibilities Chart............................................ 187 Figure 8.1 Channel levels ........................................................................ 198

LIST OF TABLES

Table 2.1 The PLC Model by Louis T. Wells, Harvard Business School. ................................................................................................. 23 Table 3.1 Components and sub-components of the balance of payments .......................................................................................... 44 Table 3.2 The GATT trade rounds ............................................................ 57 Table 7.1 Price escalation ........................................................................ 174 Table 7.2 Forms of countertrade.............................................................. 179 Table 7.3 Formulae for cost calculations ................................................. 182 Table 7.4 Incoterms ................................................................................. 184 Table 9.1 Summary of the different types of letter of credit.................... 211 Table 9.2 Basic export documents ........................................................... 212

LIST OF ABBREVIATIONS

AGOA ARIPO ASEAN ATC ATCL BEST BET BoP BRELA BRICS CBI CEO CFR CM CIF CMR CMS COMESA CPRA CTI CU CVO DDP DDU DES DRC DRTV DSM DITF D&DO EABL EAC EAITE ECOWAS EEC

African Growth and Opportunity Act African Regional Industrial Property Organization Association of Southeast Asian Nations Air Tanzania Corporation Air Tanzania Company Limited Business Environment Strengthening for Tanzania Board of External Trade Balance of Payments Business Registration and Licensing Agency Brazil, Russia, India, China, and South Africa Caribbean Basin Initiative Chief Executive Officer Cost and Freight Common Market Cost, Insurance and Freight Convention Merchandise Routiers Castle Milk Stout Common Market for Eastern and Southern Africa Centre for Policy Research and Advocacy Confederation of Tanzania Industries Custom Union Certificate of Value and Origin Delivery Duty Paid Delivery Duty Unpaid Delivery Ship Democratic Republic of Congo Direct Response Television Dar es Salaam Dar es Salaam International Trade Fair Delivery and Disposal Order East African Breweries Limited East African Community East Africa’s International Trade Exhibition Economic Community of West African States European Economic Community

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EEU EMCs EPZ EPZA EXQ EU EWURA EXW FAS FCA FCC FDIs FOA FOB FOR FRC FTA GAPCO GATT GNP HACCP IAABD IATA IBRD ICSID ICT IDF IFC IMF Incoterms IP IPRs ISO ITC KCB LAFTA LDCs LPG MIGA

List of Abbreviations

European Economic Union Export Management Company Export Processing Zone Export Processing Zone Authority Ex-quay European Union Energy and Water Utilities Regulatory Authority Ex-works Free Alongside Ship Free Carrier Fair Competition Commission Foreign Direct Investment Free on Board Airport Free on Board Free on Rail Free on Board Carrier Free Trade Area Gulf Africa Petroleum Corporation General Agreement on Tariffs and Trade Gross National Product Hazard, Analysis, Critical Control Point International Academy of African Business and Development International Air Transport Association International Bank of Reconstruction and Development International Centre for Settlement of Investment Disputes Information and Communication Technology Import Declaration Form International Finance Corporation International Monetary Fund International Commercial Terms Intellectual Property Intellectual Property Rights International Standard Organization International Trading Company Kenya Commercial Bank Latin America Free Trade Area Least-Developed Countries Liquefied Petroleum Gas Multilateral Investment Guarantee Agency

International Marketing: Theory and Practice from Developing Countries xv

MFNs MNEs NAFTA NSE NTMs OECD OLI OMCs PLC PR PSI PSRC QMS RUTF R&D SAA SACU SAFI SAAFI SAPs SADC SAGCOT SBE SCBHK SDR SPS SMEs TAN TANESCO TAZARA TBL TBTs TBS TCCIA THA TIC TIPER TNCs TPSF

Most Favored Nations Multinational Enterprises North American Free Trade Area Nairobi Stock Exchange Non-Tariff Measures Organization of Economic Cooperation and Development Ownership, Localization and Internationalization Oil Marketing Companies Product Life Cycle Public Relations Population Services International Presidential Parastatal Sector Reform Commission Quality Management Systems Ready-to-Use Therapeutic Food Research and Development South African Airways Southern African Custom Union Sumbawanga Animal Feeds Industries Sumbawanga Agriculture and Animal Feeds Industries Structural Adjustment Programs Southern African Development Community Southern Agricultural Growth Corridor of Tanzania Single Bill of Entry Standard Chartered Bank Hong Kong Special Drawing Right Sanitary and Phytosanitary Small and Medium Enterprises Tax Assessment Note Tanzania Electric Company Tanzania Zambia Railway Authority Tanzania Breweries Limited Technical Barriers to Trade Tanzania Bureau of Standards Tanzania Chamber of Commerce Industries and Agriculture Tanzania Harbors Authority Tanzania Investment Centre Tanzania International Petroleum Reserves Transnational Companies Tanzania Private Sector Foundation

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TRA TRIPS TV UAE UIM UK UN UNCTAD UNIHCR UPOV USA USD US$ VAT WIPO WTO ZIPA ZSTC

List of Abbreviations

Tanzania Revenue Authority Trade Related Aspects of Intellectual Property Rights Television United Arab Emirates Uppsala Internationalization Model United Kingdom United Nations United Nations Conference on Trade and Development United Nations High Commissioner for Refugees The International Union for the Protection of New Varieties of Plants United States of America United States Dollar United States Dollar Value Added Tax World International Property Organization World Trade Organization Zanzibar Investment Promotion Zanzibar State Trading Corporation

PREFACE

Not more than two decades ago, marketing abroad was considered prestigious, a sign of a nation’s maturity. Today, it is imperative for nations and their companies, so as to remain effective players in the world market. This book, International Marketing: Theory and Practice from Developing Countries, offers a perspective drawn on both theoretical and practical lessons from developing countries. It is particularly designed for academics, researchers, students, practitioners, and policy-makers in the fields of international marketing, international business, and international trade. To make it easy to read, various concepts are supported by exhibits, examples, and illustrations from developing countries. The main objective of this book is to develop readers’ knowledge on the basic concepts, techniques, and strategies underlying international marketing, and to enable them to appreciate those international environmental factors that are relevant for carrying out the task of an international marketer. The ultimate aim is to enable readers to develop skills for effective planning, organization, execution, and control of international marketing operations. We expect the users of International Marketing: Theory and Practice from Developing Countries to be able to demonstrate knowledge and understanding of contemporary theories and their applications in the field of international marketing and international business, providing them with the opportunity for originality in developing, applying, and implementing ideas in the area of international marketing. Likewise, they will be able to analyze and assess marketing environments in internal and external markets, and derive managerial and policy decisions on an organization’s governance and international expansion, based on a set of environmental factors in a particular business situation. Ultimately, the book develops readers’ knowledge on how to solve international marketing problems by applying their insight into strategic and operational decision making. In view of this, the book covers international marketing functions at both the governmental and the enterprise level. At the governmental level, the problems of international marketing include the creation of a favorable environment for exports within and outside the country, providing information and fiscal and financial incentives, and promoting the nation’s products abroad. At the enterprise level, major international marketing

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decisions include identification of opportunities abroad, how to choose the appropriate foreign market entry strategies, and decisions on the international elements of the marketing mix – product, promotion, pricing, and distribution decisions. Chapter One introduces the concepts of international marketing, with emphasis on the reasons for firms to go global. It identifies actors involved in international marketing, describes the distinct levels of international marketing, and finally explains the international marketing orientations. Chapter Two traces the nature and evolution of international trade theories and explains their implications in economic and business decisions in the economies of different nations. It also explains the essence of specialization in international trade, while demonstrating how international trade theories are used to explain international trade trends in emerging economies. In Chapter Three, readers are exposed to the global environmental forces that impact on international marketing involvement. The chapter places emphasis on the international financial system, variations in culture, and the political, legal, natural, and technological environment, as well as recent global trends that have shaped businesses. It reflects on the implications of the international marketing environment in developing and implementing international marketing programs and strategies. Chapter Four describes the basic international market entry decisions. It covers the market entry strategy selection criteria, strategies used to enter international markets, and the advantages and risks associated with each strategy. It compares and contrasts the functions of actors involved in entering foreign markets. Finally, the chapter describes the financial implications associated with each of the foreign market entry modes. The product decisions and product strategies suitable for international marketing are presented in Chapter Five. The chapter covers the concept of the product and its attributes, classifies products according to their degree of potential for global marketing, and describes global product strategies. It highlights the implications of product standardization and adaptation, and presents the various types of branding strategies. Finally, it describes the importance of the service sector in the world economy. Chapter Six describes promotion decisions in international marketing. The chapter presents a number of decisions on promotional campaigns and highlights the implications of using standardized “promo-tools” in foreign markets. It evaluates the characteristics of different media options and promotional programs. It also examines foreign countries’ laws and their implications in international marketing promotional campaigns. The chapter identifies the constraints in designing campaigns for international

International Marketing: Theory and Practice from Developing Countries xix

markets and the criteria for selecting appropriate promotional media. In the end, it identifies the different types of promotion mix elements and the factors influencing the choice of promotion tool. In Chapter Seven, pricing decisions for the export market are presented. The chapter examines the various pricing options and identifies the major determinants of export prices and pricing methods. It describes the steps involved in setting prices for export while describing the difficulty or desirability of having standardized prices for a company’s products. Finally, it outlines various International Commercial Terms (Incoterms) and their implications for the parties engaging in international business. Chapter Eight describes the main channels of distribution used in exporting a product, and identifies the criteria for selecting a distribution channel in the international markets. It explains the factors that need to be considered when designing marketing channels in international markets. It discusses the role of the distribution system with respect to international marketing. Finally, the chapter describes the steps involved in distribution planning, and identifies the factors determining the distribution channel level in foreign markets. Commercial documentation and financing methods in international markets are covered in Chapter Nine. The chapter assesses the various sources of financing international businesses and the risks associated with each source. It explains how various financing risks can be minimized or eliminated. It assesses the implications of the different methods of payment applied in international businesses, and discusses methods used in financing exports. Finally, the chapter assesses various insurance policies and their implications in insuring goods and services as they move across borders. In order to assist readers in understanding key concepts, each chapter opens with an introduction which presents its key objectives, and ends with chapter summary and review questions. The questions presented at the end of each chapter aim to give readers the opportunity to assess their understanding of the chapter, to apply ideas and concepts in various settings, and to generate discussion that will help them internalize the materials covered.

ACKNOWLEDGEMENTS

Writing a book consumes a lot of time, energy, and effort. It is apparent that without ample support it can become difficult to produce a book with numerous cases and exhibits drawn from the field. The dream and success of writing this book was therefore made possible by the invaluable support of several people who in one way or another supported and encouraged us. We are indebted to all our colleagues for their remarkable contributions to the development and production of this book. We would like to thank our past undergraduate and postgraduate students of international marketing and international business at the University of Dar es Salaam, who inspired us to write a book on International Marketing with emphasis on the developing country context. Their demand for relevant and context-specific cases and examples on international marketing motivated us to write and publish this book. Most importantly, we want to appreciate their invaluable contributions and input toward improving and revising various chapters. We acknowledge the support we received from our colleagues at the University of Dar es Salaam Business School in terms of reference materials and moral support during the entire process of collecting the data and eventually writing the book. Their readiness and willingness to use the book in teaching were the source of our motivation and energy to continue researching and writing this edition. We are particularly indebted to those who read the various versions of the draft manuscripts and gave us their input for improvement. We are also indebted to the owners of the companies and organizations who provided us with the information and data used in various exhibits. Without their readiness to share the information needed it would be difficult to contextualize this book. Above all, we are grateful to those who read the initial drafts of the exhibits and validated the data and information presented in this book. We would like to thank our respective families for putting up with our preoccupations whilst researching and writing. Indeed, we are grateful for their patience and understanding during those times when the work seemed monumental. They have been wonderful partners to us over the years. Finally, we thank the editors and reviewers who gave us extensive feedback for improvement. Their views, comments, and inputs helped us

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to shape the various chapters and sections before publishing the book. The financial support from the Business Environment Strengthening for Tanzania (BEST-Dialogue), through the Centre for Policy Research & Advocacy (CPRA) at the University of Dar es Salaam Business School, for editing the final work is highly appreciated. Cambridge Scholars Publishing deserves our acknowledgement and recognition for encouraging us to write the book and eventually publishing it.

—Goodluck Charles and Wineaster Anderson Department of Marketing University of Dar es Salaam

ABOUT THE AUTHORS

Goodluck Charles (PhD) is Senior Lecturer at the Department of Marketing, University of Dar es Salaam, with vast teaching, research and consultancy experience in the international business, entrepreneurship, management, and business environment. He is the former Deputy Director of the University of Dar es Salaam Entrepreneurship Centre, and Coordinator for Research and Publication at University of Dar es Salaam Business School. Dr. Charles is the current Chairperson of the Centre for Policy Research and Advocacy at the University of Dar es Salaam. He is an active member of the International Academy of African Business and Development (IAABD). Wineaster Anderson (PhD) is Associate Professor of Marketing at the University of Dar es Salaam, Tanzania. She has researched and published widely on SME performance in international business, internationalization for poverty alleviation, and innovation and sustainability in tourism and natural resources. She is the former Dean of the University of Dar es Salaam Business School and Director of Quality Assurance for the University of Dar es Salaam. Prof. Anderson is the current Chairperson of the Technical Advisory Committee to the Minister of Natural Resources and Tourism; the National Council for Technical Education – Business, Tourism and Planning Subject Board; Natural Resources and Sustainable Tourism in Africa; and the Grain to Grow Foundation, all in the United Republic of Tanzania.

CHAPTER ONE NATURE AND SCOPE OF INTERNATIONAL MARKETING

Introduction Over the last three decades a fundamental shift has occurred in the global economy and in the economies of specific nations. Countries have moved away from a world in which national economies were relatively selfcontained entities, isolated from each other by barriers to trade and investment and by national differences. Due to recent global drivers, the world economy is now more open, with an increasing number of companies participating in international business. Although internationalization began to gain momentum after the industrial revolution, especially in industrialized countries, the degree of internationalization in the emerging and developing economies of the Middle East, South America, and Africa is also increasing rapidly. Whether or not a firm wants to participate directly or indirectly in international operations, most companies today are compelled by global forces either to go international or at least to think globally. Perhaps now more than ever, businesses cannot escape the effects of the ever-increasing number of global firms exporting, importing, and manufacturing abroad. The world has recently witnessed a large number of multinational companies crossing borders to market their products and services globally. This has encouraged most companies to adopt various marketing and global strategies to market and compete within and outside their countries. Nowadays every firm must become international in its orientation, as in most cases business performance is conditioned in part by events that occur abroad. Based on this, firms are expanding the scope of their operations from domestic to export marketing, international marketing, and global marketing. Even though global operations are diverse, covering a wide variety of operations (such as global production and manufacturing, international finance, and international management), international marketing is one of the key global functions of any international business, given the strategic

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importance of marketing in today’s competitive environment. Most managers around the globe have recognized the increasing necessity for their companies and organizations to develop the appropriate marketing skills, aptitude, and knowledge to compete effectively in international markets. The emergence of a more open world economy, the globalization of consumer tastes, and the unabated global expansion of internet access have increased interconnections between national economies across the world, and this makes marketing an important component of any international business. Current interest in international marketing can also be explained by changing competitive structures, coupled with shifts in demand characteristics in markets throughout the world. With the increasing globalization of markets, companies are unavoidably enmeshed with foreign customers, competitors, and suppliers, even within their own borders. In view of this, the field of international marketing is growing. Numerous programs, publications, and research projects are cutting across developed and developing economies. In emerging economies, the need to understand internationalization and international marketing has increased substantially following the recent global expansion of firms and their increased involvement in internationalization. In line with this, it has become important for students, researchers, marketers, and firms to have a clear understanding of the nature and scope of international marketing. This also calls for a thorough understanding of the nature and development of internationalization as the basis for a deeper understanding of international marketing. The focus of this chapter is to develop a framework for international marketing, which will enable readers to understand international business operations and give an insight into why some companies decide to market abroad. After reading the chapter, readers should be able to: (i) describe the meaning of international marketing and the reasons for a firm to go global; (ii) identify the actors involved in international marketing; (iii) differentiate between domestic and international marketing; (iv) describe the levels of international marketing, ranging from domestic to global marketing; and (v) explain the international marketing orientations.

Concepts of International Marketing Not more than two decades ago marketing abroad was considered prestigious, a sign of a nation’s maturity. Today, it is imperative for nations and companies, in order to remain effective players in the world market. For nations and companies to effectively participate in international marketing it is important to understand the basis of marketing itself.

Nature and Scope of International Marketing

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Marketing refers to the process of finding out customers’ needs and wants and profitably satisfying them more effectively and efficiently than competitors. It involves carrying out business activities directed at the flow of goods and services from producer to consumers or the collection of activities undertaken by the firm to relate profitably to its market. A firm’s first activity in this context is to study its own prospective buyers. Who are they? Where are they? What factors are important in their purchase of our product or service? The second activity is to develop products or services that satisfy the customers’ needs and wants. The third matter is to set prices and terms on these products that appear reasonable to buyers, while at the same time returning a fair profit. Distribution is the fourth activity, which entails making products available when and where buyers can be conveniently accessed. The fifth action is promotion, which is about informing and persuading the market about the products or services on offer. Marketing managers must plan and coordinate these activities in order to produce successful, integrated marketing programs. For services, there are further functions that marketing managers must take into account, including the process of service delivery, service providers (people), physical evidence, and positioning. What then is international marketing? International marketing is simply performing one or more of the marketing activities listed above across national boundaries; at its more complex, it involves the performance of all the marketing functions in more than one country (the difference between single-country, dual-country, or multi-country marketing). Whether an organization markets its goods and services domestically or internationally, the definition of marketing still applies. However, the scope of marketing is broadened when the organization decides to sell across international boundaries, primarily due to the numerous other dimensions which the organization has to account for. International marketing is therefore defined as the performance of business activities designed to plan, price, promote, and direct the flow of a company’s goods and services to consumers in more than one nation, for profit. The key difference between the definitions of domestic and international marketing is that in the latter case marketing activities take place in more than one country. This apparently minor difference, “in more than one country,” accounts for the complexity and diversity found in international marketing operations. Marketing concepts, processes, and principles are universally applicable, and the marketer’s task is the same whether doing business in China, UK, USA, or Dar es Salaam, Tanzania. However, the uniqueness of international marketing comes from the range

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of unfamiliar problems and the variety of strategies necessary to cope with the differing levels of uncertainty encountered in foreign markets.

Why Firms Go International Going international is an important and complex decision made by companies at different levels of growth. In the face of the general forces that drive international trade and internationalization, there are specific factors that motivate firms to go international. At the national level, there are several trends that open business opportunities and motivate companies to become international. Such factors include: emerging regional economic and political integration; enhancement in technology; improvements in transportation and telecommunication; world economic growth; transition to market economies; and converging consumer needs. Economic integration, for instance, lowers or eliminates barriers and promotes trade within common markets. As a result, subsidiaries are established in specific markets to take advantage of free trade within the region. In recent years, consumers worldwide have been exposed to similar products, services, and entertainment, largely due to technological advancement, which has created a common demand. Lower costs and higher-quality communication due to satellite technology, tele-conferencing, and e-mail have increased business opportunities at the international level. Also, efficient transportation due to containerization and just-in-time technology are creating more international business opportunities. An emerging middle class with increasing buying power in large emerging markets such as China, Brazil, and India makes them viable trade partners. The transition of the Eastern Bloc to a market economy created important new markets and opportunities to transform inefficient government-owned local companies into successful international enterprises. These factors are expected to trigger internationalization between nations and create opportunities for companies to participate in international marketing; however, there are more specific factors that attract individual firms to acquire a global orientation and go international. While managers should observe general global trends and make their decisions in light of them, internationalization of their firms is much more influenced by factors that have direct implications on their marketing decisions. First and foremost, most companies go international for the purpose of growth and expansion in terms of sales, profits, global coverage, customer base, etc. It is well established in trade theory that strategically selected foreign markets can offer great opportunities for the growth of international companies if they are able to take advantage of those markets. Given the

Nature and Scope of International Marketing

5

experience of multinational companies, the majority of them are able to expand to markets that have a great growth potential and manage to achieve significant growth. For example, most multinational companies today are targeting countries like China, India, Brazil, and South Africa because of the growth potential they provide to their businesses. By going international, most companies have succeeded in broadening their customer base, sales revenue, and returns. Second, companies go abroad because expanding the size and scope of markets helps them to achieve economies of scale in their operations and in marketing costs. Participating in international marketing enables companies to attain economies of scale in terms of sharing of costs and risks between markets. Economies of scale occur when the unit cost of a product declines as production volume increases. Therefore, some companies look to foreign countries for lower-cost manufacturing, technological assistance, and other services, in order to achieve economies of scale and maintain a competitive advantage. Third, a product may be near the end of its life cycle in the domestic market but at the same time experience a growth market abroad. For the purpose of rejuvenating the product life cycle, the firm selling the product may opt to go international. This is mainly the case where innovations take place in advanced economies, and some products are extended to poor countries even as they are already declining in home countries. The approach is viable when the demand for the declining product is increasing in the foreign market. It is also worth noting that price competition during maturity drives firms to new international markets. Fourth, for some product lines, competition in foreign markets may be less intense than domestically and the firm moves to a less competitive market to take advantage of that market. For instance, a lot of foreign companies have in recent years entered sub-Saharan Africa in various sectors, including manufacturing and services (telecommunications, banking, transportation, tourism, etc.), due to the low competition in these sectors as compared to the level of competition experienced in developed economies. Fifth, if the firm or country has excess capacity, it can produce for export to foreign markets at a favorable marginal cost per unit. The main motivation is to utilize the excess capacity while taking advantage of the business opportunities abroad. Sixth, geographical diversification (that is, going international) may be a more desirable alternative than product-line diversification. This is used by firms that intend to have wide global networks with their products and services.

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Chapter One

Seventh, perhaps the most obvious reason to consider world markets is the potential they offer compared to domestic markets. Sometimes the product may be available in one country only, while several countries require the same product. Overall, the drivers of internationalization appear to fall under two categories: general drivers, and firm-specific drivers. Both categories are important and have a role to play in influencing the internationalization of firms. While most general drivers open up business opportunities abroad, firm-specific drivers are crucial in guiding a business’s international marketing decisions. Exhibit 1.1: Excess Capacity of Cloves from Zanzibar State Trading Corporation Zanzibar is a semi-autonomous state within Tanzania, made up of the islands of Unguja and Pemba. Cloves were introduced in Zanzibar from Mauritius in 1818. By the year 1856, Zanzibar is reported to have been producing about 75% of the world’s cloves – an average of about 3,000 tons per annum. The entrance of Zanzibar into the world clove market in the 1830s transferred the dominating role from Indonesia to Zanzibar. In 1834, Zanzibar produced 35,000 metric tons of cloves and controlled 90% of the world market. Zanzibar’s virtual monopoly continued to be maintained until the 1940s, when Indonesia regained its lead in the world clove market, both in terms of production and exportation. Indonesia produces between 80,000 and 120,000 tons of cloves, most of which are consumed domestically. Asked why they went international, Zanzibar State Trading Corporation (ZSTC) responded with a simple statement: “the product market is much more outside the country, than the domestic market.” According to ZSTC, cloves are used as medicine, as a spice, and as raw materials in the manufacture of cigarettes. “There is large surplus excess of cloves produced, especially in Pemba Island. Zanzibar cannot consume all the produced cloves as spices; Zanzibar does not have any factory which uses cloves as the main raw materials. Thus, due to large amount of production, we have to sell the product abroad,” added the ZSTC.

Nature and Scope of International Marketing

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Differences between Marketing in the Domestic and International Markets Foreign and domestic marketing are the same, in that the purpose is to create and manage profitable exchange relationships between an organization and its markets. However, although the activities and goals of international marketing are the same as those of domestic marketing, the implementation of a firm’s marketing programs may be very different. Under international marketing, marketing managers encounter trade barriers, different cultures (including foreign languages, aesthetics, material culture, religion, attitude, values, etc.), and foreign trade legislation. International marketing involves working with foreign currencies, goods usually travel longer, there can be long documentation procedures and complex procedures for settling trade disputes, business practices differ, and issues can arise relating to the creditworthiness of nations, companies, or individuals. In other words, foreign and domestic marketing are dissimilar in three important ways: i. Differences in environmental characteristics of domestic and foreign markets often require different applications of marketing principles, concepts, and techniques. ii. Foreign marketing involves crossing national borders and is thus concerned with a unique set of issues and problems. iii. Special techniques and methods are sometimes needed. This is due to the fact that some tasks associated with international marketing are not included (or are less intense) in domestic marketing (e.g., cultural research, political factors, exchange rates, trade laws, longdistance distribution.) A practical result of these differences is that one needs to acquire competence as an international marketing manager, a competence broader than that required for marketing in a specific foreign country, and distinctly different from that demanded by domestic marketing.

Levels of International Marketing Once a company has opted to go international, it has to decide the degree of marketing involvement and commitment that it is prepared to undertake. The decision made by the company will determine the level of engagement in international marketing. There are four levels that may be used to distinguish the degree of international marketing involvement: domestic marketing, export marketing, international marketing, and global

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marketing. The four levels enable the reader to see how marketing advances from the domestic to the global marketing stage. They also indicate the level of complexity of dealing with internationalization. Domestic marketing: The main focus of domestic marketing is the home country, with least involvement in foreign countries. It involves the company manipulating a series of controllable variables, such as price, advertising, distribution, and product or service attributes, in a largely uncontrollable external environment that is made up of different economic structures, competitors, cultural values, and legal infrastructure within specific political or geographic boundaries. Export marketing: In export marketing, the firm directly or indirectly exports its products and services to foreign countries, with limited international commitment. The focus is to market the domestic market’s excess abroad, making the foreign market secondary. The marketing approach in this case is more ethnocentric in the sense that domestic strategies, techniques, and personnel are perceived as superior, whereas international markets are regarded primarily as outlets for surplus domestic production. Thus, international marketing plans are developed in-house by the international division. International marketing: Companies in this stage are fully committed and involved in international marketing activities. Such companies seek markets all over the world and sell products that are a result of planned production for markets in various countries. This generally entails not only the marketing but also the production of goods outside the home market. At this point a company becomes an international or multinational marketing firm. This approach implies that the company makes different products for different countries. Global marketing: At the global marketing level, the most profound change is the orientation of the company toward markets and associated planning activities. At this stage, companies treat the world, including their home market, as one market. Often this transition from international marketing to global marketing is catalyzed by a company’s crossing the threshold of more than half its sales revenues coming from abroad. In this stage, a company operates in a very large number of countries, and for the purpose of achieving cost efficiencies it analyzes the requirements and tastes of customers of all the countries and comes out with a single product that can satisfy the needs of all. The example of Coca-Cola’s transition from international to global is instructive. Coca-Cola had actually been a global company for years; its organizational change in the mid-1990s was the last step in recognizing the changes that had already occurred.

Nature and Scope of International Marketing

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The levels of international marketing indicate an incremental approach, from domestic to global marketing. Some firms follow an incremental approach in the internationalization process. Often they start their operations in domestic markets, then introduce exports into their operations, before embarking fully on international and global marketing. A good example is that of the Bakhresa Group, a company that started in 1969 as food processor with a focus merely on the Tanzanian domestic market. In the 2000s the company gradually began to export to neighboring countries of East and Central Africa. The company has recently acquired great momentum to participate actively in international marketing and foreign production. It is one of the largest groups in subSaharan Africa, exporting and undertaking manufacturing in several African counties (Uganda, Malawi, Mozambique, Rwanda, Democratic Republic of Congo, and Zambia).

International Marketing Orientations The levels of international marketing involvement described above do not necessarily coincide with managers’ thinking and strategic orientation. Often companies are led into international and even global markets by burgeoning consumer or customer demand, and strategic thinking is secondary to “filling the next order.” The strategic approach to international marketing reveals three relatively distinct orientations that seem to dominate strategic thinking in firms involved in international marketing: (i) domestic market extension, (ii) multi-domestic market, and (iii) global marketing. Differences in the complexity and sophistication of a company’s marketing activities depend on which orientation guides its operations. The ideas expressed in each strategic orientation reflect the philosophical orientation that should also be associated with successive stages in the evolution of the company’s international operations. Domestic market extension: The domestic company seeking the extension of sales of its domestic products into foreign markets. It views its international operations as an extension of its domestic operations; the primary motive is to market excess domestic production. Domestic business is its priority, and foreign sales are seen as a profitable extension of domestic operations. Even though foreign markets may be vigorously pursued, the firm’s orientation remains basically domestic. The company markets to foreign customers in the same manner in which it markets to domestic customers. It seeks markets where demand is similar to the home market and its domestic product will be acceptable. This domestic market extension strategy can be very profitable; large and small exporting

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companies approach international marketing from this perspective. Firms with this marketing approach are classified as ethnocentric. Multi-domestic market orientation: Once a company recognizes the importance of differences in overseas markets and the value of offshore business to the organization, its orientation toward international business may shift to a multi-domestic marketing strategy. A company guided by this concept has a strong sense that country markets are vastly different (which they may be, depending on the product) and that market success requires an almost independent program for each country. Firms with this orientation market on a country-by-country basis, with separate marketing strategies for each country. Subsidiaries operate independently of one another in establishing marketing objectives and plans, and the domestic market and each of the country markets have separate marketing mixes with little interaction among them. Firms with this orientation would be classified as polycentric. Global market orientation: A company guided by the global marketing orientation or philosophy is generally referred to as a global company; its marketing activity is global, and its market coverage is the world. The world as a whole is viewed as the market, and the firm develops a global marketing strategy. The global marketing company would fit the regiocentric or geocentric classifications. It views an entire set of country markets as a unit, identifying groups of prospective buyers with similar needs as a global market segment and developing a marketing plan that strives for standardization wherever it is cost-effective and culturally appropriate.

Major Actors in International Marketing Major actors in international marketing include exporters, importers, service companies, and multinational corporations. Exporters are firms that market products abroad but produce largely in their home country. Importers include companies, firms, or individuals that buy goods from abroad. Service companies are companies that offer different exporting and importing services to the parties involved in international marketing, such as banks, investment bankers and brokers, airlines and hotels, companies, public accounting firms, consulting companies, advertising agencies, and so forth. Multinational corporations are companies that manufacture products and services in several countries. These corporations maintain their headquarters in home countries while expanding their operations into several foreign countries.

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Chapter Summary This chapter sets the scene for the rest of the book. It highlights the transformation that is happening in the world which is prompting managers around the globe develop the skills, aptitudes, and knowledge to compete effectively in international markets. The chapter describes the speed of internationalization in the emerging and developing economies that adds to the importance of international marketing. It highlights the need to understand the nature and scope of international marketing and its elements, especially in the contexts of emerging economies, where there are limited reference materials. Using examples from the context of developing economies, the chapter reveals that the focus of the book is largely on such economies without ignoring other contexts completely. In particular, the chapter makes the following key points: x International marketing entails the performance of one or more marketing activities across national boundaries. x The general forces that trigger internationalization include emerging regional and economic integration, enhancement of technology, improvement in transportation and communication, world economic growth, transition to market economies, and convergence of consumer needs. x The factors that motivate individual firms to go international include growth and expansion, economies of scale, extension of the product life cycle, less competition in foreign markets, excess capacity of the firm, and the business potential existing in foreign markets. x Although the main activities and goals of international marketing are the same as those of domestic marketing, international marketing encounters a different environment in terms of trade barriers, foreign business world, and varied business practices. x The levels of engagement in international marketing range from domestic marketing to export marketing, international marketing, and global marketing. x Three different strategic orientations are found among managers of international marketing operations. Some see international marketing as ancillary to the domestic operations. A second kind of company sees international marketing as a crucial aspect of sales revenue generation, but treats each market as a separate entity. Finally, a global orientation views the globe as the marketplace,

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and market segments are no longer based solely on national borders. x Major actors in international marketing include exporters, importers, service companies, and multinational corporations. These players interact with each other and play an important role in ensuring international marketing takes place effectively. ***

Review questions 1. Why do companies become involved in international marketing? 2. Differentiate between domestic marketing and international marketing. 3. “The marketer’s task is the same whether applied in London or Dar es Salaam, Tanzania.” Discuss. 4. Describe and explain the global forces that trigger growth of international trade. 5. With specific examples, explain why firms participate in international marketing. 6. Discuss the four phases of international marketing involvement. 7. Differentiate between the three international marketing concepts. 8. Identify and describe the major actors in international marketing.

CHAPTER TWO INTERNATIONAL TRADE THEORIES

Introduction A number of theories have been developed over the years to explain why it is beneficial for a country to engage in international trade. Drawing largely on international economics, trade theories focus on tracing the evolution of international trade and the economic interdependence of nations. While in the past international trade theory was not seen as important in international marketing, it is nowadays becoming one of the key topics in the subject. This is because the recent movement to increased internationalization cannot be explained only by referring to macro-economic phenomena. As the tremendous growth of international trade in the last thirty years (see Exhibit 2.1) and the emergence of new players that have risen to prominence in world trade have occurred in almost all countries, including rapidly emerging economies, an understanding of the origins and development of international trade in any business-related field is of great importance. In view of the fact that firms are very important in the commercial performance of nations, an appreciation of theories relating to trade and foreign direct investment is essential for managers. In addition, international trade theories help managers to understand such issues as the products they should import or export, how much they should trade, and with whom. As the complexity of the activities of multinational firms increases, the need arises for new theoretical developments that are capable of explaining the driving forces of internationalization and the relationships between different economic actors. A thorough conceptualization of the factors shaping world trade and the performance of global firms begins with an understanding of the historical forces that created the global trading system we have today. As highlighted in Chapter One, the world is changing with extraordinary rapidity, driven by many influences, including shifts in production and consumption patterns, continuing technological innovation, new ways of doing business, and, of course, policy. A comprehensive and fruitful analysis of the shaping factors of international trade and their implications

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for trade policy cannot be performed without having a clear idea of the evolution of trade patterns over time. In light of the understanding of trade development and evolution, managers are able to make decisions on market selection, market development, and expansion. They can apply the knowledge gained from international trade theories to analyze and understand the basis of specialization and to aid in the selection of countries to deal with. Through international trade theories, managers are able to see the shifts and developments occurring in the international business world. Theories of international trade are important to individual firms primarily because they can help the firms decide where to locate their production activities and from which countries to import. The main purpose of this chapter is to trace the evolution of international trade theories and explain their implications in economic and business decisions in the economies of different nations of the world. After reading the chapter the readers will be able to: (i) understand the nature of international trade theories and trace their evolution; (ii) explain the essence of specialization in international trade among different nations in the world; (iii) appreciate recent developments in trade theories and how they explain business practices in world economies; (iv) understand how business decisions, in particular international marketing decisions, are influenced by the evolution of international trade; and (v) appreciate how international trade theories could be used to explain trends of international trade in emerging economies. Exhibit 2.1: World Trade Trends Measured in gross terms, the dollar value of world merchandise trade increased by more than 7% per year on average between 1980 and 2011, reaching a peak of US$18 trillion at the end of that period. Trade in commercial services grew even faster, at roughly 8% per year on average, amounting to some US$4 trillion in 2011. Real merchandise trade growth (i.e. trade growth accounting for changes in prices and exchange rates) was equally impressive, recording a four-fold increase in volume between 1980 and 2011. Since 1980, world trade has grown on average nearly twice as fast as world production. Reductions in tariffs and other barriers to trade during this period contributed to the expansion. New players have risen to prominence in world trade, most notably large developing countries and rapidly industrializing Asian economies. Developing economies only accounted for 34% of world exports in 1980, but by 2011 their share had risen to 47%, or nearly half of the total. At the same time, the share of developed economies dropped from 66% to 53%. Surging

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exports from China boosted its share in world exports from 1% in 1980 to 11% in 2011, making China the world’s largest exporter when members of the European Union are counted separately. Source: World Trade Organization, 2013.

Evolution of International Trade Theories The basic nature of international trade is to improve the productivity of industry and the welfare of consumers, while the purpose of a theory is to simplify reality so that the basic elements of logic can be seen. Different theorists have emerged in the long history of attempts to understand the nature of international trade. Theorists attempt to answer such questions as these: Why do nations trade? What goods do they trade? Why do some countries grow faster and become wealthier than others through trade? How are the gains from trade divided? Is trade advantageous? What are the reasons that motivate private individuals and firms to voluntarily engage in trade, governments to favor it, and economists to defend it? Between 1500 and 1800, the prevailing doctrine of political economy, and arguably the first theory of trade, was mercantilism. Classicists then established the well-known finding that “trade results in a higher level of economic well-being for its participants than would be possible for them without it.” Classical theories (i.e. efficiency, absolute advantage, and comparative advantage) assume that nations trade because there are price differences between similar goods in their countries. According to classical theories, price differences are the direct result of cost differences in the respective countries. These cost differences can be of two kinds – absolute and comparative. Later, the economists Eli Heckscher and Bertil Ohlin developed the factor proportions theory, which was considered an extension of classical theories. The factor proportions theory advocates that a country should specialize in the production and export of those products that use its relatively abundant factor most intensively. More recent developments, however, have focused on the industry, the products, and how they may influence which country holds the advantage at certain points in time. Modern internationalization theories include the new trade theory, Porter’s model, the born-global theory, and the theory of networking.

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Mercantilism Theory Mercantilism was the economic system of the major trading nations during the sixteenth, seventeenth, and eighteenth centuries, based on the premise that national wealth and power were best served by increasing exports and collecting precious metals in return. The basic idea of the theory of mercantilism was that a nation can maximize wealth by maximizing the gap between export and import (the trade surplus) – in other words, maximizing exports and minimizing imports. Exporting industries were encouraged through subsidies, and import was restricted through tariffs and non-tariff barriers. The weakness of this theory was that it focused only on the needs of the government, while forgetting the welfare of its people. The accumulation of wealth, usually in gold, was spent in fortifying the military and developing national institutions, thereby consolidating the power of the central governments of the emerging nation states. According to mercantilism theory, trade was to benefit mother countries (developed economies); colonies (in Africa, Asia, and North, South, and Central America) were exploitable resources. Mercantilist nations acquired colonies as sources of inexpensive raw materials and markets for higher-priced finished goods. Trade between mercantilist nations and their colonies expanded wealth and gave rise to armies and navies to control colonial empires and protect shipping. The main problem with mercantilism is that it viewed international trade as a zero-sum game in which a nation could benefit only at the expense of other nations. But if all nations barricade their markets from imports and push their exports onto others, international trade becomes severely restricted. The least developed countries, which depend to a great extent on importing a large proportion of their goods, technology and skills, would not survive in modern times. On the basis of this, imports and exports, as well as the movement of people and technology, are necessary in a globalized economy.

Absolute Advantage Theory Adam Smith postulated the theory of absolute advantage in his book The Wealth of Nations in 1776 in his attempt to explain the process by which markets and production actually operate in society. Smith noted that some countries, owing to the skills of their workers or the quality of their natural resources, could produce the same products as others with fewer labor-hours. He termed this efficiency absolute advantage. The factories of

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the industrializing world were, however, separating the production process into distinct stages, in which each stage would be performed exclusively by one individual, which Smith termed the division of labor. Smith then extended the concept of the division of labor in the production process to the division of labor and specialized products across countries. Therefore, the theory of absolute advantage brought to attention for the first time the potential of one country to produce a given product more cheaply than another country. In this case, the specialization of countries in the production of goods, with lower costs and trade of surplus production, was beneficial for both countries. Each country would specialize in a product that it was uniquely suited for. More would be produced for fewer resources. With each country specializing in products for which it possessed absolute advantage, countries could thus produce more in total, and exchange products – trade – for goods that were cheaper in price than those produced at home. In view of this, the theory of absolute advantage destroys the mercantilist idea that international trade is a zero-sum game. Because both countries gain, international trade is a positive-sum game. The theory argues against restrictive trade policies and for nations to open their doors to trade instead, so their people can obtain a greater range of goods more cheaply in order to raise living standards. Although Smith’s work was instrumental in the development of economic theories about trade and production, it did not answer some fundamental questions about trade. Smith’s vision of trade relied on a country possessing absolute advantage in production, but did not explain what caused the production advantages. Furthermore, if a country did not possess absolute advantage in any product, could it (or would it) trade? Although it represented a major step in demonstrating the benefits of specialization, Adam Smith’s theory does not offer the same perspectives for countries that do not possess an absolute advantage for any category of products.

Theory of Comparative Advantage In his 1819 work entitled On the Principles of Political Economy and Taxation, David Ricardo sought to take the basic idea set down by Adam Smith a few logical steps further by asking what happens to trade if one country has absolute advantage in both (or all) products. Would trade still go on? His answer was that even if a country possessed absolute advantage in the production of two products, it must still be relatively more efficient than the other country in the production of one good than the other. From

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this situation, David Ricardo demonstrated that specialization is possible and beneficial even when a country does not possess absolute advantage in the production of any good. The allocation of resources toward those goods that can be obtained more cheaply than others, and their export, can bring benefits to both countries. He termed this comparative advantage. Each country would then possess comparative advantage in the production of one of the two products, and both countries would then benefit by specializing completely in one product and trading for the other. To fully understand the theories of absolute advantage and comparative advantage, consider the following two examples in Exhibit 2.2 below. It is important to note that Ricardo’s theory of comparative advantage shows that it makes sense for a country to specialize in the production of those goods that it produces relatively most efficiently, and to buy those goods it produces less efficiently from other countries (even if it could produce them more efficiently itself than those other countries). While absolute advantage looks at absolute productivity differences, comparative advantage looks at relative productivity differences. Exhibit 2.2: Absolute Advantage and Comparative Advantage Example I: Production of Wheat and Maize in Tanzania and Kenya Assume a world of two countries, Kenya and Tanzania, that produce only two products, wheat and maize, with labor being the only factor of production available. The relative efficiency of each country in the production of the two products is measured by comparing the number of labor-hours needed to produce one unit of each product. The table below provides an efficiency comparison of the two countries. Kenya is apparently more efficient in the production of wheat, whereas it takes Tanzania four hours to produce one unit of wheat. Tanzania therefore takes twice as many labor-hours to produce the same output, which gives Kenya absolute advantage in the production of wheat. Tanzania takes two labor-hours to produce a unit of maize that it takes Kenya four laborhours to produce. Kenya therefore requires four more labor-hours than Tanzania to produce the same unit of maize, and Tanzania has absolute advantage in the production of maize. According to Ricardo, comparative advantage is based on what is given up or traded off in producing one product instead of the other. Also, a country cannot possess comparative advantage in the production of both products, so each country has an economic role to play in international trade. In this numerical example, Kenya has comparative advantage in the production of wheat. If Kenya produces one unit of wheat, it foregoes the

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production of 2/4 (0.50) of a unit of maize. If Tanzania produces one unit of wheat, it foregoes the production of 4/2 (2.00) of a unit of maize. Kenya therefore has the lower opportunity cost of producing wheat. Tanzania has comparative advantage in the production of maize. If Kenya produces one unit of maize, it foregoes the production of 4/2 (2.00) of a unit of wheat. If Tanzania produces one unit of maize, it foregoes the production of 2/4 (0.50) of a unit of wheat. Tanzania therefore has the lower opportunity cost of producing maize. Hours required to produce one unit of a product Wheat Maize Kenya 2 4 Tanzania 4 2 Example II: Production of Sugar and Cocoa in Tanzania and Ghana Suppose we assume a world of two countries, Tanzania and Ghana, producing two products, sugar and cocoa. Assume Tanzania is better than Ghana at making sugar, and Ghana is better than Tanzania at making cocoa. It is obvious that both would benefit from trade if Tanzania specialized in sugar, while Ghana specialized in cocoa and they traded their products. That is a case of absolute advantage. But, suppose that one of the countries is bad at making everything? Will trade drive all producers out of business? The answer, according to David Ricardo, is no. The reason is the principle of comparative advantage. According to this theory, Tanzania and Ghana still stand to benefit from trading with each other even if Tanzania is better than Ghana at making everything. If Tanzania is greatly superior at making sugar and only slightly superior at making cocoa, then Tanzania should still invest resources in what it does best, producing sugar, and export the product to Ghana. Ghana should still invest in what it does best, making cocoa, and export that product to Tanzania, even if it is not as efficient as Tanzania. Both would still benefit from the trade. A country does not have to be the best at anything to gain from trade. That is comparative advantage, which is one of the most widely accepted theories among economists. Although it can be claimed that some countries have no comparative advantage in anything, that is almost impossible.

As highlighted in Exhibit 2.2, the comparative advantage theory is based on a number of assumptions that lead to its limitations. It assumes that countries are only driven by the maximization of production and consumption. However, governments get involved in trade for many

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reasons, such as the welfare of their people, concerns for workers or consumers, etc. While the theory assumes only two countries engaged in the production and consumption of two goods, in reality there are more than 180 countries and countless products are produced, traded, and consumed in the world today. Even as the theory assumes that there are no transportation costs, in fact transportation costs are a major expense of international trade. It further assumes labor is the only resource for production and that this is mobile within each nation (but cannot be transferred), ignoring the fact that other resources are needed in production and that labor is becoming more mobile. Finally, the theory assumes that specialization does not result in efficiency gains, whereas in fact specialization results in increased knowledge of a task and leads to future improvements. While David Ricardo’s theory stresses that comparative advantage arises from differences in (labor) productivity, it does not address the issue of what determines the products for which a country will have a comparative advantage. The theory is based on the premise that a country’s advantage may derive from its natural endowments, including climatic conditions, access to certain natural resources, and availability of an abundant labor force. Variations in natural advantages can help to explain where certain products or goods might best be produced. However, the recent trend shows that some countries that produce manufactured goods and services competitively have an acquired advantage through a new technology. Since most technological advances have originated from industrialized nations, companies from these nations control the lion’s share of global trade and investment in manufacturing and services.

Heckscher-Ohlin or Factor Proportions Theory Both Smith and Ricardo demonstrated how output can be increased through production specialization. The question remained as to why a country would be relatively more efficient in the production of certain goods and what could be the source of comparative advantage. Swedish economist Eli Heckscher and his former graduate student Bertil Ohlin asserted that this was due to the differences in countries’ endowments of factors of production, and considered this an extension of classical theories of efficiency, absolute advantage, and comparative advantage. Factor proportions theory, also termed the Heckscher-Ohlin theory, is based on a more modern concept of production, one that raised capital to the same level of importance as labor. Trade between two nations, according to this theory, was based on a difference in factor endowment, labor and capital.

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The theory focuses on cross-country differences in the endowments of factors of production such as labor and capital. Given the different factor intensities across sectors, the price of the factor used intensively in a specific sector, in a country abundant in that factor, will be lower relative to other countries; thus this country should have a lower opportunity cost in that sector, and will specialize accordingly in an open economy. Factor proportions depend on the state of technology – the current method of manufacturing a product. The theory assumes that the same technology of production would be used for the same goods in all countries. It is not; therefore, differences in the efficiency of production will determine trade between countries, as in classical theory. There are several assumptions which are necessary in explaining international trade based on factor proportions theory. First, the theory assumes two countries, two products, and two factors of production: the so-called 2x2x2 assumption. Second, the markets for the inputs and the outputs are perfectly competitive, which implies that the factors of production, labor, and capital are exchanged in markets that pay them only what they were worth. Similarly, the trade of the outputs is competitive so that one country has no market power over the other. Third, increasing production of product yields diminishing returns, meaning that as a country increasingly specializes in the production of one of the two outputs, it requires more and more inputs per unit of output. Therefore, there would no longer be constant “labor-hours per unit of output,” as assumed under classical theory. Thus, the frontiers of production possibilities would no longer be straight lines, but concave in shape. The result is that complete specialization would no longer occur under factor proportions theory. Fourth, the theory assumes that both countries are using identical technologies and therefore each product is produced in the same way in both countries. The only way that a good could be more cheaply produced in one country than in the other is if the factors of production used were cheaper. Based on these assumptions, factor proportions theory stated that “a country should specialize in the production and export of those products that use intensively its relatively abundant factor” (Leamer, 1995). A country that is relatively labor-abundant (or capital-abundant) should specialize in the production of relatively labor-intensive (capital-intensive) goods. It should then export these labor-intensive (capital-intensive) goods in exchange for capital-intensive (labor-intensive) goods. For instance, where labor is abundant in relation to capital, cheap labor rates might result in export competitiveness in products requiring large amounts of labor relative to capital.

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A further analysis of factor proportions theory is performed by the Leontief Paradox. Nobel Prize winner Wassily Leontief (1953) examined the Heckscher-Ohlin theory and established a paradox. He found that US exports were less capital-intensive than US imports. Leontief postulated that since the USA has relatively abundant capital compared with other nations, it would have been an exporter of capital-intensive goods and an importer of labor-intensive goods. One possible explanation is that the USA has a special advantage in producing new goods made with innovative technologies, and therefore, such products may be less capitalintensive than products whose technology takes time to mature and become suitable for mass production and export. However, as empirical tests are still going to confirm the Leontief Paradox, it is still a dilemma to economists and business practitioners.

Stage Approach (Product Life Cycle and Uppsala Internationalization Model) Unlike the born-global theory, the stage approach advocates that firms start trading in their local markets before they sequentially look at new countries. Two main models explain this approach: Product Life Cycle (PLC) theory by Vernon (1966), and the Uppsala Internationalization Model (Johanson & Vahlne, 1990). Vernon believed that the theories of comparative cost advantage and factor endowments lacked realism, and therefore introduced PLC theory to explain both international trade and international investment. Unlike the classical doctrine, which places greater emphasis on the nation and its endowments, PLC theory emphasizes product innovation, the uncertainty of early product development and marketing, and the cost implications of scale economies, oligopolistic rivalry, and copying. As illustrated in Table 2.1, PLC theory states that one nation is initially an exporter, then loses its export markets, and finally becomes an importer of the product. In this theory, firms follow the development of the PLC, in which they usually introduce new products only in their home market and they then eventually go abroad using cost-oriented FDI during the maturity phase. Technology and marketing factors combine to explain standardization, which drives location decisions. The product life cycle as applied to international theory refers primarily to international trade and production patterns. Like FDI theory, PLC theory is considered under the trade and investment theories.

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Table 2.1 The PLC Model by Louis T. Wells, Harvard Business School. Phase I: Introduction Phase II: Growth Phase III: Maturity Phase IV: Decline

US export strength

Product development and inventions are likely to be related to the needs of home market. Foreign production starts Product familiarity in other countries increases; other manufacturers produce. Foreign production Foreign producers gain product becomes competitive in experience; labor costs lower and export markets become competitive. Import competition begins Foreign producer has cost savings, economies of scale are sufficient to allow him to export to where the product originates.

The characteristics of the four familiar stages of the PLC according to Vernon include introduction, growth, maturity, and decline. The first phase of the PLC theory is introduction, whereby product innovations are most likely to be developed in response to domestic needs, in advanced high-income nations such as USA, Japan, UK, Germany, and France, where domestic demand is strong and research and development (R&D) resources are concentrated. Product is manufactured locally, feedback is obtained from the market, and consequent improvements are made. Production expands to achieve scale economies and any excess capacity is exported to other industrial countries. The product is standardized; production is essentially labor-intensive, retaining a degree of flexibility to incorporate changes from market feedback. The second stage entails growth, in which, if successful, the product ought to enjoy rapidly increasing sales. The original monopoly position may be broken by competitors offering variants to escape patent litigation. Foreign market demand increases, exports remain profitable, while production cost savings from scale economies exceed transport costs and tariffs. At some stage the situation will go into reverse as foreign market demand expands even further. Direct investments will then take place in foreign countries and the output of those manufacturing plants will service, initially, local markets. The product starts to become more standardized and emphasis switches to improvements in the process technology. Maturity is the third phase, whereby the worldwide demand begins to level off, forcing a shake-out among competitors. The product becomes highly standardized, and so cost becomes a major competitive

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weapon. Longer production runs improve scale economies and the consequent low unit costs and prices enable a wider market to open up for the product in the least-developed countries (LDCs). The production advantages now shift from the innovating country to those LDCs where low-cost labor, working on a standardized, capital-intensive work process, is the key determinant of location. The fourth phase is the decline stage, during which the markets in advanced economies decline more rapidly than those of LDCs, as income is switched to satisfy the insatiable demand of affluent consumers for new products. All production of the original innovation is now located in the LDCs. There are several implications which can be drawn from the PLC approach. PLC theory shows how specific products are first produced and exported from one country, but through product and competitive evolution, shift their location of production and export to other countries over time. This theory is important, firstly because it not only recognizes the mobility of capital across countries (breaking the traditional assumption of factor immobility), but also it shifts the focus from country to product. This makes it important to match the product by its maturity stage with its production location in order to examine competitiveness. Secondly, it serves to bridge a wide gap between older trade theories and the intellectual challenges of a new, more globally competitive market, in which capital, technology, information, and firms themselves are more mobile. PLC theory is particularly appropriate for technology-based products which are most likely to experience changes in production process as they grow and mature. That is its major weakness. Resource-based activities (like minerals and other commodities) or services (which employ capital, but mostly in the form of human capital) are not so easily characterized by stage of maturity. The Uppsala Internationalization Model (UIM) maintains that the enterprise gradually increases its international involvement, and that entering new markets by the firm is usually linked to the psychic distance; that is, companies start their internationalization from those markets perceived as psychically near (Johanson & Vahlne 1990, p.11). According to this theory, the firm undergoes four different modes of entering an international market, where the successive stages represent higher degrees of international involvement or market commitment: Stage 1: No regular export activities (sporadic export). Stage 2: Export via independent representatives (export modes). Stage 3: Establishment of a foreign sales subsidiary. Stage 4: Foreign production/manufacturing units.

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However, the UIM has been criticized as it is too deterministic, it does not take into account interdependencies between different country markets, it is only valid for tangible goods, while ignoring the service industries, and it is not valid in situations of highly internationalized firms and industries. Also, the world has become more homogeneous; thus psychic distance has decreased, and firms are more willing to enter into large markets. Companies today design new products and make product modifications at a very quick pace. Companies introduce products in many markets simultaneously to recoup a product’s R&D costs before sales decline. The theory is challenged by the fact that more companies are operating in international markets from their inception. The internet has made this easier, particularly for small and midsize companies. Also, small companies are more often teaming up with companies in other markets to develop new products or production technologies. Yet the theory retains explanatory power when applied to technology-based products that are eventually mass-produced. To reduce the uncertainty, many firms tend to buy knowledge about legal and financial standards from international consulting firms. Exhibit 2.3: Kenya Commercial Bank Spreads to Geographically and Psychically Close Markets Kenya Commercial Bank (KCB) started its operations in 1895 on the island of Zanzibar, and was at that point known as the National Bank of India. A year later, the bank opened a branch in Kenya, on Mombasa Island, later growing to become one of Kenya’s (and East Africa’s) largest commercial banks. Upon independence in 1963, the government of Kenya acquired a 60% shareholding in National and Grindlays Bank, as it was now known, in an effort to bring banking closer to the majority of Kenyans. In 1970, the government acquired 100% of the shares to take full control of National and Grindlays Bank, and renamed it Kenya Commercial Bank (KCB). The government reduced its shareholding to 23.6% during the 2004 rights issue exercise; this was further reduced to 23.1% following the rights issue exercise in 2008. With the most recent rights issue of 2010, the government’s shareholding is 17.75%. KCB is a fully fledged commercial bank, offering savings and lending services to individuals, entrepreneurs, and companies of all sizes. It has the largest branch network in East Africa and enjoys dominance as the bank with the largest balance sheet and capital base in the region. It is a publicly quoted company with its shares trading at the Nairobi Stock Exchange (NSE), the Uganda Securities Exchange, the Dar

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Es Salaam Stock Exchange, and the Rwanda Over the Counter Market. In 1997, KCB set up business in Tanzania before expanding further to Southern Sudan in 2006 and Uganda in 2007. The youngest subsidiary, in Rwanda, began operations in 2008. The bank has a network of 210 outlets and over 400 ATMs across East Africa that are strategically located to provide synergies across markets. During the reporting period a total of seventy-three new branches were opened across the region, raising the number from 137 branches to the current 210 branches. Forty-one new outlets opened in Kenya, eleven in Uganda, five in Tanzania, and six in Southern Sudan, while KCB Rwanda has nine outlets. Most of the branches are located in rural administrative and business centers. KCB has over two billion authorized shares, held among Kenyan, East African, and foreign investors. The Uppsala International Model may be used to explain the KCB’s internalization process in the EAC common market. For instance, one can trace the firm as it starts trading in local markets before successfully looking into new countries which are either geographically or psychologically close. This was the case with KCB which basically started trading in its local market (Kenya) before moving to Tanzania, South Sudan, Uganda, Rwanda, and Burundi. Source: Mwadime (2010), downloaded from http://erepository.uonbi.ac.ke /bitstream, June 2016

New Trade Theory Developed by Krugman in the 1970s, new trade theory constitutes a critique of classical theories of international trade that are based on free trade. The supporters of the new theory questioned the positive effects of free trade in the case of infantile industries. An important argument of the new theory is represented by the fact that, using protectionist measures to sustain certain industries for a given period of time, conditions for those industries to become leaders on the national and international markets can be created. A good example of this theory is that of the Asian countries, such as South Korea and Japan, that sustained representative companies from specific industries in order to penetrate international markets, which later became leaders of at the international level (for instance, the case of Samsung). New trade theory argues that (i) there are gains to be made from specialization and increasing economies of scale, (ii) companies that are first to market can create barriers to entry, and (iii) governments may

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play a role in assisting their home-based companies. It emphasizes productivity rather than resources. A first-mover advantage is the economic and strategic advantage gained by being the first company to enter an industry. As specialization and output increase, companies realize economies of scale and unit production costs decline. Companies then expand, lower prices, and force competitors to produce at a similar level of output to be competitive. This creates a barrier to entry for potential rivals and may allow a country to dominate in a product. Some make a case for government assistance; by working together to target new industries, a government and its homebased companies can be the first movers in an industry. The new theory has implications for government intervention in trade, in that through sophisticated and judicious use of subsidies, a government might be able to increase the chances of its firms becoming first movers in emerging industries. Of much interest is the new theory of competitive advantage launched in the final decade of the last century by Michael Porter in his book The Competitive Advantage of Nations. Porter’s diamond, as the fundamental elements of the theory were called, represents an economic model that explains why some industries become competitive in certain situations.

Porter’s Diamond Model According to Porter’s diamond model (see Figure 2.1), the characteristics of the home nation play a central role in a firm’s international success (Porter, 1990). The home base is an important determinant of a firm’s strengths and weaknesses relative to foreign rivals. In describing this perspective, the model portrays the different interdependent elements that influence an industry’s competitiveness and internationalization, including factor condition; related and supporting industries; firm strategy, structure, and rivalry; chance; and the role of government (Sharp & Dawes, 1996; Yetton et al., 1992). Factor conditions: These are human resources, physical resources, knowledge resources, capital resources, and infrastructure. Porter acknowledges the importance of basic factors (such as labor, natural resources, climate, and surface features) in what a country produces and exports, but adds the significance of advanced factors. These factors include skill levels of the workforce and quality of the technological infrastructure, and account for the sustained competitive advantage that a country enjoys in a product. Specialized resources are often specific to an industry and important for its competitiveness.

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Demand conditions: Sophisticated buyers in the home market are important to national competitive advantage in a product area. A sophisticated domestic market drives companies to modify existing products to include new design features and develop new products and technologies. Moreover, the home demand conditions can be reflected in the international development. A firm which has a large home market for a product might develop a cost advantage based on scale, and often on experience as well. Related and supporting industries: Companies in internationally competitive industries do not exist in isolation. Supporting industries provide cost-effective inputs, forming clusters of related activities in the same region that reinforce productivity and competitiveness. Exporting clusters are those that export products or make investments to compete outside the local area and can lead to long-term prosperity. Related and supporting industries can produce inputs which are important for innovation and internationalization. These industries participate in the upgrading process, thus stimulating other firms in the chain to innovate. Firm strategy, structure, and rivalry: Strategic decisions of firms have lasting effects on future competitiveness, but equally important is industry structure and rivalry between companies. The more intense the struggle to survive between domestic companies, the greater their competitiveness. This heightened competitiveness helps them to compete against imports and against companies that might develop a production presence in the home market. However, domestic competition has a positive effect on the firms and on their ability to compete in the global marketplace. The process of competition throws out inferior technologies, products, and management practices, whereby firms are now forced to be more efficient. Chance events are occurrences that are beyond the control of a firm. They are important because they create discontinuities in which some gain competitive positions and some lose. The main implication of Porter’s model for governments is that policies relating to industry and export and import regulations can hurt or help competitiveness. Governments play a powerful role in engaging the development of industries within their own borders that will assume global positions. They finance and construct infrastructure, providing roads, education, and other factors that affect production.

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Figure 2.1 Porter’s Diamond Model

Apart from theories of international trade, a firm’s development can be explained by a series of other theories that show reasons that could determine its expansion, not only within national borders but also beyond them. International trade theories have failed to explain why firms choose one specific location over another, or why they prefer production abroad rather than export to another country. On the background of the expansion of large firms and the theoretical approaches to analyzing market imperfections, a category of theories that seek to extend the limits of international trade theories and to explain foreign direct investments has emerged.

Foreign Direct Investment Theories The most recent theories of internationalization have focused more on the industry, the products, and how these may influence international trade at certain points in time. In view of the recent development of international trade theories, a number of theories have evolved to explain the essence of countries rich in capital resources such as the USA or the UK, which invest capital abroad in countries rich in labor resources, witnessing an outward migration of labor which seeks the highest reward in terms of wages. Several theories have been postulated to explain FDI trends, including monopolistic advantage theory, the eclectic paradigm, and the evolutionary perspective.

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Monopolistic advantage theory: This argues that multinational enterprises (MNEs) have or create monopolistic advantages that enable them to operate subsidiaries abroad more profitably than local competitors. Monopolistic advantage comes from superior knowledge in production technologies, managerial skills, industrial organization, and product knowledge. Economies of scale are achieved through horizontal FDI (the MNE enters a foreign country to produce the same product as the one produced at home) or vertical FDI (the MNE produces intermediate goods either forward or backward in the supply stream). The eclectic paradigm: Dunning’s eclectic paradigm, also called the OLI theory or OLI framework (1977), presents the strengths of MNEs that successfully combine three types of competitive advantages: ownership advantages, localization advantages, and internationalization advantages (hence the acronym OLI). All three factors are important in determining the extent and pattern of FDI. i. Ownership advantages address the question of why some firms but not others go abroad, and suggest that success has some firmspecific advantages that allow it to overcome the costs of operating in a foreign country. Some firms possess firm-specific capital known as knowledge capital (human capital (managers), patents, technologies, know-how, brand, reputation). This capital can be divided into tangible assets, such as natural endowments, manpower, and capital, and intangible assets, such as technology and information or managerial, marketing, and entrepreneurial skills. This capital can be replicated in different countries without losing its value. It can be easily transferred within the firm without particularly high transaction costs. ii. Location-specific advantages focus on the question of where an MNE chooses to locate. some firms take advantage of location by producing close to final consumers or downstream customers, saving transport costs, obtaining cheap inputs and jumping barriers to trade while taking advantage of market structure, government policies, and political, legal, and cultural environments. iii. Internationalization advantages influence how a firm chooses to operate in a foreign country, trading off the savings in transactions, hold-up, and monitoring costs of a wholly owned subsidiary against the advantages of other entry modes such as export, licensing, or joint venture. A key feature of this approach is that it focuses on the incentives facing individual firms.

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The evolutionary perspective: This theory argues that for firms, entering new markets involves introducing greater psychic distance. Differences in language, culture, or political systems that disturb the flow of information between a firm and the market influence FDI decisions. On the basis of this, firms would rather invest in host countries that are relatively close to it culturally.

Born-Global Theory Born-global theory, according to Oviatt and McDougall (1994), describes a firm that from its inception seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. According to this theory, “born-global” firms are characterized by smallness in size, but are growth- and technologyoriented and tend to be managed by entrepreneurial visionaries (Fillis, 2002). Born-global firms therefore think about internationalization from the point of inception, or internationalize right from or shortly after inception. A young entrepreneurial firm that is virtually engaged in international business from the start adopts a born-global model. The slow, gradual internationalization predicted by the process model is no longer practical or realistic in today’s fast-paced, interconnected economy. Today, numerous firms take bold steps to internationalize along bornglobal lines. Factors giving rise to the emergence of born-global firms include the increasing role of niche markets, advances in production processes and/or technology, the flexibility of the born-global model, and the advances in and speed of information technology. For instance, it is now common for tour operators marketing safaris to Serengeti National Park or Mount Kilimanjaro to design a website to solicit offers in the morning, but even before the day ends for them to receive several orders from abroad. That is the power of the ICT world. Exhibit 2.4: Vicfish Limited: A Born-Global Firm. Even though traditionally it is assumed that most companies first establish a solid home market and go global only in later stages of their life cycle, there are companies born with global thinking from the beginning. Firms that start their international activities from birth enter different countries at once and approach new markets both for export and import. These firms seek to undertake international and global marketing operations even if they are small. Vicfish Ltd. provides a good example of a bornglobal firm. This is a privately owned company that deals with the export

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of fish from Lake Victoria in East Africa. Currently, the company has a daily capacity of 100 tons of fish and an annual turnover of over US$30 million. The company started its operations in 1992 after receiving an order to supply prawns from Tanzania to London. In the course of exporting seafood, the company realized that there was demand for white fish in the European and US markets. After securing more customers in Europe, they built their own fish-processing plant with the capacity to process five tons per day. Currently, the company exports fish to several European countries and its business orientation has always been internationalization. Source: Sutton & Olomi, 2012.

The Network Model The network model explains a mode of operation in which several business actors handle activity interdependently. Actors get linked to each other and their needs and capabilities are mediated through the interaction taking place in the relationship. This theory assumes that an international firm cannot be analyzed as an isolated actor, as it has to be viewed in relation to other actors in the international environment. According to the theory, collaborative networks provide a basis for global competitiveness, innovation, and agility in a dynamic knowledge-based economy. In other words, the network model of internationalization allows for the influence of external actors or organizations on the internationalization of the firm (Andersen, 1997; Coviello & Munro, 1997). Among the potential benefits that accrue from business networking are increased access to market opportunities, sharing risks, reducing costs, boosting innovation, achieving business goals not achievable by a single firm, and increasing knowledge (Anderson, 2009; Rutashobya & Jaensson, 2004; Holmlund & Kock, 1998).

Relevance of International Trade Theories in Emerging Economies International trade theories form the basis of explaining trends of trade among different nations. However, business practitioners may ask whether such international trade theories can explain trade trends in emerging economies, and whether they are applicable in developing countries. In order to appreciate the relevance of these theories, it is important to examine the trade trends in emerging economies and see how international

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trade theories relate to trade development. According to UNCTAD statistics (see Figure 2.2), Africa’s exports, for instance, are still dominated by primary products, particularly fuels, and constitute less the export of manufactured products. This reflects the postulates of classic economic theories of international trade, which emphasize that countries specialize in the export of products and services that they produce most efficiently. The availability of natural endowments in Africa in the face of low technological development influences the trade trends. An interesting trend in Africa today is that over the last decade, China has gradually progressed from one of the smallest among the top ten trading partners of Africa to one of the largest ones, coming in second after the USA in 2010 (IMF, 2012). Despite this increasing engagement with emerging partners, Africa is continuing to expand its share in European and American import markets. China and India now consume 12.5% and 4% of African exports respectively, which equates to 5% and 8% of the respective countries’ import markets. Africa’s engagement with China has been on an upwards trend, with its share in the Chinese mineral and fuel import market up from less than 5% in 1995 to almost 25% in 2010. Furthermore, developing countries in recent years have shifted their trade patterns as a result of gradual industrial growth and increased foreign direct investment. Moving from agricultural and other primary production to manufacturing tends to drive up the import intensity of production; moreover, global trade increasingly involves value chains with different geographical locations that contribute various parts to the production processes. Such shifting patterns of trade, as well as the increased demand for primary commodities from the rapidly growing economies, has strengthened South–South trade. One additional observation from international trade trends in Africa is that intra-African trade tends to be more sophisticated in terms of trade in manufactured products than is usually perceived. The statistics show that Africa trades with itself more in manufactured goods relative to its trade with the outside world. The new trade theories, particularly theories of foreign direct investment, explain this trend.

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Figure 2.2 Africa’s Exports by Broad Category

Source: UNCTAD, 2011

In recent years there has been interest in looking at how the internationalization of small and medium enterprises (SMEs) can be explained by international trade theories, given their dominance in developing economies. While almost all international trade theories have relevance here, the development of more contemporary theories of international trade provides a better understanding of the internationalization of SMEs. The recent theories of trade, such as the born-global model, network theory, and foreign direct investment theories pay great attention to drivers of internationalization and the growth of firms from small domestic enterprise to multi-national company. Exhibit 2.5 offers additional explanation of the relevance of international trade theories in explaining the internationalization of SMEs in a developing country context. Exhibit 2.5: Internationalization for SMEs in Tanzania Unless one puts theory into practice, it is difficult to appreciate the knowledge of theories in internationalization. Tanzania is among the least developed countries, and in taking the case of SMEs from this country that are seeking to go international, such theories can be used in a number of ways. The drivers to go international can be explained using all the theories earlier described. However, mercantilism or other classical

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theories focus largely on the trading nations while ignoring the individual actors, hence they give little understanding of SME internationalization. Modern theories, on the other hand, may shed some light: born-global, the stage approach, the diamond model. Born-global theory describes a firm that from its inception seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. Born-global firms are characterized by being small in size but growth- and technology-oriented, and tend to be managed by entrepreneurial visionaries. Nevertheless, born-global theory does not tell us what the sources of being born global are, and it hardly enlightens us as to why most SMEs, especially those from developing countries like Tanzania, lack most of the stated characteristics that are supposed to be a major source of internationalization. Unlike the born-global theory, the stage approach of PLC theory and the UIM advocate that firms start trading in their local markets before successively looking at new countries. In PLC theory, the firm initially introduces new products only in its home market and then eventually goes abroad using cost-oriented FDI during the maturity phase. To a certain degree, the SMEs in Tanzania follow this sequence, although most of them start up and cease trading before going international; thus they rarely follow the sequential PLC model. There are a few SMEs from Tanzania entering markets which are either geographically close (Kenya, Uganda, Rwanda, Burundi, Mozambique, Malawi, Zambia, and DRC) or psychically close (mainly Kenya and Uganda). This is more related to the Uppsala Internationalization Model than PLC theory. The UIM maintains that an enterprise increases its international involvement gradually and that entering new markets by the firm is usually linked to the psychic distance; that is, companies start their internationalization from those markets perceived as psychically near. Porter’s diamond model takes us further in understanding why SMEs from Tanzania like many other developing countries may have less possibilities of success in foreign markets. According to this model, the characteristics of the home nation play a central role in a firm’s international success. The home base is an important determinant of a firm’s strengths and weaknesses relative to foreign rivals. In describing this perspective, the model portrays the different interdependent elements that influence an industry’s competitiveness and internationalization. Such elements include the factor condition; related and supporting industries; firm strategy, structure, and rivalry; chance; and the role of government. This theory, therefore, enables us to contemplate how the opportunities and challenges in the exporting countries shape the propensity for SME

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internationalization. Source: Anderson, W. (2011): “Internationalization Opportunities and Challenges for Small and Medium-Sized Enterprises from Developing Countries,” Journal of African Business, 12:2, 198–217.

Chapter Summary This chapter has presented a number of theories that explain why it is beneficial for a country to engage in international trade and what determines the pattern of trade among nations. As noted in the chapter, most theories of international trade present the idea that at the foundation of international trade are differences that exist in production between countries and in the relative endowment of resources. In general, these theories try to explain how and why the trade between two countries develops and what earnings could be obtained as a result of specialization. In particular, the chapter makes the following key points: x Mercantilists argue that the country’s best interest is to promote exports and restrict imports so as to run a balance of trade surplus. Mercantilism therefore views trade as a zero-sum game in which one country’s gains causes losses for other countries. x The theory of absolute advantage suggests that as countries differ in resource endowment and their ability to produce goods efficiently, a country should specialize in producing goods in areas where it has an absolute advantage and import goods for which other countries have absolute advantages. x The theory of comparative advantage suggests that it makes sense for a country to specialize in producing those goods that it can produce most efficiently, while importing goods it produces less efficiently from other countries. According to this theory, free trade brings about increased world production and therefore trade is a positive-sum game. x The Heckscher-Ohlin factor proportion theory stipulates that the pattern of international trade is determined by difference in factor endowments among different nations. It argues that countries will export those goods that make use of locally abundant factors, and will import those that make intensive use of factors that are locally scarce. x The international product life cycle theory suggests that trade patterns are influenced by where the products are initially

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x

x

x

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developed and introduced. The theory stresses that a company will begin to export its product and later take on foreign direct investment as the product moves through its life cycle. It divides the stages of the product life cycle into introduction, growth, maturity, and decline. New trade theory postulates that trade allows a nation to specialize in the production of certain goods, attaining economies of scale and lowering the costs of producing those goods while buying goods it does not produce from other nations. It suggests that nations may benefit from trade even if they do not differ in resource endowments and technology. The theory recognizes the gains made from specialization and increasing economies of scale, first-mover advantage, and government intervention. The Uppsala internationalization model proposes four different modes of internationalization, where the successive stages represent higher degrees of international involvement or market commitment. The stages according to this model are (i) no regular export activities, (ii) export via independent representatives, (iii) establishment of a foreign sales subsidiary, and (iv) foreign production/manufacturing. Companies normally start their expansion in a psychically nearby market and expand gradually to more distant markets as they acquire more resources and experience. Porter’s model contends that the degree to which a nation is likely to achieve international success in a certain industry is a function of the combined impact of factor endowments, domestic demand conditions, related and supporting industries, and domestic rivalry. The presence of all four components is necessary for Porter’s diamond to provide an effective explanation of competitive advantage. The foreign direct investment theories present the conditions that favor FDI and MNEs. The monopolistic advantage theory argues that MNEs create monopolistic advantages through superior knowledge in production technologies, managerial skills, industrial organization, and knowledge of product. The eclectic paradigm (OLI Framework) presents the strengths of MNEs that successfully combine competitive advantages of ownership, location, and internationalization. The evolutionary perspective contends that a firm will invest in host countries that are culturally relatively close to it.

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x Born-global theory recognizes firms that from their inception seek to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries as bornglobal firms. Increasing globalization that expands the role of niche markets, advances in process and production technology, and progress in information technology have seen a rise in born-global firms. x Network theory argues that collaborative networks provide a basis for global competitiveness, innovation, and agility in a dynamic knowledge-based economy. x Drawing from the postulates of most international trade theories, the exports of most developing countries, and Africa in particular, are dominated by primary commodities, due to their endowment of natural resources and their low level of technological advancement. International trade statistics indicate however that trends, especially in emerging economies, are changing as a result of emerging developments such as the growth of relationships with new partners and intra-continental trade. ***

Review questions 1. “International trade theories are predominantly studied in international economics.” Why is it important for international marketing managers and business practitioners to understand international trade theories? 2. “Mercantilism is a bankrupt theory that has no place in the modern world.” Discuss. 3. How might the principle of comparative advantage theory be useful to the international marketer? 4. What are the major limitations of comparative advantage theory? 5. Write about the similarities and differences of the theories of absolute efficient advantage, comparative advantage, and factor proportion theory. 6. Using born-global theory, the Uppsala internationalization model, product life cycle theory, and Porter’s diamond model, explain the challenges and opportunities facing SMEs from developing countries when entering foreign markets. 7. How does product life cycle theory differ from the Uppsala internationalization model?

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8. Drawing upon the new trade theory and Porter’s model, explain the drivers of a nation’s competitive advantage. 9. Are trade theory and Porter’s framework useful to explain the internationalization of firms? Explain your answer. 10. Growth of foreign direct investment can be explained by several international trade theories. Using practical examples, explain at least three theories of foreign direct investment. 11. “In recent years there has been an increase in born-global firms in developing countries.” With relevant examples, explain the factors triggering the growth of born-global firms. 12. Describe network theory and its applicability in the internationalization of firms. 13. Do international trade theories provide a complete explanation of trade trends in developing countries? Explain your answer.

CHAPTER THREE INTERNATIONAL MARKETING ENVIRONMENT

Introduction One of the fundamental steps that needs to be taken prior to beginning international marketing is an environmental analysis. This analysis is important for managers because firms in international markets operate in a complex environment of opportunities and threats emerging from different countries. International marketing presents a more complex task than domestic marketing because of the large number of uncontrollable variables in the international marketing environment, and their heterogeneity. Despite the fact that the basic marketing principles are applicable to all markets around the world, the difference lies in the application of those principles in environments that may vary significantly from the home country. Given that international marketers deal with environmental complexities in both foreign and domestic markets, making international marketing decisions is generally more challenging. This complexity is increased by the difficulties involved in gathering information about the foreign market. The multi-dimensionality and complexity of foreign country markets in which a firm may operate makes the international marketing environment an important topic. As many of the issues international marketers face are outside of their direct control, they need to be prepared to adapt their strategies to cope with unfamiliar situations and problems. They may experience varying political, economic, cultural, technological, and social situations in different countries. Recent trends in the global business environment, such as tremendous growth on the part of emerging economies, technological development, political crisis in certain countries, global warming, and the movement of consumers across the world make the international marketing environment even more dynamic and complex. Developments in demography, investment, energy and other natural resources, transport costs, and institutional quality are capable of changing

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the overall nature of international marketing. The task of an international marketer is therefore to study the trends in the international marketing environment and to take the marketing elements that they can control (research, product, price, promotion, and distribution), to adapt them so that they work effectively within their target markets. This chapter intends to expose readers to the global macro and micro environmental forces that impact on international marketing involvement. After reading the chapter, the reader should be able to: (i) appreciate the influence of various factors on world trade and the economic linkages between nations; (ii) understand the international financial system and the usefulness of data on the balance of payments in making marketing decisions, (iii) explain the barriers likely to be encountered as firms market their products across varying cultures; (iv) describe how the political, legal, natural, and technological environments are likely to impact on firms operating in international markets; (v) appreciate the key recent global trends shaping businesses in the world; (vi) reflect on the implications of the international marketing environment in developing international marketing programs; and (vii) gather knowledge and information that could be useful in developing and implementing an international marketing strategy. For the purposes of this book, the international marketing environment is analyzed at two levels: at the level of the global economy and at the foreign country level. While analysis of the international economy focuses on the general global forces shaping international business, the foreign market environment analysis reviews the environmental forces of specific countries. Nevertheless, some of the variables analyzed are complementary, as they influence each other and have similar implications for international marketing decisions.

International Economy Marketing is one of the key economic activities and is affected by two aspects of the international economic environment in which it is conducted: by the global or world economy, and by the individual economies of the targeted countries. The most salient characteristics of the world economy to international marketing are increasing integration and thus internationalization, the amount of foreign investment taking place, the management of the international flow of capital, the balance of payments, trade protectionism, the international institutions, and multilateral agreements. The characteristics of each aspect of international economy need to be appreciated if international marketing efforts are to be

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successful. In addition to the global economy, the international marketer also needs to undertake economic analysis of the individual economies of the countries considered as the potential market in order to assess the size of the market and therefore its potential, and the nature of that market, which provides clues of the character of the company’s marketing tasks.

Balance of Payments A country’s balance of payments (BoP) measures the flow of all economic transactions between residents of that country and the residents of the rest of the world over a period of time, usually one year. It is the systematic record of all the nation’s economic transactions with the outside world in a given year. Each transaction of the BoP is either a credit or a debit. A credit transaction is that for receipt of payment from foreigners, while a debit transaction is that for payment to foreigners. The BoP is a double-entry bookkeeping account and therefore always balances. As a consequence, the overall balance of payments in a normal situation should always be zero. When credits exceed debits in the BoP account, it is said to be in surplus – that is, when receipts exceed payments. On the other hand, a balance shows a deficit when payments exceed receipts. The BoP has three main components: a current account, a capital account, and an official settlements account. The current account records all the goods and services the nation exchanges with other nations, while the capital account measures international financial transactions, such as foreign investments or government borrowing, over both the long and the short term. The official settlements account measures the change in a nation’s liquid and non-liquid liabilities to foreign official holders and the change in the nation’s official reserve assets during the year. The sub-components of these components are given in Table 3.1.

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Table 3.1 Components and sub-components of the balance of payments Components Current Account

Sub-Components i. ii.

iii.

Capital Account

i.

ii. iii. Official Settlement Account

i. ii.

Trade in goods (exports and imports) where a Merchandise Trade Balance is obtained. Trade in services (net of travel and transportation, income of a country’s investments abroad, payments for foreign investments in the country, military transactions, and other services) where a Balance on Service is obtained, from which, when combined with the merchandise trade balance, a Goods and Services Balance is obtained. Transfer payments (private and government gifts to foreigners and gifts received from foreigners) where a Balance of Transfer Payments is obtained, from which, when combined with the Goods and Services Balance, the Current Account Balance is obtained. Long-term capital (direct investment receipts and payments, portfolio investment receipts and payments, net government loans, and net other long term). Short-term private non-liquid capital (liabilities to foreigners and claims on foreigners). Short-term private liquid capital (liabilities to foreigners and claims on foreigners). Change in the country’s liabilities to foreign official holders (liquid and non-liquid liabilities) Change in the country’s official reserve assets (gold, convertible currencies, special drawing rights (SDR) and gold tranche position in the International Monetary Fund (IMF).

From its components, the balance of payments is computed as follows: Current Account Balance + Official Settlement Account Balance Capital Account Balance = 0 The implications of balance of payment analysis to the international marketer lie in the fact that the BoP account influences the nation’s gross national product, interest rates, prices, exchange rates, employment, etc. The BoP account can be an important basis for forecasting a nation’s demand potential. In this respect, it is the current account of the BoP

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statement that will be of interest to the international marketer. BoP analysis can indicate (i) the overall health of the economy of the targeted nation; (ii) which nations are exporters or importers of the product concerned; (iii) which nations are the best targets on which to concentrate marketing efforts (for instance, a nation with a persistent BoP deficit account is unlikely to import many goods and services compared to a country with a surplus account); (iv) the level of competition, by noting which nations supply the products in question to the target market; (v) the capital account of the BoP can also be a useful indicator of pressure on the nation’s foreign exchange rate. A nation with a persistent trade surplus is likely to find its currency appreciating against the major world currencies. Such exchange rate changes can result in losses or gains for a firm trading with, or investing in, that country. The firm’s pricing policy will be affected, should the currency be depreciating, and the firm is most unlikely to quote prices in fluctuating currency. Thus analysis of the BoP is a useful and important information source for international marketers. Exhibit 3.1: External Payment Arrears Scandal: Whose Money Was “Spent”? External Payment Arrears (EPA) is usually defined as a payment by the central government on its contracted or guaranteed external debt that has not been made within a specific time period after falling due. During the 2005–06 financial year, Tanzania lost about US$131 million from its EPA account, held at the Bank of Tanzania (BoT), in what were then described as “dubious payments” to local companies. The EPA account was originally set up by the government to help service the balance of payments, whereby local importers would pay into the account in local currency and foreign service providers could then be paid by the BoT in foreign currency. Due to low foreign currency availability in the 1980s and 1990s, the debt within the account reached around $677 million by the year 1999. Efforts under the Debt Buyback Scheme and cancellations negotiated under the Paris Club helped to reduce the debt level to $233 million by 2004. Officials at the BoT and businesses took advantage of one of the strategies devised to reduce the account debt, whereby a creditor could endorse debt repayment to a third party. A special audit by Ernst & Young discovered that more than $131 million was improperly paid to twenty-two local firms. It is alleged that all twenty-two firms used forged documents to withdraw the external payment arrears from the Official Settlement Account, on the grounds that they had entered into agreements with external creditors.

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Sources: “Kikwete sacks his Central bank governor over ‘corruption.’” (10 January, 2008), http://tzcommoncents.com/; “Cheating firms given more time to return cheated money in Tanzania.” (22 August 2008), Xinhua, http://english.people.com.cn/90001/90777/90855/6483568.html.

Trade Protectionism Nations may establish trade laws and other barriers to protect local companies against intrusion by foreign companies. This is a salient characteristic of the differences between international and domestic marketing, as discussed in Chapter One. Countries use a variety of measures to restrain entry, ranging from tariffs to non-tariff barriers. There are many reasons advanced for the imposition of barriers: to protect a newly established industry; to make the cost of the imported goods equal to the cost of domestically produced goods (the “scientific tariff”), so as to make it possible for domestic producers to meet foreign competition; to protect home markets against foreign competition; to protect domestic labor against cheap foreign labor; to conserve natural resources; to protect industries that are important for national defense; to cure a deficit in the nation’s balance of payments (i.e. to eliminate the excess of the nation’s expenditure abroad over its foreign earnings); and finally, to improve the nation’s terms of trade and welfare. Some protectionist arguments are considered valid, such as protection for infant industries and for national defense purposes. In an era of environmental consciousness, the conservation of resources argument is also valid. Every one of these points can be persuasively defended, but the economic advantages of free trade are thereby minimized or even ignored, and the consumer is the one who pays the cost of these protective measures in terms of limited choice and higher prices.

Types of Trade Barrier Trade barriers are classified according to the way they are applied and the purposes for which they are used. Broadly, trade barriers are classified into tariff and non-tariff measures. These measures are further classified into those directed at controlling imports, those aimed at controlling exports, and those controlling domestic operations. The WTO categorizes trade barriers into (i) measures directly affecting imports, (ii) measures directly affecting exports, and (iii) measures affecting production and trade (see Exhibit 3.2). For the purposes of this book, however, trade barriers are simply classified into tariff and non-tariff barriers or measures. This is consistent with a common classification of trade barriers and is easy to

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understand. While the list of trade barriers is diverse, this book’s focus is on the barriers that are most significant to the task of the international marketer. Exhibit 3.2: Trade Barriers Affecting Imports and Exports Measures directly affecting imports (i) Customs procedures. (ii) Tariffs and other taxes and charges affecting imports. (iii) Customs valuation. (iv) Pre-shipment inspection. (v) Rules of origin. (vi) Import prohibitions, quotas, and licensing. (vii) Anti-dumping, countervailing duties, safeguarding regimes. (viii) Government procurement. (ix) State trading enterprises. (x) Other measures. Measures directly affecting exports (i) Procedures. (ii) Export taxes. (iii) Export restrictions. (iv) Export subsidies. (v) Export promotion. (vi) Special economic zones. Measures affecting production and trade (i) Regulatory framework. (ii) Technical barriers to trade. (iii) Sanitary and phytosanitary measures. Source: WTO (2013).

Tariff Barriers Tariffs are essentially special taxes on products imported from other countries. Customs duties are of two basic types – ad valorem or specific amounts per unit – or a combination of these, as follows: i. Ad valorem duties are expressed as a percentage of the value of the goods (e.g. 20% of the entry price of radios).

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ii. Specific duties are expressed as a specific amount of currency per unit of weight, volume, length, or other units of measure (e.g. 25 cents per kilogram or 10% per gallon). Specific duties are usually expressed in the currency of the importing country. iii. Alternative duties: In this case both ad valorem and specific duties are set out in the customs tariff for a given product. Normally, the applicable rate is the one that yields the higher amount of duty, although there are cases where the lower is specified. iv. Compound or mixed duties: These duties provide for specific plus ad valorem rates to be levied on the same articles. v. Antidumping duties: Applied if injury occurs to domestic producers. These are special additional import charges designed to cover the difference between the export price and the “normal” price, which usually refers to the price paid by customers in the exporting countries. vi. Countervailing duties: Additional duties levied to offset subsidies granted in the exporting country. Other import charges include: vii. Variable import charges: Can be used to raise imported product prices to the domestic price level. viii. Temporary import surcharges: Used as a local industry protection measure and in response to balance of payments deficits. ix. Compensating import taxes: In theory these taxes correspond with various internal taxes, such as value added taxes and sales taxes. Governments may have two purposes in placing special taxes on goods coming from other countries. They may wish to earn revenue and/or make foreign goods more expensive in order to protect national producers. Other arguments for tariff include curing deficit in the nation’s balance of payment and to improve the nation’s terms of trade.

Non-Tariff Measures (NTMs) Non-tariff measures (NTMs) are policy measures, other than ordinary customs tariffs, that can potentially have an economic effect on international trade in goods, changing quantities traded or prices or both. At a broad level, NTMs are divided into three categories: (i) those imposed on imports (import quotas, import prohibitions, import licensing, customs procedures, administration fees, etc.); (ii) those imposed on exports (export taxes, export subsidies, export quotas, export prohibitions, voluntary export restraints, etc.); and (iii) those imposed internally in the

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domestic economy (domestic legislation on health, technical and product requirements, labor requirements, environmental standards, internal charges, and domestic subsidies). This list of NTMs is not exhaustive as new measures have recently emerged as a result of increasing interest on the part of various countries in using NTMs to protect their economies. As shown in Exhibit 3.3, UNCTAD (2010) offered a list of seventeen categories (A–P) of NTMs, indicating the diversity of the measures. Exhibit 3.3: Classification of Non-Tariff Measures A. Sanitary and phytosanitary measures. B. Technical barriers to trade. C. Pre-shipment inspection and other formalities. D. Price control measures. E. Licenses, quotas, prohibitions, and other quantity control measures. F. Charges, taxes, and other para-tariff measures. G. Finance measures. H. Anti-competitive measures. I. Trade-related investment measures. J. Distribution restrictions. K- Restrictions on post-sales services. L. Subsidies (excluding export subsidies). M. Government procurement restrictions. N. Intellectual property. O. Rules of origin. P. Export related measures. Source: UNCTAD, 2011.

One of the common NTMs is the quota, which is a quantitative restriction or a specific numerical limit applied to a particular product entered a country. For instance, there is a limit on the number of television sets imported into the UK, there are French restrictions on Japanese cars, and Japan imposes quotas on citrus fruit. The goal of quotas is the conservation of scarce foreign exchange and/or the protection of domestic producers and employment in the product lines affected. International firms have limited responses to a quota, but they can set up assembly plants in the markets concerned as a long-term strategy to overcome quota constraints. The second measure is exchange control, which refers to government controls in all dealings with foreign exchange. One of the most effective

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means is to seek governmental approval to secure foreign exchange in all trade transactions. Thus a local company which gains foreign exchange from the export of goods or services will usually have to sell it to the authorities, usually the central bank. The local firm wishing to import goods from abroad will also be required to purchase foreign exchange from the central bank. The implications of this system are that only essential items such as capital goods will be imported, at the expense of luxury items such as cars or domestic appliances. A major implication for the international marketer is that the repatriation of profits may be made difficult, as this would involve using the scarce foreign exchange. To overcome this, the international companies use transfer pricing, whereby high prices are charged on inputs to the firm’s subsidiary and low prices are charged on the finished product. Third are restrictive customs procedures, which include the rules and regulations (certifications, merchandise classification, etc.) used for classifying and valuing commodities as a basis for laying import duties, hence making them expensive for the foreign markets. Fourth, an embargo or total ban, which is the complete restriction of importation of a certain product from a particular country. This normally happens due to political reasons. The fifth type of non-tariff barrier is government purchase. This happens when a government decides to take control of the country’s entire importation of a particular commodity, and the trading firms are required to purchase these goods directly from the government stores. Economies of scale in bulk buying are enjoyed by the government and it can thus buy more for less. The limitation of this method is that the government buys from the supplier of its own choice and the product quality favors the government, hence limiting variety and choice for the trading firms. Other non-tariff barriers include technical norms and standards, consumer protection regulations (labeling laws, industrial standards, etc.), and restrictive administrative and technical regulations. Such measures are diverse and are the most problematic and the least quantifiable, and hence they have considerable impact on the marketing strategy. It is important to note that sanitary and phytosanitary (SPS) measures are commonly applied by various countries to set out the basic rules for food safety and animal and plant health standards. The main purposes of SPS measures have been to protect animal, plant, or human health from risks arising from the entry, establishment, or spread of pests, diseases, disease-carrying organisms, or disease causing-organisms; risks arising from additives, contaminants, toxins, or disease-causing organisms in foods, beverages, or foodstuffs; diseases carried by animals, plants, or

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products; and from the entry, establishment, or spread of pests. Technical barriers to trade (TBTs), meanwhile, seek to protect a country through technical standards set for product testing and certification procedures. Although the essence of TBTs is to ensure that regulations, standards, testing, and certification procedures do not create unnecessary obstacles, the challenge is that technical standards vary from country to country, making it difficult for producers and exporters – especially those in developing countries – to meet the standards. Recent trends in international trade indicate that NTMs are often applied as alternative trade policy instruments, since multilateral trade agreements impose limits on the use of traditional trade policy instruments such as tariffs. The result is that NTMs are rapidly gaining importance in regulating trade, and have almost replaced tariff barriers in manufacturing sectors. Non-tariff measures pose many challenges for exporting firms, but more often than not it is the manner of implementation rather than the measure itself that causes problems for businesses. For example, a country could have very high standards for imported goods, making it difficult for exporters to comply with these standards. On the other hand, exporters that manage to comply with the regulations might still have problems demonstrating their compliance, or else might face long delays before their goods are admitted into the importing country. In the first case, an exporter could perceive the NTM itself to be the main impediment to trade, whereas in the second case they might view the procedural obstacle as the source of their difficulty. In particular, TBT or SPS measures can have positive trade effects for more technologically advanced sectors, but negative effects in agricultural sectors in developing economies. However the major risk is that the threat of protectionism using NTMs is gaining momentum (Exhibit 3.4). Exhibit 3.4: The Continued Threat of Protectionism Since early 2008, a number of countries have introduced protectionist measures to restrict trade as part of their response to the global crisis. These attempts at protecting domestic industries have raised fears of spiraling retaliatory responses, but resurgent protectionism has been restrained thus far. The most recent joint WTO-OECD-UNCTAD report of 25 October 2011 showed that new import restriction measures taken between May and mid-October of 2011 affect only 0.6% of total G20 imports, the same proportion recorded during the prior six months. Restrictive measures mainly affected machinery and mechanical appliances, iron and steel articles, electrical machinery and equipment,

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organic chemicals, plastics, and man-made staple fibers. The incidence is less than that recorded from October 2008 to October 2009 when traderestrictive measures peaked, affecting 1.01% of total world imports. However, the report noted that the political will to resist creeping protectionism appears to be under increasing pressure. Commitments made by G20 members to roll back export restrictions have not been met. In fact, the number of export restrictions has continued to increase. Yet, given the present international economic environment, there is still a danger that more countries will enhance protectionist measures, especially non-tariff measures (NTMs), should political emotions dull the memories of the damaging effects of past “beggar-thy-neighbor” policies and overpower the commitments to and rationale for a multilateral trading system. The danger may increase if unemployment rates remain high and the recovery loses further momentum. In this context, there is an urgent need to address NTMs. There are legitimate reasons for NTMs, such as the protection of health, safety, and the environment, but they have also been abused as a pretext for protectionism. NTMs therefore pose a major trade policy challenge. Since 2008, the leaders of G20 countries have repeatedly discussed refraining from NTM use because of their potential for slowing down the positive outcomes of trade expansion and integration. “Green protectionism” through NTMs has recently increased. While there are legitimate grounds for environmental protection in support of sustainable production and consumption, concerns have arisen that such incentives are forms of trade distortion that cannot be properly challenged in the dispute settlement mechanism under current WTO trade rules. Hence, multilateral trade rules need further revision to ensure that the necessary government support to promote environmental protection and sustainable production and consumption is provided without undermining the principles of a fair trading system. Source: World Trade Report, 2012.

The impact of NTMs is more adverse in developing countries that depend on agriculture as a major economic activity. Compliance with standards is limited by inadequate equipment, non-availability of highly skilled technical persons, inadequate capacity in risk assessment, and a limited laboratory accreditation program. In East Africa, for instance, almost all countries are net importers of milk despite the great potential they have in the dairy sector. One of the concerns has been the challenge of meeting the NTM requirements. Before an export deal is concluded, for example, participants on both sides of the border must obtain a permit

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from the national dairy board or other relevant dairy authority to authorize the transaction. Veterinary certificates, certificates of origin, national quality seals, and quality test results for each batch are also required. Each of these requirements has the potential to be used as a non-tariff barrier if ever there is a perceived benefit from preventing exports or keeping a neighboring country’s dairy products out.

Implications of Trade Barriers to the International Marketer There are several implications of trade barriers to international marketers that may affect their decisions. As may be noted already, trade barriers affect the firm’s pricing, product, and distribution policies as well as its foreign investment decisions. For instance, as the effect of a tariff is to increase the price of the imported product, the foreign company could respond in a number of ways: i. The product may be modified or stripped down to lower the price or perhaps get a more favorable tariff classification. ii. Since the tariff on unassembled products or ingredients is usually lower than that on completely finished goods, to ship products completely knocked down (CKD) for assembly in the local market is another way the manufacturer can minimize the tariff burden. iii. In some circumstances, the firm may seek to turn the tariff to its own advantage by establishing a subsidiary in the foreign country if the host country is exerting strong pressure for local manufacture that will be noncompetitive with existing sources.

Regional Economic Integration Regional economic integration is an agreement among countries in a specific geographic region to reduce and ultimately remove trade protectionism (i.e. both tariff and non-tariff barriers), to allow the free flow of goods or services and factors of production among them. It is any type of arrangement in which two or more countries agree to coordinate their trade, fiscal, or monetary policies. Regional economic integration can take the form of a free trade area, a customs union, a common market, or an economic union. The major aim of any economic integration is to achieve a faster rate of economic growth in the countries involved. While the idea of the World Trade Organization (WTO) is to liberalize trade internationally, in regional economic integration, the idea is to liberalize trade among member countries.

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Forms of Economic Integration There are three main criteria to determine the kind of regional economic integration that the countries are in: (i) freedom to trade – trade liberalization between member countries in terms of removing trade barriers; (ii) degree of factor mobility – flexibility of labor and capital to move across member countries; and (iii) commonality of economic policy – imposing common or differential external tariffs on imports from outsiders. Using such criteria, different forms of economic integration have been established, including the following: i. Free Trade Area (FTA): This is the simplest form of economic integration, in which a group of countries agree to eliminate tariffs between themselves, but maintain their own external tariff on imports from the rest of the world. There is no factor mobility between the member countries – factors of production such as labor and capital are immobile. Examples of FTAs include the North American Free Trade Area (NAFTA), the Latin America Free Trade Area (LAFTA), and the Association of Southeast Asian Nations (ASEAN). ii. Customs Union (CU): This is the second form of economic integration, in which a group of countries agree to eliminate tariffs between themselves, but maintain common tariff rates against outsiders. Likewise, there is no factor mobility between the member countries. Examples of CU include the Southern African Customs Union (SACU), which combines the Republic of South Africa, Botswana, Lesotho, and Swaziland. iii. Common Market (CM): A common market establishes free trade in goods and services. It also sets common external tariffs among members and allows for the free mobility of capital and labor across countries. For instance, the former European Economic Community (EEC), the East African Community (EAC), the Economic Community of West African States (ECOWAS), and the Common Market for Eastern and Southern Africa (COMESA). iv. Economic Union (EU): An economic union maintains free trade in goods and services, sets common external tariffs among members, allows the free mobility of capital and labor, and will also relegate some fiscal spending responsibilities to a supra-national agency (harmonizing the monetary, fiscal, and tax policies of the member nations). Examples include the European Economic Union (EEU) and the Caribbean Basin Initiative (CBI).

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Monetary Union (MU): In addition to the economic union features, the MU also has complete identification in macroeconomic features, a central monetary authority, a common currency, a common budget, and a single political leadership system. Monetary union establishes a common currency among a group of countries through the formation of a central monetary authority which will determine monetary policy for the entire group. For example, the Maastricht treaty by EU members to implement a single European currency (the Euro). Likewise, each US state has its own government which sets policies and laws for its own residents. However, each state cedes control, to some extent, over foreign policy, agricultural policy, welfare policy, and monetary policy to the federal government. Goods, services, labor, and capital can all move freely, without restrictions among the US states, and the nation sets a common external trade policy.

In addition to these types, there are also multi-sectional integration and sectoral integration. For instance, TAZARA is the sectoral integration between Tanzania and Zambia. Arguments For and Against Regional Economic Integration Most of the theoretical discussion revolves around the customs union. There are two major kinds of effects that result from this integration, static welfare affects and dynamic welfare effects. Static welfare effects of a customs union occur as a result of the change in trade pattern among member countries, and they are measured in terms of trade creation and trade diversion. x Trade Creation: Trade creation results when domestic production is replaced by imports from a lower-cost and more efficient producer within the customs union. This increases welfare. x Trade Diversion: Trade diversion results when a higher-cost supplier from within replaces imports from a lower-cost supplier from outside the union. This usually reduces welfare. However, the dynamic welfare effects are more important and they result from economies of scale, external economies, greater competition, and higher levels of investment made possible by regional economic integration. The proponents of regional economic integration argue from economic and political viewpoints. Specifically, from an economic perspective, they argue that unrestricted free trade will allow countries to specialize in the production of goods and services that they can produce

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most efficiently. The opening of a country to free trade stimulates economic growth in the country, which in turn creates dynamic gains from trade. In addition, flows of FDI can transfer technological, marketing, and managerial know-how to host nations. Also, such integrations stimulate economic growth. On the political side of the arguments, incentives are created for political cooperation between neighboring states; in addition, by grouping their economies together the countries can enhance their political weight in the world. Economic integration lessens political tension between member countries.

International Trade and Multilateral Trading Systems The first multinational agreement governing international trade was the General Agreement on Tariffs and Trade (GATT) which was negotiated between twenty-three countries in Geneva in 1947. Due to certain flaws in GATT, the World Trade Organization (WTO), now with 150 members, was established in 1995 as a result of the Uruguay Round (1986–94). Unlike GATT, the WTO operates on the principal of consensus instead of majority or super-majority voting. Also, it has a dispute settlement process that is backed up by sanctions. General Agreement on Tariffs and Trade (GATT) GATT was first signed in 1947. The agreement was designed to provide an international forum that encouraged free trade between member states by regulating and reducing tariffs on traded goods and by providing a common mechanism for resolving trade disputes. The primary reason for its existence was to provide a framework for multilateral trade negotiations and trade expansion, so as to reduce and eliminate trade restrictions and create a forum for nations to resolve trade conflicts and discuss trade issues; a wider goal was the general liberalization of trade worldwide. GATT operated on the principal that all members must treat each other equally, without discrimination in terms of trade restrictions or other regulations. GATT’s members were to eliminate tariffs and quotas in trading among nations. They were to give preferential treatment to exports from developing nations, and engage in consultation when disagreements arose. In such an atmosphere, disagreeing members were more likely to compromise than to resort to arbitrary trade-restricting actions.

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GATT’s Achievements and Failure World trade cooperation since World War II has led to an open-door trading policy. As shown in Table 3.2, GATT engineered eight rounds of tariff-cutting, including (i) tariffs only (Geneva 1947, Annecy 1949, Torquay 1951, Geneva 1956, Dillon 1960–61); (ii) the Kennedy Round (tariffs, anti-dumping, customs valuation); (iii) the Tokyo Round (tariffs, NTB codes); and (iv) the Uruguay Round (1986–94), establishing the World Trade Organization (WTO), which, in addition to goods, covered services and intellectual property rights and created a binding dispute settlement mechanism. On average, developed-country tariffs on manufactured goods were reduced from above 40% to below 4%. GATT’s success in reducing barriers to international trade allowed firms’ global logistics to become more rational and international than in a world of tight trade restrictions. In addition, GATT provided a forum for discussion of trade issues, which would not have been possible without its presence. Table 3.2 The GATT trade rounds Year 1947 1949 1951 1956 1960–61 1964–67

Place/Name Subject Covered Countries Geneva Tariffs 23 Annecy Tariffs 13 Torquay Tariffs 38 Geneva Tariffs 26 Geneva (Dillon Round) Tariffs 26 Geneva (Kennedy Round) Tariffs and anti-dumping measures 62

1973–79 Geneva (Tokyo Round)

Tariffs, non-tariff measures, 102 “framework” agreements 1986–94 Geneva (Uruguay Round) Tariffs, non-tariff measures, rules, 123 services, intellectual property, dispute settlement, textiles, agriculture, creation of WTO, etc. Source: WTO (2007), Understanding the World Trade Organization. WTO Information and Media Relations Division.

Although GATT was an important force in world trade expansion, the results and benefits were not distributed equally. The LDCs were dissatisfied with trade arrangements because their share of world trade declined, and the prices of their raw material exports compared unfavorably with the prices of their imports of manufactured goods. Though many of these LDCs were members of GATT, they felt that GATT did more to further trade in goods of industrialized nations than it

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did to promote their own primary products. Tariff negotiations and reductions were far more important to manufactured goods than to primary products. Therefore, under GATT, trade expanded especially in manufactured goods, creating a growing trade gap between industrial and developing countries as well as unfavorable terms of trade for the poorer countries; the price relationship between industrial and primary goods was strongly in favor of the former. Moreover, GATT covered trade in goods only, while ignoring the trade in services and intellectual property rights. Textiles were not covered; and GATT had weak trade dispute resolutions, with blocking, no time limits, and little consistency in decision-making. United Nations Conference on Trade and Development (UNCTAD) The countries’ dissatisfaction with GATT gave rise to the formation of UNCTAD in 1964, with the goal of furthering the development of emerging nations, through trade as well as by other means. UNCTAD seeks to improve the prices of primary goods exports through commodity agreements. The idea behind commodity agreements is that if the commodity-producing countries could get together to control supply effectively, this would mean higher prices and, hopefully, higher total returns from commodity exports. The major problem with commodity agreement has been the inability to control supply when there are many supplying nations; a way around is to establish a tariff preference system favoring the export of manufactured goods from LDCs. The major achievements of UNCTAD have been modest. One is organizational; UNCTAD has succeeded in establishing a new “club” for world trade matters with a large membership and financing from the UN budget. Its second achievement is all the publicity and attention given by so many countries to the trade aspects of a major world problem – the gap in economic development between the “haves” and the “have nots” among the nations. International Monetary Fund and World Bank The International Monetary Fund (IMF) and the World Bank were both established in 1944 after the Bretton Woods conference in response to the problems of unstable currencies and lack of monetary reserves which characterized world trade before World War II. The IMF was primarily created to promote international monetary cooperation and provides policy advice and technical assistance to help countries build and maintain strong economies. The World Bank was formed to promote long-term economic development and poverty reduction, by providing technical and financial

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support to help countries reform particular sectors or implement specific projects. IMF Mandate: The main objectives of the IMF are (i) stabilizing the foreign exchange rates; (ii) establishing freely convertible currencies; (iii) provision of short-term financial assistance to member countries with balance of payment problems; (iv) providing a forum to discuss international monetary problems; and (v) promotion of international monetary cooperation. Therefore, the IMF’s fundamental mission is to help ensure stability in the international system by keeping track of the global economy and the economies of member countries, lending to countries with balance of payments difficulties, and giving technical help to members. The IMF oversees the international monetary system and monitors the financial and economic policies of its members. It keeps track of economic developments on a national, regional, and global basis, consulting regularly with member countries and providing them with macroeconomic and financial policy advice. It provides loans to countries that have trouble meeting their international payments and cannot otherwise find sufficient financing on affordable terms. This financial assistance is designed to help countries restore macroeconomic stability by rebuilding their international reserves, stabilizing their currencies, and paying for imports – all necessary conditions for re-launching growth. The IMF also provides concessional loans to low-income countries to help them develop their economies and reduce poverty. To assist mainly lowand middle-income countries in effectively managing their economies, the IMF provides practical guidance and training on how to upgrade institutions and design appropriate macroeconomic, financial, and structural policies. The World Bank Mandate: The World Bank, also known as the International Bank for Reconstruction and Development (IBRD), is an international financial institution that provides financial and technical assistance to developing countries for development programs (e.g. bridges, roads, schools, etc.), with the stated goal of reducing poverty. The World Bank performs several functions, including: granting reconstruction loans to countries devastated by war; granting developmental loans to underdeveloped countries; providing loans to governments for agriculture, irrigation, power, transport, water supply, education, health, etc.; providing loans to private concerns for specified projects; promoting foreign investment by guaranteeing loans provided by other organizations; providing technical, economic, and monetary advice to member countries for specific projects; and encouraging the industrial development of underdeveloped countries by promoting economic reforms.

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Both the World Bank and the IMF are popular institutions in providing financial and technical assistance to developing countries as well as guidance on economic policies. However, one of the major challenges caused by these institutions is the conditions associated with their assistance. Despite the good intentions of the conditions stipulated by the World Bank and IMF to poor countries, they give rise to a number of difficulties. The most devastating programs imposed by the IMF and the World Bank on developing countries are the structural adjustment programs (SAPs). The widespread use of SAPs started in the early 1980s after a major debt crisis. The debt crisis arose from a combination of (i) reckless lending by Western commercial banks to developing countries, (ii) mismanagement within developing countries, and (iii) changes in the international economy. The conditions required LDCs to liberalize trade, privatize public enterprises, reduce government expenditure, and introduce financial liberalization. Despite almost two decades of SAPs, many developing countries have not been able to pull themselves out of massive debt. The SAPs have, however, served corporations superbly, offering them new opportunities to exploit workers and natural resources. The key implication of IMF and World Bank conditions to international marketers is that various business opportunities have arisen from their conditions. Trade liberalization and the privatization of public enterprises are among the key drivers of internationalization of firms. The interventions of the World Bank and the IMF have created a large number of FDI opportunities, increasing the flow of foreign investments to foreign countries. World Trade Organization (WTO) The World Trade Organization (WTO) came into existence on 1 January 1995 as a result of the Uruguay Round (1986–94) to deal with the rules of trade between nations at a global level. Unlike the GATT, which was dealing with trade in goods only, the WTO agreements cover goods (under the General Agreement on Tariffs and Trade – GATT), services (under the General Agreement on Trade in Services – GATS), and intellectual property (under the Agreement on Trade-Related Aspects of Intellectual Property Rights – TRIPS). By 2013, the total membership of the WTO was 159 countries. The WTO performs many functions. First, it administers trade agreements by providing a forum for the discussion of trade issues. Second, the WTO sponsors multilateral rounds of trade negotiations and provides a forum for these. Third, it provides a forum for dispute settlement between members. Fourth, it monitors national trade policies

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and conducts periodic reviews of the trade policies of each of its members. Fifth, it offers technical assistance to its members and cooperates with other international organizations. In sum, the WTO is an organization for liberalizing trade; it offers a forum for governments to negotiate trade agreements and settle trade disputes, and it generally operates a system of trade rules. WTO agreements are legal texts covering a wide range of activities, and are therefore very complicated. The agreements cover a large range of areas, from agriculture, to textiles and clothing, banking, telecommunications, government purchases, industrial standards and product safety, food sanitation regulations, intellectual property, and much more. But a number of simple, fundamental principles run throughout all of these documents. These principles provide the foundation of the multilateral trading system.

The WTO’s Core Principles The WTO’s core principles include non-discrimination (most favored nation and national treatments), tariffs only, tariff bindings, and transparency. A. Non-discrimination Most-favored-nation (MFN). In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners – whether rich or poor, weak or strong. Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favor (such as offering a lower customs duty rate for one of their products) and you have to do the same for all other WTO members. This principle is known as most-favored-nation (MFN) treatment. It is also the first article of the General Agreement on Tariffs and Trade (GATT), which governs trade in goods. MFN is also a priority in the General Agreement on Trade in Services (GATS) (Article 2) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4), although in each agreement the principle is handled slightly differently. Together, those three agreements cover all three main areas of trade handled by the WTO. Some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded within the group, discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries. And in services, countries are allowed, in limited circumstances,

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to discriminate. But the agreements only permit these exceptions under strict conditions. National treatment – treating foreigners and locals equally. Imported and locally produced goods should be treated equally, at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights, and patents. This principle of “national treatment” (giving others the same treatment as one’s own nationals) is also found in all the three main WTO agreements (Article 3 of GATT, Article 17 of GATS, and Article 3 of TRIPS), although once again the principle is handled slightly differently in each of these. National treatment only applies once a product, service, or item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment, even if locally produced products are not charged an equivalent tax. B. Progressive Liberalization Lowering trade barriers is one of the means of encouraging trade. The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively. From time to time other issues such as red tape and exchange rate policies have also been discussed. Since GATT’s creation in 1947–48 there have been eight rounds of trade negotiations. A ninth round, under the Doha Development Agenda, is now underway. At first these focused on lowering tariffs (customs duties) on imported goods. As a result of the negotiations, by the mid-1990s industrial countries’ tariff rates on industrial goods had fallen steadily to less than 4%. But by the 1980s, the negotiations had expanded to cover non-tariff barriers on goods, and to new areas such as services and intellectual property. Opening markets can be beneficial, but it also requires adjustment. The WTO agreements allow countries to introduce changes gradually, through “progressive liberalization.” Developing countries are usually given longer to fulfill their obligations. C. Transparency and Bindings Sometimes, promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future opportunities. With stability and predictability, investment is encouraged, jobs are created, and consumers can fully enjoy the benefits of competition: choice and lower prices. The multilateral trading system is an attempt by governments to make the business environment stable and predictable. In the WTO, when countries agree to open their markets for goods or services, they “bind” their commitments. For goods, these

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bindings amount to ceilings on customs tariff rates. Sometimes countries tax imports at rates that are lower than the bound rates. This is frequently the case in developing countries. In developed countries, the rates actually charged and the bound rates tend to be the same. A country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade. One of the achievements of the Uruguay Round of multilateral trade talks was to increase the amount of trade under binding commitments. In agriculture, 100% of products now have bound tariffs. The result of all this is a substantially higher degree of market security for traders and investors. The system tries to improve predictability and stability in other ways as well. One way is to discourage the use of quotas and other measures used to set limits on quantities of imports; administering quotas can lead to more red tape and accusations of unfair play. Another is to make countries’ trade rules as clear and public (“transparent”) as possible. Many WTO agreements require governments to disclose their policies and practices publicly within the country or by notifying the WTO. The regular surveillance of national trade policies through the Trade Policy Review Mechanism provides a further means of encouraging transparency, both domestically and at the multilateral level.

Foreign Country Marketing Environment One of the distinguishing features of the international marketing environment is that international marketers deal with environmental variables that cut across nations and the environments of specific countries. In the previous sections, the chapter has focused largely on the international economy, with greater emphasis on the factors affecting the marketing environment across nations. In this section, the book describes the nature of the marketing environment in foreign countries, focusing largely on the environmental variables of the country targeted by the exporter. Besides understanding the general global forces that affect the conduct of business across the world, managers need to understand the specificities of the countries they plan to enter.

Economic Environment As well as analyzing the global economic environment, international marketers need to understand the economic environments of foreign countries in order to adapt their decisions to the economic conditions of their target markets. This consists of the economic factors that exert major

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influence on firms working in an international business environment. The economic environment relates to all the factors that contribute to a country’s attractiveness for foreign businesses, such as per capita income, monetary systems, and rates of inflation and interest. For example, inflation and interest rates affect the borrowing costs for companies, and contribute to a country’s attractiveness. If a country has a high rate of inflation, its central banks will raise the interest rate, increasing the cost of borrowing for firms. High inflation also makes the value of the revenue in the domestic currency fall, and this exposes firms to foreign exchange risks. It is worse still if firms produce in countries of high inflation and then sell products to countries of low inflation, since the input costs are on the rise while the revenue stays stable (see Exhibit 3.5). The essence of assessing a foreign country’s economic environment is to determine its market size and potential. In view of this, any international marketer needs to undertake an economic analysis of the market in order to assess the size of the market and therefore its potential, and the nature of that market, which provides clues of the character of the company’s marketing tasks. For example, per capita income is a useful indicator of market potential and reflects to a certain degree the level of economic development in the country. A low per capita GNP (which is derived by dividing the nation’s gross product by the total population) means a low level of economic development, and thus a market of limited potential for the purchase of goods and services. Inflation is another good indicator. Inflation is the increase in the general price level of goods and services in a country, and results in a decline in purchasing power for consumers in that economy. Inflation is important to the international marketer for a number of reasons: x Inflation affects the consumer’s ability to buy goods and services. x A high inflation rate can contribute to political and economic instability. An international firm operating in these markets will face difficulties in its pricing strategies and cost control efforts. x Inflation also increases the prices of factors of production in the market concerned. A firm contemplating overseas production operations in a potential target market will incur higher costs. These will be reflected in a higher product price, which will perhaps affect the firm’s competitiveness. Therefore, an international marketer needs to undertake an economic analysis of the following determinants of the firm’s market size: (i) population of both actual and potential markets; (ii) inflation; (iii)

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population growth; (iv) distribution of population; (v) distribution of per capita income; (vi) other demographic characteristics.

Exhibit 3.5: Global Shock Shifting Business Trends All regions faced negative trade shocks in 2009, followed by a turnaround during the global economic recovery of 2010–11. The adverse shock of 2009 was mainly caused by the massive contraction of global demand (more than 3% of world income), but in part also by the collapse in commodity prices. The trade shocks were strongest among the economies in transition and countries in Western Asia and Africa. Because of the sharp fluctuations in energy and other commodity prices, energy exporters faced the strongest trade shocks, followed by mineral exporters. Agricultural exporters suffered less dramatic trade shocks, in part because many of them are net energy importers and hence see commodity price shocks that affect both sides of their external balances. For similar reasons, most LDCs have not seen comparably strong trade shocks, despite the large swings in commodity prices. LDCs consist of a heterogeneous group of economies, encompassing a wide range of export specializations, from energy and minerals to agricultural and manufacturing exporters. Given the variety of export structures, LDCs, as a group, resemble an “export-diversified” economy on average, but individual countries have faced large shocks because of their skewed export base and/or high dependence on food and energy imports. Economies with more diversified export specialization have faced milder trade shocks over the past three years, and also have more stable export revenues and levels of import demand, enabling more stable output growth. Between 1995 and 2010, the value share of the developed countries in world merchandise trade declined from 69% to 55%, while that of developing countries increased from 29% to 41%. Over this fifteen-year period, China’s share alone increased fourfold from 2.6% to about 10.0%. Over the same period, the market share of Latin America and the Caribbean increased from 4.5% to 5.9%. The value of Africa’s merchandise exports rose from $100 billion in 1995 to $560 billion in 2010, while its share in world trade improved modestly from 2.0% to 3.2%. World market penetration of exports from LDCs, small island developing States (SIDS), and landlocked developing countries (LLDCs) remains extremely limited. For example, even though LDC exports have grown over fivefold since 1995, their world market share is still less than 1%. Source: World Economic Situation and Prospects (2012).

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Physical environment Apart from the economic environment, an international marketer must undertake an analysis of a country’s natural resources, climate, topography, infrastructure, and degree of urbanization. The international physical environment poses a particular balance of payments problem for poor countries trying to manage their environments, since the export of natural resources remains a large factor in their economies, especially those of the least developed nations. Natural resources: These include existing and potential forms of wealth provided by nature, such as minerals, land, water, climate, energy sources, etc. There are a number of reasons for an examination of a country’s resources to the global marketer. An economy abundant in resources is attractive for local production, indicates future prospects, and determines the type of economic structure that can develop there. Notably, the instability and adverse price trends faced by most developing countries make it impossible for them to manage their natural resource bases for sustained production. The rising burden of debt servicing and the decline in new capital flows can intensify environmental deterioration and resource depletion occurring at the expense of long-term development. Climate: The country’s climate can dictate the consumption patterns and products required, the form of packaging and distribution of products, and the type of plantation, including fruits, crops, and vegetation for export to other world markets. Topography: A country’s topography consists of its geographic features, including rivers, lakes, mountains, forests, etc. These features not only yield natural resources, but they also offer potential for tourism (e.g., in Tanzania, Mount Kilimanjaro, Ngorongoro Crater, Lake Nile). Topography also influences the four Ps of marketing (price, product, promotion, and place); for example, mountainous countries will present transportation and distribution problems to a firm, while landlocked countries such as Burundi, Malawi, and Zimbabwe will have an influence on the costs of transportation, and accessibility by land to these markets will depend on the political stability of the neighboring countries. Infrastructure: This refers to systems of transportation (roads, ports, etc.), communication, energy, commerce, and finance. Well-developed infrastructure has great potential to promote trade between countries. However, poor infrastructure affects the trade performance of the country and its trade partners (see Exhibit 3.6). Infrastructure is of critical importance in a market: utilization of the available resources will be higher in countries with more developed infrastructure, and vice versa; it affects the efficient operation of the distribution systems; and business

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success is highly determined by the availability of quality communication infrastructure (e.g. telephone, fax, telex, satellites, and computers). Exhibit 3.6: Port of Dar es Salaam: Deteriorating Capacity Dar es Salaam (DSM) port is Tanzania’s major port, handling over 90% of all import and export trade. The majority of the cargo handled is for domestic consumption (71%) and the remaining 29% is for transit to other countries (TPA, 2012). The port serves the six landlocked countries of Zambia, Malawi, DR Congo, Burundi, Rwanda, and Uganda. DSM port is the starting point for two major transportation corridors: a central corridor served by TRL railway line (1.0m gauge) and the DSM corridor served by TAZARA railway line (1.067m gauge). Currently, DSM Port performs the role of both a landlord and an operator; as operator, it handles one container terminal and the other terminals, and as landlord it has sub-contracted (concessioned) the container terminal that is managed by Tanzania International Container Services. Following the economic liberalization and privatization of the 1990s, the performance of DSM Port improved substantially, making it one of the most efficient ports in the whole of sub-Saharan Africa (World Bank, 2012). The reforms went hand in hand with the increase in economic activity that increased trade and traffic through the port. The port’s existing facilities could not support the increased trade, and the earlier improved performance started to deteriorate; by the mid-2000s its performance was very weak. The deterioration of the Tanzanian port services, especially DSM Port, resulted in long delays at anchorage, long dwell time, long ship turnaround, corruption, and high port service charges as compared to other competitor ports (World Bank, 2012). Recent performance has deteriorated further, undermining its potential in promoting trade. Ships are often forced to wait to dock and the transit of goods through the port is slow. The World Bank estimates that trade costs are 60% higher between Tanzania and China than between Brazil and China, despite the distance being almost half. The port is also unable to accommodate larger vessels, which is becoming increasingly problematic. Container ships have become bigger. The DSM port situation has not just been a problem for Tanzania. It has also held back the neighboring landlocked countries, Rwanda, Burundi, Zambia, Uganda, Malawi, and DR Congo. It is estimated that if the port were to reach the required level of efficiency, the Tanzanian economy would gain almost US$1.8 billion a year.

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Source: http://www.best-dialogue.org/wp-content/uploads/port-charges-sit uationanalysis-final-report-2.pdf?eae10f

Urbanization: The proportion and concentration of the population living in cities. To the international marketer this information is important, because (i) urban areas represent a concentration of potential customers, and (ii) urban and non-urban areas have different consumption patterns and thus form distinct customer requirements. Therefore, the degree of urbanization is a fairly good indicator of the size of the market and also reflects the type of marketing strategies the firm needs to adopt. However, given the recent trend of growth of cities, especially in developing countries, there is a risk of urbanization causing a high level of poverty that may shrink international market size (see Exhibit 3.7). Exhibit 3.7: World Urbanization: A Blessing or a Curse? Over the last twenty years many urban areas, especially in developing countries, have experienced dramatic growth as a result of rapid population growth and as the world’s economy has been transformed by rapid technological and political change. It is estimated that almost half of the world’s total population lives in urban settlements. Nevertheless, not all regions of the world have reached this level of urbanization. It is expected that half of the population of Asia will live in urban areas by 2020, while Africa is likely to reach a 50% urbanization rate only in 2035. Between 2011 and 2050, the world population is expected to increase by 2.3 billion, passing from 7.0 billion to 9.3 billion. At the same time, the population living in urban areas is projected to gain 2.6 billion, passing from 3.6 billion in 2011 to 6.3 billion in 2050. Thus, the urban areas of the world are expected to absorb all the population growth expected over the next four decades, while at the same time drawing in some of the rural population. As a result, the world rural population is projected to start decreasing in about a decade and there will likely be 0.3 billion fewer rural inhabitants in 2050 than today. Furthermore, most of the population growth expected in urban areas will be concentrated in the cities and towns of the less developed regions. Asia, in particular, is projected to see its urban population increase by 1.4 billion, Africa by 0.9 billion, and Latin America and the Caribbean by 0.2 billion. While cities command an increasingly dominant role in the global economy as centers of both production and consumption, rapid urban growth throughout the developing world is seriously outstripping the capacity of most cities to provide adequate services for their citizens. Over

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the next thirty years, virtually all of the world’s population growth is expected to be concentrated in urban areas in the developing world. While much of the current sustainable cities debate focuses on the formidable problems for the world’s largest urban agglomerations, the majority of all urban dwellers continue to reside in far smaller urban settlements. Many international agencies have yet to adequately recognize either the anticipated rapid growth of small and medium cities or the deteriorating living conditions of the urban poor. Source: UN (2011).

Socio-Cultural Environment The socio-cultural environment is a collection of social factors that affect a business, such as social traditions, values and beliefs, literacy and education levels, ethical standards and the state of society, the extent of social stratification, conflict and cohesiveness, and so forth. The sociocultural environment consists of factors related to human relationships and the impact of social attitudes and cultural values on the business of the organization. Differences in cultural and social environments have been identified in recent times as having major influences on marketing behavior. The cultural environment shapes people’s values, attitudes, perceptions, and consumption patterns. Therefore, international marketers need to focus on cultural similarities in different markets. This approach can widen opportunities and enable the firm to standardize its marketing strategies, with a global product and global brand as the outcome. Examples of global products are Coca-Cola and Sony Walkman. Even though culture has many definitions, we can simply define it as an integrated sum total of learned behavior that is handed down and shared by members of a particular society. A society’s cultural values and behavior patterns are learned (and not biologically determined); they are shared with other members of the group; and they are interrelated (that is, one element of the culture is connected with another – e.g. marriage and religion, material goods and social status, etc.). Culture is constantly changing and is therefore dynamic. Cultural knowledge can be classified into two types: factual knowledge and interpretive knowledge. The former refers to the facts that a marketer can study and understand, for instance, the meanings attached to different colors and tastes. The color black is normally worn at funerals in the UK, whereas in Brazil it is purple. Gift-giving is another example: in Japan, for instance, one never gives items with “four” in the name, as the intonation

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of the word sounds like death. Interpretive knowledge refers to the nuances of a culture’s values, traits, and patterns, for instance the culture of time, the meaning of life, etc. What is required of an international marketer is to avoid applying his or her own cultural values of behavior, known as the self-reference criterion trap, in which a person unconsciously applies his or her own cultural values, knowledge, and experiences in evaluating a situation. This will lead to failure because it could prevent the person from developing an awareness of the cultural differences and recognizing how important these differences are. As a result the marketer will either take no action or will react in a manner which may be construed as offensive by the host. Cultural elements include language, religion, social organization, aesthetics, education, and material culture, and these are explored in detail below.

Language Language is an essential element of culture for it reflects its nature and values, and it is widely presumed that it is the language that distinguishes one culture from another. Language is a primary means of communication. We can list a number of implications that language has for marketing: i. In business communication, translation from one language to another can result in inaccuracies. A literal translation may change the entire meaning. Poor translation and the misuse of language are among the common traps of international marketing. ii. The same language may have different meanings in different places e.g., “petrol” in the UK means “gasoline” in the USA. A global marketer should make use of a truly bilingual interpreter who will make certain that the meaning is not lost in translation. Alternatively, a marketer should learn the foreign language (both spoken and unspoken). iii. Marketers should also be aware of silent language or symbolic communication in terms of space, time, and friendship. For instance, in the UK, meeting at the appropriate time is considered reliable and polite, while Indonesians show respect by arriving late for meetings. The problem with silent language is that the differences are not obvious, and they can be difficult to interpret because silent language operates within the context to convey the message. In a high-context environment such as the Japanese or Arabic cultures, communication depends on non-verbal aspects, i.e., interpreting what is meant rather than what is actually spoken. In low-context cultures such as Germany and the USA,

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communication depends more on explicitly verbal expression. The UK stands in between the two extremes of the continuum. Marketers from low-context cultures need to be trained to develop skills to listen for unspoken messages. Marketers moving from high- to low-context environments need to be trained to be precise in both written and spoken messages.

Religion Religious values influence a culture’s outlook on life. This is reflected in the society’s morality, attitude to life, gender roles, etc. The major religions in the world include Christianity, Islam, Hinduism, Buddhism, Shintoism, and Animism. Religious values do influence consumption patterns and business practices. There are a number of effects drawn from religion: i. Certain religions prohibit the use of certain goods and services; for instance, Muslims are prohibited from drinking alcohol or eating pork, while Jews abstain from eating pork and shellfish. This yields market potential for the sale of non-alcoholic beverages and vegetarian products. ii. Religious divisions can affect the potential stability of the market. Marketing in these markets can be a threat, although equally, opportunities exist. The religious hurdle could indicate potential market segments. iii. Religious holidays affect working patterns, so that in the Muslim world, virtually all types of work slow down during the month of Ramadan, particularly business. In these countries, religion is a total way of life for people. It would not be desirable to conduct business in this month in these countries. In the Christian world, religion is only one aspect of life, and business interruptions are minimal except for a few days over the Christmas period. iv. Religion also influences gender roles, customs such as dress and marriage, and social institutions. For instance, women in Muslim societies have to practice monogamy, whereas men are allowed to be polygamous, and the role of women is restricted to the household. These moral codes and taboos can have an impact on firms operating in these countries, such as having to adjust their sales teams by having only male salespersons. v. The Protestant ethic of hard work and success is a dominant value, and its measure of achievement is the acquisition of wealth. In

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contrast, Hinduism as practiced in India is fatalistic about the acquisition of wealth. Exhibit 3.8: Halal Practices by Sumbawanga Agricultural and Animal Food Industries Ltd. Sumbawanga Animal Feeds Industries (SAFI) incorporated on 8 November 1989 and changed its name to Sumbawanga Agricultural and Animal Food Industries Limited (SAAFI) on 6 March 1996 under the Certificate of Change of Name No 17427. SAAFI is implementing an integrated project in Sumbawanga, Rukwa Region, that covers a beef cattle farm, an abattoir, a meat-processing plant, and a by-product processing plant (rendering plant). Oman has been a regular buyer of meat from Tanzania. SAAFI has installed a modern plant in East and Central Africa, equipped with the latest technology and machinery, with a capacity of slaughtering 1,000 tons per month. After learning that most of the clients from the Middle East prefer to buy live animals instead of processed meat because of their strong religious beliefs, the SAAFI management invited buyers from the Middle East to see how the slaughtering process is undertaken in consideration of Halal practices. As a result, SAAFI’s major foreign markets now include Egypt, Congo, the United Arab Emirates, Saudi Arabia, and Oman.

Social Organization Social organization defines the way people relate to each other, and includes the roles of men and women in society, social class, the family unit, group behavior, caste systems, marriage, and rituals. These different elements have an effect on marketing, as each institution has an influence on the overall patterns of life such as social behaviors, value systems, and the social hierarchy. The family unit: This is a fundamental unit of social organization in many societies; examples include the nuclear family or the extended family. In many parts of Africa, India and the Far East, the family unit is termed the extended family because it consists of two or three generations, while in the UK and most of Europe, the typical household comprises a nuclear family, consisting of two parents and their children. This information is important to a marketer because (i) they would like to know who the decision-maker is in the unit, whether families travel in a unit or

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individually, whether they buy large packs, etc., and (ii) it contributes to effective promotional targeting. Role and status: Men and women adopt different roles in the family and in social institutions. For instance, in many African countries the woman’s role is restricted to the family and to bringing up the children. In Middle Eastern countries, women tend to purchase food products, and it would be inappropriate for firms to target men in their promotional campaigns. Social hierarchy or class systems: Members of society are generally ranked according to criteria based on income, power, religion, wealth, etc. An understanding of the social stratification system would enable marketers to segment their markets effectively and position their products appropriately. Values, attitudes, social norms, and beliefs: These are also important determinants of consumer behavior, and global marketers should develop an understanding of them to implement effective marketing strategies. Social norms are the modes of behavior and the accepted roles and standards in a society. An attitude is a person’s point of view toward something and it usually involves like or dislike; examples include attitude toward foreign products, attitude toward achievement, attitude toward change, etc. Attitudes are difficult to change and marketers would benefit from fitting their products into existing attitudes, rather than trying to change people’s minds. A belief is a person’s opinion about something. Marketers are interested in people’s beliefs regarding products and services, because these beliefs make up the product and brand image and people act on them. Values are shared beliefs or group norms. Thus the global marketer must identify different values held by foreign consumers and business people in order to communicate effectively.

Aesthetics The aesthetics of a culture refers to its designs, forms, colors, shapes, sounds – things that convey the concept of beauty and good taste. These are reflected in a society’s music, arts, architecture, etc. The aesthetics of a culture can affect a firm’s marketing strategy, and therefore marketers need to be aware of and sensitive to local aesthetic preferences. Colors are often used as a mechanism to identify brands and for product differentiation. Colors tend to have different connotations and more symbolic value in international markets than in domestic markets. The design of a product and package should take local preferences into account. For instance, McDonald’s often have a uniform policy regarding

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the design of their facilities, but in Vienna, Austria, they modified their designs to fit in with local tastes. Brand names are also affected by aesthetics. The general policy of many companies is to have one in the local language. With global integration, firms attempt to project a global brand image – examples include Coca-Cola or Kodak.

Education The process of learning and sharing cultural values is transmitted through the education system. The education system can take many forms and it is important for the marketer to understand the different systems because it can indicate the type of consumer market available. For instance: x The literacy rate will affect marketers’ promotional strategies. A high illiteracy rate may mean the exclusion of printed instructions and more drawings, and vice versa. x An economy with a poorly developed education system may hinder the firm’s operations in the market through a lack of trained personnel, both within the firm and in support services such as R&D and advertising agencies.

Technology and Material Culture Environment Material culture refers to the technological and economic aspects of a society, while technology refers to the techniques used in the creation of material goods. The international marketing implications of material culture and technology include the following: x Material culture affects the level of demand, the quality and type of products demanded, and their functional features, as well as their means of production and distribution. For instance, the level of income may limit the desirability of a certain product (e.g., electrical appliances can fail to find a market in Tanzania due to the low income levels). x The way technology is utilized in the creation of goods and services is also related to how a society organizes its activities. For example, operating a washing machine in a high-technology culture is not difficult, but this is not the case in less developed countries.

Sacred objects

Philosophica l systems

Beliefs & norms

Prayer

Taboos

Holidays

Rituals

Written language

Official language

Linguistic pluralism

Language hierarchy

International languages

Mass Media

Religion

Spoken language

Language

Invention

Science

Urbanization

Communications

Tools and objects

Energy systems

Transportati on

Technology and Material Culture

Literacy level Human resources planning Status systems

Higher education

Secondary education

Primary education

Vocational training

Formal education

Education

Social stratification

Social mobility

Interest groups

Authority structures

Social institutions

Kinship

Social organization

Scientific method risktaking

Wealth change

Achievemen t work

time

Values and Attitudes Towards:

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Figure 3.1 Composition of the socio-cultural environment of an international firm

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x Material culture and living conditions have a major impact on the quantity and type of product demanded. In Japan, for example, houses are small which will determine the size of furniture exported to Japan, while the opposite is true in the USA. Material culture therefore determines people’s attitude toward things – for instance, electronic appliances may sell well in England or France but may not find a market in Tanzania, and so on.

Role of the Institutional Machinery in Addressing the Culture-Related Barriers Facing Tanzanian Exporters Like in most developing countries, various cultural elements affect export activities in Tanzania. The major affected areas include marketing, communication, price negotiations, labeling, branding, and packaging. Language barriers have the greatest impact, followed by education and religion. Tanzanian exporters engage agents and exclusive distributors in foreign markets as a strategy to overcome socio-cultural barriers. Internally, Tanzania has several institutions that deal with exporters, including the Tanzania Chamber of Commerce, Industry and Agriculture (TCCIA), the Tanzania Bureau of Standards (TBS), and TanTrade. The role of these institutions in trade is largely the formulation and regulation of macroeconomic and sectoral policies that define and provide the guidelines and rules governing the activities of players in the economy. Equally, private sector institutions such as the TCCIA and the Tanzania Private Sector Foundation (TPSF) support export development and promotion. The TCCIA is the sole authority or issuer of all certificates of origin of products from Tanzania. For example, it issues the East African Certificate of Origin, the SADC Certificate of Origin, the AGOA Certificate of Origin, and the International Certificate of Origin. It is clear that certificates of origin reduce or remove trade barriers, including cultural barriers, to a large extent. The TCCIA provides training workshops on such topics as business skills, taxation, sales and marketing, IT for business, and accounting. In addition, it helps with business licensing processes, to formalize business and trade and provide promotional activities. The TBS participates actively in the harmonization process of standardization within the EAC and SADC regions. The major activity of the TBS is to supervise the implementation of standards, which are important for trade facilitation: without standards there is no business. For

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example, the TBS organizes training on ISO 9001:2008 QMS (Quality Management Systems), to enable participants to understand the requirements of international markets and to be able to implement the standards in their organizations, as well as ensuring that companies deliver quality products (goods or services) consistently and enabling them to become competitive by solving typical problems facing typical organizations. In that regard, the TBS plays the most important role to export business, as the standards make products competitive on the local and international market and reduce both technical and psychic distance. TanTrade endeavors to foster better market penetration for Tanzanian goods and services on the domestic, regional, and international markets, through the planning, coordination, organization, and management of Dar es Salaam International Trade Fairs (DITFs), specialized exhibitions and expositions, and through participating in servicing incoming and outgoing missions. Trade fairs and exhibitions are considered one of the best ways of meeting current customers, reaching previously unidentified prospects, and offering goods and services to international markets. TanTrade builds the capacity of local traders or potential exporters through short-term training on international business, before sending them to participate in trade fairs and exhibitions organized abroad by trading partners just to gain exposure.

Political Environment The political environment of international marketing is one of major uncontrollable forces confronting the operations of foreign firms because of its uniqueness in every country. Perhaps the most important considerations for global firms are the political and legal forces operative in the countries in which they plan to conduct business. Some foreign governments are unstable (that is, there may be frequent, dramatic, unpredictable regime change or political unrest). Marketing operations may be influenced by political risk stemming from the host nation or the home nation, or by political conflict. To enable the foreign firm to choose a less risky market and allocate future investments, before embarking on operations within a country it should assess the political climate in terms of the current government and political system; the stability of government policies; any potential risks or harassment to business due to political activities; and the national ideology or philosophy of the government.

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Current Government and Political System International marketing decisions by businesses are affected by the actions of government bodies at all levels – supranational, national, and sub-national. The extent to which any government becomes involved in international marketing, and the specific nature of such involvement, depends in part upon the type of government. This is determined by the procedures through which the citizens form and express their will and the extent to which their will controls the government’s composition and policies (i.e. whether it is a republic, democracy, monarchy, or dictatorship). Under a democratic government, people are consulted from time to time to ascertain the majority will, thus government policies reflect majority opinions. Meanwhile, in a dictatorship the regime determines the government policy without consulting the needs and wants of its people. An international marketer must discover all the above aspects to establish the appropriate policies in order to minimize the risks.

Stability of Government Policies A stable government ensures continuity in policy as it relates to business. Also, a stable system allows firms to plan their affairs with certainty. What a firm is really looking for in its international markets is the reasonable continuity of government policies toward business, especially international business. Great uncertainty in this area leads to negative decisions, for example no investment, reduced activity, or withdrawal from a market.

Risks and Harassment to Business from Political Activities Political risks usually frustrate foreign trade. There are four main kinds of political risk: confiscation, expropriation, nationalization, and domestication. Confiscation is when the government decides to take control of a foreign firm’s assets in its country with no payment made to compensate for its loss. Expropriation is an official act where the property of the foreign firm is seized with the intention of using it in the interest of the public, but the expropriated firm is given compensation. In most cases payment is not negotiable. Nationalization is the process whereby a government decides to take over ownership of an industry for its own control. Both local and foreign firms may be affected. Domestication represents a variety of pressures that can be placed on a foreign-owned firm to transfer ownership and/or control to local citizens. Domestication

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is performed in several ways: foreign investors may be forced to sell shares of stock to local investors at a predetermined price, the government may apply pressure to employ nationals at top decision-making levels, permissions may be required for importing equipment, and so forth. The host government can restrict entry of firms in a variety of ways. In some cases, the acquisition of a national firm by a foreigner may be prohibited or foreign ownership may not exceed a certain percentage of the company. In other cases, local nationals must form part of the foreign company’s management structure as a means of guaranteeing a fair contribution to the local economy. Likewise, firms may be restricted with respect to the products they can sell. Harassment can be imposed on the foreign firm’s operations in the form of licensing or tax policies, or even social unrest. Under licensing policy, a license may be required to establish a business, to acquire foreign exchange, to purchase imports, to change prices, to hire or fire personnel, or to sell to government agencies. This can affect all areas of business operation, from labor to customer relations, product design, or pricing. Tax policy can be used to capture more revenue and penalize foreign businesses. Under social unrest, damage to property from riots and insurrections can also be significant (Exhibit 3.9). Exhibit 3.9: Political Risks are Frustrating! Earlier reports of Doing Business by the World Bank highlighted substantial efforts by governments in the Middle East and North Africa to improve business regulations for local entrepreneurs. But the reform momentum has slowed since the beginning of the Arab Spring in January 2011, as some countries have entered a complex process of transition to more democratic forms of governance. The post-Arab Spring governments have had a broad range of economic, social, and political issues to address, and this in turn has resulted in a slower overall reform process, as new governments have struggled to adjust to important shifts in the political and economic landscape. The region faces structural challenges that can impede private sector activity. A history of government intervention has created more opportunities for rent-seeking than for entrepreneurship. Firm entry density in the Middle East and North Africa is among the lowest in the world. Moreover, the region suffers from a crisis of governance and trust: businesses do not trust officials, and officials do not trust businesses. Business managers in the region rank corruption, anticompetitive practices, and regulatory policy uncertainty high on their

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list of concerns. At the same time, public officials view the private sector as rent-seeking and corrupt. All these challenges notwithstanding, the recent political changes greatly affect the attractiveness of the region. Source: World Bank, 2013.

National Ideology and Government Philosophy Because marketing is a cultural as well as an economic and technical activity, the ideological environment in which it is to be done will affect it. For instance, a conservative government will promote private business with minimal restrictions, while socialism encourages public ownership and a lot of restrictions. All the functions of marketing must be carried on in any society that is above the subsistence level, but the way these functions are performed will vary according to the ideological environment. One implication of this for the international marketing manager is that the firm’s marketing program must be freed from the ideological ties of the home country. Exhibit 3.10: The Impact of the Arusha Declaration on Sisal Exportation from Tanzania The sisal plant was introduced to Tanzania in 1893 by a German agronomist named Dr. Richard Hindorf. The first plantation was at Kikokwe on the south side of the river Pangani. The plant grew consistently to become one of the most organized commercial crops farmed in East Africa, and was a major economic force. When the mainland achieved independence in December 1961, the country was the world’s biggest grower of sisal, which was its main cash crop. By then production stood at around 200,000 tons a year. Beautiful sisal estates could be seen beside railway lines and roads. Sisal was mainly grown in Tanga and the Eastern regions, comprising Morogoro, Coast, and Dar es Salaam. Until 1967, the industry was totally in the private sector. However, with the proclamation of the famous Arusha declaration, whereby the major economic activities came under state control, over 50% of the industry was purchased. This led to the collapse of sisal export activities in Tanzania in the 1970s and 1980s. The output fell from 230,000 tons in 1961 to around 20,485 in 2000. Among the reasons for this sudden decline were government policies on sisal.

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Nationalism Nationalism is the belief among the individuals of one nation that they are different from and/or better than the individuals of other nations. The respectable form of nationalism is called patriotism, while its excessive form is called chauvinism. The existence of nationalism has several implications for the international marketer: i. Nationalism toward the home country should not color the firm’s marketing program. Its focus should be on selling its products, not carrying the nation’s flag. ii. The firm as a foreigner in all of its international markets may be a victim of local nationalism, or xenophobia. A possible strategy to avoid this might be to develop as national an image as possible. Developing such an image will affect policies on branding, promotion, and distribution as well as other elements of the marketing mix. One of the challenges facing the international marketer is finding how best to adapt to the demands of local nationalism without diminishing the international strengths of the firm. Finally, the international marketer must assess other factors such as government attitudes toward international business, traditional hostilities between nations and ethnic groups, the political power of international organization, and so forth.

Strategies to Reduce Political Risks International marketers should operate in countries with less political risks or apply certain strategies to reduce the risks. Some of the strategies are as follows: (i) identifying points of political vulnerability, (ii) establishing positive political business interactions within the host country, and (iii) promoting among government officials the need to regulate international transfers of various resources. Favorable political attention can mean protection, reduced tax rates, exemption from quotas, control of competition, and other concessions. On the other hand, political vulnerability can lead to labor agitation, public regulation, price fixing, quotas, and other forms of government harassment, if for any reason the product is considered to be unfavorable. If the political situation is proving a threat to the firm it can either adapt the nation’s strategies or withdraw from the market. This is a costly process but also fairly straightforward.

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The choice of any option will depend on the relative bargaining powers of the firm and the host government.

Legal and Regulatory Environment The legal environment for business is a product of the political environment, and it constitutes the country’s laws and regulations. Legal systems vary from country to country in terms of their complexity, interpretation, and application, and the global marketer must be aware of how individual legal systems could affect the company’s business operations and the 4Ps of the marketing mix. For instance: x In some countries oral contracts are legally binding (such is the case in Japan). x Under common law, the right to use a brand name is determined by the priority of use (i.e., the firm that uses the brand name first is the owner of that trademark), while under code law the person who registers the brand name first has the right to it. Laws pertaining to brand piracy are loose and have limited legal sanctions. Another major legal system in the world is Islamic law, which tends to be mixed with common and civil laws. Exhibit 3.11: Is the Global Legal and Regulatory Environment Improving? Over ten years, 180 economies implemented close to 2,000 business regulatory reforms as measured by Doing Business. Eastern Europe and Central Asia improved the most, overtaking East Asia and the Pacific as the world’s second most business-friendly regions according to Doing Business indicators. OECD high-income economies continue to have the most business-friendly environment. Business regulatory practices have been slowly converging as economies with initially poor performance narrow the gap with better performers. Among the fifty economies with the biggest improvements since 2005, the largest share (a third) is in subSaharan Africa. Among the categories of business regulatory practices measured by Doing Business, there has been more convergence in those that relate to the complexity and cost of regulatory processes (business start-up, property registration, construction permitting, electricity connections, tax payment and trade procedures) than in those that relate to the strength of legal institutions (contract enforcement, insolvency regimes, credit information, legal rights of borrowers and lenders, and the

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protection of minority shareholders). Two-thirds of the nearly 2,000 reforms recorded by Doing Business were focused on reducing the complexity and cost of regulatory processes. Source: The World Bank Doing Business Report (2013).

Foreign Laws and the Marketing Mix Product: Legislation regarding the product is aimed at protecting consumers by setting legal requirements for health, safety, and performance. The legislation on product attributes can vary considerably in different markets. For instance, sales of the pesticide DDT were banned in the USA because of safety factors, yet in many other parts of the world it is legally sold. In Belgium, medicines for external use must be in octagonal shaped yellow-brown glass. An Italian court ruled that a soft-drink producer had to list ingredients on the bottle and not on the bottle cap. Promotion: Promotion is subject to stringent controls in many nations, partly to protect consumers from ambiguous, misleading, and deceptive advertising messages, and partly to regulate advertising from the standpoint of taste and morality. For example the UK allows no cigarette advertising on television; in India and many Middle Eastern countries nudity is forbidden in advertising, whereas in Holland it is quite common. In Germany it is quite difficult to use words like “best” or “better,” and in Sweden and Norway advertising directed at children is prohibited, but it is allowed in Tanzania. Place/Distribution: Legal agreements between producers/principals and distributors/agents do differ under different legal systems, but compared to the rest of the marketing mix there are relatively few laws to constrain the global marketer. Problems do arise when a principal wishes to end an agency agreement, for laws differ in this respect in different markets. Exclusive distribution agreements are acceptable in most parts of the world, but whereas the establishment of exclusive territories for middlemen is accepted in many parts of Europe, it is not in the USA, where it contravenes anti-trust laws. Price: Many countries have legal regulations on resale price maintenance. The pricing of essential goods such as foods is tightly controlled in many markets, particularly those with high inflation rates such as Brazil, where there are price controls on food and drink. The significance of these regulations governing prices for the global marketer is that they affect the firm’s marketing strategy and could make the market less attractive.

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Conflict Resolution Conflicts will inevitably arise in the course of business transactions with other firms, intermediaries, customers, and governments because of interpretation of the contracts, faulty goods, or deceptive advertising. For such a case, legal disputes can be settled in the following ways, listed based on priority: x x x

By having improved communications between the parties and by negotiations, i.e. mediation. By the two parties going to arbitration, which involves a neutral party, to help resolve the differences. By referring the dispute to court (see for example Exhibit 3.12). This is time-consuming and expensive, and could possibly be affected by an unfavorable view of foreign firms by host country courts. It could also generate a negative image for the company.

Exhibit 3.12: Conflict Resolutions between Foreign Direct Investors and Tanzania Under Tanzanian regulations, disputes between a foreign investor and the Tanzanian Investment Center that are not settled through negotiations may be submitted to arbitration through one of several options: i. Arbitration based on the arbitration laws of Tanzania. ii. Arbitration in accordance with the rules of procedures of the International Centre for Settlement of Investment Disputes (ICSID). iii. Arbitration within the framework of any bilateral or multilateral agreement on investment protection to which the government and the country of which the investor is a national are parties. iv. Arbitration in accordance with the World Bank’s Multilateral Investment Guarantee Agency (MIGA), to which Tanzania is a signatory. v. Arbitration in accordance with any other international machinery for settlement of investment disputes agreed upon by the parties. Tanzania is a member of both the International Center for Settlement of Investment Disputes (ICSID) and the Multilateral Investment Guarantee Agency (MIGA). ICSID was established under the auspices of the World Bank by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. MIGA is also World Bank-affiliated

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and issues guarantees against non-commercial risk to enterprises that invest in member countries. Tanzania is a signatory to the New York Convention on the Recognition and Enforcement of Arbitration Awards, though the Arbitration Act of Tanzania does not give force of law in Tanzania to the provisions of the conventions. An arbitration award will be recognized as binding once it is filed in a Tanzanian court and will be enforceable as if it were a decree of the court, subject to the provisions of the Arbitration Act of Tanzania. In recent years there has been a concern over Tanzania’s commitment to upholding ICSID decisions after a recent case involving Standard Chartered Bank – Hong Kong (SCBHK) and the Tanzania Electric Supply Company (TANESCO). On April 23, 2014, the Tanzanian High Court ordered both parties in on-going ICSID arbitration proceedings to refrain from “enforcing, complying with, or operationalizing” a decision made by the Tribunal in ICSID proceedings from February 12, 2014. Some have interpreted the ex-parte injunction as a clear breach of the provisions of the ICSID Convention and the actions of the High Court put Tanzania in breach of its international law obligations. Source: http://photos.state.gov/libraries/tanzania/65409/Tz_ICS_2014/ Tanzania_ICS_2014_FINAL.pdf

The Implications of the Legal Environment to a Global Marketer x The international legal environment is complex, as different countries have different legal systems. This has implications for product, price, promotion, and place/distribution strategies. x An international firm’s business activities have to meet the legal requirements of domestic, foreign, and international laws. x Wherever conflicts arise, they can be resolved in foreign countries by mediation, arbitration, and the courts. Among all these, the mediation process is preferable.

Chapter Summary The chapter has presented the international marketing environment variables both from the global perspective and the context of the foreign country. Overall, the international marketing environment presents a more complex task than domestic marketing because of the higher number of uncontrollable variables and their heterogeneity. This requires

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international marketing managers to be prepared to adapt their strategies to cope with unfamiliar situations and problems. The chapter makes the following key points: x The most salient characteristics of the world economy, with an important bearing on international marketers, include the balance of payments, trade protectionism, increasing economic integration, international institutions, and multilateral agreements. x A country’s balance of payments (BoP) measures the flow of all economic transactions between residents of that country and the residents of the rest of the world over a period of time, usually one year. It is made up of three main components: a current account, a capital account, and an official settlements account. The BoP shows the overall health of various economies, and indicates the best market for international marketers to concentrate their marketing efforts. x Trade protectionism involves both tariff barriers (special taxes on products imported from other countries) and non-tariff measures (NTMs – policies other than ordinary customs tariffs), established by countries to restrain the entry of undesirable goods for economic, political, social, or any other reasons. Recent international business trends indicate that NTMs are gaining importance in regulating trade, increasing the threat of protectionism in the world today. x Regional economic integration is an agreement among countries in a specific geographic region to reduce and ultimately remove trade protectionism. Depending on the degree of cooperation, economic integration can vary from trade union, custom union, common market, economic union, to monetary union. Even though the main argument for economic integration is trade creation, it can cause a problem of trade creation. Economic integration is also associated with many other dynamic effects that either lead to increased trade or, on the other hand, increase inefficiency. x International trade and multilateral trading systems are influenced by a number of international institutions including GATT, UNCTAD, the IMF, the World Bank, and the WTO. x GATT was created to provide an international forum that encouraged free trade between member states by regulating and reducing tariffs on traded goods and by providing a common mechanism for resolving trade disputes. While GATT succeed in expanding world trade through an open-door policy, it failed to

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distribute the benefits equally to developed and developing countries. UNCTAD was formed to further the development of emerging nations by improving trade, enhancing the prices of primary goods exports through commodity agreements. It established a new “club” for world trade matters and increased publicity around the trade gap in economic development between the “have” and “have not” nations. The IMF and the World Bank were created to encourage international monetary cooperation, and to promote long-term economic development and poverty reduction respectively. Despite their success in providing financial and technical assistance to developing countries, they are accused of some of the stringent conditions that encumber the economies of LDCs. The WTO was established to administer trade agreements, to facilitate multilateral trade negotiations, to provide a forum for dispute settlement between members, to monitor national trade policies, and to provide technical assistance to its members. The WTO has strengthened the world trading system by extending GATT rules to services, increasing protectionism of intellectual property, reducing agricultural subsidies, and enhancing monitoring and enforcement mechanisms. The foreign country economic environment consists of the economic factors that have an impact on firms and contribute to a country’s attractiveness for foreign businesses. These factors include per capita income, monetary system, and rates of inflation and interest. A country’s economic environment determines its market size and potential. The country’s physical environment consists of its natural resources, climate, topography, infrastructure, and urbanization. Internationally, the physical environment poses a particular balance of payments problem for poor countries trying to manage their environments, since the export of natural resources remains a large factor in their economies, especially those of the least developed nations. The socio-cultural environment is the collection of social factors affecting a business, including social traditions, values and beliefs, levels of literacy and education, ethical standards and state of society, the extent of social stratification, conflict and cohesiveness. Understanding of social-cultural environment in different cultural

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settings enables international marketers to learn about consumer behavior and design their marketing programs accordingly. x The political environment is one of the major uncontrollable forces confronting the foreign firm’s operations because of its uniqueness in every country. Differences in political systems between countries influence the stability of various countries, the degree of political risk, and the national ideology, all of which have important implications for the practice of international marketing. x The business legal and regulatory environment is generated from the political environment of a particular country. Differences in legal systems have implications for the design and implementation of marketing programs in different countries.

Review questions 1.

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Economic Integration can take several forms that represent varying degrees of integration. Discuss these forms, giving concrete examples for each type. Briefly, discuss the following terms: x Trade Creation and Trade Diversion. x Trade Account. With the specific example of regional groupings, discuss the various effects of regional economic integration. State the implications of such groupings to the international marketer. With relevant examples, explain the impact of NTMs on international marketing operations. “Cultural and social factors are less predictable influences on the marketing environment and they often frustrate many international marketers.” Discuss this statement, using real business examples of your choice. “Regional Economic Integration can take several forms that represent varying degrees of integration.” Discuss these forms, giving concrete examples of each type. Describe how the legal environment affects the 4Ps of international marketing. “The main task of international marketing managers is to formulate a marketing program that will enable the company to adapt to its environment in such a way that its goals are attained as effectively as possible. However, one of the complex assignments done by international managers is to assess the environment beyond the national borders.” Comment on this statement, showing the relevance

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and complexity involved in assessing the foreign market environment. Give relevant examples to show how the foreign market environment can affect international marketing decisions. Describe the key economic, political, and social factors that influence international marketing decisions. Differentiate between the current account and balance of trade. Briefly explain the following: x Trade protectionism in international marketing. x Static and dynamic effects in regional economic integration. x Export incentives. x Nationalism. Why does the balance of payments always balance even though the balance of trade does not? Enumerate the ways in which a nation can overcome an unfavorable balance of trade. What has been the impact of the following institutions on the environment for international firms? (i) the WTO, (ii) the IMF, (iii) the World Bank. What do you understand by the term “political risk” in international marketing? What is the management process available for managing political risks?

CHAPTER FOUR FOREIGN MARKET ENTRY STRATEGY

Introduction The choice of market entry strategy is one of the key decisions to be made by any firm that decides to adopt a strategy of internationalization. The decision on market entry strategy is not made in isolation from the other important decisions always made by firms contemplating foreign expansion. Firms expanding internationally must decide on which markets to enter, when to enter them, at what scale, and which entry mode to use. These choices are an indispensable component of strategic decisionmaking in international marketing, as selecting the right markets and the correct sequence of entry is crucial. The wrong choice of market and entry strategy can lead to two types of costs to the firm: the actual costs of an unsuccessful attempt to enter the wrong market, and the associated opportunity costs. Contrary to the traditional approach, which treats foreign market selection and market entry mode as two related but essentially separate decisions, in this book they are considered to be two aspects of one decision-making process. Decisions as to the form of market entry logically follow the choice of the most appropriate market to enter. The market entry strategy is therefore one of the key decisions that cannot be made without consideration of other basic market entry decisions. The main purpose of this chapter is to describe the basic market entry decisions made by international marketers in selecting the market to enter, and strategies for entering the selected market. In particular, the chapter (i) describes the basic entry decisions made by the firms contemplating global expansion; (ii) presents the market entry strategy selection criteria; (iii) describes the various strategies used by companies to enter international markets; (iv) discusses the advantages and risks associated with each of the international market entry strategies; (iv) compares and contrasts the functions of actors involved in various strategies and approaches used to enter foreign markets; (v) describes how investment policies in foreign countries may affect firms going international; and (vi) discusses the

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financial implications associated with each of the foreign market entry modes. Although the chapter considers all basic entry decisions, the strategies for entering foreign markets are given greater emphasis, given their strategic implications in international marketing. As a matter of logical flow, the chapter begins with the consideration of the basic entry decisions, before focusing solely on market entry strategies.

Basic Market Entry Decisions Firms contemplating foreign expansion make decisions regarding the market to enter, timing of entry, scale of entry, and entry mode. All these decisions are crucial and interrelated in the selection of a global expansion strategy. The optimality of the strategy chosen to enter a foreign market will depend on the market selected, scale of entry, and timing of going global. For example, whereas a firm may best serve one market by exporting, it may serve another by setting up a new wholly owned subsidiary or by acquiring an established company. Each of the basic market entry decisions is described below, and its implications for other decisions are reflected upon.

Selection of the Market to Enter Deciding which foreign market to enter is a crucial step in developing a global expansion strategy. It may impact on the firm’s other activities and influence its long-term profitability and general performance. Since all markets do not have the same profit potential, market selection must be based on the assessment of a nation’s long-term profit potential. This potential is a function of several environmental factors that influence a country’s attractiveness, many of which have been covered in the previous chapters. From what we might have already noted, the most favorable markets are those that are economically and politically stable. These markets offer an attractive market potential measured in terms of market size, purchasing power, and currency stability. Although there is no tried and true rule of thumb for the best market to enter or for identifying where there is a market need or a gap for a firm’s product, countries where the competition is not so severe could indicate potential markets. On the other hand, undesirable markets are those that are economically and politically unstable, with limited market potential.

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Selection of a market to enter may be complicated by the lack of global data to compare all countries in the world. While comparing all countries may not be feasible, the selection process can be informed by the information available to managers regarding the suitability of the countries under consideration. Thus, the selection process can be guided by answering the following key questions: i. Which international markets are of interest to the firm, regardless of their apparent potential? ii. Which international markets should be excluded from consideration because of the political and regulatory environment or any other risks? iii. Which remaining international markets have the least attractive political and social environment? iv. Which remaining international markets are least attractive because of their nature and potential market size? v. Which remaining international markets have substantial entry barriers? vi. Which remaining international markets should be avoided because competing firms are well entrenched in them? vii. Which remaining international markets are not large enough to justify the intended marketing efforts? viii. Which remaining international markets are unlikely to respond to the planned marketing activities? ix. Which remaining international markets are unattractive because of the problem of reaching them? x. Do any of the international markets under consideration meet the company’s objectives or match its competitive strategy? In addition to considering the questions highlighted above, companies that adopt a logical process of entering a foreign market take a systematic approach to market selection. The process entails (i) reducing the number of potential markets through applying macro-criteria, (ii) reducing the number of potential markets using industry criteria, and (iii) finally deciding on the number of potential markets based on micro-criteria. The selection starts with the preliminary screening of potential markets based on a set of criteria. Then the industry and company sales potential in each market are estimated. Based on the results, the market opportunity is identified and the selected market is tested. It is important to note that the company can reject any of the international markets at any particular point in the decision-making process, when the selection criteria are not met.

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In some situations, however, market selection involves an opportunistic approach, resulting from the casual discovery of the market potential by international marketing managers. This approach is used when the market becomes known to the firm in an unplanned way. In selecting international markets, the firm must have access to various kinds of information through management knowledge and experience, internal company data, the internet, trade journals and magazines, and government publications.

Timing of Entry Once the foreign market is selected, the firm must decide the timing of entry. Whether the firm is considered to enter the market early or late depends on the timing of other firms: it is early when an international firm enters a foreign market before other foreign firms, and late when a firm enters after other international businesses have already established themselves in the market. Firms entering a market early can gain firstmover advantages, including: the ability to pre-empt rivals and capture demand by establishing a strong brand name; the ability to build up sales volume in that country and ride down the experience curve ahead of rivals, gaining a cost advantage over later entrants; and the ability to create switching costs that tie customers into their products or services, making it difficult for later entrants to win business. On the other hand, the firstmover disadvantages (the disadvantages emerging from entering a foreign market before other international businesses) are pioneering costs (which an early entrant has to bear but a later entrant can avoid), such as the cost of business failure if, due to ignorance of the foreign environment, the firm makes major mistakes, and the cost of promoting and establishing a product offering, including educating customers. Pioneering costs arise mostly when the foreign business system is so different from the firm’s home market that it must devote considerable time, effort, and expense to learning the rules of the game.

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Figure 4.1 Systematic selection of international markets Stage 1: Reduction in number of potential markets: macro-criteria Stage 2: Reduction in number of potential markets: industry criteria

Final reduction in number of potential markets: microcriteria Market

Preliminary screening of potential market

Market rejected

Estimate industry sales potential in each market

Market rejected

Estimate company sales potential in each market

Market rejected

Market opportunities identified

Selected market tested

Market rejected

Source: Bradley (2002).

Scale of Entry After choosing which market to enter and the timing of entry, firms need to decide on the scale of market entry. This decision must be made carefully, since entering a foreign market on a significant scale is a major strategic commitment, involving decisions that have a long-term impact and are difficult to reverse. Small-scale entry, on the other hand, has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm’s exposure to that market. It is a way of gathering information about the foreign market before deciding whether to enter on a significant scale and how best to enter. Balanced against the value and risks of the commitments associated with large-scale entry are the benefits of small-scale entry. Then again, the lack of commitment associated with small-scale entry may make it more difficult for the smallscale entrant to build market share and capture first-mover or early-mover advantages. The risk-averse behavior of the firm that enters foreign markets on a small scale may limit its potential losses, but it may also miss out on potential advantages. It is important to note that large-scale entry gives both customers and distributors an assurance that the firm will remain in the market for a long time. Thus, a firm must think of the implications of scale of entry and strike a balance that will minimize risks

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while ensuring that the confidence of customers and distributors is maintained.

Market Entry Strategy (Modes) Once the firm has decided to enter the foreign market, the question arises as to the best mode of entry. A market entry strategy is the planned method of delivering goods or services to a target market and distributing them there. The choice of method of entry into foreign markets for many firms is a fundamental and critical decision in international marketing, as the entry technique will have an impact on the rest of their marketing programs. It will influence the firm’s ability to develop products and its distribution strategy, promotion, or pricing. Entering foreign markets may be achieved in a variety of ways, each of which presents unique advantages and challenges to the firms in terms of the risks associated with it, the degree of control it offers, and the resources it requires. In view of this, it is imperative for international marketers to understand the criteria for selecting a market entry strategy before they choose.

Market Entry Decision Criteria Firms choosing their market entry strategy face a difficult decision with regard to choice of entry mode. While there are a variety of modes, ranging from indirect exporting to foreign manufacturing, the choice of entry is influenced by several factors. The market entry decision involves a trade-off between control, costs, and risk. For instance, if the firm opts to manufacture in the host country, its degree of control over marketing and production decisions will be high, although it will involve higher costs and greater risk. While some strategies offer lower levels of risk and less market control, others give firms greater control but expose them to higher risks. When choosing the market entry strategy there are a number of factors to be considered, including factors specific to the firm, environmental factors, and the nature of the product.

Factors Specific to the Firm Firm-specific factors may include the goals of the firm, personnel and administrative requirements, capital requirements, risks, or the firm’s flexibility in coping with the foreign environment. More specifically, firms with different goals, objectives, and strategies, and varying international experience, will select different market entry strategies. For example, if a

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firm’s objective is to be a leader or to have greater control in the market, it will choose direct market entry. If the firm’s objective is to have less control then it will select an indirect entry strategy. If the firm lacks skilled and experienced international personnel, it should avoid high-risk direct entry strategies. In addition, the amount of capital requirement will vary with the method of entry, hence this will determine the choice of entry method. For firms which have limited capital and low tolerance for financial risks, indirect methods would be preferable, and vice versa. The ability of the firm to adapt to changing circumstances is particularly desirable in the case of a direct entry strategy.

Environmental Factors As we have seen from the previous chapter, environmental factors such as economic, political, legal, and socio-cultural conditions have a direct impact on the performance of a firm in foreign markets. For example, in a foreign market with a low per-capita income and low purchasing power, the firm would find it difficult to justify direct entry strategies. A firm should consider whether the political condition of the country favors the chosen entry method. For instance, in a centrally planned economy, joint ventures are more favorable. Legal restrictions on the extent of business conducted in a host country may force the firm to choose a specific mode of market entry. If the firm has little or no knowledge of the foreign market’s factors, such as language, religion, or social organization, an indirect market entry strategy may be appropriate.

Nature of the Product The technological content of the firm’s products, whether industrial or consumer-oriented, will determine the level of service support required. For example, when a product requires after-sales service, this will affect the choice of method of entry – in this case, direct market entry may be favored.

Market Entry Strategy Alternatives Market entry ranges from indirect exporting to wholly owned production facilities based in foreign markets. Figure 4.2 illustrates the three methods used as market entry strategies: indirect exporting, direct exporting, and foreign production. Indirect exporting is appropriate when the firm lacks knowledge about the foreign market, or lacks capacity in terms of human

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and financial resources. Direct exporting takes a lot of preparatory work and significant time and travel to make and develop the right contacts. This method is suitable in the engineering and capital goods sectors. There are three options under direct exporting: the use of an agency, distributorship, or overseas subsidiaries. There are a number of factors which favor or hinder a firm to produce abroad: tariff and non-tariff barriers, political considerations, transportation costs, the size of the market abroad, cost of production, etc. The actual type of local production depends on the arrangement made, and could vary from contract manufacturing, assembly plant, licensing, or joint ventures, to total ownership of production facilities. Figure 4.2 Market entry strategy alternatives Foreign Market Entry Strategies

Indirect Exporting

x Export Houses o Export merchants o Confirming houses o Export agent x Export Management Company x International Trading Company x Piggybacking

Direct Exporting x Agent x Distributor x Overseas Subsidiaries

Foreign Production

x Foreign assembly x Contract manufacture x Licensing x Franchising x Joint venture x Strategic alliances x Local production

Export Houses This is any company which is not a manufacturer, whose main activity is the handling and financing of export trade. Export houses include export merchants, confirming houses, and export agents. Export merchants buy

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goods outright and sell them on under their own name. They act as domestic wholesalers, operating in foreign markets through their own sales agents or sales force. Their profit is derived from the difference between the buying and the selling price. Confirming houses act on behalf of the overseas principal to confirm an order which a foreign buyer has placed. They finance the transactions and accept the credit risk. The confirming houses receive a commission from the buyer. An export agent acts as the manufacturer’s export department and undertakes most or all of the exporting tasks, e.g. attending to the physical and clerical tasks associated with exporting, stocking goods at home or abroad, following up delivery dates, providing after-sales service if required, carrying out credit risk assessments, and so on. An export agent will usually cover a particular sector of industry. Remuneration is in the form of a commission from the manufacturer, although an alternative form of remuneration is possible, for example on a cost plus profit margin basis. There are many advantages to entering foreign markets using export houses. For example, the firm can take immediate advantage of the merchants’ or export agents’ knowledge of the foreign market and contacts in those markets. There is no need for the organization to have its own export department. Export merchants pay the firm in cash, thus the firm avoids credit risks. Some merchants have developed expertise in the field of export. Credit is carried by the confirming house, which also pays in the home currency and promptly. The exporter will have a closer link to its overseas customers, since the confirming house is an agent. In addition, importers can place orders to exact specifications; the exporter maintains greater control over their market because the sales are in their name and there is an immediate gain of an export department at minimal cost. However, there are a number of disadvantages. For example, a firm does not get direct contact with the overseas customers, thus there can be a lack of goodwill. The manufacturers have little or no control over the firm’s market; thus they lack an idea of its true needs and the potential market that may exist. Sometimes, when merchants take on many product lines, the firm’s product may receive little attention. If the manufacturer’s products provide a poor return, then the export agent may ignore or drop the product. And finally, a firm may not get the opportunity to develop export experience.

Export Management Company An export management company (EMC) is a specialist intermediary in that it acts as an export department for the exporting firm – in effect, it

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works as the exporter’s agent. EMCs are useful to small and medium-sized companies. There are several advantages associated with the use of this option. First, EMCs have instant market knowledge and business contacts abroad; and since they deal with many firms, then the exporters gain from economies of scale in management and transport costs. Also, their payments are based on performance, hence the possibility of generating high sales. However, there are various disadvantages associated with the use of EMCs. They may lack the necessary degree and depth of market coverage. The exporter will not gain international knowledge and experience. EMCs specialize in a single geographical market or product, thus an exporter may have to resort to many EMCs. The exporting firm may not receive the degree of attention expected because the EMC is dealing with many unrelated products.

International Trading Company International Trading Companies (ITCs) tend to be large-scale manufacturers and merchants that are involved in wholesale and retail distribution. They normally act as agents for principals in overseas markets. The main advantage of using an ITC is that it acts as a traditional agent in the overseas market and, furthermore, it can supply the firm with technical backup if required. Also, ITCs tend to handle documentation, shipping, etc., and pay in the country of origin. However, ITCs carry competing products, and are unlikely to give the firm’s product the attention it may need to succeed in overseas markets.

Piggyback Exporting or Joint Marketing Piggyback or joint marketing occurs when a firm enters into a collaborative arrangement with a major manufacturer in a similar field – in other words when one manufacturer (the “carrier”) uses his established overseas distribution network to market the goods of another manufacturer (the “rider”) alongside his own. There are two possible arrangements in this foreign market entry strategy: (i) the carrier can act as an agent by selling the rider’s products on a commission basis; (ii) the carrier can act as a merchant and buy the products outright in order to resell them. This is an ideal for firms wishing to enter the international market, and is most suited to those situations where: x the marketing, distribution, and service costs are high;

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x the carrier may sell the rider’s products because they complement his product range, which therefore gives the carrier a wider competitive offering to the market; x the marketing requirements are high and sophisticated; x overseas customers may have a desire for innovative products that the carrier cannot supply from his own range; or x the opportunity for lowering unit distribution costs exists. There are a number of advantages and disadvantages to the parties involved in piggybacking trade arrangements. For the rider, for example, it provides a simple and low-risk method of entering the foreign market: it gives immediate access to an overseas market, especially for firms with limited resources, and the distribution expenses are shared by both parties. On the side of the carrier, it is an easy and profitable way of broadening its product range; it provides the carrier with an attractive sales package which could increase its profit levels. It is also an easy way for the carriers of cyclical or seasonal products to keep their distribution channels operating throughout the year. The disadvantages of piggyback operations should also be noted, however. The exporting company may become dependent on the carrier, and may therefore find itself under the control of the bigger company. It is quite difficult to find a suitable piggyback partner. The rider’s product may take second priority to the carrier’s product line. Problems could arise from branding and promotional policies in that the rider’s products could be sold under the carrier’s label, and this could limit potential overseas expansion. It may be the case that the carrier’s sales and service staff will need to be trained to handle the rider’s product(s), or arrangements may be needed to provide warranty and service backup.

Agent An agent is an individual or organization that acts on behalf of a principal, to bring the principal into a contractual relationship with third parties to whom the principal’s products or services can be sold. Agents act as intermediaries between suppliers and users. They can be commission agents, after-sale agents, stocking agents, or del credere agents. Commission agents do not hold stocks; they pass the orders to the principal, who then delivers the goods directly to the customer. This is suitable for industrial goods and where there are entry problems into a particular market; also for markets with limited or irregular orders. Service after-sale agents provide servicing and repair facilities and charge the customer. This kind of agent is specifically for technical products. A

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stocking agent holds stocks of the product, and acts as a wholesaler for the overseas principal. He does not take title to the goods, and he receives a commission on sales plus a fixed sum to cover storage and handling facilities. A del credere agent accepts the credit risk, agreeing to pay the principal in the event of a default by the customer. They are paid a much higher commission. There are several advantages of using agents. The firm obtains the services of an experienced local national who is familiar with local business practices and customs, is fluent in the language, and is perhaps fully aware of the exporter’s industry. The agent can provide information on the market and recent developments. This will enable the firm to plan effectively. If the exporter is visiting the territory, the agent can make the necessary arrangements and provide the right introductions and orientation. The cost to the firm of using an agent is virtually nil and the results of using such a channel are almost immediate in terms of sales. However, there are also a number of disadvantages of using agents. The company has only a part share of their time because they normally work for other principals as well. An agent dealing with a highly technical product may find it difficult to keep abreast of the latest technical innovations and their merits. In general, most agents are weak on marketing skills and rarely involve themselves in promotional work. As agents do not take title to the goods, they risk very little except perhaps time, and this could have the effect of not inducing them to invest their best efforts in the firm’s products. Commission agents may order in small quantities which can lead to uneconomical freighting arrangements. In general, agents are not prepared to take risks.

Distributorship Distributors are customers who have been given exclusive or preferential rights to purchase and resell a specific range of products from a supplier organization. Normally they are given sole rights and operate in specific geographical areas or markets. Their remuneration comes from the difference between the purchase and resale price. They differ from agents in a number of respects. They contract to hold stocks, they have preferential rights, and the contractual relationship with the supplier is that of principal and principal. Distributors can offer the exporter a number of valuable services, such as stockholding, promotional support, after-sales services, market feedback, sales forecasting and reports, and sales and distribution management. Likewise, distributors tend to achieve a higher level of sales

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than agents. Distributors will be able to look after the supplier’s staff during visits to the market. Usually, they carry most of the risk for product failure in the market, and have experience in selling and distributing the product; this reduces the supplier’s workload. The exporter can supply distributors in bulk and thus use cost-effective freight rates. Their livelihood depends on the sale of stock and therefore they will push for a high sales volume. Distributors will take all the credit risks in the market and they have an intimate knowledge of the market to help the exporting firm plan and develop its marketing there. However, the manufacturer’s product will be competing for the distributor’s time and attention, and if it sells slowly it may be given low priority. As they carry the risks of product failure, distributors may be reluctant to take on new products. Also, distributors and exporters are very suspicious of each other’s profit margins. Terminating a distributor’s agreement is very difficult, as the distributor will have invested more heavily in a project than an agent would. A continuous problem is the level and share of promotional expenditure. A distributor may become concerned that the firm might perhaps decide to set up a subsidiary in the market if business sales are substantial. Distributors tend to change their product range at frequent intervals, and the product may not be pushed because it is no longer considered competitive. This may give rise to conflicts of opinion as to what constitutes a competitive product.

Overseas Subsidiaries The exporter may choose to use its own resources (i.e. sales personnel), set up an overseas branch office, or set up an overseas marketing subsidiary. The company’s own salesperson may be used in a market where suitable agents are not available or are difficult to find. The advantage is that the salesperson can project the company image and obtain immediate market feedback which will facilitate marketing and production planning. Because there are no intermediaries, the exporter will not need to share any profit. The major drawback of this approach is that the firm may need to develop fully an export organization. An overseas branch office uses local personnel trained in the firm’s product and organizational culture, and supervised by resident executives. These offices are usually set up because the overseas operation has become too large for a local agent to handle. One advantage to the exporter is that this approach is viewed favorably by local authorities because it employs local personnel. In addition, the firm can deal with local problems immediately, selling and marketing are handled more effectively than if they were in the

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hands of intermediaries, and company policies on various issues are implemented. The disadvantages for the exporter include foreign problems such as legal rules, repatriation of profits, and labor problems. Conflicts may arise between the head office and the local director of the overseas branch office, and the firm’s capital investment is subject to greater risk due to political instability. An overseas subsidiary company, meanwhile, is possible only if the scale of business can support a higher level of operations. It provides a firm with a base in the market to elaborate marketing operations and carry stock. The advantages and disadvantages of this method are in most cases similar to most of those of an overseas branch office, the additional points being that the firm could gain tax advantages, and reduced tariffs or no barriers at all are imposed.

Foreign Market Assembly An assembly operation consists of the last stages of the manufacturing process, where most of the product’s components are manufactured in domestic plants or in other foreign countries, before being transferred to the particular foreign market for final assembly. This could be said to be a halfway stage between indirect exporting and foreign manufacturing, and it is usually labor-intensive rather than capital-intensive. This type is advantageous when: x The firm can take advantage of lower costs in the foreign market, resulting in a lower final price of the product. x The local government incentivizes the setting up of assembly operations by banning the import of fully assembled goods. This also creates employment in the local market. x A tariff barrier is in existence, thereby making the product uncompetitive in terms of price. x The transportation costs on fully assembled products are high. x The final product is perceived as “local,” which can also help in its marketing. x The initial experience of the foreign market during assembly operations will be useful at a later stage, should a full manufacturing operation be established.

Contract Manufacturing Contract manufacturing is an alternative to assembly operations. It involves the company’s product being manufactured or assembled in the

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foreign market by another producer operating under contract. The company placing the contract would still handle the distribution and marketing of the product. This is a halfway house between licensing and direct investment in production facilities. It differs from licensing with respect to the legal relationship of the parties involved, in that the contractor simply produces on the basis of orders from the foreign firm. When using contract manufacturing, the international firm’s investment is kept to a minimum. The firm avoids most of the foreign market problems which may arise from a lack of familiarity with the economy concerned, such as legal or labor problems. Also, the product which is produced in the country can be marketed as locally made, and this is generally perceived in very positive terms by both consumers and the government. Savings in transportation costs are realized. In addition, production costs may be lower in the foreign market because of cheaper labor or material costs. Contract manufacturing allows a firm to enter a market otherwise protected by trade barriers such as high tariffs. The firm can concentrate its efforts on developing markets without having to divert resources into establishing its manufacturing plant in the market. However, it may be difficult to find satisfactory and reliable manufacturers in the foreign market. Extensive technical training may be required for the local producer’s staff. Quality control of the product is usually difficult to achieve. It is also possible, at the end of the contract, for the local producer to become a potential competitor, having acquired the necessary production and marketing expertise. This possibility could be minimized by the international firm pursuing a strong branding policy. Exhibit 4.1: Tanzania Breweries Limited and East African Breweries Limited1 An agreement that saw SABMiller2 cede a 20% stake in Tanzania Breweries Limited (TBL) to East African Breweries Limited3 (EABL) in exchange for a similar stake in Kenya Breweries was formalized in 2002. That agreement provided that TBL would grow EABL’s flagship Tusker brand in Tanzania, among other brands, as EABL did the same for SABMiller’s selected brands in Kenya. Among other issues, in March 2008 TBL threatened to increase the prices of EABL’s Tusker and 1

Also follow the case at http://en.wikipedia.org/wiki/East_African_Breweries and http://allafrica.com/stories/200910201185.html 2 SABMiller Africa BV is the principal shareholder of TBL. 3 East African Breweries Limited is a subsidiary of Diageo Plc.

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Guinness brands, a proposal that the Kenyan brewer rejected. EABL argued that the proposed 16% increase in the price of Guinness would move the brand from parity with TBL’s Castle Milk Stout (CMS). In reply to TBL’s notice of its intention to increase prices, the Kenyan brewer argued that a similar adjustment in the price of Tusker would move it from the mainstream to a semi-premium beer. When the contract came up for renewal, as provided for in the agreement, EABL stepped back, rejected the renewal, and later cancelled it, quickly initiating a similar deal with Serengeti Breweries. Eventually, court papers were filed by two of the world’s leading brewers, Diageo and SABMiller, filing for corporate betrayal, espionage, and sabotage. In court, the Kenyan brewer cited three grounds it reckoned constituted fundamental breach of its contract with TBL. It accused the Tanzanian brewer of effecting unilateral price changes, failing to use its best means to develop sales for EABL’s products, and failing to spend the requisite amount on advertising to promote EABL’s products. Although TBL contends that allegations of breach are nothing but a smokescreen, the partnership between the two parties went through turbulence in 2009, which led to EABL’s acquisition of 51% of Serengeti Breweries Limited (SBL) and its exit from TBL’s shareholder structure.

Licensing Licensing entails the sale of a patent (concerning a product or a process), manufacturing know-how, technical advice and assistance, or the use of a trademark or trade name on a contractual basis, by which the international firm (licensor) grants a license to a national company (licensee) and receives royalty payments in return. The payment for a license can take the following forms: x an initial payment where the agreement is signed to pay for the initial transfer of components, design, or know-how; x an annual percentage fee based on profits or sales; x an annual minimum payment; or x an exchange of patents or knowledge (cross-licensing). Licensing offers a number of advantages to both licensor and licensee. For instance, a licensor requires little or no capital outlay. This may be very attractive for small firms entering the world market. Licensing permits a quick and less problematic way of entering foreign markets. The firm gains immediate access to local market knowledge, distribution, and

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existing consumer contacts. Licensing permits market entry and development which would otherwise be closed on account of: high tariffs on finished imported manufactured products; high costs of setting up wholly owned subsidiaries; distant overseas markets where the extra costs and logistics of shipping finished products would make them uncompetitive; home manufacturers without the production capacity to meet overseas orders; expensive freight charges on bulky or heavy products of low value; difficulties in the repatriation of profits, dividends, and, sometimes, royalties; local suppliers with an entrenched position. Licensing can provide an opportunity to produce revenue from processes or technology that the firm no longer uses in its key markets. In many markets, particularly socialist ones, licensing is perhaps the only way in which markets may be entered. Many governments look favorably upon licensing largely because of the implications for local employment and the long-term benefits of technology transfer to the host nation. To a licensee, no R&D costs are required, as the licensor has done it all. Also, the licensee has access to the new technology or know-how of the licensor, allowing it to strengthen its competitive position. Nevertheless, disagreements may arise in terms of the responsibilities of each party (e.g. the marketing efforts of the licensee, territorial coverage, etc.). When the agreement finally expires, the licensor may find that it has indirectly established its future competitor, which has used the expertise gained to set up as a rival organization. Strict product quality control is difficult to achieve, and this matter is not helped by the fact that the product will tend to be sold under the licensor’s brand name. Governments can impose conditions on firms remitting royalties. The returns from licensing can be limited when compared to direct investment. There is often great difficulty in finding a suitable licensee with the necessary technical expertise in the target market. The licensee has a weak bargaining position, in particular for undisclosed technology, until the technology has been supplied. There may be difficulties in communicating complex and sometimes subtle technologies successfully from one company to another, and across cultures.

Evaluating Licensing Arrangements Because of the complications that may emerge from the licensing arrangement, it is important for both parties to make a critical evaluation of the commitment before they sign any agreement. The following questions can help both licensor and licensee to evaluate the agreement before it is signed:

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x x x x x x x x x x x x x x x x x

How many patents, processes, or trademarks will be used? How will technical assistance be rendered? Which products are included in the agreement, and to what extent? What territory is to be covered by the license? How should the licensee be compensated? The currency in which payments will be made to the licensor. What happens if compensation cannot be paid by the licensee? If sublicensing is permitted, how should it be carried out? What geographical limitations are there on the marketing of the licensed product or service? What are the provisions as to the duration of the agreement and its cancellation? What rights does the licensor have in developments by the licensee? What visitation and inspection privileges are held by the licensor? Can the parent company inspect accounts? What provisions are there for satisfactory promotional or sales performance and adequate quality control? What home and host government approvals are required? What tax factors are involved? How will disputes be settled?

Franchising Franchising is a particular form of licensing in which the franchisor makes a total marketing program available, including brand name, product, method of operation, and management advice. This is more comprehensive than a normal licensing arrangement, in that the franchisee agrees to a total operation being prescribed. Franchising is best suited to service industries, markets with a high level of economic development, and product concepts that require limited training and can easily be applied. The advantages of franchising are many. It is a much more rapid way to expand business activity over a larger area with minimum investment than other forms of market entry strategy (Exhibit 4.2). It is very profitable for the franchisor, who receives income in the form of royalties and fees and from the purchase of product components or ingredients. Moreover, exclusive purchase arrangements that in many cases exist allow the franchisor to retain maximum control over the product concept. The franchising strategy is not without its disadvantages, however. For

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example, the firm could possibly attain higher profit levels by running the operations itself. To expand rapidly and over a wide geographic area requires many franchisees that are not only competent but are also financially in a position to take on a franchise; these are difficult conditions to fulfill. There are difficulties in monitoring the quality of the franchise operations, and this requires constant, systematic supervision of the franchisee. Exhibit 4.2: Power Food Limited Introduces Plumpy’Nut Through Franchising Power Foods Industries Ltd. is an agro-processing company dealing with fortified food and Plumpy’Nut® products in Tanzania. Established in 1993, the company has grown from a small cereal flour miller to an international healthy food supplier. The company made a franchising agreement in 2009 with Nutriset, a family-owned and family-operated food manufacturing company with twenty-five years’ experience, headquartered in Normandy, France, to make nutritional products available for the benefit of children (Plumpy’Nut). Plumpy’Nut is a Readyto-Use Therapeutic Food (RUTF), with a similar nutritional value to F100 milk, for the nutritional rehabilitation of children with severe acute malnutrition. It is a paste that needs neither preparation nor dilution before consumption. After extensive renovation works and the installation of new equipment, Plumpy’Nut production started in December 2010. The company made a total investment of US$1.4 million in the new facilities and provided a total working capital of US$600,000. The franchise has provided Power Foods with an opportunity to serve the whole region of East Africa with Plumpy’Nut for the UNHCR programs. The PlumpyField Network is an international network of independent local producers of ready-to-use foods, dedicated to promoting nutritional autonomy worldwide. The partnership includes technology transfer and rigorous quality standards support from Nutriset. There are twelve partners in the network around the world, including Power Foods. In order to meet the requirements of the Plumpy’Nut project, the company opened up to outside investors, and two, one from the USA and another from France, came in. Power Foods has improved its quality assurance processes using the quality assurance system validated by Nutriset (Hazard, Analysis, Critical, Control Point (HACCP), Principles of Food Hygiene CAC/RCP 1-1969, and the International Code of Hygienic Practice for Foods for Infants and Children CAC/RCP 21-1979). Power Foods’ vision is to become a leader in the processing and

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distribution of quality nutritious and safe food products in the effort to fight malnutrition among children and vulnerable groups in the subSaharan Africa region and across the world by 2025. With malnutrition being the number-one killer among children under the age of five within the developing world, the mission of Power Foods is to help eradicate this shameful epidemic with the support of PlumpyField. Source: Managing Director, Power Foods Limited (2011).

Joint Venture A joint venture is a project in which two or more parties invest. It normally results in the formation of a new company in which the parties have shares, though neither party has effective control over the decisionmaking process. It differs from licensing in that the firm (i) takes an equity share and (ii) has a management role. The parties share profits, risks, and assets. Profit and loss may be shared equally or in different proportions, and the contribution of each party varies. For a joint venture to be successful the following should be done: x It is essential to find the right partner in terms of commonality of orientation and goals, and there should be complementary and relevant benefits to each partner. x The negotiation must address key issues from the outset, such as profit distribution and provision for changes in the original mission. There are various advantages associated with joint ventures. A firm sees higher returns compared with royalty payments. Greater control may be exerted over production and marketing operations. The risk is shared on a new venture, especially when it involves long-term capital investment (Exhibit 4.3). More international experience may be gained, and therefore greater familiarity with the local environment, in particular the cultural aspects. Many firms embark on joint ventures as a way of overcoming import limitations. Compared to wholly owned subsidiaries, they have a number of advantages. They are favored by foreign governments because there is less risk of loss of control. There are benefits of technology transfer and increased profits. Joint ventures require less capital and management resources. The firm is less likely to be taken over by the government because it incorporates local partners. The local partner can exert political influence, thus the venture may benefit from government supports, grants, and tax advantages. A good relationship is possible with

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unions, local government, and other local organizations. This facilitates instant and better market knowledge and feedback. Compared with licensing, however, joint ventures require more capital and management resources, and risk factors are increased with an equity approach. Compared with wholly owned subsidiaries, conflicts of interest may arise from national differences in management philosophy, culture, and business objectives. Likewise, the partners’ business objectives may differ. Integrating joint venture operations between different nations can be difficult and unsatisfactory. There is always a feeling that the other partner may be getting the better deal. Finally, joint ventures frequently suffer from not exactly being jointly run. Exhibit 4.3: Tanzania Market Entry: American Embassy Advice to US Investors The Tanzanian government encourages joint ventures between local firms and foreign investors; this also facilitates access to land, which foreigners cannot own. Many foreign firms have recently partnered with the National Development Corporation, Tanzania Petroleum Development Corporation, and the National Housing Corporation, in energy, biofuels and real-estate ventures. To enter the Tanzanian market, local contacts, cultural appreciation, and relationship-building are important. Successful US companies have taken the time to visit Tanzania in order to get to know the market and meet with potential partners. Marketing US goods is generally done through a local agent or distributor. Successful investment usually requires an American or local representative on the ground to oversee operations and financial transactions. Pervasive corruption and bureaucratic obstacles can be minimized by working with local lawyers and by insisting that contracts and offers be made in writing. Source: US Embassy, (2011).

Strategic Alliances A strategic alliance is a type of international corporate alliance between organizations from different countries that are often competitors. It differs from the joint venture in that a strategic alliance is more extensive; for instance, in an alliance the partners contribute manufacturing know-how, production technology, marketing expertise, access to distribution networks, etc. Sometimes equity acquisition by one or both partners is involved. The reasons for forming alliances vary, but the most important include gaining market entry, remaining competitive

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on a global scale, and attaining economies of scale. Alliances tend to be based on production, distribution, or technology. There are various risks associated with strategic alliances: x There may be differences in corporate culture and management philosophy and practice, which may threaten the survival of the alliance. x The objectives may be set on short-term goals as opposed to longterm gains. x There may be differences in solving problems – for instance, one partner may prefer a technical solution to a marketing solution. x There is a danger of a one-way flow of technological know-how if procedures and guarantees are not enforced and adhered to. Therefore, strategic partnerships are a response to global competition, to enhance a firm’s global reach, established to enter markets and gain access to a potential series of resources and skills. Exhibit 4.4: The Divorce between Air Tanzania Corporation and South African Airways: What Went Wrong? Overview Air Tanzania Corporation (ATC), the Tanzanian flag-carrier, was established on 11 March 1977, to operate the services suspended following the collapse of East African Airways (EAA), which was owned jointly by Tanzania, Kenya, and Uganda. The airline initially leased one Douglas DC-9-32 5Y-ALR from Kenya Airways and one Boeing 707-331 YN-BWL (exN762TW) from Areo Nica. Regular and domestic flights followed, using Boeing 737-200s and Fokker F27s, and adding de Havilland Twin Otters to its fleet for domestic services from Kilimanjaro International Airport (KIA). The fleet was gradually upgraded by two Boeing 737-200s, four Fokker F27s and four DHC-6 Twin Otters. Due to decreased traffic, two of the F27s were removed from service in 1981, but were returned two years later, only to be removed again in 1984. The airline leased a single Boeing 767-200 1991/1992 from Ethiopian Airlines but this aircraft was too large and the airline had to dispose of it. The carrier also leased a McDonnell Douglas MD-83, G-BNSA during 1989. The airline has also had in its fleet two Boeing 737-33A, XA-SWOs (leased from TAESA on a short term contract 1998), five H-TAC 1999-2003s and a single Dornier 208-201 ZS-OVM leased from South African Airways. Air Tanzania Corporation’s Efforts to Join a Strategic Alliance

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Air Tanzania was privatized in late 1998 and was planned to be merged into Alliance Air, but the plans were cancelled and the airline remained state-owned. The airline was originally wholly owned by the Tanzanian government via Air Tanzania Corporation (ATC). In February 2002, the government began the process of privatizing ATC through the Presidential Parastatal Sector Reform Commission (PSRC). Advertisements were placed in the local, regional, and international media, inviting potential bidders. The International Finance Corporation (IFC) acted as the lead advisor to the government in this transaction. The following eight airlines submitted expressions of interest: Aero Asia International (Pakistan), Air Consult International (Ireland), Comair (South Africa), Gulf Air Falcon (United Arab Emirates), Kenya Airways, Nationwide Airlines (South Africa), Precision Air (Tanzania), and South African Airways (South Africa). Four airlines of eight bidders carried out diligence: South African Airways (SAA), Kenya Airways, Comair, and Nationwide. On 19 September 2002, the deadline, only SAA submitted a bid; Kenya Airways and Nationwide did not. The government therefore selected SAA as the winning bidder. In December 2002, after signing an agreement with the government, SAA purchased a 49% stake in ATC for US$20 million (US$10 million as the value of the shares, and the remaining US$10 million for the capital and training account to finance its proposed business plan). As the strategic partner, SAA planned to create its East African hub in Dar es Salaam, to form a “Golden Triangle” between Southern, Eastern, and Western Africa. It also intended to replace ATC’s fleet with Boeing 737-800s, 737-200s, and 767-300s, and planned to introduce regional routes, routes to the Middle East, and routes to West Africa. The government was expected to sell 10% of its current 51% stake to a private Tanzanian investor, thereby reducing its ownership to a noncontrolling interest in a new entity, Air Tanzania Corporation Limited. Air Tanzania Corporation Limited within the Strategic Alliance The new airline, Air Tanzania Company Limited (ATCL), was launched on 31 March 2003, offering direct flights from 1 April between Johannesburg and Dar es Salaam, but also to Zanzibar and Kilimanjaro. The same year, Air Tanzania recorded a pre-tax loss of almost US$7.3 million in the first year of the alliance. The loss was mainly attributed to an inability to expand the network as quickly and extensively as originally planned. It had been hoped to launch services to Dubai, India, and Europe, but these had been delayed as there were only Boeing 737-200s in the fleet. The development of Dar es Salaam International Airport as a hub for the SAA alliance had also not proceeded as planned. On 31

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January 2005, ATCL suspended one of its few regional services from Dar es Salaam to Nairobi, following intense competition from Kenya Airways on the route. On 31 March 2006, the government of Tanzania announced that it would dispose of ATCL, following the four years of loss-making which amounted to TZS24.7 billion. According to the 2006 director general of the Civil Aviation Authority, Air Tanzania was in a worse state than before it was taken over by SAA; Tanzania’s government was blamed by SAA for failing to release about US$30 million needed to implement Air Tanzania’s business strategy to reverse continued losses. Termination of the Strategic Alliance Contract After the merger of the two African airlines failed to achieve its goals, the two parties entered into a sale of shares agreement under which SAA sold its 49% stake in Air Tanzania to the Tanzanian government, which agreed to take on the burden. On 7 September 2006, the Tanzanian government bought back 49% of the shares in ATCL for US$1 million, hence officially terminating the partnership contract it had entered with SAA. The venture collapsed due to the partners’ different interests in the whole airlines business. The disengagement documents were signed in Johannesburg at the SAA Head Office on 29 August 2008, in the presence of officials representing the government of Tanzania, ATCL, and SAA. Both sides agreed to an amicable resolution to all outstanding issues and committed to cooperate commercially in the future where mutual benefits could be extracted. The president and CEO of SAA signed the agreement on behalf of his company, while the executive chairman of PSRC and the chairman of ATCL signed on behalf of the government of Tanzania and ATCL respectively. Following the disengagement signed in August 2008 the Tanzanian government held secret talks with the Chinese Development Bank to sell the 49% shares acquired back from SAA to a Hong-Kongbased private firm, with a view to reviving the airline.

Foreign Direct Investment Investment in foreign markets can take many forms, but two important distinctions are normally made: Portfolio investment (PI) and foreign direct investment (FDI). Portfolio investment refers to the purchase of shares in companies where control does not follow. Foreign direct investment is a type of investment in which participation in the management and control of the enterprise is involved. FDI represents the highest level of investment a company can make in an overseas market, and it involves immense financial commitment in particular, as well as

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management skills, marketing expertise, manufacturing know-how, transfer of technology, and so on. FDI is often chosen as an alternative to exporting for a number of reasons: x The firm may have to establish a presence in the local market to defend itself from local competition. x Exporting to the foreign market is not attractive because of government policies and barriers to trade, therefore the firm needs to establish a base in the market. x The firm could serve the market better by adapting its products to local needs. x The foreign firm can compete more effectively in the local market because it can gain competitive advantages in terms of costs or technology. x There may be efficiency gains if the operations are close to the source of the raw materials. There are two major strategies to establish foreign production facilities: through acquisition, or through the establishment of new production facilities. An acquisition strategy involves buying out an existing local firm. The acquisition route involves the purchase of all or the majority of the shares of the local company in order to gain control. There are a number of advantages to this method. It is the fastest way for the firm to enter a market and acquire a trained labor force, local management, and access to distribution. The acquisition strategy offers networks, local knowledge, and contacts with the market and local authorities; and it allows ownership and management of well-known brand. The disadvantages of the acquisition method include the problem of integrating a newly acquired company, especially when company has different management and business practices; also, while most governments tend to offer foreign investors low-interest loans and tax holidays for the construction of new plants, under the acquisition method this treatment is missing. The establishment of new production facilities is costly and timeconsuming, although it has a number of advantages: x The firm can develop in the way it wants to. x It can incorporate the latest equipment and technology. x It avoids the problem of changing the business practices of the former organization, which could lead to resistance on the part of workers and managers. x Favorable grants and tax periods.

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x Maximum control over product and reduced transportation costs as the product is now produced locally. There are, however, disadvantages associated with this entry method. There are heavy costs involved as everything needs to start afresh. There is increased risk in the event of a political crisis. There is long period before the venture starts generating profit. Also, the firm has to abide by local laws, which may be detrimental to the firm’s goals or organization. In general, wholly owned ventures are favored because the firm acquires greater experience in international marketing, all profits accrue to the firm, conflicts of interest which would occur in partnership are eliminated, and the possibility of developing synergetic international systems exists. Due to the various disadvantages inherent in FDI, and investors’ hesitation to invest in risky markets, developing countries have introduced various initiatives to attract FDI. For example, the Tanzania Investment Centre (TIC) was established as a one-stop center for investors as a strategy to attract FDI to the country (Exhibit 4.5).

Exhibit 4.5: Tanzania Investment Centre’s Incentives to Attract FDI The Tanzanian Investment Centre (TIC), established by the Tanzanian Investment Act of 1997, is the focal point for all investors’ inquiries, screens foreign investments, and facilitates project start-ups. As a primary agency of the government in all investment matters, the TIC is charged with the following functions: assisting in enterprise establishment (e.g. incorporation and registration of enterprises; obtaining necessary licenses, work permits, visas, approvals, facilities or services; sorting out any administrative barriers that confront both local and foreign investments; promoting both foreign and local investment activities; securing investment sites and assisting investors to establish EPZ projects; granting certificates of incentives and investment guarantees, and registering technology agreements for all investments that are over US$300,000 and US$100,000 for foreign and local investments respectively; providing and disseminating up-to-date information on existing investment opportunities, benefits, or incentives available to investors: and assisting all investors whether or not they are registered by the TIC. Approved projects receive TIC certificates of incentive and are allowed 100% foreign ownership, VAT and import duty exemptions on project/capital goods, and repatriation of 100% of profits, dividends, and

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capital, after tax and other obligations. Refund of duties charged on imported inputs used for producing goods for export and goods sold to foreign institutions such as the UN and its agencies operating in Tanzania is allowed. Similar incentives are offered to investors in semi-autonomous Zanzibar through the Zanzibar Investment Promotion Agency (ZIPA). The country uses the WTO’s Trade-related Investment Measures (TRIMs) to promote development objectives, encourage investment in line with national priorities, and attract and regulate foreign investment. Trade development instruments that Tanzania has adopted include Export Processing Zones (EPZs), Investment Code and Rules, and Export Development/Promotion and Export Facilitation. EPZs were established by the 2002 EPZ Act and are open to both domestic and foreign investors. The Export Processing Zones Authority (EPZA) is charged with designating suitable areas for the location of EPZs. The EPZA also oversees incentive packages such as exemptions from corporate tax and withholding taxes on rent, dividends, and interest; remission of customs duty, VAT, and other taxes on raw materials and capital goods; and exemption from VAT on utilities, wharf charges, and levies imposed by local authorities. Tanzania experienced a steady rise of foreign direct investment over the last decade, although investment decreased in 2009 as a result of the global financial crisis. In 2009, the value of FDI was US$650 million, compared to US$744 million in 2008 (the highest figure recorded in Tanzania in the past eight years). Tanzania attracted US$1.87 billion of FDI inflows in 2013, a 72% increase from the previous year and the highest in the East Africa region. The UN Conference on Trade and Development’s (UNCTAD) 2014 World Investment Report listed a total of $12.72 billion of FDI stock in Tanzania. In the last decade the total FDI stock in Tanzania exceeded US$6 billion, making the country a leading FDI destination in the East Africa region. Tanzania’s strategic location makes it a natural East African hub for investors seeking to exploit not only resources but also a growing market of 527 million consumers in East and Southern Africa. In recent years, the government has sought to attract investment in both the productive and extractive sectors, including agriculture, with the Kilimo Kwanza (agriculture first) strategy and the development of the Southern Agricultural Growth Corridor of Tanzania (SAGCOT), and mining, with both sectors eligible for 100% capital expenditure deductions. The TIC promotes investment and trade opportunities in agriculture, mining, tourism, telecommunications, financial services, energy, and transportation infrastructure.

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However, investment incentives can be unpredictable; in 2014, the government moved to limit the scope of incentives by increasing the investment threshold to qualify as a “strategic investor” to US$50 million for foreign investors, with the limit remaining at US$20 million for Tanzanian investors. American investors, for instance, have commented that while the business climate has generally improved over the past decade, in certain sectors the legacy of socialist attitudes has not fully dissipated, sometimes resulting in suspicion toward foreign investors and slow decision-making. Source: http://photos.state.gov/libraries/tanzania/231771/PDFs/Country_ Commercial_Guide_2011_Tanzania.pdf and http://photos.state.gov /libraries/ tanzania/65409/Tz_ICS_2014/Tanzania_ICS_2014_FINAL.pdf.

In addition, despite the fact that it is not the purpose of this book to embark on the economics of FDI, some reflection on the FDI trends in emerging economies and the developing countries of Africa would be instructive to international marketing managers. According to the World Investment Report (2013), recent global trends and incentives offered by developing countries are shifting the direction of flow of FDIs in the world (Exhibit 4.6). Exhibit 4.6: FDI Trends in Emerging Economies and Developing Countries The BRICS countries (Brazil, the Russian Federation, India, China, and South Africa) have recently emerged not only as major recipients of FDI but also as important outward investors. Their outward FDI rose from US$7 billion in 2000 to US$145 billion in 2012, or 10% of world flows (up from only 1% in 2000). Overseas investment by BRICS countries is mainly in search of markets in developed countries or in the context of regional value chains. Over 40% of their outward FDI stock is in developed countries, of which 34% is in the EU. Some 43% of outward FDI stock is in neighboring BRICS economies, in Latin America and the Caribbean, transition economies, South Asia, South-East Asia, and Africa. FDI inflows to Africa rose for the second year running, up 5% to US$50 billion, making it one of the few regions that registered year-on-year growth in 2012. FDI outflows from Africa almost tripled in 2012, to US$14 billion. Transnational companies from the South are increasingly active in Africa, building on a trend in recent years of a higher share of FDI flows to the region coming from emerging markets. In terms of FDI stock, Malaysia,

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South Africa, China, and India (in that order) are the largest developingcountry investors in Africa. FDI inflows in 2012 were driven partly by investments in the extractive sector in countries such as the Democratic Republic of Congo, Mauritania, Mozambique, and Uganda. At the same time, there was an increase in FDI in consumer-oriented manufacturing and services, reflecting demographic changes. Between 2008 and 2012, the share of such industries in the value of green-field investment projects grew from 7% to 23% of the total. Source: World Investment Report, (2013).

Interestingly, some companies in Africa (e.g. the Bakhresa Group in Tanzania and the Dangote Group in Nigeria) have been able to embark on FDI across several African countries. This has demonstrated the emerging trend of FDI outflow in the region in spite of the risks involved in most African countries. As a matter of entry strategy, the approach used by the companies investing abroad in Africa is that they enter the market with minimum effort before starting the whole production facility (Exhibit 4.7). This works on the assumption that investment in the foreign market has to be incremental, based on the proof of the firm’s ability to serve the target market. In view of the example of the Bakhresa Group, it is apparent that it is possible for the firm to begin with a lower-risk strategy and increase its involvement in the foreign market after acquiring the adequate experience, skills, and resources needed to embark on fully fledged foreign production. Since participating in FDI is the most intense form of commitment to international marketing, incremental commitment sometimes proves to be a feasible approach. However, as discussed previously, this will depend on the decision of the firm on the scale of entry and its capability of facing the foreign market’s risks. Exhibit 4.7: Bakhresa Group Goes Abroad Gradually The Bakhresa Group is one of the leading industrial houses in Tanzania, East Africa. Having started in a humble manner with a small restaurant in the port city of Dar es Salaam in the mid-1970s, it has now emerged as one of the prominent family-owned business groups in the region. The group’s operations are spread across Tanzania, Zanzibar, Uganda, Kenya, Rwanda, Burundi, Zambia, Malawi, and Mozambique. Plans are in place to spread its wings to other countries. It now boasts a turnover of more than US$600 million and employs over five thousand employees, associated directly. There are several companies under its umbrella and

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its investments are primarily in the food and beverage sector, packaging, logistics, marine passenger services, and real estate. The company began to export 20% of its output with the intention of entering the foreign market gradually, by exporting and then embarking on local production. Using the experience gained from the market, lessons learned, and the networks developed through exportation, the Bakhresa group is currently undertaking production in six African countries. The firm is undertaking strategic initiatives to strengthen its operations in East and Central Africa, and in particular it plans to build factories in the Democratic Republic of Congo and Zambia. It is also exploring investment opportunities in Kenya and elsewhere. Source: IGC, (2012).

More recently, Africa has witnessed an inflow of FDI from global companies, taking various forms. For instance, the Coca-Cola Company merged with the South African company SABMiller to form Coca-Cola Africa, which is expected to become the leading beverage company in the continent (Exhibit 4.8). Given the growing income of the middle class in Africa, Coca-Cola has devised a strategy of building a long-lasting presence in the continent to take advantage of emerging opportunities. As one of the top ten largest Coca-Cola bottling partners worldwide, CocaCola Africa can leverage the scale, resources, capability, and efficiency needed to accelerate Coca-Cola growth and contribute to the economic and social prosperity of African communities Exhibit 4.8: The Coca-Cola Company Merges SABMiller and CocaCola Sabco to Form Coca-Cola Beverages Africa Following its invention in 1886 by a pharmacist named John Pemberton, the Coca-Cola Company is now one of the largest manufacturers, distributors, and marketers of non-alcoholic beverage concentrates and syrups in the world. Coca-Cola’s headquarters are in Atlanta, Georgia, in the USA. It is best known for its flagship product, Coca-Cola, and is one of the largest corporations in the USA. The company is home to twenty billion-dollar brands, including four of the top five soft drinks: Coca-Cola, Diet Coke, Fanta, and Sprite. Other top brands include Minute Maid, Powerade, and vitaminwater. The company owns or licenses and markets more than 500 beverage brands, mainly sparkling drinks but also waters, juice drinks, energy and sports drinks, and ready-to-drink teas and coffees. With the world’s largest beverage distribution system, the Coca-

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Cola Company reaches consumers in more than 200 countries. Coca-Cola manages seven main operating segments (most of them geographically based), including: Eurasia and Africa; Europe; Latin America; North America; Asia Pacific; Bottling Investments; and Corporate. The North America operating segment generates the majority of its revenue from the sale of finished beverages, while the other geographic regions get most of their business from the manufacture and sale of beverage concentrates and syrups. The Coca-Cola Company supports the largest beverage distribution system in the world, made up of company-owned or controlled bottling and distribution operations, as well as independently owned bottling partners, distributors, wholesalers, and retailers. Beverages bearing trademarks owned by or licensed to the company account for 1.9 billion of the approximately 57 billion beverage servings of all types consumed worldwide every day. The Coca-Cola Company enters the global market using various modes of entry. The most common modes are exporting, licensing, and franchising. Besides exporting beverages and its special syrups, CocaCola also exports its merchandise to foreign distributors and companies. The company has also started licensing with bottlers around the world and supplying them with the special syrup necessary to produce the product. Coca-Cola works with more than 300 bottlers internationally to produce, deliver, market, and sell products around the world. In recent years, the Coca-Cola Company has been looking to relatively undeveloped markets with a growing middle class and money to spend on soft drinks and juices. To that end, it announced it will invest US$5 billion with its bottling partners in Africa by 2020, raising its investment in the region to US$17 billion from 2010 to 2020. Coca-Cola plans to build new manufacturing capacity, develop sustainability initiatives, and create jobs in developing countries. In a move that supports expanding its fruit-based drinks portfolio and investing in Africa, in late 2014 the Coca-Cola Company announced a partnership with alcoholic beverage company SABMiller and South Africa’s Gutsche Family Investments to create Coca-Cola Beverages Africa, the continent’s largest bottler. The new company will serve about a dozen high-growth markets, where disposable incomes and the population are growing, and will handle about 40% of the beverage company’s African volume. In exchange for its US$260 million investment, the CocaCola Company will receive an 11% interest in the bottler and SABMiller’s global Appletiser brand of carbonated juices, as well as about twenty other African and Latin American non-alcoholic beverage brands.

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Gutsche Family Investments already controls Coca-Cola Sabco, a CocaCola bottler since 1940 with operations in seven African countries. Coca-Cola Beverages Africa will absorb most of SABMiller’s nonalcoholic operations on the continent as well as Coca-Cola Sabco’s plants. It will serve twelve countries, employ 12,000 people, and account for 40% of the total Coca-Cola beverage volume consumed in Africa. On full completion of the proposed merger, shareholdings in Coca-Cola Beverages Africa will be as follows: SABMiller – 57.0%; Gutsche Family Investments – 31.7%; and the Coca-Cola Company – 11.3%. Phil Gutsche, Chairman of Gutsche Family Investments, says, “Our family sees this merger as an important and logical step to enable CocaCola Beverages Africa to optimize the opportunities for development in the rapidly evolving African beverage market. We are very excited about the opportunity and are totally committed to ensuring that Coca-Cola Sabco’s distinctive culture is successfully integrated with that of our new partners in order to create an even more successful business in the future.” Sources: http://www.ukessays.com/essays/marketing/coca-colas-entry-strategiesinto-the-african-market-marketing-essay.php#ixzz3xrgAzja3; http://www.vault.com/company-profiles/food-beverage/the-coca-colacompany/company-overview.aspx; http://www.wealthandfinance-intl.com/coca-cola-operations-combine-in-africa.

Chapter Summary The chapter has covered the basic market entry decisions. It reflects upon the decisions that firms expanding internationally must make: which markets to enter, when to enter them, at what scale, and which entry mode to use. The underlying argument is that the market entry strategy is one of the critical entry decisions, but it cannot be made without consideration of other basic market entry decisions. The chapter makes the following major points in particular: x The selection of a foreign market is based on the assessment of a nation’s long-term profit potential, which is a function of factors impacting the political and economic stability of the country. Based on key determinants of market potential, selection of the market to enter begins with a preliminary screening of potential markets, followed by an estimate of industry sales potential and company sales potential, and the identification of market opportunities.

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x Several advantages are associated with entering a foreign market early, before other international businesses have established themselves. These advantages must be balanced against the pioneering costs that early entrants often have to bear, including the greater risk of business failure. x Large-scale entry into a foreign market constitutes a major strategic commitment that is likely to change the nature of competition in that market and limit the entrant’s future flexibility. Small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm’s exposure to that market. x The market entry decision involves a trade-off between control, costs, and risks. The choice of entry mode is influenced by factors specific to the firm (goals, personnel requirements, capital requirements, risks, or flexibility), environmental factors (political, socio-cultural, legal, economic, etc.), and the nature of the product to be exported. x Market entry modes are wide-ranging, from indirect exporting to wholly owned production facilities in foreign markets. Each mode presents unique advantages and challenges to firms, in terms of the risks associated with it, the degree of control it affords, and the resources needed to use it. x Indirect exporting involves four major alternatives: export houses, export management companies, international trading companies, and piggybacking. It is appropriate when the firm lacks knowledge about the foreign market, or lacks capacity in terms of human and financial resources. x Direct exporting entails the sale of goods directly to the foreign market through the use of an agency, a distributorship, or an overseas subsidiary. It has the advantages of facilitating the learning curve, offering economies of scale, and avoiding the costs of setting up the manufacturing facility abroad. Challenges include high transport costs, trade barriers, and problems with local marketing agents. x An assembly operation consists of performing the last stage of manufacturing abroad, with most of the product’s components being manufactured in domestic plants or other foreign countries before transfer to the particular foreign market for final assembly. It facilitates the company to lower costs in the foreign market, avoids trade barriers, and decreases transportation costs.

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x Contract manufacturing is an alternative to assembly operations. A company’s product is manufactured or assembled in the foreign market by another producer operating under contract. Through this strategy, the firm avoids most of the foreign market problems which may arise from a lack of familiarity with the economy concerned. x Licensing involves the sale of a patent, manufacturing know-how, technical advice, and assistance, or the use of a trademark or trade name on a contractual basis, by which the international firm grants a license to a national company and receives royalty payments in return. The main advantage of licensing is that the licensee bears the risks and costs of opening new markets. Disadvantages include the risk of losing the technology and lack of control over the licensee. x Franchising is a particular form of licensing in which the franchisor makes a total marketing program available, including brand name, product, method of operation, and management advice. It is a much more rapid way of expanding business activity over a large area with minimum investment than other forms of market entry strategy. x A joint venture is formed by two or more companies that agree to pool their resources and management together to undertake a particular business. It has the advantages of sharing the costs and risks of opening new markets and of gaining knowledge and political influence. It carries the risk of losing control over technology and business operations. x A strategic alliance is a more extensive kind of international cooperation between firms, where the partners contribute manufacturing know-how, production technology, marketing expertise, access to distribution networks, etc., in order to gain market entry, to remain competitive on a global scale, and to attain economies of scale. x Foreign direct investment (FDI) represents the highest level of market entry strategy, where the firm undertakes local production by buying shares of an enterprise in another country, reinvesting in a foreign-owned company, or establishing wholly owned operations. While FDI is associated with a number of benefits, including control over the company’s operations and access to resources and markets, there are also associated risks of investing directly into foreign markets.

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Review questions 1. 2.

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5. 6. 7. 8. 9. 10. 11. 12. 13.

Identify and describe the basic market entry decisions that must be made by firms contemplating international expansion. Suppose you have been approached by an international firm that is in the dilemma of how to select which market to enter. What would you advise the firm to do in order to select the right market? “There are advantages and disadvantages of being the first mover into a foreign market.” Discuss this statement, citing specific examples to support your answer. You have recently been appointed as a marketing expert by the Board of External Trade (BET) to train various international marketing stakeholders on various international marketing issues. The first task that the BET has asked you to perform is to train marketing managers from various commercial organizations on the strategies to enter international markets. With specific examples: a. Explain the factors affecting the choice of market entry strategy in international marketing. b. Outline and discuss the various market entry strategies available for consideration. c. With specific examples, explain the factors affecting choice of foreign market entry strategy. What are the factors that prompt international business to invest in foreign countries? Discuss, giving suitable examples. What is the purpose of export intermediaries? Compare and contrast the functions of an agent and a distributor What are the advantages and disadvantages to both rider and carrier in piggyback operations? What are the advantages and disadvantages of establishing a joint venture? Discuss the benefits and drawbacks of strategic alliances. Why do firms prefer the acquisition route to foreign-owned production operations? What conditions favor direct foreign investment as a market entry strategy? Discuss how the need for control over foreign operations varies depending on the market entry strategy selected by the firm.

CHAPTER FIVE INTERNATIONAL PRODUCT DECISIONS

Introduction Product decisions are probably the most crucial of the marketing mix elements. The marketing mix, which is the means by which an organization reaches its target market, is made up of product, pricing, distribution, and promotion decisions. These are usually shortened to the acronym “4Ps.” When dealing also with service marketing, they form the 8Ps of marketing: product, pricing, promotion, place, process, people, physical evidence (or philosophy), and productivity (or performance). Marketing mix decisions are fundamental to the success of international marketing, as they make up a substantial part of the marketing effort. These decisions begin with designing the right product for the target market, followed by other considerations. The product decisions must be made in a way that reflects the dynamics of the foreign market, whereby the product strategy must give the international firm a competitive advantage there. Just because a product is successful in the domestic market, there is no guarantee that it will be successful when exported to other countries. Internationally, a marketer must always establish the local needs and take them into account. Errors in product decisions in international marketing sometimes occur because of differences that exist between countries. For example, the imposition of a globally standardized product where it is inapplicable can destroy the business. While some products have universal appeal and require little change before being offered internationally, other products have narrower appeal and must be modified first. Therefore, decisions about the product types to be offered represent the most critical decisions in determining the future of an international company. The management must first decide what products to offer in the marketplace, before making other intelligent product decisions pertaining to the product’s physical attributes, its benefits, etc. In view of this, international marketing managers must answer several questions regarding the product in foreign markets. What new products should be developed for what markets? What .

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products should be added to, removed from, or modified for the product line in each of the countries in which the company operates? What brand names should be used? How should the product be packaged? How should it be serviced? What kind of product strategy should be used? Answers to these questions help the firm to develop the right product strategy for its foreign operations. The main purpose of this chapter is to describe the product decisions and discuss the product strategies suitable for international marketing. Specifically, the chapter (i) describes the concept of the product and its attributes, (ii) classifies products according to their degree of potential for global marketing, (iii) describes different global product strategies, (iv) discusses important decisions that a firm has to take into consideration when designing its product offering in international markets, (v) highlights the implications of product standardization and adaptation as marketing strategies in foreign markets, (vi) describes and analyzes the concepts of the international brand, various types of branding strategies in global business, and brand piracy, and (vii) describes the importance of the service sector in the world economy. While the chapter focuses on international product decisions, it begins with a brief reflection on basic product concepts to ensure a common understanding of them. A firm that is going global makes decisions on basic product concepts, with additional global product decisions.

What is a Product? A product can be defined as a collection of physical, service, and symbolic attributes which yield satisfaction or benefits to a user or buyer. The product is a combination of physical attributes (such as size and shape) and subjective attributes (such as image or quality). A customer purchases on the basis of both dimensions. In the postmodern world it is increasingly important that the product fulfills the image which the producer is wishing to project. This may involve organizations producing symbolic offerings represented by meaning-laden products that chase stimulation-loving consumers who seek experience-producing situations. So, for example, simply selling mineral water may not be enough. It may have to be “glacial” in source, and perhaps flavored. This opens up a wealth of new marketing opportunities for producers. The product is divided into three levels: core product, actual product, and augmented product. i. The core product is the most basic level of the product, which looks at what people set out to buy and what benefits the producer

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would like their product to offer buyers. The core product is also known as benefits and is generally intangible in nature. ii. The actual product is about translating the list of core product benefits into a product that people will buy. It is the larger “packaging” of the core product, including the quality level, features, styling, brand name, and packaging. iii. The augmented product is the totality of benefits that the person receives or experiences in obtaining the formal product. A product’s physical properties are characterized in the same way the world over. They may be convenience or shopping goods or durables and non-durables; however, one can classify products according to their degree of potential for global marketing: i. Local products – seen as only suitable in a single market. ii. International products – seen as having extension potential into other markets. iii. Multinational products – products adapted to the perceived unique characteristics of national markets, e.g. McDonalds. iv. Global products – products designed to meet global segments, e.g. Kodak or Coca-Cola. Quality, method of operation or use, and maintenance (if necessary) are watchwords in international marketing. A failure to maintain these will lead to consumer dissatisfaction. It is becoming increasingly important to maintain quality products based on the ISO 9000 standard, as a prerequisite to export marketing.

Product Decisions Product decisions are defined as every conscious decision made by a company for a product. There are many such different decisions. At one extreme, there are such things as a minor modification of the label or color of the package. At the other extreme, there are such things as diversification into new business fields, either through internal R&D or mergers and acquisitions. Companies make decisions about the product type, the tangible or physical attributes (materials, size, weight, design, packaging, performance, comfort) of the product, and the intangible or augmented attributes (brand image, styling, installation, delivery, credit, warranty, after-sales service, return policy). Managers also make decisions about product mix (the composite of products offered for sale by a firm) and product line (a group of products that are closely related either because they satisfy a class of need, are used together, are sold to the same

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customer groups, are marketed through the same type of outlet, or fall within a given price range). A company’s product mix consists of the total number of products that are offered for sale. The product mix has a certain width, length, depth, and consistency. The width of a product mix refers to the company’s total number of different product lines. The length of a product mix refers to the total number of brands in all of the company’s product lines. The depth of a product mix means the average number of variants of the company’s products. The consistency of a product mix refers to how closely related the company’s product lines are in terms of characteristics, production process, and distribution channels, to name just a few. The product line decisions determine the length of a company’s product mix. They involve (i) line stretching, which occurs when the company stretches its product line beyond its current range, and (ii) line filling, which occurs when new products are added to a company’s present line, for reasons such as establishing an image of a full-line company, taking advantage of excess capacity, filling gaps in the market, and discouraging competitive actions. While both domestic and international firms must make the basic marketing decisions, the chapter now turns its attention to global product strategies and decisions. The product decisions are discussed in the context of international marketing, in view of the fact that international products have the potential to be extended from the domestic market to a number of international markets.

Global Product Strategies When a company decides to begin marketing products abroad, a fundamental strategic decision is whether to use a standardized marketing mix (product, price, place, promotion, people, physical evidence, process management) and a single marketing strategy in all countries, or to adjust the marketing mix and strategies to fit the unique dimensions of each local market. International marketing product decisions cover a number of issues pertaining to whether to sell the product as it is internationally or modify it for different countries or regions. They also decide whether to design new products for foreign markets or incorporate all differences into one product and introduce it globally. From the decisions made, companies can pursue four global product strategies to penetrate foreign markets: (i) straight product extension, (ii) product adaptation, (iii) product innovation/invention, (iv) standardization, and (v) global products. There are different forces in the international environment that may favor the adoption of any of these global marketing strategies.

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Straight product extension: The firm adopts the same product policy used in its home market. This means firms simply extend their home product communication strategies to the foreign markets. This strategy is cost-effective, since it allows for greater economies of scale. It is not commonly used for consumer products due to differences in tastes and preferences of consumers across different countries. Product adaption: This strategy involves modifying the product or making some changes to enable the firm to cater to the needs and wants of its foreign customers. It involves changing elements of the product design, function, or packaging in response to needs or conditions in specific markets. This strategy is discussed in detail in the later sections. Product invention: This strategy involves designing and developing an entirely new product for the foreign market. It is applied when the marketer recognizes the socio-cultural and economic differences from country to country and how the differences necessitate redesigning the product for the foreign market. Instead of simply adapting existing products or services to the local market conditions, the approach here is to zero in on global market opportunities. The product invention strategy therefore consists of developing and launching products with a global mindset. Product standardization: The company that applies a policy of standardization offers the product sold in its domestic market in all of its foreign markets (developing the same product for multiple countries). Firms subscribing to global standardization view the world as one entity, not a collection of national markets. An example of a company that uses product standardization is Coca-Cola. The company uses “relatively standard products, brands, formulations, packaging, positioning, and distribution in its global markets.” Further details are offered later while comparing product standardization and product adaptation. Global products: Global products meet the wants and needs of a global market and are offered in all regions of the world. These kinds of products are designed to meet the needs of all markets, not certain target markets. Pursuing a global product strategy implies that a company has largely globalized its product offering. Although the product may not need to be completely standardized worldwide, key aspects or modules may in fact be globalized. Global product strategies require that product usage conditions, expected features, and required product functions be largely identical, so that few variations or changes are needed. Companies pursuing a global product strategy are interested in leveraging the fact that all investments for producing and developing a given product have already been made.

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Global strategies will yield more volume, which will make the original investment easier to justify.

Product Standardization versus Adaptation Policies Companies marketing their products or services overseas are faced with the decision of whether to standardize or adapt their product offerings. This decision concerns firms that are commencing to market their products in foreign countries, as well as those already operating internationally and considering expanding into further markets. The decision on product standardization or adaptation centers on the perception of consumer homogeneity and/or the movement toward homogeneity. Product decisions are greatly influenced by different forces in the international environment that may favor the firm either increasing standardization or increasing adaptation. Nevertheless, most products fall somewhere on the spectrum between the extremes of “standardization” and “adaptation.” The application the product is put to also affects the design strategy. In agricultural implements a mechanized cultivator may be a convenience item in a UK garden, but in India and Africa it may be essential equipment. As stated earlier, perceptions of the product’s benefits may also dictate the design strategy. For example, a refrigerator in Africa is a very necessary and functional item, kept in the kitchen or the bar. In Mexico, the same item is a status symbol, and is therefore kept in the living room.

Product Standardization Considering the current globalized market, many companies are increasingly adopting standardization as a strategy for going international. Despite national differences that exist between countries, the increasing commonality of the world today encourages some firms to standardize their products. It is not strange to see exactly the same cellular phone or camera in Kenya as will be found in the UK or USA. Despite certain minor modifications in packaging and labeling, Coca-Cola is the same around the world, and this gives the company a number of benefits. The factors encouraging product standardization are as follows: i. Economies of scale in R&D, production, and marketing. ii. Consumer mobility around the world, increasing the commonality of consumer preferences. iii. The impact of technology, which makes it possible for consumers in different parts of the world to consume the same products.

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iv. Country of origin. The image of a product may have a strong effect on consumer perceptions and biases about foreign products. For example, Japanese cars or Swiss watches are perceived as highquality products in Tanzania. v. Centralized management of international operations when the mode of entry is mainly exports. vi. Industrial and high-tech products that increase the cost of adaptation make it more economical to use the standardization strategy. In addition to these factors, standardization gives firms the advantage of cost reduction through economies of scale; it enables them to improve quality by focusing their resources on the development of the same product features; and it enhances the global image and customer preferences through uniform quality and services. Standardization allows for global branding, using the same brand name, logo, image, and positioning everywhere in the world. It addresses the needs of global consumers (homogeneous consumer groups sharing similar interests and product or brand preferences). In some particular cases, being “foreign made” offers an advantage over domestic products. For example, in Zimbabwe one sees the word “imported” on many advertisements, which gives the product advertised a perceived advantage over domestic products. Often a price premium is charged to reinforce the concept that “imported means quality.” If the foreign source has negative connotations, attempts are made to disguise or hide the fact through, for example, packaging or labeling. Mexicans hate to take products from Brazil. By putting a “made in elsewhere” label on the product this can be overcome, provided the products are manufactured elsewhere, though the company may be Brazilian. On the other hand, standardization is associated with some disadvantages, including: lack of product uniqueness in each market; being off-target (missing the customer target completely); vulnerability to trade barriers; and strong local competition due to customization by competitors and lack of local knowledge. The strategy ignores the fact that there are substantial differences between countries and even between different regions within the same countries.

Product Adaptation Despite increasing globalization, adaptation is still considered to be a viable product strategy, taking into account differences between countries and the need for companies to be more market-oriented. Product

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adaptation may be mandatory (necessary for product to be sold in a local market) or discretionary (not necessary, but maybe beneficial). Firms are compelled to undergo mandatory adaptation when adapting products to local requirements is inevitable in order to comply with legal, infrastructural, and physical requirements in the respective countries. For example, adapting cars to left-hand drive in the UK is a legal requirement. Voluntary adaptation occurs when it adds value businesswise to adapt a product to better meet the needs of the local market, or to develop new brands for individual local markets, even though such adaptation is not required. The pressure for adaptation originates from competitive offerings, climate, geography, infrastructure, government regulations, international standards, customer expectations and preferences, and buyer behavior. i. Differing usage conditions: These may be due to climate, skills, level of literacy, culture, or physical conditions. Maize, for example, would never sell in Europe rolled and milled as in Africa. It is only eaten whole, on or off the cob. In Zimbabwe, kapenta fish can be used as a relish, but will always be eaten as a starter to a meal in developed countries. Colors have different interpretations in different societies; language and religious beliefs may also affect a product’s performance. ii. General market factors: This includes income levels, tastes, etc. Canned asparagus may be very affordable in the developed world, but may not sell well in the developing world. iii. Influence of Government: Taxation, import quotas, non-tariff barriers, labeling, health requirements. Non-tariff barriers are an attempt, despite their supposed impartiality, at restricting or eliminating competition. A good example of this is that of the Florida tomato growers, who successfully persuaded the US Department of Agriculture to issue regulations establishing a minimum size for tomatoes marketed in the USA. The effect of this was to eliminate the Mexican tomato industry, which grew a tomato that fell under the minimum size specified. Some non-tariff barriers may be legitimate attempts to protect the consumer; for example, the ever-stricter restrictions on the use of horticultural insecticides and pesticides may cause African growers a headache, but they are deemed to be for the public good. iv. Company history and operations: Sometimes, as a result of colonialism, production facilities have been established overseas. Eastern and Southern Africa is littered with examples. In Kenya, the tea industry is a colonial legacy, as are the sugar industry of

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Zimbabwe and the coffee industry of Malawi. These facilities have long been adapted to local conditions. v. Financial considerations: In order to maximize sales or profits the organization may have no choice but to adapt its products to local conditions. vi. Pressure: Sometimes, as in the case of the EU, suppliers are forced to adapt to the rules and regulations imposed on them if they wish to enter into the market. Although one of the major disadvantages of product adaptation is the cost of modifying the product, it has some advantages. The strategy enables the company to penetrate otherwise closed markets. It allows consumers to use products in different climates and infrastructures, and ensures better product performance in different usage conditions. The strategy may decrease costs due to varying local inputs and/or the elimination of some product features. Ultimately, product adaption leads to increased sales due to better meeting industry norms or cultural preferences.

Product Attributes The physical product is made up of a variety of elements, including the physical product and its subjective image. Consumers are looking for benefits, and these must be conveyed in the total product package. Physical characteristics include range, shape, size, color, quality, quantity, and compatibility. Subjective attributes are determined by advertising, self-image, labeling, and packaging. In manufacturing or selling produce, cognizance has to be taken of cost and the legal requirements of the country. Again, a number of these characteristics are governed by the customer or agent. For example, there are very strict quality requirements to be observed for beef products sold into the EU. In fish products, the Japanese demand more “exotic” types than, say, would be sold in the UK. Further, none of the dried fish products produced by the Zambians on Lake Kariba and sold to the Lusaka market would ever pass the hygiene laws if sold internationally. In sophisticated markets, the variety and range is so large that constant watch has to be kept on the new strains and varieties in order to be competitive. Most often consumers go for the product brand, the type and quality of packaging, labeled products, and those with a long warranty period. Thus, a marketer must focus on these attributes to make the product competitive.

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International Product Branding A brand is a name, sign, symbol, or design, or a combination of all these, which is intended to identify the goods or services of a seller or group of sellers and to differentiate them from those of competitors. It is important to note that branding decisions also cover trademark decisions. While the trademark is a particular word, symbol, or device that identifies a product with a particular manufacturer, distributor, or service and has legal protection against imitations, the brand is a term or name that can be uttered. A brand identifies the product, while a trademark identifies both the product and the company. World brands are based on the same strategic principles, positioning, and marketing mix, but there may be changes in message or other image considerations. Examples of widely known brand names are Norsk or Hydro in fertilizers; in tractors, Massey Ferguson; in soups, Heinz; in tobacco, Bat; in chemicals, Bayer; and in wrist watches, Roamer, Rado, Timex, Casio, and Seiko. These world brand names have been built up over the years, with great investment in marketing and production. Branding plays an important role in both the domestic and international markets. First, branding identifies the firm’s product or service. Second, it communicates the quality of the product, especially when the customer reorders the goods. Third, a brand is something that can be advertised and assists sellers in controlling their share of the market. Fourth, branding can add a measure of prestige to ordinary commodities. Global brands provide scale economies in the development of advertising, packaging, promotion, and so on; exploitation of media overlap and exposure to customers who travel; and the associations of a global presence or of the “home” country. Branding in International Markets Five basic branding strategies are open to the global marketer: i. Uniform brand name worldwide: Companies which produce and market one major product on a global basis use this strategy to secure greater international product identification, which enhances sales and associates them with quality. Examples include CocaCola, Avis, Sony, BMW, McDonald’s, Heineken, and Philips. ii. Uniform brand name worldwide modified for differing markets: Modifying the existing brand to make it more compatible with that market; for example, Nestlé coffee is branded “Nescafé Gold Blend” in the UK and “Nescafé Gold” in Germany.

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iii. Different brand name for a product to suit different markets: This strategy is suitable when the original brand name is inappropriate or cannot be translated into the local language, and to play down its foreignness (i.e. to solve the language problem). iv. Corporate umbrella branding: The corporate name is a form of trademark. Trademarks can take the form of letters, symbols, logos, or initials. Some firms use this strategy to have the benefit of a double impact, for example Unilever. v. Regional branding: this is used if a global firm is targeting markets that are close to each other and share common traits such as lifestyle or consumer habits. For example, Germany, Austria, and those parts of Switzerland where German is spoken constitute a market of nearly 100 million consumers. This strategy may be justified on the grounds of the gains to be made from better coordination and effective control of the promotional strategy. Brand Equity Brand equity is a measure of the brand’s ability to capture consumer preference and loyalty. It represents the added value that accrues to a product as a result of investment in the marketing of the brand. Globally accepted brands such as Coca-Cola, McDonald’s, or Yamaha have very high brand equity. These brands succeed because they deliver unique benefits and have great impact because they forge deep connections with customers. Brands with strong equity have many competitive advantages. They enjoy high levels of consumer awareness and strong brand loyalty, which help when introducing new products and make them less susceptible to price competition. Brand equity associations often involve emotional attachments, including affinity, positive brand image, and brand identity. They also involve cognitive factors such as familiarity, knowledge, and perceived quality, as well as social factors, including peer-group acceptance. When these associations turn negative (as in anti-globalization sentiments against global brands) the brand equity can go down very quickly. In an attempt to develop brand equity, large retailers are moving increasingly into their own brands e.g. Marks & Spencer, Walmart, and so on. They try to obtain greater control and higher margins through selling their own brands.

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Brand Piracy Piracy involves using a brand name or symbol that is very similar to a famous product. Piracy can take a number of forms, from imitating the established brand to faking the original product. The final form is preemption of brand names, where the law allows companies to register in their names a number of well-known brands, which are then sold to the original company when it moves into the local market, or to other interested parties. Factors contributing to brand piracy include gaining the high status of extremely valuable foreign brands, and the relative ease with which access can be gained to the technology required to produce these goods. It is difficult to protect a trademark or brand, unless all countries are members of a convention. Brand piracy is widespread in many developing countries. Aspects of branding include the promotional aspects. A family brand of products under, for example, the Sony label or Sterling Health, is likely to be recognized worldwide and hence enhance the subjective product characteristics. Brand piracy has contributed to the emergence of counterfeit products on the global market. Counterfeits or knockoffs are fake products that are designed and labeled so as to mislead the customer into assuming that they are “the real deal.” Counterfeit products are damaging to the brand’s equity and must be controlled, often by direct intervention. Exhibit 5.1: Counterfeit Industry in Tanzania Tops $525 Million Annually Despite the small size of Tanzania’s economy, it is estimated that counterfeit products in the country reached US$525 million per annum in 2012. According to the Confederation of Tanzanian Industries (CTI), government revenue loss due to counterfeits is possibly 15% to 25% of total domestic revenue. The counterfeit goods that are popular include clothes, mobile phones, building materials, shoes, and pharmaceutical items. Most counterfeit products in Tanzania originate from Asian countries such as China, India, the United Arab Emirates (Dubai), Indonesia, Taiwan, or Thailand, and some African countries including Kenya, South Africa, Mozambique, Malawi, and Nigeria (without forgetting homemade fakes). Appropriate laws and institutions to oversee the regime for control of piracy and counterfeits have been put in place in Tanzania. The country has also signed and ratified a number of international treaties on the

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protection of intellectual property rights (IPRs) so as to bring its position up to international standards. Amongst others, the IPR laws include the Paris Convention for the Protection of Industrial Property (1883), the Trade Mark Law Treaty (1981), the Lusaka Agreement establishing ARIPO, the Harare Protocol, the WIPO Treaty (1970), and UPOV. Apart from copyright, these IPR laws are administered by the Business Registration and Licensing Agency (BRELA), established since 1997. Specifically, Tanzania has promulgated laws to deal with piracy and counterfeits, such as: (i) the Trade and Service Marks Act of 1986, and (ii) the Copyright and Neighboring Rights Act of 1999, which prominently includes provision against the manufacture, modification, importation for sale, or renting of any device whose copyright is already established. There are also other relevant acts such as the Merchandise Marks Act of 1963 (operationalized only since 2005) that specifically prohibits the importation of counterfeits, and empowers the appropriate officers to seize, detain, forfeit, or dispose of the counterfeits, with fines imposed on the culprit. It empowers the Fair Competition Commission (FCC) to investigate go-downs and premises suspected to hold illicit goods. Yet the counterfeiting problem is increasing, largely due to brand piracy. Since the country relies on imports, the high cost of genuine products people face in the market has created an insatiable demand for cheap products. No wonder the country has become a boom market for imported used goods, which mingle with and often overwhelm the market for new goods. This has generated a fertile ground under which counterfeits and substandard new goods have gained popularity. Source: http://www.best-dialogue.org/wp-content/uploads/Counterfeit-goodshaunt-Tz-Citizen-15-Nov-2012.pdf; and http://esrf.or.tz/docs/PB% 20COUNTERFEIT_FINAL.PDF.

International Packaging and Labeling Packing and labeling decisions are made in the course of developing the product or modifying it for the foreign market. As countries differ in terms of environmental conditions (climate, infrastructure, technology, regulations, economic conditions, culture, etc.), these decisions must be made with care. In contrast to domestic marketing, where there are similar conditions, packaging and labeling in international marketing must take into account the specific conditions in different countries. They form some of the aspects that are modified when the company uses the strategy of adaptation.

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Packaging Packaging is the general group of activities in product planning which involve designing and producing the container or wrapper for a product. International packaging performs the same two functions as in the domestic sphere: protection and promotion. It protects the product from damage which could be incurred in handling and transportation (different climatic conditions may require a change in the package to ensure protection). The promotional aspects tend to overshadow its protective functions, because the former has a powerful influence on the purchase decision. For instance, the visual aesthetics, package size, color, shape, unit type, weight, and volume are very important in packaging. For aircraft cargo, the package needs to be light but strong, while for sea cargo containers are often the best form. The customer may also decide the best form of packaging. In horticultural produce, developed countries often demand blister packs for mangetouts, beans, strawberries, and so on, whilst for products like pineapples a sea container may suffice. The cost of packaging always has to be weighed against the advantage gained by it. Increasingly, environmental aspects are coming into play. Packaging that is non-degradable plastic, for example, is less in demand; bio-degradable, recyclable, reusable packaging is now the order of the day. This can be both expensive and demanding for many developing countries. Packaging is a key product decision for any firm aspiring to ensure that its products perform in the foreign market. Actually, a package may be the only significant way in which a firm can differentiate its product. A firm’s management may choose to package its product in such a way as to increase profit possibilities. Packaging may be so attractive that customers will pay more just to get the special package. In the face of its benefits, the main global trend nowadays is to ensure that the packaging of goods is designed to protect the product during shipping and address environmental issues. The package should also offer communication cues that provide consumers with a basis for making a purchase decision. Labeling Labeling not only serves to express the contents of the product, but may provide promotional symbols (for example, Africafe in Tanzania or Cashel Valley in Zimbabwe); in addition, the EU is now imposing very stringent regulations on labeling, even to the degree that the pesticides and insecticides used on horticultural produce have to be listed. This could be very demanding for producers, especially small-scale ones where production techniques may not be standardized. Government labeling

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regulations vary from country to country. Barcodes are not widespread in Africa, but do assist in stock control. Labels may have to be multilingual, especially if the product is a world brand. Translation could be a problem with many words being translated with difficulty. Again, labeling is expensive, and in promotion terms non-standard labels are more expensive than standard ones. Regulations differ by country regarding the labeling of various products. For instance, in Tanzania, health warnings on tobacco products are a legal requirement. The American Automobile Labeling Act clarifies the country of origin and the final assembly point. The EU requires labels on all food products that include ingredients from genetically modified crops. Regulations on labeling and marking are designed both to inform and to protect consumers. The languages to be used on packages are often prescribed by governments, just as the volume or weight of the contents should be indicated. Government regulations also specify a list of ingredients to be shown on the package and the manner it must be shown in different countries. Thus, any firm contemplating expansion of its product coverage to foreign markets must be familiar with the legal requirements for labeling in different countries. In packaging and labeling products, the firm needs to consider several factors: product packaging norms, existing standards, the country’s economic development, environmental concerns, the promotional strategy of the company, cultural meaning and implications, government regulations, and language issues. Consideration of these factors will enable the firm to customize its packaging and labeling strategies to achieve a competitive approach.

Conditions and Warranties A condition is a term (whether oral or written) that goes directly to the root of the contract. It is so essential to its very nature that if it is broken the innocent party can treat the contract as discharged. That party will not therefore be bound to do anything further under that contract. A warranty is a guarantee from the seller that the product will perform as stated. Warranty functions include: x Promotional role: Potential customers feel reassured about buying from a firm that provides a warranty, especially when buying expensive technical products. x Protective function: This limits the firm’s liability, especially from unreasonable claims.

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Whether the warranty should be standardized or adapted depends on a number of factors, including international competition, the conditions of product use, the nature of the product, and the firm’s capability. Many large-value agricultural products such as machinery require warranties. Unfortunately, not everyone upholds them. It is common practice in Africa that if the original equipment has not been bought through an authorized dealer in the country, that dealer refuses to honor the warranty. This is unfortunate, because not only may the equipment have been legitimately bought overseas, it also actually builds up consumer resistance to the dealer. When the consumer is eventually offered a choice, the reticent dealer will suffer, for example when new dealers spring up. Some products require servicing on a regular basis, particularly consumer durables and industrial goods. Servicing may be required because: x The firm needs to comply with the warranty policy it offers; x It is used as a promotional tool (e.g. with mechanical equipment); x To enhance consumer satisfaction and develop repeat purchases. There is no issue of standardization or adaptation, as the conditions and needs of different markets make this task impractical. What is needed for a firm is commitment in terms of significant investment in facilities, personnel, supply of spare parts, training, and so on.

New Product Development Normally a new product is one that has already been marketed in the home market, but is new to the host market. However, a new product could be new to the firm, the host market, or the international market. The process of new product development in international marketing is the same in the home market as in the international market. It involves: (i) the birth of an idea; (ii) idea screening; (iii) concept development and testing; (iv) business evaluation; (v) prototyping; (vi) market testing; and (vii) the introduction and commercialization of the product. In the international market, the advantages lie in sourcing new product ideas and testing marketing possibilities on a global scale. Ideas for new products in international marketing are generated from various sources, including local subsidiaries and distributors who are likely to have some ideas from their respective markets. The most immediate evaluation of an idea is whether it is compatible with the company’s objectives, strategies, and resources. Focus groups in the

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foreign market can offer the development team a chance to hear spontaneous reactions to a new concept and get suggestions for improvement. Once the concept is developed, the business is evaluated and the market is tested. The product is launched and commercialized in the target market selected. It is important to note that product development in international marketing requires intensive research and innovation. Successful companies must constantly innovate to stay ahead of the competition and meet the needs of increasingly demanding consumers. To be innovative means creating a stream of new products, in new product categories, using new technologies.

Global Marketing of Services The marketing of services in any context is different because of their unique features (intangibility, inseparability, heterogeneity, and perishability). However, international services differ from domestic services in two major aspects: (i) they involve crossing borders, and (ii) they interact with foreign cultures. Because of these differences, the global market needs for services are diverse. In recent years the world has witnessed the growth of services internationally, for a number of reasons (e.g. changing lifestyles affected by affluence, increased leisure time, and more women in paid employment). The increased complexity of life, ecological concerns, and changes in technology have also contributed to the growth of services globally. Services are playing a significant role in national economies and between nations, which has led to an increase in the global marketing of services. The competitive advantage of some nations derives from the service sector (e.g. telecommunications, consultancy, education services). Multinational firms that provide highly technical services are beginning to offer them as a major product line. Despite the role of services in the global economy, there are various constraints imposed on their international marketing. Some of the major constraints are as follows: i. Trade barriers: These include tariff barriers (e.g. taxes on imported advertising, over-charging international students for education) and non-tariff barriers (e.g. state organizations purchasing insurance and banking services only from home companies). ii. Service immobility: This is related to the perishability and inseparability of services.

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iii. Environmental factors: Cultural factors, including tastes and preferences. iv. Technology: Computer and telecommunications have removed distance as a barrier to trade, especially in the financial markets.

Chapter Summary The chapter has described the product decisions and strategies suitable for international marketing. It addresses several issues regarding the type of products to be offered to international markets, the modifications required for the product to fit the foreign markets, branding, packaging, product development, and the international marketing of services. In particular, the chapter makes the following key points: x A product is a collection of physical, service, and symbolic attributes which yield satisfaction or benefits to a user or buyer. It is divided into three levels: core product, actual product, and augmented product. x The physical product is made up of a variety of elements including the physical attributes and the subjective image of the product. Consumers are looking for benefits, and these must be conveyed in the total product package. x Companies make several product decisions regarding product types, tangible/physical attributes (material, size, weight, design, packaging, performance, comfort) and intangible/augmented attributes (brand image, styling, installation, delivery, credit, warranty, after-sales service, return policy). x Depending on their internationalization strategy, companies may pursue one of five global product strategies to penetrate foreign markets: (i) straight product extension, (ii) product adaptation, (iii) product innovation/invention, (iv) standardization, and (v) global products. x Product standardization occurs when the company offers a product sold in the domestic market in all of its foreign markets. This strategy is applied to achieve economies of scale, to take advantage of consumer mobility, and because of the country of origin’s image. Through standardization, a firm can reduce the cost of product development and improve global branding. However, standardization lacks product uniqueness in each market and it is vulnerable to trade barriers and strong local competition.

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x Product adaptation involves modifying the product or making some change to enable the firm to cater for the needs and wants of its foreign customers. The need for adaptation originates from the country’s differences in terms of competitive offerings, climate, geography, infrastructure, and government regulations. Despite the increased costs of adaptation, the strategy enables the company to penetrate foreign markets and enables consumers to use products in different climates and infrastructures while ensuring better product performance in different usage conditions. x A brand is a name, sign, symbol, or design, or a combination of all of these, which is intended to identify the goods or services of one seller or a group of sellers and to differentiate them from those of competitors. Branding in international marketing plays the role of identifying the product or service of the firm. It communicates the quality of the product and adds economies of scale in the development of advertising, packaging, and promotion. x There are a variety of global branding strategies that may be used by companies: (i) uniform brand name worldwide; (ii) uniform brand name worldwide, modified for differing markets; (iii) different brand name for a product to suit different markets; (iv) corporate umbrella branding; and (v) regional branding. x Brand equity is a measure of the brand’s ability to capture consumer preference and loyalty. It represents an added value that accrues to a product as a result of investment in the marketing of the brand. Brands with strong equity have many competitive advantages, including high consumer awareness, strong brand loyalty, and less price competition. x Brand piracy occurs when a company uses a brand name or symbol that is very similar to a famous product supplied by another company, for the purpose of gaining the high status of highly valuable foreign brands and due to easy access to the technology required to produce the goods. Brand piracy contributes to the emergence of counterfeit products in the global market. x Packaging is the general group of activities in product planning which involve designing and producing the container or wrapper for a product. International packaging performs both protective and promotional functions. The global trend nowadays is to ensure that the packaging of goods is designed to protect the product during shipping and address environmental issues. x Labeling expresses the contents of the product and may also have a promotional function. In packaging and labeling products, firms

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need to consider product packaging norms, existing standards, the target country’s economic development, environmental concerns, promotional strategy, cultural implications, government regulations, and language issues. x A warranty is a guarantee by the seller that the product will perform as stated. It plays both a promotional role and a protective function. x New product development in international marketing basically follows the same process as the development of a new product in domestic marketing. But product development in international marketing requires intensive research and innovation. x International services differ from domestic services in that they involve crossing borders and they interact with foreign cultures. The marketing of services in international marketing is constrained by trade barriers, service immobility, environmental factors, and technological differences.

Review Questions 1.

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4. 5. 6. 7. 8. 9. 10. 11. 12.

Discuss the following terms: product; product attributes; product standardization; product adaptation; international packaging; international servicing; warranty; branding. Describe and analyze the concepts of an international brand, the various types of branding strategies in global business, and brand piracy. Discuss four important decisions that a firm has to take into consideration when designing its product offering in international markets. Discuss the basic criteria for product standardization versus adaptation decisions. What are the merits of product standardization worldwide? What factors encourage product modification? What is the role of packaging in international markets? What are the functions of warranties in international markets? What factors determine the nature of the warranty to be offered in the international markets? What are the functions of servicing in international markets? What are some of the approaches to brand policy in international markets? Explain the term “brand piracy.” What are the major factors contributing to brand piracy?

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13. Define the concept of a new product. Describe the whole process of new product development. What is the advantage of product development in the international market over the domestic market? 14. Describe the importance of the service sector in the world economy. 15. What are the constraints that face the marketing of services internationally? 16. What are the criteria for effective global service marketing? 17. One of the decisions made by international firms is whether to standardize or adapt their products to the foreign market requirements. Suppose you have been consulted by the exporters of handcraft products to advise them on the strategy which they should use. Bearing in mind that most of them are small and they are not well known in the foreign markets, which strategy would you recommend them to use? Why? 18. With relevant examples, describe the relationship between brand piracy and counterfeit products.

CHAPTER SIX PROMOTION IN INTERNATIONAL MARKETING

Introduction Promotion in international marketing plays the same role as it does in domestic marketing. The essence of promotion in international marketing is the transmission of messages from the sender (exporter) to the buyer (importer) to achieve the desired outcomes. Nevertheless, an international firm has many other audiences besides the importer, located in both domestic and international markets. Given the diversity of international markets, promoting goods and services in foreign markets requires a thorough understanding of different audiences and their respective characteristics. Understanding the norms, motivations, attitudes, interests, and opinions of the target market is crucial to company success in marketing to different cultures around the globe. This implies that the effectiveness of promotion as a form of communication is impacted by a number of factors in international marketing. These include sensitivity to social norms, the degree to which local tastes and preferences are catered for, the level of conformity to cultural values, and the alternatives and constraints attached to each market. In view of this, it is imperative for international marketers to understand the dynamics of communication and promotion in international markets, the factors influencing promotion programs, and the promotional strategies to apply in the foreign markets. From the basic marketing principles, consumers in any market, whether domestic or foreign, need to be informed, persuaded, and reminded about the product’s existence, the major aim being to create business. In order to effectively promote products and services, managers should understand the basic principles of managing the communication process, alternative strategies that exist to promote the business, and how to manage the promotion program. The main objective of this chapter is to describe the important promotion decisions in international marketing and explain the development and management of promotion programs when dealing with

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foreign markets. For the purpose of setting the foundation for a thorough understanding of the promotion process, the chapter begins with a brief reflection on communication in international marketing. Specifically, the chapter aims to: (i) describe the communication process and its challenges in the context of international marketing; (ii) discuss a number of important decisions that confront marketing managers when designing promotional campaigns in international marketing; (iii) highlight the implications of using standardized promo-tools in all foreign markets; (iv) evaluate the characteristics of different media options in international markets and design effective promotional programs; (v) examine foreign countries’ laws to determine their implications in international marketing promotional campaigns; (vi) identify the constraints in designing a campaign for the international market; (vii) discuss the criteria for selecting the appropriate media of promotion; (viii) identify the different types of promotion mix elements and the factors influencing the choice of promotion tool; and (ix) describe the role of promotion mix elements in international marketing.

Process of Marketing Communication Marketing communication is a process that involves the conveyance of information from the sender to the receivers of information in different markets. As in the case of domestic marketing, international marketing communication entails three major elements: the sender, the medium through which the message is conveyed, and the receiver of the message. The essence of communication in international marketing is the same as its essence in domestic marketing, except that international marketing communication entails unique challenges that originate from environmental differences. It is therefore apparent that there is a need to tailor communication activities to the market being targeted. Although the constraints of international marketing communication vary from one market to another, there are common challenges experienced when communicating across cultures. When a company communicates across international boundaries, a number of important factors have to be taken into consideration. As in the case of domestic communication, the global communication process involves: i. The information source: An international marketing executive with a product message to communicate. ii. Encoding: The message from the source, converted into effective symbolism for transmission to a receiver.

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iii. A message channel: The communication media that convey the encoded message to the intended receiver. iv. Decoding: The interpretation by the receiver of the symbolism transmitted from the information source. v. Receiver: A consumer who receives the message in the foreign market and is the target for the thought transmitted. vi. Feedback: Information about the effectiveness of the message that flows from the receiver (the intended target) back to the information source for evaluation of the effectiveness of the process. vii. Noise: Uncontrollable and unpredictable influences, such as competitive activities and confusion, that detract from the process and affect any or all of the other six steps.

Challenges in Marketing Communication Whilst the communication process is ostensibly straightforward – someone (the seller) says something (the message) to someone (the buyer), through a medium – it is compounded by certain factors. These mitigating factors have an effect on the decision to “extend,” “adapt,” or “create” new messages. The factors that can make international marketing communication challenging are as follows: x Language difference: The diversity of languages in world markets, even within one country, provides a serious challenge because when venturing abroad the firm will need to communicate in the foreign language, which is not necessarily the same as the language of the country of origin (pitfalls include managing many languages, use of outdated language, and translation errors). Advertising may also play different roles in developed and underdeveloped countries. For instance, in developing countries “education” and “information” may be paramount objectives, while in developed countries, the objectives may be more persuasive. x Media availability: Media available in the domestic market may not be available in the foreign market, or if they exist they are not allowed to be used for promotion other than by the government. In some countries, especially in developing societies, electronic media may be limited to affluent groups only, and if used they limit market coverage. For example, in Africa a number of countries do have television, but the extent of its use and the time available may be limited. Media use and availability, coupled with the type of message which may or may not be used, is tied to government

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control. Governments may ban types of advertising, as is the case of cigarettes on British television. Intending advertisers should refer to the appropriate codes of advertising practice available in each country. Intermediary availability: The availability and effectiveness of advertising agencies, media houses, and media buying groups vary from country to country and this variation can constrain international communication. Activities of competitors: Depending on the market, competitors are other international firms, local firms, or a combination of both. Competitors’ activities may require either an increase or a reduction in promotion in a given market at any time. Government controls: Most governments regulate promotional activities within their borders in the interest of protecting their citizens, their firms, and their culture. Such regulations can impact on the media, the message, the budget, media ownership, and the operations of promotional intermediaries. Cultural differences: Culture affects people’s likes or dislikes, how they interpret signals and symbols, and their attitudes toward and biases against particular messages. Variations in culture between countries make it difficult for international firms to design a communication strategy that will have the same impact across countries. Because of cultural differences, changes may need to be introduced in translation. For example, it would be quite unacceptable to have swim-suited ladies advertising suncare products in Muslim countries. Three major difficulties occur in attempting to communicate internationally: the message may not get through to the intended recipient, due to a lack of media knowledge; the message may get through but not be understood, due to a lack of audience understanding; and the message may get through and be understood, but not provoke action. This may be due to a lack of cultural understanding.

The challenges of international marketing communication imply that promoting goods and services in foreign markets requires a different blend of activities from promoting products domestically. There are some promotional strategies that take on greater importance when promoting internationally. Altogether, the selection of the promotional strategy to use will be influenced by the specific conditions of a particular country. This makes it important for international firms to evaluate the market and their promotional strategy prior to beginning the promotional activities in the foreign market.

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Promotion Functions, Critical Questions, and Decisions Promotion refers to activities that communicate the product or service and its merit to target customers and persuade them to buy. Its function or role in international marketing is similar to that in domestic operations – to communicate with customers so as to inform, persuade, and remind them about the products and services. The principal functions include informing customers about the availability of the product, persuading them to switch over from the competitor’s brand, and reminding them about the benefits of using (and the continual existence of) the product or service in the markets. Several questions may be asked by international marketers regarding promotion: (i) How will national differences affect the promotional campaigns? (ii) How much local versus international emphasis should there be in the program? (iii) What should the content and nature of the promotional message be? (iv) What kind of promotional tools should be applied in the international markets? (v) How much investment is needed in financing the promotional activities of the company? The basic promotion decisions are the same regardless of where in the world the target market is located. However, the promotion methods and strategies used can vary across countries. The choices available to a marketing manager within each of the decision areas may also vary dramatically from one country to another. As noted before, commercial television may not be available in some places. Where it is, government rules may limit the type of advertising permitted or when advertisements may be shown. Radio broadcasts in a market area may not be in the target market’s language. The target audience may not be able to read. Access to interactive media such as the internet may be non-existent. Cultural influences may limit advertising messages. Advertising agencies that already know a nation’s unique advertising environment may not be available.

International Promotion Tools (Promo-Tools) The basic promotion tools that are commonly used in both domestic and international marketing are advertising, sales promotion, personal selling, and publicity. Other forms of promotion include exhibitions, trade missions, direct marketing, online marketing, and sponsored events. Some promotional strategies have gained importance in recent times due to changes in technology, media availability, and the movement of people across countries. For example, the trade fair has become popular both as a

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“flag-flyer” and as a product display and competitive informationgathering facility. There are over 600 trade fairs worldwide, including the Dar es Salaam International Trade Fair, Tanzania, the Hanover Fair in Germany, the Royal Agricultural Show in the UK for machinery, the Zimbabwe International Trade Fair for agricultural produce and other more general things, the Paris Air Show in France for airplanes, the Tea Fair in Kenya, and so on. The criterion for participating in fairs is always cost versus effectiveness. Online marketing is also becoming more popular due to increased use of social media, including Twitter, Facebook, etc.

International Advertising Advertising is any paid form of non-personal communication (presentation and promotion of ideas, goods, or services) through “mass” media by an identified sponsor. Advertising is the key in international communications because it is the most visible, it is a relatively cost-effective method, and allows effective positioning of the product. One of the challenges faced by an international marketer is whether to standardize or adapt the advertising campaigns. Standardized advertising means the use of common messages, advertising appeals, creative ideas, art copy, stories, media, strategy, and so forth in the markets of multiple countries. Adaptation occurs when the advertising program is modified to suit the requirements of the foreign markets. As in the case of other marketing mix elements, each strategy has certain advantages and disadvantages. Even though the strategy used depends on its suitability, among the elements of the promotional mix advertising has the greatest similarities worldwide, making standardization of advertisements more common. Advertising is formulated and executed through global advertising agencies that have wholly owned subsidiaries, joint ventures, and working agreements with local agencies. The advantages of standardization of international advertisements are as follows: i. Standardization reduces the advertising costs as there is no duplication of effort for each market. It reduces production costs in artwork, printing, and so on, since the concept can be transferred with minor modifications. In this way, economies of scale can be achieved in centralizing the advertising campaign. ii. Through standardization, consumers increasingly share similar frames of reference with regard to products and consumption. It is therefore easier to project a consistent product image.

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iii. Standardization enables the company to ensure consistency and maintain its corporate-wide image objective. Consistency in advertising the product and its company plays an important role in creating a global image. iv. Standardization of advertising enables the company to have a similar positioning through centralized advertising control. Standardization is based on the assumption of homogeneous segments; without this, the possibility of communication breakdown increases, thus making the product less appealing to customers and adversely affecting sales. For example, cavity-reducing fluoride toothpaste sells well in developed countries where healthy dental care is perceived as important, but it has limited appeal in markets such as Tanzania where the reason for buying toothpaste is breath control. When designing an advertisement for this it is important then for marketers to be aware of this difference and customize it accordingly. There are several such barriers to the standardization of international advertising. The key barriers include: i. Differences in culture that influence comparison of advertisements: humor, gender roles, sophistication of the target market, information content, etc. It is not often appropriate to replicate local advertising approaches in other countries because of cultural differences and sensitivities. ii. Communication infrastructure influences the channel selected for advertising in foreign countries. For example, due to limited access to the internet, using it to promote products and goods in Africa may be ineffective. In large less-developed countries, advertising media such as television may not be geographically dispersed, but limited to urban areas. iii. Legislative obstacles influence the content, language, sexism, and even the product to be advertised in a certain market. Firms advertising products abroad must comply with legal requirements, and this makes it necessary to adapt advertising campaigns to the foreign market. There are various pieces of legislation around the world today that control price advertising, prohibit misleading advertising, and protect children. Most Islamic countries ban the use of sex in advertising. iv. Consumer literacy differs from country to country, and this influences the kind of messages and media used to advertise across different markets. v. Language differences may require the company to use different languages and slogans when advertising in different countries.

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It is important to note the crucial advertising decisions are those most often affected by cultural differences among markets. Consumers respond in terms of their culture: its style, feelings, value systems, attitudes, beliefs, and perceptions. The function of advertising is to interpret the qualities of products in terms of consumer needs, wants, desires, and aspirations, using emotional appeals, symbols, and persuasive approaches. Thus, reconciling an international advertising campaign with the cultural uniqueness of markets is the challenge confronting the international or global marketer. Advertising intensity varies a great deal from place to place, and in some countries it is not a very common form of communication. This makes the adaptation of an advertising campaign a feasible strategy in international marketing. Adaptation of advertising considers local needs, leading to better positioning and price differentials in individual markets. When the visual and verbal element of the advertising are adapted to local languages, models, and scenarios, advertisements become more effective.

Advertising Decisions Facing the International Marketer Before embarking on a promotion campaign, the following questions, among many others, must be answered. What can be said about the product? Which audience is being reached? What resources does the organization have? Can someone do it better, say an agency? Marketers contemplating advertising in foreign markets must decide on the advertising objectives, budget, selection of agencies, choice of media, campaign scheduling, evaluation of the campaign, and organization and control. They are outlined in detail in the sections below. Although these decisions are all made in domestic marketing, they can become quite complex in international marketing because of the natural complexity of the market. Some of the practical problems facing the decision-maker in global advertising include the allocation of an appropriate advertising budget to several countries, developing the message to use in the selected markets, and deciding what media to select to advertise there. i) Objectives Advertising must only be undertaken for a specific purpose or purposes, which must be translated into objectives. While it is difficult to attribute directly to advertising, the ultimate objective of persuasive advertising is to obtain sales. Other objectives include building a favorable image, giving out information, stimulating distributors, or building

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confidence in a product. Whatever objectives are pursued, these must be related to the product life cycle and the stage the product is at. ii) Budget Setting an advertising budget for a foreign market is quite tricky, due to the major investment needed to advertise across countries. Even though there are scientific methods of deciding the level of advertising budget such as sales response methods and linear programming, in most cases less scientific means, including rule of thumb, are used. The most common budgeting methods are as follows: x Objective-and-task method, where the advertiser identifies advertising sales goals, conducts research, determines the costs of achieving the goals, and allocates the necessary sum. x Percent-of-sales method, where the budget is based on past or projected sales. x Historical method, which determines the budget on the basis of past expenditure, giving more weight to recent expenditure. x Competitive parity, which uses the budgets of international competitors as a benchmark. x Executive-judgment method, which is based on collective executive opinions. x All-you-can-afford methods, which are commonly used by small and medium firms. iii) Selecting the Agency or Agencies Agencies may be used or not depending on the organization’s abilities, its confidence in the market, and its market coverage. Two alternatives are available to the firm: an international agency with domestic and overseas offices, or the use of a local agency in each national market. Each agency would be selected using the following criteria: i. Market coverage. ii. Quality of overage. iii. Market research, public relations, and other marketing services. iv. Relative roles of company advertising department and agency. v. Communication and control. vi. International coordination. vii. Size of company’s international business. viii. Image. ix. Company organization. x. Level of involvement.

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iv) Message Selection The messages may be audio, as in radio advertising; visual, as in billboards or magazines; or audio-visual, as in television, online, or cinema advertising. Message selection is probably the area where the most care has to be taken. Decisions hinge on the standardization or adaptation of message decision, language nuances, and the development of global segments and customers. Message design has three elements: illustration, layout, and copy. Advertising appeals should be consistent with the tastes, wants, and attitudes in the market. Coca-Cola and Pepsi have found universal appeal. With the postmodern age now affecting marketing, message design is becoming particularly crucial. It is not just a question of selling, but of crafting images. It is often the image, not the product, that is commercialized. Products do not project images, products fill the images which the communication campaign projects. Copy, or text, has been the subject of much debate. Effective translation requires good technical knowledge of the original and translated languages, product knowledge, and an understanding of the objectives of the original copy. Care has to be taken that the meaning does not get lost in translation. v) Media Selection There is great difference in the variety and availability of media across the world. The choice of media depends on its cost, coverage, availability, character (national, local, or international), continuity, size (space or time unit employed), and atmosphere (for example, in Tanzania, posters and billboards rather than adverts in the newspaper). In advertising the choice is based on the media available, such as television, radio, press, magazines, cinema, posters, direct mail, transport, and video promotion. The type of media selected depends on the objectives of the campaign, media effectiveness, and the budget available. For awareness, television can serve well in those countries where it is generally available. For attitude change and image-building, television and magazine advertising are generally more useful. To affect behavior directly, the media chosen have to be timely, reaching the audience near the time of purchase. vi) Campaign Scheduling Scheduling international campaigns is difficult, especially if handled alone rather than with an agency or third party. Scheduling decisions involve decisions on when to break the campaign, the use of media solely or in combination, and the specific dates and times for advertisements to appear in the media.

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vii) Evaluation Advertising campaign evaluation is not very easy at the best of times. Whilst it would be nice to say that “X” sales had resulted from “Y” advertising inputs, too many intervening factors make the simple tie-up difficult. Evaluation takes place at two levels: the effectiveness of the message and the effectiveness of the media. Few African developing countries have any sophisticated methods for campaign evaluation. Measures include message recall tests, diary completion, and brand recall. viii) Organization and Control The firm has basically three organizational alternatives: (i) it can centralize all decision-making for international advertising at headquarters (e.g. Nestlé); (ii) it can completely decentralize the decision-making to foreign markets (e.g. Vodacom); or (iii) it can use some blend of these two alternatives (e.g. Kodak or Coca-Cola). The degree of autonomy afforded to local subsidiaries depends on the philosophy of the organization and the relative knowledge of the local market by the principal.

International Personal Selling Personal selling refers to a process whereby sales people are used to communicate, primarily face-to-face, with prospective customers. It is person-to-person communication between a company representative and a prospective buyer. The seller’s communication effort is focused on informing and persuading the prospect with the goal of making a sale. Their job is to understand the buyer’s needs correctly, attach those needs to the company’s products, and then persuade the customer to buy. This is the most effective and flexible promotional tool, but it can be the most expensive, and is mainly used in industrial markets to sell technical goods such as machinery or computers. Often it is more important in international marketing than domestically, for two reasons: (i) restrictions on advertising and lack of media availability may limit the amount of advertising the firm can do, and (ii) low wages in many countries allow the company to hire a much larger sales force, especially in LDCs. Sales people may be: x Nationals: Cost-effective, possessing better market knowledge, etc. x Expatriates: Employed from the host country (e.g. a Tanzanian working for a Tanzanian company in Kenya).

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x Cosmopolitan: Management level, employed by a firm from one country, based in the second country, working for the third country (e.g. Tanzanians working for a Kenyan firm in Uganda).

Basic Functions of Salespeople Operating in Foreign Markets i. The actual selling activity: The communication of product information to customers and obtaining orders. ii. Customer relations: The salesperson must at all times be concerned with maintaining and improving the company’s position with customers and the general public. iii. Information gathering and communication: The salesperson is often able to provide information that might be useful in planning advertising and trade promotion programs. The personal selling process is typically divided into several stages: prospecting, pre-approach, problem-solving, approaching, presenting, handling objections, closing the sale, and follow-up. The relative importance of each stage can vary by country or region. It is also important to note that a well-selected, well-trained, well-compensated, and well-supported salesperson can, and in most instances will, make the difference between successful and unsuccessful foreign sales volume.

Types of International Personal Selling There are various types of international personal selling based on the major purpose of selling and the approach used. The most common types fall under these categories: i. Creative selling: Persuading a new buyer to take a trial order. ii. Missionary selling: The manufacturer’s sales representatives working closely with an intermediary. iii. Technical selling consultancy pitch: The technical aspects of products are emphasized. iv. Trade selling: The salesperson assisting intermediaries in foreign sales promotion.

International Publicity Publicity refers to any kind of news or editorial comment about a company, its products, its practices or its personnel that is reported by some media (broadcast and/or print media), and is not paid for by the

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company. It is a major component of the public relations activities of a company. Public relations is the marketing communications function that carries out programs designed to earn public understanding and acceptance: it should be viewed as an integral part of the export marketing effort. The marketing purposes of public relations activities are to: x Achieve objectives that cannot be achieved, or not as cheaply, by other means, for example gaining recognition through social responsibilities. x Achieve positive image and counter negative perceptions. x Gain recognition by any group that has an actual or potential impact on an organization’s activities, e.g. financial institutions or multinational companies. The most widely used tools of PR are press releases and prepared editorial material. They are often prepared on new products, the opening of new plants, the accomplishments of the company, the activities of company personnel in community or governmental activities of locally recognized merit, the favorable impact of the company on the local economy, the role of the company as a local employer, or the contribution that a company makes to a country.

Sales Promotion Sales promotion refers to any paid consumer or trade communication program of limited duration that adds tangible value to a product or brand. It consists of all sales activities that supplement and strengthen personal selling and advertising. Sales promotion activities stimulate consumer purchases and improve the effectiveness and cooperation of retailers or middlemen. Such activities include discounts, in-store demonstrations, samples, coupons, gifts, contests, sponsorship of special events, and pointof-purchase displays. Sales promotion activities are usually non-recurrent and have a relatively short-run life that adds tangible value to the product or brand, such as price reduction or a “buy one, get one free” offer. The major purpose of a sales promotion may be to stimulate non-users to sample a product or to increase overall consumer demand and enhance product availability in distribution channels. Sales promotions could be a vital tool when introducing a product internationally. Sampling or couponing, among other promotion strategies, could be a great way to introduce the product to an international market. In international markets, sales promotion provides a tangible incentive to buyers and reduces the

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perceived risk associated with purchasing a product. It provides accountability for communications activity, while offering an additional method of collecting additional data from customers in the foreign markets. One barrier to sales promotion in international marketing is that it requires support from local retailers and distributors. For example, grocery stores must be able to cash in coupons redeemed by their customers. This entails sending the coupons and paperwork to the accounting department of the company offering the promotion. Sales promotion may be associated with fraud, and therefore it faces different restrictions in various countries.

International Trade Fairs and Exhibitions A trade fair (trade show, trade exhibition, or expo) is an exhibition organized so that companies in a specific industry can showcase and demonstrate their latest products or services, study the activities of rivals, and examine recent market trends and opportunities. In international marketing, trade fairs and exhibitions open up opportunities for companies to expose their products to foreign countries and explore opportunities for their business. For example, the East Africa International Trade Exhibition (EAITE) for multi-sector products, equipment, and machinery is the largest trade event held annually in the East African market. The exhibition attracts exhibitors from more than thirty countries and visitors from all over East and Central Africa, thus giving exhibitors an excellent opportunity to explore several countries at one time. The trade fair is a concentrated exhibition of the products of many manufacturers and exporters. There are two types: broad, general, wellestablished annual fairs (for instance the annual Dar es Salaam International Trade Fair in Tanzania or the Hanover Fair in Germany), and specialized fairs, for products in particular groups or industries (for example the annual Paris Air Show). Trade fairs offer various advantages: x They are a forum to buy and sell products, sign contacts, arrange international distribution and shipping, and forge agent relationships. x They offer the ideal opportunity to introduce new products and make personal contact with potential customers. x They offer the chance to study new products. x They are an effective method of promoting the company’s product to a large group of potential buyers.

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x They can be an important source of marketing intelligence. x They save time and effort, as they provide direct contact with potential buyers. Exhibit 6.1: Dar es Salaam International Trade Fair in Tanzania: A Generic Trade Fair The Dar es Salaam International Trade Fair (DITF), which is a recognized member of the Union of International Trade Fairs, has established itself over years as the shopping window for Tanzanian products as well as those of the East, Central, and Southern African region. The DITF, which takes place in Dar es Salaam every year on 7 July, acts as a one-stop-shop for several countries in the region, including Botswana, Burundi, Congo, Kenya, Malawi, Rwanda, Uganda, South Africa, Zambia, and Zimbabwe. The business communities in the region exhibit and use the fair as a forum for business exchange. Participation has ever been on the increase from merely c. 100 companies in the late eighties to over 1,000 companies in 1998. In 2006, a total of 1,548 exhibitors exhibited at the fair, of which 108 came from overseas, representing over twenty-five countries. Fifteen foreign countries participated at an official level. The fair enjoys the support of the government through the Ministry of Industry, Trade and Marketing, the Tanzania Chamber of Commerce, Industry and Agriculture (TCCIA), the Confederation of Tanzania Industries (CTI), as well as other institutions in the country. The grounds offer rental space amounting to about 30,000m² (net). Being a general fair, it brings together over 200,000 people every year including consumers and traders, importers and exporters, wholesalers, agents, business executives, government officials, diplomats, political leaders, and members of the general public. During the fairs, test sales are allowed and facilities to cater for all the needs of both exhibitors and general visitors are available. Agricultural products, food and beverages, textiles, garments and yarns, manufactured products, construction materials, automobiles, electrical goods and appliances, chemicals and cosmetics, timber and furniture, trade services, engineering products, machinery, computer software, gift articles, and handicrafts are among the commodities exhibited in the DITF. With the ground covering a total area of 160,000m², the Board of External Trade (BET) organizes several events during the DITF, including buyer–seller meetings, symposia, seminars, and tourist visits to national parks.

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Exhibition hall facilities range from individual pavilions to large exhibition halls of up to 4,000m² gross.

Direct Marketing Direct marketing is gaining prominence in promoting and marketing businesses internationally. It entails connecting directly with carefully targeted individual consumers, both to obtain an immediate response and to cultivate lasting customer relationships. Basically, direct marketing is one of the fastest growing forms of marketing where marketing channels are managed without intermediaries. The customer database is used to create a platform for direct marketing. This database is an organized collection of comprehensive data about individual customers or prospects, including geographic, demographic, psychographic, and behavioral data. It is used to reach a wider market across national boundaries. Given its convenience and ease of market access, direct marketing has several benefits to both buyers and sellers in international marketing. To buyers, it is convenient and gives access to a variety of products. It increases access to comparative information about companies, products, and competitors. It can be interactive and immediate, especially when the direct responsive approach is used. To sellers, direct marketing is a tool for building relationships with customers. It is a low-cost, efficient, fast approach to reaching wider markets across countries.

Types of Direct Marketing Various forms of direct marketing are applied to promote and market products in foreign markets. The most predominant forms of direct marketing are direct-mail marketing, catalog marketing, telephone marketing, direct-response television marketing, kiosk marketing, and digital/online marketing. Some of these methods are explored in more detail here: i. Direct-mail marketing: Mailing a person at a particular address to inform, remind, and pursue a person to buy a particular product. This approach is personalized, and gives easy-to-measure, better results than mass media. Japanese car exporters, such as Car Junctions, Trade Car View and Outrec, commonly use this approach to promote their motor vehicles to the East African market.

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ii. Catalog direct marketing: Involves printed and web-based catalogs from which customers can choose the products they need and make payments directly to the seller or online. Online catalogs have a lower cost than printed catalogs and include interactive content. iii. Telephone direct marketing: Using the telephone to sell directly to consumers and business customers. Telephones offer purchasing convenience and increased product service and information. In developed countries, toll-free numbers to receive orders from television and print advertisements, direct mail, and catalogs are commonly used. This approach is feasible in such markets due to the availability of infrastructure and media. In developing countries, the approach is not widely used due to issues of security, infrastructure to supply the products, and availability of reliable telephone services. iv. Direct-response television (DRTV) marketing: Involves advertisements that describe products and give customers a toll-free number to purchase products on home shopping channels. This approach is less expensive than other forms of promotion and makes it easier to track results. Interactive TV allows viewers to interact with television programs and advertising using their remote controls and provides marketers with an involving means to reach targeted audiences. v. Kiosk marketing: Placing information and ordering machines in stores, airports, trade shows, and other locations. This kind of marketing facilitates easy promotion and distribution of products. It is very convenient for customers, especially in places where there are large inflows of people. vi. Mobile phone marketing: Entails ad-supported content that is used to promote products and facilitate purchases through mobile phones. Due to the challenges of access to computers, and given the growing telecom sector in developing countries, mobile commerce is expanding significantly. Mobile phones are not only used to communicate with customers but also to make various transactions electronically, and they are considered to be very convenient to customers. vii. Online marketing: Conducted through interactive online computer systems that link consumers with sellers electronically. It is done through two channels: (i) commercial online services that offer online information and marketing services to subscribers who pay a monthly fee, and (ii) the internet, the vast public web of computer networks that connects users of all types around the world to each

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other and to a large information repository. The explosion of internet usage has created a new world of electronic commerce, a term that refers to the buying and selling process supported by electronic means. Today there are several companies promoting goods and services through online marketing.

Chapter Summary This chapter describes the important promotional decisions in international marketing. It builds on the principles of effective communication to reflect on the development and management of promotional activities in the context of international marketing. While the chapter recognizes that the basic promotion decisions in international marketing are similar to those of domestic marketing, it highlights the specific challenges and differences that exist when dealing with foreign markets. More specifically, the chapter presents the following major points: x As in the case of domestic marketing, international marketing communication involves the sender, the medium through which the message is conveyed, and the receiver of the message. The process of conveying information in international marketing consists of the information source, encoding, message channel, decoding, receiver, feedback, and noise. x Even though the communication process in international marketing is the same as in domestic marketing, international marketing communication faces several additional challenges: language differences, media availability, intermediary availability, activities of competitors, government controls, and cultural differences. x Advertising is the key international communication tool because it is the most visible, it is a relatively cost-effective method, and is effective in product positioning. However, before making basic advertising decisions, the company must decide whether to standardize or to adapt the advertising programs for the international market. x Standardized advertising implies the use of a common advertising program and strategy in multiple country markets. It reduces the advertising cost and enables the company to ensure consistency and maintain image objectives, while facilitating similar positioning through centralized advertising control. Despite the benefits of standardizing advertising in international markets, differences in culture, legislation, consumers’ literacy level, language, and

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communication infrastructure compel companies to adapt their advertising campaigns to foreign market requirements. Marketers contemplating advertising in foreign markets must decide on their advertising objectives, budget, selection of agencies, choice of media, campaign scheduling and evaluation, and organization and control. Although these decisions are made in domestic marketing, they can become quite complex in international marketing because of market differences. International personal selling refers to a process whereby salespeople communicate primarily face-to-face with prospective customers in different countries. Although the approach is a very effective and flexible promotional tool, it can be one of the most expensive due to its personal nature of communication. The basic functions of salespeople in international marketing consists of the actual selling activity, building customer relations, and information gathering and communication. International publicity is any kind of news or editorial comment about a company, its products, its practices, or its personnel that is reported by some form of media in any country targeted by the company, and that is not paid for by the company. Both publicity and public relations are integral parts of the export marketing effort. Sales promotion is any paid consumer or trade communication program of limited duration that adds tangible value to a product or brand to supplement and strengthen personal selling and advertising. It is a vital tool when introducing a product internationally. Sales promotion in international marketing requires support from local retailers and distributors and so it may be associated with fraud. International trade fairs and exhibitions open up opportunities for companies to expose their products to foreign countries and explore opportunities for their businesses. Direct marketing connects directly with carefully targeted individual consumers both to obtain an immediate response and to cultivate lasting customer relationships. Due to advances in technology and the movement of people from one country to another, direct marketing has become an effective way of promoting products in international marketing. It is done in one of the following forms: direct-mail marketing; catalog marketing; telephone marketing; direct-response television marketing; kiosk marketing; and digital/online marketing.

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Review Questions 1. 2.

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8. 9. 10. 11. 12. 13. 14.

Describe the international marketing communication process and show how it relates to international promotional activities. “While the essence of communication in both the domestic and the foreign market is the same, international marketing communication faces additional challenges.” Discuss. What constraints are you likely to face when designing an advertising campaign for the international market? Why is it difficult for the international advertising manager to use standardized advertising in all foreign markets? How does each stage of the communication process require modification when promoting in international marketing? “When designing promotional campaigns in international marketing, the marketer is confronted with a number of important decisions.” Discuss. What are the critical decisions that any international marketer should make to ensure the development of appropriate advertising campaigns in each foreign market? “Standardizing advertising campaigns in international markets can lead to a number of advantages for the firm.” Discuss. Discuss the criteria for selecting appropriate advertising media. Why does personal selling play a proportionately larger promotional role in foreign markets than in the domestic market? Discuss the different types of international personal selling. What factors influence the choice of sales force personnel? Discuss the role of international public relations in international marketing. Discuss the benefits of international trade fairs to international firms. a) Define direct marketing. b) Describe the major benefits of direct marketing in international marketing. c) Identify various forms of direct market and explain their suitability in the context of a developing country.

CHAPTER SEVEN INTERNATIONAL PRICING STRATEGY

Introduction Price is what customers pay to get the product or service. While other marketing elements (product, promotion, place, process, people, physical evidence or philosophy, and productivity or performance) are known as cost-centered elements, the pricing function is considered revenuecentered. This is mainly because decisions on pricing are mainly centered on how much the firm should charge or generate as revenue, while decisions for the other 7Ps of marketing are centered on how much the firm should spend for them to happen. For international markets, pricing is one of the most important elements of the marketing product mix, as it generates cash and determines a company’s survival. Pricing affects product positioning, market segmentation, demand management, and market share dynamics. However, pricing in international marketing is very complex and not an easy decision because it affects the firm’s ability to stay in the market, and it is complex because of the diversity of markets, differences in political, legal and consumer characteristics and numerous other factors. In addition, a firm’s pricing policy is inherently a highly cross-functional process, based on inputs from the firm’s finance, accounting, manufacturing, tax, and legal divisions. Multinationals also face the challenge of how to coordinate their pricing policy across different countries. In this chapter, the critical issues to consider in order to remain competitive in the international market have been taken into account. In that sense, the reader should be able to (i) examine the various pricing options and the complications involved in setting prices in foreign markets; (ii) identify the major determinants of export prices and pricing methods; and (iii) describe the steps involved when setting prices for products sold abroad. The chapter also goes on to discuss the difficulty or desirability of having standardized prices for a company’s products across all countries, and it describes various International Commercial Terms (Incoterms).

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Pricing Standardization versus Adaptation Policies Pricing strategy can be standardized or adapted across global markets. The firm can standardize its pricing decisions by charging the same price for a product in every foreign market in which it operates. This is suitable if a firm’s competitive position does not vary frequently from one market to another and it enjoys a monopolistic position. It is not consumer orientated, and the products may end up underpriced or overpriced depending on various local factors. This is a difficult strategy to maintain because of differences in local taxes, export taxes, distribution channels, marketing costs, and freight and insurance rates. Alternatively, the price for the firm’s products may vary according to local market needs and conditions, which is known as price adaptation or differential. The advantage of this strategy is that it is very flexible and allows the firm to modify its prices according to changes in the market and competitive conditions. However, price differentials make it difficult for a firm to develop a global strategic position. Taking a practical example from the service industry, FastJet, a lowcost airline, has demonstrated an impressive performance in the African market. Despite the fact that the company is known for its low-cost strategy, the price set for each market is modified to suit the needs to the market, and this has given the company a competitive edge. The FastJet pricing policy is that consumers pay for what they need in every market (Exhibit 7.1).

Exhibit 7.1: FastJet – Africa’s Low-Cost Airline The need for African low-cost airlines is unquestionable. Africa’s size, challenging terrain, and poor infrastructure make air travel the logical choice over the arduous road alternative. There is a rapidly developing middle class that has an appetite for consumerism and travel. Fastjet is the holding company of fastjet Airlines Limited (Tanzania), a low-cost airline which operates flights under the fastjet brand in Tanzania using a fleet of three Airbus A319 aircraft. By adhering to the high international standards of safety, security, quality, and reliability, fastjet has brought a new flying experience to the African market at low prices. Fastjet’s long-term strategy is to become the most successful pan-African low cost airline. The fastjet low-cost airline was launched in Tanzania on 29 November 2012. It carried more than 350,000 passengers in the first year of

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operations and had sold one million seats by December 2014. Comparing 2014 with 2013, passengers flown increased by 63% and capacity rose by 62%. The group operates nine routes to eight destinations in five countries in Africa. It also operates five international routes from Dar es Salaam to Johannesburg (South Africa), Harare (Zimbabwe), Entebbe (Uganda) and Lusaka (Zambia). It also serves Entebbe from Kilimanjaro. The current fleet of three aircraft is now almost fully utilized, a fourth aircraft is expected to join the fleet in Q3 2015, and additional growth opportunities will require more aircraft over the remainder of 2015. This will enable fixed overhead costs to be further spread over a larger operation. In December 2014, fastjet Tanzania achieved its first profitable month of operations, a major milestone for the company. The key contributors to this were the maximization of fleet capacity and improved revenue per passenger. Further contributors were the increase in load factor (the number of passengers as a percentage of the number of available seats flown) and a reduction in the cost of aviation fuel. In December 2014, fastjet Tanzania operated its aircraft for 10.2 block hours per day, compared to 5.5 block hours per day in December 2013. This increased flying time and delivered 71% more seats for sale with no growth in its fleet size, resulting in additional revenue of US$2.5 million with no increase in fixed aircraft costs. A maturing brand and high-season demand contributed to an average revenue per passenger growth of 20%, adding just under US$1.2 million of revenue, and a passenger load factor increase of 3%, delivering a further US$200,000 of revenue, with a yearon-year fuel price reduction of 16%, saving US$400,000. Using its low-cost model to drive the lowest possible unit costs, and avoiding costly frills, with additional services such as baggage handling or refreshments available as pay-as-you travel optional extras, fastjet has gained a competitive advantage in most African countries. Fastjet operates a well-proven low-cost airline model, operating a single-type fleet of modern, fuel-efficient jet aircraft on a short-haul point-to-point network. The company capitalizes on economies of scale and knowledge sharing. A group approach to contracts and service providers enables further efficiencies and reduced fixed costs. A centralized fleet management structure optimizes provision of aircraft across the fastjet group. Centralized services are geographically located to optimize cost and performance. Fastjet expects to further increase the frequency of flights on its current routes, to link to more domestic destinations, to add new domestic destinations as airfields are upgraded to take its A319 aircraft, and to add international destinations such as Nairobi, Lilongwe, Mombasa, Kigali,

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and Lubumbashi to the Tanzanian network, in line with consumer demand. Flights to destinations in Kenya are dependent on fastjet gaining approval from the Kenyan government. This approval has been outstanding for some time due to disagreements on the application of the Bilateral Air Service Agreements that exist between the two countries. However, recent discussions between the Tanzanian and Kenyan governments lead the company to believe that approval will be granted. Source: FastJet Annual Report (2014), downloaded from http://www.fast jet.com/img/stand_alone_files/file/original/236678-fastjet-85.pdf

Determinants of Export Prices and Pricing Methods Basic factors that influence the setting of an export price are as follows: x Environmental factors: Regulations, exchange rates, inflation rates, and price controls. x Market factors: Competition, income levels, and market structure. x Company internal factors: Price objectives, production costs, distribution costs, and profitability.

Pricing Approaches There are many pricing approaches that a firm could use, ranging from cost-plus pricing to penetration pricing. Actual pricing methods are usually cost, market, or competition oriented approaches. In the international arena, however, other factors come into play. Exhibit 7.2: Price Controls by the Energy Water Utilities Regulatory Authority (EWURA) in Tanzania Tanzania imports all its petroleum requirements. The oil marketing companies (OMCs) based in this country normally set the product price based on the price floor and ceiling as announced by the Energy Water Utilities Regulatory Authority (EWURA), which is the country’s regulator of the fuel business. The EWURA considers several variables when setting the prices such as the cost, insurance, and freight (CIF) for Dar es Salaam, tax elements (including EWURA, TBS charges, and TRA levies), transportation costs, TPA charges and oil marketing company margins. The oil products are categorized into AGO, PMS, and IK which represent gas oil, petroleum, and kerosene respectively. There have been numerous

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discussions around the price ceiling and floor that EWURA imposes on OMCs once per month. The discussion is basically based on the formulae used by EWURA. Therefore, the risk associated with the regulator in pricing issues is minimal, once the OMCs agree with EWURA on the best pricing formulae. However, with the introduction of bulk procurement systems, the issues surrounding pricing tensions will be minimized, because of the uniformity of the prices at the entry point. Gulf Africa Petroleum Corporation (GAPCO) is one of the OMCs; the company is registered in Mauritius, and has subsidiaries in Tanzania, Kenya, Uganda, Rwanda, and Zanzibar. It is one of the largest independent petroleum marketing and trading organizations and is primarily involved in petroleum product imports, retail and wholesale marketing, trading, storage, distribution, supply, and transport of oil products. Reliance Industries Middle East (DMCC), a subsidiary of Reliance Industries Limited registered in the UAE, took over management control and majority shareholding of GAPCO Mauritius in July 2007. Countries where GAPCO has set up subsidiaries have different legal and regulatory frameworks when it comes to pricing.

Cost-Plus Pricing The traditional method of price calculation is the “cost-plus” approach. In this method, the cost structure determines the firm’s pricing structure and its profitability. In international pricing, the same cost factors apply as in the domestic market; but the price calculation will include the components of the domestic price plus the additional costs that are specific to export transactions. There are basically two ways of calculating this aspect: the historical accounting cost method and the estimated future cost method. The former includes direct and indirect costs and has the disadvantage of ignoring demand and the firm’s competitive position in the target market. Estimated cost approaches are based on assumptions of production volume (depending on process) which will be a principal factor in determining costs. Again, difficulties may lie in trying to estimate production levels. In reality, costs may be a useful starting point, but should never be used as the final arbiter. There are additional costs when going abroad, including transportation, special packaging, freight and insurance costs, storage costs, local taxes, intermediary costs, etc. All these sets of factors add up and lead to price escalation (Table 7.1). We can identify three main constituents of costs associated with exporting:

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order getting costs, order handling costs (direct to export orders), and order handling costs (export overhead). i. Order getting costs: Agency fees and commissions, direct selling costs, trade fairs and exhibitions, promotional activities, advertising, gifts and samples, market research, and travel costs. ii. Order handling costs (direct to export): Special packaging and production preparation, transport costs, financing and insurance charges, documentation charges, export and import duties, storage costs, and other special costs. iii. Order handling costs (export overhead): Salaries of export office personnel, office materials, post, telephone, telex charges, depreciation of equipment, and training costs. Table 7.1 Price escalation USD Target price in foreign markets

25.00

Less 40% retail margin on selling price Retailer cost

7.14 17.86

Less 75% importer/distributor marking up cost Distributor cost

7.60 10.20

Less 12% VAT on landed value and duty CIF value plus duty

1.09 9.11

Less 9% duty on CIF value

4.31

Landed CIF value

4.80

Less ocean freight and insurance

1.40

Required FOB price to achieve target price

3.40

In this example, if US$3.40 is less than the domestic price, price escalation can prevent a firm entering a market. However, the firm has alternatives to counter it: i. ii. iii. iv.

Consider marginal pricing. Shorten the distribution channel. Modify or simplify the product, if possible. Find an alternative source of supply with lower cost.

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v. Reduce the cost of the product by adapting it or by manufacturing it abroad.

Retrograde Pricing Market range for similar product Less: local mark-ups on import price % Less: duties payable (if applicable) Less: freight and insurance estimates

Retrograde pricing

Less: documentation and freight costs in exporting country Less: forwarding, packing, and marking costs Less: agent commission, proportion of export overhead Profit area

Gap

Costs

Contribution area

Add: proportion of fixed costs

Variable production costs (direct materials, labor, and variable overheads)

Figure 7.1 Retrograde Pricing Method

An alternative pricing technique to the cost-plus method is working back from a market price that you will have to meet to be competitive. This approach to pricing is known as retrograde pricing. Retrograde pricing is obtained by working backward from an established or accepted range of marketing prices and simultaneously working forward from the cost side (see Figure 7.1). Unlike other methods of pricing in international

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marketing, the retrograde pricing approach takes into account costs, demand, and the competition environment in the international markets.

Competitive Pricing Whilst costs are important, they should be looked at alongside the prices of competitive products in the target markets. Once these price levels have been established, the base price – the price that the buyer will pay for the product – can be determined. This involves four steps: i. Estimation of demand schedules. ii. Estimation of incremental and full manufacturing and marketing costs to achieve projected sales volumes. iii. Selection of price which offers the highest contribution. iv. Inclusion of other elements of the marketing mix. These steps are by no means easy. Costs are difficult to assess properly, as are demand conditions. With products of a raw commodity nature or those traded on the international market subject to world prices, often the producer has no alternative but to take the going price – the price governed by competition, especially on the supply side. In Tanzania, for example, although cashew nut prices internationally may be encouraging, if too many farmers grow them, the price will be suppressed for all.

Market Pricing For certain products, firms can charge “what the market can bear.” If the supplier is one of a few, despite all the problems associated with price fixing, the market may be able to bear a high price. If, as in Africa, an export crop fails, then other suppliers can take advantage of this to charge higher prices for a similar export crop. This was the case a few years ago with the Kenyan avocado market. A crop failure in Israel gave an unprecedented boost to Kenya’s price and production. The problem is that, encouraged by the profit margins, more entrants are drawn into the market.

Transfer Pricing This refers to a multinational firm’s pricing of goods and services between its headquarters and subsidiaries. It is used to transfer funds from one market to another, to reduce a firm’s tax liabilities, and to circumvent exchange control regulations. Transfer pricing is more appropriate to those organizations with decentralized profit centers. It is used to motivate profit

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center managers, to provide divisional flexibility, and also to further corporate profit goals. It is also used to shift resources within a firm to offset inflation in country subsidiaries, to support a subsidiary’s local competitive position, and in other cases for profit repatriation. This has resulted in accounting firms developing strict guidelines for the transfer pricing process. The benefits of transfer pricing for international firms include: x Lowering duty costs by shipping goods into high-tariff countries at minimal transfer prices, so that the base duty level is low. x Reducing income taxes in high-tax countries by overpricing goods transferred to units in such countries; profits are eliminated and shifted to low-tax countries. Such profit shifting may also be used for “dressing up” financial statements by increasing reported profits in countries where borrowing and other financing are undertaken. x Facilitating dividend repatriation, when this is curtailed by government policy. Invisible income may be taken out in the form of high prices for products or components shipped to units in that country. Across national boundaries the system gets complicated by taxes, joint ventures, attitudes of governments, and so on. There are four basic approaches to transfer pricing. i. Transfer at cost: Few practice this, which recognizes that foreign affiliates contribute to profitability by operating domestic scale economies. Prices may be unrealistic, so this method is seldom used. ii. Transfer at direct cost plus overheads and margin: Similar to transfer at cost. iii. Transfer at a price derived from end market prices: A very useful strategy, in which market-based transfer prices and foreign sourcing are used as devices to enter markets too small to support local manufacturers. This gives a valuable foothold. iv. Transfer at “arm’s length”: This is the price that would have been reached by unrelated parties in a similar transaction. The problem is identifying an arm’s length price for all products other than commodities. Pricing at arm’s length for differentiated products results not in a specific price, but prices that fall within a predeterminable range. Many governments see transfer pricing as a tax evasion policy and in recent years have begun to look more closely at company returns. Rates of

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duty encourage the size of the transfer price: the higher the duty rate, the more desirable a lower transfer price. A low level of income tax creates a pressure to raise the transfer price to locate income within the low-tax setting. Harmonization of tax rates worldwide may make the intricacies of transfer pricing obsolete. Government controls, such as cash deposits on importers, give an incentive to minimize the price of the imported item. Profit transfer rules may apply which restrict the amount of profit transferred out of the country. Other controls look at monopoly pricing like the case of the UK government against Hoffmann-La Roche, which forced the price of its tranquilizers downwards.

Dumping Price In economics, “dumping” is a kind of predatory pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price either below the price charged in its home market or below its cost of production. The purpose of this act is sometimes to increase market share in a foreign market or to drive out competition. Dumping, as defined by GATT, is the difference between the normal domestic price and the price at which the product leaves the exporting country. It is a process of pricing exports at a lower level than in the domestic market. Dumping is considered illegal in many countries, but it is very difficult to prove that dumping has occurred.

Countertrade Countertrade is when a company sells a product in another country and receives some form of compensation other than money. Countertrade is an umbrella term used to describe unconventional trade-financing transactions that involve some form of non-cash compensation. Countertrade, including barter, is a frequent pricing option in countries with a lack of hard currency, especially when global financial turmoil puts domestic currencies under pressure. Various forms of countertrade exist, including barter, compensation deals, counter-purchase, product buy-backs, and offsets (Table 7.2). Countertrade is used in order to gain access to new or difficult markets; to overcome exchange-rate controls or lack of hard currency; to overcome low country creditworthiness; to increase sales volume; and to generate long-term customer goodwill. On the other hand, countertrade has some shortcomings, including time-consuming and costly negotiations, uncertainty,

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lack of information on future prices, and transaction costs. Due to the shortcomings of countertrade, it is important for international marketers to evaluate the countertrade offer by considering several questions: i. ii. iii. iv.

Is this the only way the order can be secured? Can the received goods be sold? How can we maximize the cash portion? Does the invoiced price incorporate extra transaction costs? Are there import barriers to the received goods? v. Could there be currency exchange problems if we repatriate the earnings from sales in a third country? Table 7.2 Forms of countertrade Barter

Compensation deals

Counter-purchase

Product buy-backs

Offset deals

This is the least complex and oldest form of bilateral non-monetary countertrade. It involves a direct exchange of goods or services between two trading partners. Involves payment both in goods and in cash; the inclusion of some amount of cash makes the deal more attractive to the seller. This is the most typical version of countertrade, in which two contacts are negotiated, one to sell the product (which constitutes the initial agreement) at an agreed cash price, and one to buy goods from the purchaser at an amount equal to the amount of the initial transaction. May take two forms: (i) seller agrees to accept some amount of output as full or partial payment; (ii) seller agrees to buy back at a later date. The seller contracts to invest in local production or procurement to partially offset the sale price.

Currency Devaluation and Revaluation Devaluation is a reduction in value of one currency vis-à-vis other currencies, while revaluation is an increase in currency value. Currency devaluation has several effects. Devaluation makes exports cheaper and imports more expensive, which in turn increases aggregate demand (assuming demand is relatively elastic). This is simply because currency devaluation makes exports more competitive and appear cheaper to foreigners, eventually increasing demand for exports and making imports more expensive. With exports more competitive and imports more expensive, the country would experience higher exports and lower imports, which would reduce the current account deficit. Higher aggregate

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demand is likely to cause higher real GDP and inflation. An increase in aggregate demand leads to demand pull inflation, while currency devaluation increases inflation because imports become more expensive, which causes cost push inflation. With exports becoming, cheaper manufacturers may have less incentive to cut costs and become more efficient. Over time, therefore, costs may increase. Exhibit 7.3: Why Has China Devalued its Currency? The debate as to why China’s government devalues its currency has remained widely inconclusive.1 In 2015, for example, the Yuan, also known as renminbi, lost 3.5% against the dollar, trading at an exchange rate of about 6.46 to the US dollar. Yuan depreciation against the US dollar hit its lowest level since 2011 when China announced a 2% currency devaluation in August 2015. While some analysts believe the renminbi devaluation is a response to the dynamics of global currency markets, China’s trading partners, on the other hand, think that the government is purposely devaluing its local currency in order to help Chinese exporters make their goods cheaper on the world market. Accordingly, the People’s Bank of China,2 which in fact supports a stronger local currency, prefers the world to believe that Yuan depreciation in the last quarter of 2015 was a way to make the country’s financial system more market-oriented.

Setting Export Prices to Sell Competitively Pricing products for export requires several steps, but there are five main ones: defining pricing objectives, analyzing the market situation, calculating costs, establishing the target price structure, and presenting price quotations. 1 Also see: Li, Hongbin, Hong Ma, and Yuan Xu (2015). How Do Exchange Rate Movements Affect Chinese Exports?: A Firm-level Investigation. Journal of International Economics 97(1), 148–61; Han, J., and Shen, Y. (2016). Exchange Rate Pass-through to China’s Export Price: A Product-level Investigation. China & World Economy, 24(2), 48–67; Eichengreen, B., and Kawai, M. (Eds.). (2015). Renminbi Internationalization: Achievements, Prospects, and Challenges. Brookings Institution Press. 2 Han, M. (2016). From Centrally Planned Economy to Market-Oriented Principles: The People’s Bank of China under Change. In Central Bank Regulation and the Financial Crisis (156–82). UK: Palgrave Macmillan.

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i) Define Pricing Objectives The firm’s international pricing policy should reflect its corporate objectives, such as achieving a target market share, getting a return on investment, maximizing profits, using excess production capacity, eliminating competition, projecting a high-quality image, relating prices to those of competitors, etc. ii) Analyze the Market Situation Given the pricing objectives, an international marketer should perform an assessment of the market and come up with a sales forecast for the product. The function of marketing analysis in relation to export pricing is to establish an upper limit (ceiling) for the pricing decision based on the demand for the product and the nature of the competition. The market situation determines a range of export price possibilities, so the market size, competition, price data, discount, and so on need to be studied. iii) Calculate Costs The behavior of costs in the company has great influence on international pricing decisions. Costs change with changes in volume of sales and production. Cost items in a business are traditionally divided into three kinds: fixed costs, variable costs, and semi-variable costs. x Fixed costs: Fixed costs are those that tend to be relatively unaffected by increases or decreases in production volume. They tend to be incurred through the passage of time and for this reason are also known as period costs. x Variable costs: Variable costs tend to vary directly with changes in production volume (exporting costs, sales volume), for example direct materials, direct labor, and certain overheads. Marginal costing (MC) is based on the idea that decisions on the price to be charged depend on the additional costs which result from the extra one unit of the product produced. That is, the extra unit of production explained by the variable cost per unit. x Semi-variable costs: These costs have both fixed and variable elements which combine to produce a total cost which does vary with levels of activity, but not proportionately. An example is the cost of electricity to the production area.

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Table 7.3 Formulae for cost calculations, usually expressed in this form:

Cost Volume Profit Analysis

Break-even Point

variable costs + fixed costs = total costs VC + FC = TC sales price per unit × total units = total revenue SP × units = TR total revenue – total variable costs = contribution margin TR – TVC = CM total revenue – total costs = profit TR – TC = ʌ contribution margin – fixed costs = profit CM – FC = ʌ contribution margin = fixed costs CM = FC

iv) Establish Target Price Structure The exporter should determine the effects of a market opportunity on profit by working backward from an established or accepted range of marketing prices, and simultaneously working forward from the cost side. Unlike other methods of pricing in international marketing, the retrograde pricing approach takes into account costs, market demand, and the competition environment in the international market. v) Present Price Quotations Export price quotations are different and more complex than those used in domestic selling. The practices of many nations have to be considered. Although definitions are helpful in clarifying what is meant by the price quote, it is still important for exporters to assure agreement on the exact meaning of the terms being used so that they and their importers both know their respective duties and liabilities. Special care should be observed when negotiating terms and conditions with the party responsible for the division of both cost and risks. The most commonly used across the globe are International Commercial Terms (Incoterms), which spell out the legal responsibilities of each party.

International Commercial Terms International Commercial Terms (Incoterms) were introduced in 1936 to avoid confusion over the interpretation of shipping terms and to define the roles of the buyer and seller (i.e., the exporter and importer). They explain how functions, costs, and risks should be divided between parties in connection with delivering goods from the seller to the buyer. For

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instance, sellers favor quoting terms that give them least responsibilities, least liability, and less risks, such as ex-work or FOB. Buyers, on the other hand, prefer CIF, where responsibility begins when goods are in their own country. Incoterms also indicate the division of labor in providing various transportation, handling, and insurance arrangements. Generally, they divide obligations and risks between buyer and seller in ten areas: i. Providing the goods in conformity with the contract. ii. Licenses and other certificates. iii. Contracts of carriage and insurance. iv. Delivery of goods. v. Transfer of risk (of loss or damage). vi. Division of costs. vii. Notices to buyer and seller. viii. Proof of delivery, transport documents, or equivalent electronic messages. ix. Checking, packing, marking inspection. x. Providing additional assistance and information. As Table 7.4 and Figure 7.2 summarize, each of the Incoterms has a precise and unique definition, but they can be grouped into four basic categories: x E-terms (EXW): Where goods are made available to the buyer at the seller’s premises, or other named point. x F-terms (FCA, FAS, FOB): Where the seller is required to deliver goods to a carrier at a named point. x C-terms (CFR, CIF, CPT, CIP): Where the seller contracts for carriage but does not assume the risk of loss or damage after shipment, after a certain point in the country of origin. x D-terms (DAF, DES, DEQ, DDU, DDP): Where the seller bears all costs and risks to bring the goods to a named destination point.

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Table 7.4 Incoterms Export packing and marking.

EXW: Ex-works or ex-factory

Getting goods to railway station.

FOR: Free on rail

Hands over the goods cleared for export to the carrier named by the buyer at the named place.

FCA: Free Carrier

• Seller hands over the goods cleared for export to the carrier named by the buyer at the named place. • If no point is indicated by the buyer, the seller may choose within the range stipulated where the carrier shall take control of the goods. • When the buyer needs seller’s assistance in contracting with the rail, air, or other carriers, the seller may act at the buyer’s risk and expense.

Transport to port and getting goods alongside ship.

FAS: Free alongside ship (e.g. FAS Dar es Salaam)

• Seller places goods alongside the vessel at the named port of shipment, cleared for export. • Buyer bears all costs and risks of loss or damage to the goods from that point on.

• Title passes to the customer at the factory gate. • Exporter is responsible for basic packing; special packing may be a charge on the customer. • All expenses and risks of transport are met by the importer. • Exporter delivers goods to the railway station. • Exporter is responsible for basic packing; special packing may be a charge on the customer. • All expenses and risks of transport are met by the importer.

International Pricing Strategy Getting goods on board and preparing shipping documents.

Freight cost (port to port).

FOB: Free on board FOA: Free on board airport FRC: Free on board carrier (e.g. FOB Dar es Salaam) CFR: Cost and Freight (e.g. CFR Mombasa)

Marine insurance.

CIF: Cost, Insurance, Freight (e.g. CIF Lagos)

Putting goods at disposal of customer on board vessel at port of destination. Unloading charges at port of destination.

DES/EXS: Delivered Exship, port of destination (e.g. EXS Singapore) DEQ/EXQ: Exquay (duty paid)

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• The exporter is responsible for packing and delivery to the ship/airport carrier/named carrier, cleared for export. • Exporter is responsible for all risks and expenses until the goods have passed over the ship’s side or onto aircraft or carrier. • The exporter is responsible for all charges except insurance. • The title of goods passes to the importer when they arrive at the port of destination and the bill of lading is handed over to the importer. • Importer pays all landing charges and customs duties and is responsible for transferring the goods to his own premises. • The exporter is responsible for all charges including insurance. • Exporter arranges all shipping details, obtains bills of lading and the insurance policy for certificates, and provides invoices. • Exporter packs the goods, arranges shipment, and pays freight charges and marine insurance. • Exporter’s risks and responsibility only cease when the ship has arrived at the port of destination and the goods are ready to be unloaded.

• Seller places goods at the disposal of the buyer on the quay at the named port of destination. • Seller bears all costs and risks involved in bringing the goods to the named port of destination. • This term can only be used for sea or inland waterway transport. If the parties’ desire is to include in the seller’s obligations the risks and costs of the handling of the goods from the quay to another place in or outside the port, the DDU or DDP terms should be used.

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Delivering goods at the named place in the country of import without clearance.

DDU: Delivery Duty Unpaid (named place of destination)

Delivering goods at the named place in the country of import with clearance.

DDP: Delivery Duty Paid (named place of destination)

• Seller delivers goods at the named place in the country of import. • Seller bears costs and risks involved in delivering the goods to the named place. This excludes duties, taxes, and other official charges payable upon import. • Buyer is responsible for carrying out import customs formalities. Buyer pays additional costs and bears risks caused by this failure to clear the goods for import in time. • Seller delivers goods at the named place in the country of import. • Seller bears the costs and risks, including duties, taxes, and other charges, to deliver the goods cleared for import. • While the EXW term represents the minimum obligation for the seller, DDP represents the maximum obligation.

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Destination Customs

Arrival Terminal

Transport Insurance

Transport

Departure Terminal

Exporting Customs Formality

Port of Origin to Terminal

Loading

Packing

Incoterms

Figure 7.2 Incoterms Responsibilities Chart

EXW FAS FCA FOB CFR CIF CIP DES DEQ DDU DDP

Expenses borne by seller Expenses borne by buyer

Chapter Summary This chapter focuses on key pricing decisions and strategies in international marketing. Pricing is recognized as the revenue-generating marketing element, as compared to other elements, which are costoriented. The price generates cash for the company and affects product positioning, market segmentation, demand management, and market share dynamics. The chapter presents the following key points:

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x Pricing strategy can be standardized or adapted across global markets. While the firm can standardize its price by charging the same price for the product across foreign markets, it can also vary the price and adapt it to local market conditions. x Export prices are determined by several factors, categorized into environmental, market, and internal company factors. x As in the case of domestic marketing, the pricing approaches for international firms are usually oriented toward cost, demand/market, and competition. However, international pricing takes into account the influence of the foreign market dynamics. x Multinational firms price their goods and services between their headquarters and subsidiaries through transfer pricing. This approach lowers the duty costs, reduces income tax, and facilitates dividend repatriation. x Dumping as a form of predatory pricing occurs when manufacturers export a product to another country at a price either below the price charged in its home market or below its cost of production. x Countertrade arrangements enable the company to sell a product in another country and receive some form of non-cash compensation. It is used to gain access to new markets, overcome exchange rate controls, overcome low country creditworthiness, and increase sales volume and customer goodwill. x Setting export prices entails a number of steps: defining pricing objectives, analyzing the market situation, calculating costs, establishing target price structure, and presenting price quotation. x International commercial terms (Incoterms) were introduced to divide obligations between buyer and seller in these areas: conformity with contract; license and other certificates; carriage and insurance; delivery of goods; risks of loss/damage; division of costs; notices to buyers and sellers; proof of documents; checking, packaging, and inspection; and provision of additional assistance and information.

Review Questions 1. Price arbitrage occurs due to price differentials and creates a parallel or gray market. What should the government’s position on the issue of parallel imports be, and what should a company affected by this do in order to avert such a situation?

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2. Discuss the difficulty or desirability of having standardized prices for a company’s products across all countries. 3. The Hubert Company makes a variety of cotton garments and is considering exporting a particular type of dress to Ireland. Standard shipments would involve some 1,800 dresses, and the company has found through market research that this type of garment, imported from other countries, is on sale in retail stores in Ireland at around $20 per dress. Information on average retailer and wholesaler mark-ups in Ireland has also been obtained and the following estimates have been collected relating to a shipment of 1,800 dresses: Irish mark-ups Average retailer’s mark-up ………………. Average wholesaler’s mark-up…………… Taxes and duties Sales tax ………………………………… Tariffs………………………………….. Costs from port of shipment Handling costs in Ireland………………….. Marine insurance…………………………… Oceanic freight………………………………. Other exporting costs Export credit insurance…………………….. Documentation………………………….. Forwarding costs: (trucking, handling, and wharfage)………………….. Packing costs Plastic bags, stencil making………………. Crates …………………. Export overhead Proportion of export office costs……………. Relevant production costs Direct materials………………………… Direct labor………………………………….. Variable overhead…………………………..

100% on price to retailer 30% on price to wholesaler 10% on landed cost 20% on CIF price 10% on CIF price 3% of 110% of CIF value $832 per shipment $30 $10 $17 per crate (4 crates required for all 1,800 dresses) $13 per crate $43 (4 crates required) $0.30 per dress $1.93 per dress $1.10 per dress $0.40 per dress

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Required: i.

Calculate total contribution to be earned for the 1,800 dresses exported. ii. What benefits does the retrograde pricing approach have over other methods of pricing in international marketing? 4.

The JK Leather Company has a small factory engaged in the manufacture of leather shoes. Working at full capacity, it can produce 6,000 pairs of shoes per year. The company has been estimating demand for its output in the domestic market for the next year and believes that this market will only absorb 5,000 pairs at a selling price of US$30. At this level of activity, the company believes it will not break even. There has, however, been a firm enquiry from overseas for 1,000 pairs of shoes at US$28 a pair. Cost data for next year are estimated to be: x x x

Variable costs per pair of shoe: US$24 Fixed costs for the year: US$31,000 Additional variable costs per pair for the export order: US$2

Required: i.

How much profit or loss will the company make if it relies solely on the domestic market? ii. What profit will the company make if it accepts the export order? iii. What minimum number of shoes would the company need to export in addition to its domestic output, in order to break even? 5.

ABC Garments Company Ltd. designs, manufactures, and exports custom-made rugs, mainly to Canada, in the range of US$1,000 to US$20,000. Since the company started operating, sales quotations and selling prices have been determined by first estimating the direct costs (direct labor, direct materials, and direct export costs) and adding a proportion of common factory and distribution overheads. To the total of these, the company adds a further 20% to provide a profit margin.

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Direct labor……………………………………………. Direct material…………………………………………... Direct export costs……………………………………... Overhead absorbed ……………………………………. Total estimated costs ………………………………… Plus 20% profit margin ……………………………….. US$

191 US$ per Rug 1,000 600 1,200 400 3,200 640 3,840

The overhead absorption method used by the company was to apply a percent of direct labor cost rate of 40% on all quotations. The year’s estimated overhead for the company is US$240,000, of which US$96,000 is considered fixed. The new customer rejected the quotation when he received it but said that he would be willing to place a firm order if the selling price of each rug could be reduced to US$3,100. The export manager is in a dilemma; he knows that the company is in a slack period and he wants to build up sales volume. On the other hand he is reluctant to accept this counter offer since the price of US$3,100 is below total estimated cost. Should he accept or reject the offer? 6.

The WAMESA Company, which produces leather shoes, is considering the price structures relevant to the export of goods to a customer based in Madrid, Spain. For a consignment of 3,000 pairs of shoes, the export office has obtained the following cost figures:

Export packing, marking crates with shipping marks…………………………………………………………… Carriage and Insurance for delivery to railway station by road transport………………………………………………………… Rail transport to port (including insurance) and getting goods alongside ship………………………………………………… Loading of ship, dock dues and costs of preparing shipping documents…………………………………………………… Sea freight to Barcelona (nearest port to Madrid) …………… Marine insurance (port to port)………………………………… Unloading of ship at Barcelona………………………………… Import duty on 3,000 pairs of shoes (and customs clearance)… Transport and insurance costs to buyer’s warehouse in Madrid……………………………………………………………

US$ 300 100 310 100 875 100 90 1,200 150

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Required:

7.

8.

Which of the itemized costs should be taken into account by the WAMESA Company in establishing a price point under the following Incoterms: EXW, FOR, FAS, FOB, CFR, CIF, EXQ, and DDP? “It is always important for the parties engaging in international business to understand the International Commercial Terms (Incoterms).” Explain. ALICE & ASHA Enterprise exports a single product which is made from components which are assembled and packed for shipment with a cost per unit of $6. The direct costs of assembly and packaging work out at $2 per unit. The company operates a factory which has a current capacity of assembling and packing 10,000 units of the product per week. It could produce rather more, but only if it was prepared to incur additional costs. Variable overheads, including transportation costs to overseas customers, average out at $4 per unit, and fixed overheads total $6,300 per week. You are required to find: i. Variable cost per unit of the product. ii. The full absorbed cost per unit of the product when the factory is working at 100% capacity. iii. The full absorbed cost per unit of the product when the factory is working at 70% capacity.

9.

Explain the differences between the full costing, retrograde costing, and marginal costing approaches to pricing. Which approach is the best? Why?

CHAPTER EIGHT INTERNATIONAL CHANNELS OF DISTRIBUTION

Introduction In every country and in every market, all consumer and industrial products go through the distribution process. Channels of distribution are an integral part of the marketer’s activities, and as such are very important. Distribution channels are viewed as conducting four basic flows: physical flow of goods, flow of ownership and control, flow of information, and flow of money. This implies that the distribution process includes the physical handling and distribution of goods, the passage of ownership (title), and, most important from the marketing strategy perspective, the buying and selling negotiations between producers and middlemen and between middlemen and consumers. In order to provide these flows and other services, the middlemen or channel members charge a margin. The longer the channel, the more margins are added. Yet cutting channel length may be impossible, as a country’s infrastructure requirements may dictate them being there. Distribution has two major elements, the physical and the institutional. Physical distribution consists of activities involved in moving finished goods from manufacturers to customers. It covers all services and physical elements (transport, warehousing, and inventory management) required to ensure the smooth flow of goods and services from producers to final consumers. These are much-specialized areas of distribution and include different modes of transport – land, sea, and air – and services offered by freight forwarders, agents, insurance, transport, and warehousing. The institutional part of distribution involves the choice of agents, distributors, wholesalers, retailers, direct sales, or sales forces. While in international marketing these activities are not themselves very different from those encountered in domestic market distribution, decisions regarding distribution processes differ because of different channel alternatives and market patterns. This chapter describes the main channels of distribution used in exporting a product, it identifies the criteria for selecting a distribution

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channel in international markets, and it describes the factors that need to be considered when designing marketing channels. It also discusses the role of the distribution system with respect to international marketing, the steps involved in distribution planning, and the factors determining the level of distribution channel in the foreign market.

Functions of Channel of Distribution A channel of distribution is the path through which a product passes as it travels from the producer to the final consumer. It is an institution through which goods and services are marketed. Channels of distribution perform the following basic functions: i. Physical distribution: The movement of the firm’s products to its customers, consisting of transportation, warehousing, inventory, customer service/order entry, and administration. ii. Provide information between sellers and buyers: Gathering and distributing marketing research and intelligence information about actors and forces in the marketing environment needed for planning and facilitating exchange. iii. Promotion: Developing and spreading persuasive communication about an offer. iv. Breaking bulk, creating assortments, and matching: Shaping and fitting the offer to the buyer’s needs, including activities such as manufacturing, grading, assembling, and packaging. v. Provide technical advice. vi. Contact buyers: Finding and communicating with prospective buyers. vii. Negotiation: Reaching an agreement on price and other terms of the offer, so that ownership or possession can be transferred. viii. Order processing, documentation and billing. ix. Merchandizing and sales support. x. Financing, credit, and collection: Acquiring and using funds to cover costs of the channel work. xi. Risk taking: Assuming the risks of carrying out the channel work. While some companies perform most functions on their own, others use agents and distributors to perform the functions. For instance, Oryx Energies (Tanzania) controls most of its channel functions to ensure that they are effectively performed (Exhibit 8.1). However, they work with distributors and retail outlets to facilitate their products reaching wider markets.

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Exhibit 8.1: Oryx Energies (Tanzania): Distribution Functions and Channels Oryx Energies began its operations in Tanzania in 1999. The company has three entities in Tanzania: i) Oryx Oil Tanzania Ltd.: specializes in the storage and distribution of fuels and lubricants, with a presence in the retail segment and, as a supplier, to the industrial and mining sectors. Oryx Oil Tanzania Ltd. is also the owner and operator of the Dar es Salaam lubricant oils blending plant. ii) Oryx Gas Tanzania Ltd.: specializes in the storage, filling, and distribution of Liquefied Petroleum Gas (LPG) in cylinders and bulk. Oryx Gas Tanzania Ltd. is the market leader in LPG, with a market share in excess of 70%. iii) Tanzania International Petroleum Reserves Ltd. (TIPER), a 50/50 joint venture with the government of Tanzania. Tiper is a former refinery that has been turned into a modern tank farm, providing mass storage to all trading and marketing companies looking for storage capacity. The distribution channels of Oryx entail an integrated supply model that covers the storage and distribution of a variety of products and services to domestic and industrial customers. These include fuel sourcing, strategic storage facilities, wholesale distribution, retail service stations, LPG storage, filling and distribution, high quality lubricants from its own blending plant, and a full range of products and services for commercial and industrial clients (including on-site management and logistics). It has a retail network of over twenty service stations throughout Tanzania, which supply fuels, lubricants, and LPG to the domestic market. Oryx Energies jointly owns (with the Tanzanian government) and manages one of the largest bulk import and storage sites in sub-Saharan Africa, TIPER. With an overall storage capacity of 150,000m3, the facility offers hospitality to oil marketing companies operating in the country. It was afforded access to a Single Point Mooring (SPM) by the Tanzanian authorities from November 2012, providing a single buoy where all large incoming vessels have to offload. TIPER also benefits from bonded warehouse status, since 2011, allowing third parties to further expand regional fuel supply opportunities from its facilities. Oryx Energies has its own dedicated import terminal in Dar es Salaam for bulk fuels and additional lubricant storage. The company supplies fuels and lubricants to commercial and industrial customers around the country. These include civil engineering contractors, hotels and

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restaurants, power supply and generation companies, manufacturing and production companies, transporters, and miners. They also install and manage on-site fuel storage and dispensing equipment, including lubricants, for a number of large customers, incorporating specialized industry expertise where necessary. The company has fuel storage depots placed around the country to ensure that inland customers also receive a continuous and reliable supply. These facilities also handle lubricants and LPG for the local market. In addition, they distribute bulk fuel to independent resellers, who manage their own service stations. Oryx Energies, being a market leader in Liquefied Petroleum Gas (LPG) in Tanzania, distributing almost 30,000 metric tons per year, stores, bottles, and distributes LPG from their gas terminal and filling plant in Dar es Salaam. The cylinders are then distributed via appointed dealers. They provide bulk deliveries of LPG, including the installation and management of gas tanks for collectives, like school and university canteens. In addition, they export LPG to neighboring countries such as Kenya and Rwanda. They supply a wide range of high-quality lubricants, mostly from the lubricant oil blending plant in Dar es Salaam. Customers for these include industries such as construction, mining, transport and marine companies, resellers, retail outlets, and export clients. The lubricant facility also blends and packages product on behalf of third parties, including oil majors. Oryx Energies’ trading arm sources product for its storage and distribution activities, and supplies third-party importers and exporters. It systematically participates in the National Bulk Procurement System through which all products are imported into the country and is often awarded the benefit of the tenders. Source: http://www.oryxenergies.com/en/country-presence/tanzania.php, downloaded on 15 March 2016.

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Number of Channel Levels In marketing, whether international or domestic, the marketer must decide on the design of the distribution channel to be used. Distribution channels can either be direct or indirect (Figure 8.1). The former has no intermediary levels and the manufacturer sells directly to the consumer, while the latter contains one or more intermediaries between the manufacturer and the final consumer. Accordingly, three alternatives are available for international marketers: (i) using a direct channel (a distribution system without intermediaries), (ii) using an indirect channel (a system with one or more intermediaries), and (iii) using a dual distribution system with more than one channel. In view of this, a manufacturer can reach customers with its own sales force, a sales force that calls on wholesalers who sell to customers, or a combination of these two arrangements. A manufacturer can sell directly to wholesalers without using a sales force, and wholesalers, in turn, can supply customers. Finally, a distributor or agent can call on wholesalers or customers for the manufacturer. Although an international marketing firm has the option of managing its distribution function either directly or indirectly through a middleman or a suitable combination of the two, the use of middlemen is quite prevalent due to physical distance, and also because of differences in geographical, cultural, and market characteristics between trading countries. However, whether the company distributes its goods and services directly to consumers or through intermediaries depends on the trade-offs among the various objectives a company might try to accomplish with its distribution channel. So, the most critical step in designing a distribution channel for a given product is to determine what objectives the channel must accomplish and their relative importance. Some objectives of the distribution channel could be: to increase the availability of the good or service to potential customers; to satisfy customer requirements by providing high levels of service; to ensure promotional effort; to obtain timely and detailed market information; to increase cost-effectiveness; and to maintain flexibility.

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DOMESTIC PRODUCTION

INDIRECT MARKETING CHANNEL Export Houses

Foreign Buying Offices

Cooperative Export

International Trading Company

DIRECT (ABROAD) MARKETING CHANNEL Sales Offices

Marketing subsidiaries

Agent (commission, stockist)

Distributors

International Trading Company

FOREIGN MANUFACTURING SALES DIRECT TO FINAL CONSUMER Figure 8.1 Channel levels

Choice of Channels of Distribution The choice of international channels of distribution is not only critical but is also an important part of international marketing strategies. This is because the alternative international channels of distribution are many and involve both domestic and foreign market options. For instance, one alternative could be to market directly to buyers via the internet, mail order, various types of door-to-door selling, or manufacturer-owned retail outlets. The other options could be to utilize retailers and various combinations of sales forces, agents/brokers, and wholesalers. The number

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of individual buyers and their geographic distribution, income, shopping habits, and reaction to different selling methods frequently vary from country to country and may require different channel approaches. Product characteristics such as degree of standardization, perishability, bulk, service requirements, and unit price have an impact as well. Generally speaking, channels tend to be longer (i.e., require more intermediaries) as the number of customers to be served increases and the price per unit decreases. Bulky products usually require channel arrangements that minimize the shipping distances and the number of times products change hands before they reach the ultimate customer. Tanzania, for instance, opted for bulk procurement of fuel products in 2012 to minimize the distribution costs and improve on channel management (see Exhibit 8.2). Although this practice has reduced the profit margin of some Oil Marketing Companies, it has generally benefited the country in terms of economies of scale and reduction of distribution costs. Exhibit 8.2: Bulk Procurement of Fuel in Tanzania Has Brought Significant Benefits Tanzania experienced shocks in the availability and supply of petroleum products between the 1980s and 2006. Although the oil marketing companies (OMCs) were making profits due to international price changes, fuel availability was unreliable. In order to control this practice, protect the consumer, and ensure an equal playing field, in 2012 the government introduced the Bulk Procurement System (BPS) and Single Point Mooring (SPM) for the import of fuel to the country. The bulk procurement system applies to motor super premium, automotive gasoil, kerosene, heavy fuel oil, Jet-A1, LPG, and other petroleum products. The fuel BPS was established to ensure supply at the most competitive price, by purchasing from a pool of imports obtained from suppliers selected through a competitive bidding process, to take advantage of economies of scale. This initiative has helped to reduce by half the cost of importing petroleum products and curb congestion at the Dar es Salaam port. Within a period of two years after its introduction the import costs dropped to around US$37.33 per metric ton compared to US$71.46. Besides the significant reduction of fuel prices, the system has increased compliance and transparency in the fuel sub-sector. “Since the introduction of the system, fuel adulteration, which was an intractable problem for many years, has substantially declined.”

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Source: http://24tanzania.com/bulk-procurement-cut-fuel-import-costs-in-tanzania (Daily News, 27 May 2014).

Overall, in deciding on the international distribution channel design, the following aspects have to be considered carefully: x Market needs and preferences. The international marketer needs a clear understanding of market characteristics and preference before selecting the channel of middlemen. x The cost of channel service provision including the capital or investment cost of developing the channel and the continuing cost of maintaining it. x Incentives for channel members and methods of payment. x The size and coverage of the end market to be served. x Product characteristics required, complexity of product, product range, nature of product, perishability, packaging. x Middlemen characteristics – whether they will push products or be passive, their skills. x Market and channel concentration and organization. x Legal Requirements. x Company characteristics: company size, company objectives. x Risks involved. x Competitors’ policies. x Channel availability. x Sales volume. x Degree of control.

Areas to Investigate When Making Decisions on Distribution Channel i. What are the different channels of the product in question? ii. How many intermediaries should be used at each stage in a distribution channel? This varies between intensive distribution (selling through any retailer that wishes to handle the product), selective distribution (choosing a limited number of resellers in a market area, e.g. shopping or specialty goods, industrial goods), or exclusive distribution. iii. What are the specific tasks and responsibilities to be taken over by each of the intermediaries involved? iv. What are the terms and conditions under which different intermediaries do business, in these areas: establishing prices,

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credit and payment terms, discount rebates, sales and merchandise services, guarantees and warranties, and repair and maintenance?

Distribution Alternatives A marketer’s options range from assuming the entire distribution activity (by establishing its own subsidiaries and marketing directly to the end user) to depending on intermediaries for distribution of the product. In contrast to domestic marketing, internal marketers must take into account a number of domestic and foreign market intermediaries. Home-country or domestic middlemen are located in the producing firm’s country, providing marketing channel services from a domestic base. These include global retailers, export management companies, trading companies, export merchants, export jobbers, and home-country brokers. Foreign-country middlemen are based in the foreign country, including manufacturers’ representatives, foreign distributors, foreign-country brokers, dealers, import jobbers, wholesalers and retailers, trading networks, and voluntary chains. While some of these channels are explained under market entry strategies (see Chapter Four), there are key examples of channels used which merit further consideration in this chapter. The following examples serve to show how international distribution channels are organized.

Home-Country Middlemen Export Merchants: These are essentially domestic merchants operating in foreign markets. As such they operate much like domestic wholesalers as they purchase goods from a large number of manufacturers, ship them to foreign countries, and take full responsibility for their marketing. Sometime they utilize their own organizations, but more commonly they sell through middlemen. Export Jobbers: Export jobbers deal mostly in commodities and they do not take physical possession of goods, but assume responsibility for arranging transportation. However, because they work on a job-lot basis, they do not provide a particularly attractive distribution alternative for most producers. Trading Companies: These companies accumulate, transport, and distribute goods from many countries. Most large export trading companies are located in developed countries, but they ship goods to developing countries and buy raw materials and unprocessed goods.

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Foreign-Country Middlemen Manufacturers’ Representatives: These are agent middlemen who take responsibility for a producer’s goods in a city, region, market area, entire country, or several adjacent countries. When responsible for the whole country, the middleman is called the sole agent. Manufacturers’ representatives are widely used in the distribution of industrial goods overseas. They have a variety of titles, including sales agent, resident sales agent, exclusive agent, commission agent, and indent agent. Distributors: A foreign distributor is a merchant middleman. This intermediary always has the exclusive sales rights in a specific country and works in close cooperation with the manufacturer. The distributor has high degrees of dependence on the supplier companies and the arrangement is likely to be on a long-term continuous basis. Working through distributors permits the manufacturer a reasonable degree of control over distribution functions. Import Jobbers, Wholesalers, and Retailers: Import jobbers purchase goods directly from the manufacturer and sell to wholesalers and retailers, and to industrial customers. Wholesalers and retailers engage in direct importing for their own outlets and for redistribution to smaller middlemen. In some cases they can sell directly to final consumers. For instance Game and Shoprite are Southern Africa-based large-scale retailers operating in Tanzania. They import large consignments of goods from South Africa and sell directly to the Tanzanian market. Brokers: Brokers do not take title to the goods traded, but link suppliers and customers. They are commonly found in international markets, especially agricultural markets. Brokers have many advantages: they can be less costly overall for suppliers and customers, and are better informed by buyers and sellers. They are socially skilled in bargaining and forging links between buyers and sellers. Brokers bring the “personal touch” to parties who may not communicate with each other. They also bring economies of scale by accumulating small suppliers and selling to many other parties. Likewise, brokers stabilize market conditions for a supplier or buyer faced with many outlets and supply sources. Personalized Trading Networks: Frequently, relationships may be built up between a buyer and a seller, in which, over time and as confidence grows, unwritten and informal understandings develop. These relationships reduce information, bargaining, monitoring, and enforcement costs. Often, as relationships build, trust develops, which may become a proxy for laws. Flexibility ensues, which often means priorities or “favors” can be expedited. Trust and reciprocity can enable trade to develop in unstable economic circumstances, but both parties are aware that the

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relationship can be undermined through opportunistic behavior. The Kenyan fresh vegetable industry is a classic example of personalized trading networks enabling international trade between Kenyan suppliers and their familial (often Asian) buyers in the UK. Associations, Voluntary Chains, or Cooperative Exporters: Associations, voluntary chains, and cooperatives can be made up of producers, wholesalers, retailers, exporters, and processors who agree to act collectively to further their individual or joint interests. Members may have implicit or exclusive contracts, membership terms, and standard operating procedures. These forms of coordination have a number of advantages: i. They counter the “lumpy investment” phenomenon by spreading the cost of investment among members. ii. They can reduce or pool members’ risks by bulk buying, providing insurance and credits, and pooling market prices and risk. iii. They lower the transaction costs of members through arbitration of disputes, provision of market information systems, and being a first stop for output. iv. They can reduce marketing costs through the provision of promotion, protection of qualities, and monitoring members’ standards. v. They can act as a countervailing power between buyers and producers. This is very important in an environment in which supermarkets in the UK, for example, are now buying in such quantities that they are dictating terms to suppliers.

Distribution Planning Distribution planning is one of the strategic marketing functions that enables the company to integrate its distribution actions into the marketing plan. While distribution planning follows more or less the same process of planning as other marketing mix elements, it is important to highlight the specific steps followed when performing this function. The steps in distribution planning include: i. ii. iii. iv.

Determination of marketing objectives. Evaluation of changing conditions from country to country. Determination of strategy in each country. Determination of the role of the distribution channel amongst the general marketing mix elements.

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v. Determination of distribution policy for each country in terms of level of distribution to be used (direct or indirect), types of outlets (full price, service outlets), and number of outlets (intensive, selective, exclusive). vi. Determination of performance standards for all organization in the distribution chain. vii. Establishment of means of measuring performance. viii. Comparison of actual and expected performance standards.

Determining International Distribution Policy Determining the international distribution policy is a strategic marketing activity which is done on the basis of the overall marketing objectives. First, it entails selecting the level of distribution in which to sell, which means evaluating these elements: x Economics of distribution: The necessity for performing various processing, distribution, and service functions, and the costs of doing these in-house against engaging independent specialists. x Size of the potential market and the likely sales revenue and profit volume that can be obtained. x Intensity of promotional efforts that will be contributed by the independent actors, as compared to the firm’s own facilities. x Political and social factors. It is also necessary to select the number of channels in which to sell, which depends on market coverage, the sales support provided, and the customers’ buying habits. Finally, the type of distribution organization to which to sell must be chosen. This is a big problem for an organization entering a foreign market for the first time; the guiding criteria will be costs and risks.

Chapter Summary This chapter has covered a number of key decisions made by international marketers about the international channels of distribution. It indicates a broad range of alternative distribution systems, and shows the essence of selecting a particular channel in international marketing distribution. Specifically, the chapter presents the following key points:

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x There are four basic flows in the channels of distribution: physical flow, ownership and control, flow of information, and flow of money. x While physical distribution consists of activities involved in moving finished goods from manufacturers to customers, the institutional part of distribution entails the choice of the right channel. x Channels of distribution perform several functions including physical distribution, provision of information to buyers and sellers, promotion, breaking bulk, contact buyer negotiation, order processing and handling, financing, sales support, and risk-taking. x While channels of distribution are either direct or indirect, three alternatives are available for international marketers: the use of a direct channel, an indirect channel, or a dual distribution system. x The design and choice of international distribution channel is influenced by several factors, including market-related factors, costs, channel-related factors, and internal factors. x Key areas to be investigated when making a decision on distribution channels are the availability of a channel of distribution, the number of intermediaries that can be used, the specific tasks and responsibilities of each intermediary, and the terms and conditions under different intermediaries. Home-country or domestic middlemen are located in the producing firm’s country, providing marketing channel services from a domestic base. These include global retailers, export management companies, trading companies, export merchants, export jobbers, and home-country brokers. x Foreign-country middlemen are based overseas and include manufacturers’ representatives, foreign distributors, foreigncountry brokers, dealers, import jobbers, wholesalers and retailers, trading networks, and voluntary chains. x Distribution planning entails determining marketing objectives; evaluating the market conditions in each country; determining the strategy; the role of distribution channel, distribution policy, and performance standards; establishing performance measures; and comparing actual performance with standards. x Distribution policy entails selecting the level of distribution in which to sell, the number of channels to use, and the type of distribution organization to which to sell.

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Review Questions 1. What are the criteria for selecting the distribution channel in the international markets? 2. Discuss the role of the distribution system with respect to international marketing. Show how the physical distribution functions may vary in different markets, and account for this variation. 3. “Although distribution decisions in international marketing could be similar to decisions made in domestic marketing, they are always more complex and difficult to make.” Discuss. 4. Describe the steps involved in distribution planning. 5. What are the factors determining the level of distribution channel in foreign markets? 6. Describe and discuss the main channels of distribution used in exporting a product. 7. Which channel would you recommend for the product of a small manufacturer in Tanzania, and why? 8. What market information would the international marketer require to assist him in designing a channel of distribution for his products in a foreign country?

CHAPTER NINE FINANCING INTERNATIONAL MARKETING TRANSACTIONS AND COMMERCIAL DOCUMENTATION

Introduction Export documentation requirements vary considerably by country, commodity, and situation. Export documents are the key to international trade as they outline the sale, shipment, and responsibilities of each party so that the full transaction is understood and completed without delay or additional costs as well as ensuring compliance with applicable regulations. The focus of this chapter is to equip the reader with knowledge of commercial documentation and financing risks and methods in international markets. It aims to enable readers to describe the basic commercial documents and their implications in international business, but also to assess the various sources of financing available to international businesses and the risks associated with each source. The chapter will identify the various international financing risks and explain how such risks can be minimized or eliminated; assess the implications of the different methods of payment as applied in international businesses; discuss methods used in financing exports, and the circumstances under which the use of a particular method may be appropriate; and assess various insurance policies and their implications in insuring goods and services as they move across borders.

International Financing Risks Financing international marketing transactions involves a host of risks over and above those encountered by strictly domestic operations. International firms have to be aware of these risks and understand the methods available for reducing risk to an acceptable level. The major risks include commercial risk, foreign currency risk, transfer risk, and political risk.

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Commercial Risk Commercial risk refers to the buyer’s ability to pay for the products or services ordered. This risk is also typical for a domestic operation. As a result, international firms are accustomed to checking the financial stability of their customers and may even have internally approved credit limits. Although checking credit references in the domestic environment poses no great difficulty, such information is not always readily available in many overseas markets, therefore past experience with a commercial customer abroad may frequently be the only indicator of the customer’s financial stability.

Foreign Currency Risk Foreign currency risk exists whenever a company’s bills are in a currency other than its own – especially when the foreign currency is weaker and subject to market fluctuations. A currency risk exists because the value cannot be determined at the outset. Foreign currency risk grows with the length of credit terms and with the instability of the foreign currency. By invoicing in their own currencies, suppliers shift the currency risk to the customer.

Transfer Risk Although the customer may be able to pay, payments always get delayed by bureaucracies, creating a transfer risk. Transfer delays prevail in countries where the foreign exchange market is controlled and where the customer has to apply for the purchase of foreign currency before payment takes place. Delays beyond the credit terms (ninety days) add costs to the exporter or supplier.

Political Risk Financing of international operations is also subject to political risk, which includes the occurrence of war, revolutions, insurgencies, or civil unrest, any of which may result in non-payment of accounts receivable. In some cases, civil unrest may demand rescheduling of foreign trade debt. In other situations, political unrest may bring about a new government that cancels foreign debt.

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Methods of Payment There are various methods used in the international sale of goods to pay the purchase price. These are as follows: Drafts covering exports: The draft is a formal order issued by the exporter to the importer, specifying when the sum is to be paid to a third party – usually the exporter’s bank. The exporter may use either a sight draft or a time draft. Sight drafts are used when the exporter desires to control the shipment beyond the point of the original shipment, usually to assure payment. Here the exporter endorses the bill of lading and adds a sight draft on the correspondent bank of the exporter’s bank. Under time drafts, the period in which the payment is to be made is, for example, thirty, sixty, or ninety days after sight. Drafts directed to a bank for collection are accompanied by shipping documents consisting of a full set of bills of lading in negotiable form, airway bills of lading, or parcel post receipt, together with insurance certificates, commercial invoices, consular invoices, and any other documents that may be required in the country of destination. Cash in advance: This is a method whereby payment is made before goods are delivered. These are used where credit is doubtful, exchange restrictions difficult, or unusual delays may be expected. They are very little used today. Sales on a consignment basis: This is a method whereby credit is extended by the exporter. No tangible obligation is created by consignment sales. The exporter is not compensated until the products are physically sold by the importer. The entire risks are absorbed by the exporter, because he holds the title to the goods. Letters of credit: A letter of credit arrangement will be agreed upon in the contract of sale. The buyer instructs a bank in his own country (the issuing bank) to open a credit with a bank in the seller’s country (the advising bank/correspondence bank) in favor of the seller, specifying the documents which the seller has to deliver to the bank for him to receive payment. If the correct documents are tendered by the seller during the currency of the letter of credit arrangement, the advising bank pays him the purchase price or accepts his bill of exchange drawn on it, or negotiates his bill of exchange, which is drawn on the buyer. Whichever method used is pre-arranged between the seller and the buyer. As Table 9.1 summarizes, letters of credit can be revocable or irrevocable, confirmed or unconfirmed. Whether the credit is revocable or irrevocable depends on the commitment of the issuing bank. Whether it is confirmed or unconfirmed depends on the commitment of the advising

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bank. These commitments are undertaken to the seller, who is the beneficiary under the credit. There are four main types of letters of credit, namely, the revocable and unconfirmed letter of credit, the irrevocable and unconfirmed letter of credit, the irrevocable and confirmed letter of credit, and the transferable letter of credit. x The revocable and unconfirmed letter of credit: Neither the issuing nor the advising bank is committed to the seller, and as such the credit can be revoked at any time. This type of credit affords little security to the seller that he will receive the purchase price through a bank. x The irrevocable and unconfirmed letter of credit: In this case, the authority that the buyer gives to the issuing bank is not revocable and the issuing bank is obliged to pay the seller, provided that he has tendered the correct document before the expiry of the credit. If the issuing bank defaults, the seller can sue them in the country where the bank has a seat. In some circumstances, the seller can sue the issuing bank in his own country if there is a branch office. From the point of view of the seller this type of letter of credit is a more valuable method of payment than a revocable and unconfirmed letter of credit. x The irrevocable and confirmed letter of credit: In this type of credit, the advising bank adds its own confirmation of the credit to the seller. Thus, the seller has the certainty that a bank in his own country will provide him the finance if the correct documents are tendered within the time stipulated. The confirmation constitutes a conditional debt of the banker, i.e. a debt subject to the condition precedent that the seller tenders the specified documents. A confirmed credit that has been notified cannot be cancelled by the bank on the buyer’s instructions. See the following case: x Transferable credit: The parties to a contract of sale may agree that the credit is transferable. The seller can use such credit to finance the supply transaction. The buyer opens the credit in favor of the seller, and the seller (who in the supply transaction is the buyer) transfers the same credit to the supplier (who in the supply transaction is the seller). This type of credit is used when a person buys goods for immediate resale and wishes to use the proceeds of resale to pay the original seller.

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The Doctrine of Strict Compliance Under this doctrine, the seller, to obtain payment, must tender documents which strictly comply with specifications by the buyer; otherwise the correspondent bank will refuse to honor the credit. The banks which operate the documentary credit act as agents for the buyer, who is the principal, and as such they should not pay against documents that are different from those specified. Table 9.1 Summary of the different types of letter of credit Revocable Who applies for L/C? Who is obliged to pay?

Importer

Unconfirmed Irrevocable Importer

Confirmed Irrevocable Importer

No-one

Issuing bank

Who reimburses paying bank? Who reimburses issuing bank?

Issuing bank Importer

Issuing bank

Issuing and correspondent banks Issuing bank

Importer

Importer

Fraud in Letter of Credit Transactions Letters of credit have been described by an English judge as “the lifeblood of commerce” and as such the defense of the bank that it will not honor the credit because fraud has occurred is accepted rarely and with reluctance. Such a fraud may occur if the shipment of the goods is fraudulent or if the bills of lading tendered under the credit are falsified or forged. Where there is a mere suspicion by the bank that fraud has occurred, refusal to honor the credit is not accepted. Such refusal will only be accepted if it is proved to the satisfaction of the bank that the documents tendered are fraudulent and the seller is a party to the fraud or knew of it.

Bills of Exchange A bill of exchange is an unconditional order in writing, addressed by one person (drawer) to another (drawee) and signed by the person giving it (drawer), requiring the person to whom it is addressed (drawee) to pay on

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demand, or at a final or determinable future time, a certain sum in money to, or to the order of, a specified person (payer) or to the bearer.

Commercial Documentation There are numerous documents used in export trade. The relevance of each mainly depends on whether the exporter is from a developed or lessdeveloped country. Table 9.2 Basic export documents 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Invitation to quote Quote Pro forma invoice Order confirmation/ acknowledgement Bill of lading/short form bill of lading Airway bill Marine (other) insurance policy Commercial invoice Consular invoice Certified invoice Certificate of origin Packing list/weight note Specification sheet Manufacturer’s analysis certificate

15. Health, sanitary, phytosanitary, veterinary certificate 16. Quality inspection certificate/certificate of value 17. Independent third-party inspection certificate 18. Dispatch advice note 19. Dangerous goods declaration 20. Shipping or export consignment notes 21. Documentary credit of payment drafts 22. Export licenses 23. Import licenses 24. Exporter’s commission advice to agent 25. Customs and excise export entry forms 26. Other specifically requested documents

Commercial Documents Pro forma invoice: This is a form of quotation by the seller to a potential buyer. It is the same as a commercial invoice except for the words “pro forma invoice” which appear on it. It may be an invitation to the buyer to place a firm order, and is often required by him so that the authorities of the importer’s country will grant him an import license and/or foreign exchange permit. The pro forma invoice normally shows the terms of trade and price so that once the buyer has accepted the order there is a firm contract to be settled as stipulated in the pro forma. Details

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from the accepted pro forma must be transposed identically to the commercial invoice, so that goods are in accordance with the pro forma invoice. No pro forma invoices are used in settlements in advance, on consignment, subject to tender, or after an invitation to tender has been accepted by the seller. Commercial invoice: The following details must appear on a commercial invoice used in international trade: (i) names and addresses of buyer and seller and date; (ii) complete description of goods (if payment is to be obtained by means of a documentary letter of credit, this description of goods must exactly match the details in the documentary credit); (iii) unit prices, where applicable, and final price against shipping terms; (iv) terms of settlement (e.g. under documentary credit or thirty days sight documents against acceptance); (v) shipping marks and numbers; (vi) weight and quantity of goods; and (vii) name of vessel, if known or applicable. Sometimes it is also necessary to show the following to the customs authorities in the buyer’s country: seller’s signature, origin of goods, ports of loading and discharge or places of taking in charge and delivery, details of freight, and insurance charges, specified separately where applicable. Certified invoice: A certified invoice may be an ordinary signed commercial invoice specially certifying that the goods are in accordance with a specific contract or pro forma; that the goods are, or are not, of a specific country of origin; and any statement required by the buyer from the seller. There are also formal certified invoices which when submitted to the importing authorities will provide them with the necessary evidence to pass the goods through customs with a lower import duty or none at all. Combined certificates of value and origin (CVO) are used between members of the Commonwealth, and there are special invoices for other major trade areas such as the EU. All certified invoices must be signed, and in the case of combined certificates of value and origin they should be signed by a witness as well. Weight note: This certificate may be issued by the seller or often by a third party. It indicates weight of goods, which should tally with that shown on all the other documents. Weighbridge tickets are sometimes produced for road or rail shipments. Banks will accept superimposed declaration of weight on shipping documents, unless credit calls for a separate or independent document. Packing list and specification: These documents set out details of the packing of the goods. These are required by the customs authorities to enable them to make spot checks or more thorough checks on the contents

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of any particular package. The packing list has no details of the cost or price of the goods; the specification does have these details. Manufacturer’s analysis certificate: The certificate states the ingredients and proportions revealed by an analysis of chemicals, drugs, etc. Third-party certificate of inspection: This is a certificate declaring the result of an examination of the goods by a recognized independent inspection body. In order to protect himself from paying when substandard or worthless goods have been shipped, an importer can call for an independent check or examination of goods before they are dispatched. This is important for the buyer, as banks’ liabilities and responsibilities under documentary credit are limited to documents and not goods represented by the documents.

Official Documents Consular invoice: The importing authorities of several countries require consular invoices to be produced before goods may be cleared through customs. These invoices are normally obtained by the exporter from the embassy of the importing country and are submitted to the embassy for stamping, at a charge. Sometimes a chamber of commerce is required to certify on the consular invoice that the origin of the goods is as stated. The selling price is mainly examined in the light of the current market price, to ensure that there is no “dumping,” that importers are not siphoning money overseas, or that the correct basis for levying import duty can be determined by the customs authorities. Legalized invoice: Some countries require that commercial invoices should be legalized by their own embassy or consulate in the seller’s country. Sellers produce their own invoices and have them stamped (visa) by the buyer’s embassy. This is normally required in the countries of the Middle East. Certificates of origin: These constitute signed documents evidencing origin of the goods, and are normally used by the importer’s country to determine the tariff rates. They should contain the description of goods and the signature and seal of the chamber of commerce. Blacklist certificate: Countries at war or with badly strained political relations may require evidence that the origin of the goods is not that of a particular country, that the parties involved (manufacturer, bank, insurance company, shipping line, etc.) are not blacklisted, or that the ship or aircraft will not call at ports in such a country unless forced to do so.

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Health, veterinary, and sanitary certificates: Sometimes these are required for official purposes in the purchase of foodstuffs, hides and skins, livestock, and in the use of packing materials.

Insurance Documents Letter of insurance: This is normally issued by a broker to provide notice that insurance has been placed pending the production of a policy or certificate. Sometimes this takes the form of a cover note. The above documents do not contain details of the insurance being effected and therefore are not considered satisfactory by banks which normally require evidence of an insurance contract in documents required under a documentary credit. Broker’s certificates and cover notes are issued by a third party and not the insurer, so that in the event of any claim, it would be made against the broker. Insurance certificates: These are issued by insurance companies to embrace either open covers or floating policies. The systems of open cover and floating policies are similar in that: i.

Once the system has been arranged, the insured party is covered for all his shipments on the terms and for the risks agreed. The insured will declare to the insurance company the value and details of each shipment and will receive a pre-printed insurance certificate made valid, and the document will show the risks covered and be pre-signed by the insurer. ii. Under English Law, no action will be obtained on a contract of insurance evidenced solely by an insurance certificate. So, any action to be taken against insurers can only be on production of a policy to be sued on.

Transport Documents Airway bill: The IATA airway bill (sometimes called an air consignment note or air freight note) is often issued in a set of twelve, of which three are commercially important, the remainder being copies for airline purposes. The three important documents are: (i) for the issuing carrier, (ii) for the consignee, and (iii) for the shipper. The waybill is a receipt only and not a document of title; the goods are delivered to the named consignee without further formality once customs clearance has been obtained. Combined transport bill of lading: As a natural sequel to unitization of cargo, it has become increasingly customary for the “unit load,” especially

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where the cargo has been packed in a container of twenty feet in length, to be shipped on one contract of carriage from a “place of taking in charge” to a “place of delivery.” This is known as a “combined” or “multi-modal” transport, and is a substitute for the traditional port-to-port bill of lading. It is called a combined bill of lading; “combined transport bill of lading” is used. When such a document is required under a documentary credit it does not make sense for such credit to specify ports of loading and discharge, or to prohibit trans-shipment, as the essentials are the places of taking in charge and delivery.

Exhibit 9.1: Export Procedures and Documentation in Tanzania Business license: Exporters are required to obtain a valid trading or business license from the city or town council where the business will be conducted. Export license/permit: Some products require a specific license or permit from government departments or institutions, or from a controlling body legally empowered to issue them. Depending on which category of product a trader wants to export abroad, he or she has to contact the Forest department for forestry products; the Fisheries department for fish products; the Wildlife department for wildlife products; the Mining department for minerals or gemstone products; Marketing Boards for coffee, tobacco, cotton, sisal fiber, raw tea, and raw pyrethrum; or the Ministry of Agriculture for food (staple) products. For instance, the exportation of minerals in Tanzania is governed by the Mining Act, Cap. 123. Export of all minerals requires a permit from the Commissioner for Minerals. The export process must comply with the export procedure described under the Mining (Mineral Trading) Regulations, 1999. There are fees which are payable before the export permit is granted. In addition, provisional royalty or provisional payment in lieu of royalty must be paid before issuance of export permit. The Commissioner has powers to re-value minerals to be exported. The consignment of minerals to be exported must be sealed by the Commissioner before it is taken out of the country. Documentation: Once an exporter has obtained an order from a buyer abroad and an agreement has been reached to export goods to the buyer and the mode of shipment determined, the following steps are necessary: x Shipment by Air: First, the exporter should apply for an export license or permit for the export product if it falls under the abovementioned product groups; other products call for no license.

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After confirmation of cargo space, an airway bill is prepared by the carrier or its agent on presentation of the documents, including a commercial invoice, an export license or permit (if required), and technical documents (if required) on health, quality, weight, certificate of origin, etc. Then the exporter must process a Single Bill of Entry (SBE) by attaching all the above documents at the customs long room. Once a customs release/approval is obtained, the exported goods are taken to the airport for air freighting via the documents cleared by customs. Shipment by Sea: An exporter should, first, obtain a license or permit (if required). Second, obtain technical documents for the product. Third, apply for shipping space to an agent or shipping company. Then obtain a single bill of entry from customs, complete it and then attach all the previous or required documents for processing the SBE at the long room. A shipping company or agent will finally prepare a bill of lading after accomplishing customs verification and approval, port charges and procedures, and cargo loading (FOB).

House bill of lading: These documents are issued by freight forwarders for their own services. This exhibit is the form recommended by the Institute of Freight Forwarders Ltd. for trading members of the institute, and bears the IFF Standard Trading Conditions. Under the Carriage of Goods by Sea Act 1971, any sea waybills, data freight receipts, house bills, forwarding agents’ receipts, or similar non-negotiable documents, not being bills of lading or title documents, are nonetheless subject to the Hague Rules relating to bills of lading where the non-negotiable documents provide evidence that they relate to contracts of carriage of goods by sea. Rail consignment note: With the growth of freight liner traffic, the volume of goods being exported by rail through to their final continental destination is increasing. Consequently, the carrier’s receipt, or a duplicate copy of it, frequently accompanies the other documents. Goods will be released to the consignee, upon application and normal proof of identify, by the rail authorities at destination or by delivery direct. Control over the goods would be arranged in the same way as for an air consignment. The rail consignment note should bear the stamp of the station of departure and the date of departure. Road waybill: The Convention Merchandises Routiers (CMR) consignment note is an internationally approved and recognized nonnegotiable transport document used when goods are traveling by road

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through or to countries which are parties to the CMR. The contracting countries include Austria, Belgium, Bulgaria, Czechoslovakia, Denmark, Finland, France (including overseas territories), Federal German Republic, German Democratic Republic, Gibraltar, Greece, Hungary, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Romania, Spain, Sweden, Switzerland, United Kingdom (including Northern Ireland), and Yugoslavia. Bills of lading: This document is the receipt given by the shipping company to the shipper for goods accepted for carriage by sea. If in negotiable form it also conveys title to the goods, and the goods will only be released by the shipping company at destination against surrender of a signed original of the bill of lading. Finally, the bill of lading evidences a contract of carriage. Short form bills of lading: One of the three functions of a bill of lading is to provide evidence of the underlying contract of carriage by sea which comes into being with the reservation of space on board a ship. The shipping company’s terms are usually given in full on the reverse, but with the short form bill this is not the case. The essence of the “short form” is the complete removal from the reverse of the bill of lading of the “small print” which gives details of the contract of carriage. Short form bills of lading can be defined as “bills of lading issued by shipping companies or their agents who indicate some or all of the conditions of carriage by reference to a source or document other than the bill of lading.” In a number of countries, including the UK, the use is being encouraged of a short form bill of lading common to a number of different shipping companies. This is not pre-printed with the name of the shipping company, so the “name of the carrier” has to be typed in with the other data relating to the specific shipment. This type of document is known as the “common short form bill of lading.” Banks will accept such bills of lading when presented under documentary credits, unless the credit specifies otherwise. Bills of lading (liner): These are issued by shipping companies in respect of goods carried on regular line vessels with scheduled runs and reserved berths at destination. Such means of transport have possible advantages over tramp vessels which do not necessarily adhere to a very strict schedule and may make unscheduled calls at various ports on the way to the ultimate destination. Shipping lines serving the same routes or destinations may form a conference, within which agreements are made over such matters as the terms and conditions of bills of lading, freight rates, and sometimes of sailing and use of berthing facilities. Non-negotiable sea waybills: The processing of bills of lading is slow since they may have to pass through several hands. Therefore, these

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documents may not be received by the consignee before arrival of the vessel. The non-negotiable sea waybill was developed to avoid delay in the handling of goods at destination, and has been adopted by a number of shipping lines as an alternative to bills of lading. It resembles the air waybill, as the goods are delivered to the named consignee without any need to hand over the waybill. Mate’s receipts: This is a receipt for goods shipped abroad. Not being a document of title, it should be exchanged for the set of bills of lading by the shipper at the offices of the shipping company.

Financial and Financing Documents Bills of exchange: The legal definition (Bills of Exchange Act 1882, Section 3) of a bill of exchange is an unconditional order in writing, addressed by one person (drawer) to another (drawee), signed by the person giving it (drawer), requiring the person to whom it is addressed (drawee) to pay on demand, or at a fixed or determinable future time, a certain sum in money to, or to the order of, a specified person (payee), or to bearer. (The words in brackets do not appear in the Act, but have been inserted for clarity). Bills of exchange are widely used in international trade, partly since they are convenient vehicles for collecting payment from traders abroad. Finance may be arranged in a number of ways using bills of exchange, both for the buyer (drawee) and for the seller (drawer). Bills of exchange which have been dishonored may be used in their own right as the basis for legal action. After payment, the discharged bill of exchange is retained by the drawee as evidence of payment; in other words it becomes a receipt for the money. It is the practice in some European countries for banks to avail bills of exchange by adding the bank’s name to the bill; this raises the status of the document as the availing bank has guaranteed payment at maturity. Promissory notes: While not bills of exchange, these are largely subject to the same rules and are used for a somewhat similar purpose, the settlement of indebtedness. Instead of being drawn like a bill of exchange by the person expecting to be paid, they are made by the person who owes the money, in favor of the beneficiary (i.e. an IOU). When due, it is presented for payment by the holder, who may be the payee or someone to whom the promissory note has been negotiated. Inspection and sampling order: When banks are protecting consignment stocks for foreign exporters to, say, the Kenyans, or if they are lending to a Tanzanian importer against a pledge of goods, the goods are usually warehoused in the bank’s name pending sale to buyers.

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Prospective buyers frequently need to inspect and sometimes sample the goods before buying them, and it is necessary to be able to authorize a warehouse to permit this to take place. Assuming that the overseas seller (Kenyan) or the Tanzanian importer authorizes sampling and/or inspection, a bank may issue such an order on a warehouse and hand it to the prospective buyer. Delivery order: This is an order on a warehouse instructing it to deliver goods to the bearer or a party named in the order. Banks issue such orders when goods stored in their name are to be delivered to a buyer or are to be reshipped and have to leave a warehouse. Warehouse receipt: This is a receipt for goods issued by a warehouse. The document is not negotiable and no rights in the goods can be transferred under it. Delivery orders may be issued against the receipt for the goods which relate to it. Trust receipt: When a bank wishes to release documents of title, or the goods themselves, to a customer of undoubted integrity, whilst still retaining its security rights in those goods and/or the proceeds of their sale, it may obtain a completed trust receipt from its customer to whom a loan has been made. This is an acknowledgement of the pledge of the goods to the bank, and an undertaking of the customer to take the documents as trustees for the bank and to (i) arrange for goods to be warehoused in the bank’s name, or (ii) arrange for processing of the goods and their return to the warehouse in the bank’s name, or (iii) arrange for sale of the goods and to pay all sale proceeds without deduction to the bank immediately on receipt or within a short, stated period of time. Exhibit 9.2: Import Procedures in Tanzania Business license: An importer is required to have a valid business license in order to conduct any business; such a license is obtained from the city or town council. Import permit: An importer has to obtain an Import Declaration Form (IDF) from his or her Bankers. This serves as an import license, and is sold at US$10. Certain sensitive products require special clearance/approval from the relevant authority, e.g. drugs, firearms, etc. Therefore an importer has to ensure that such permissions are obtained. Import documentation/processing: As a first step an importer receives from a supplier an invoice and bill of lading. Then the following movements are necessary: x Produce copy of an import declaration form. Payment of 1.2% of FOB value must be paid to the pre-shipment Inspection Company

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x x

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for goods worth US$5,000 and above. There are some exceptions for some goods, e.g. gold, art, military equipment, and personal effects. Process for securing important documents: Obtain a Tax Assessment Notice (TAN) from PSI companies/Customs office. Pay assessed fees at a commercial bank as per TAN. Obtain bill of lading from a shipping agent (if not yet obtained). Obtain Delivery and Disposal Order (D&DO) from Tanzania Harbours Authority (THA). Obtain acknowledgement from customs that all necessary documents have been lodged. Check by customs officials documents, import declaration forms, bill of lading, commercial invoice, CRF, TAN, pay-in-slip, ocean freight certificate, parking list, disposal order of THA. Obtain assessment of charges from TPA, customs wharfage, storage, and handling fees. Make payments. Release of goods: Customs officers will physically inspect goods and then issue a Release Order. The importer takes the Release Order to THA, where a gate pass is issued for taking out the goods.

Exhibit 9.3: Procedures for Payment of Duty and Taxes on PSI Consignments in Tanzania Payment of duty and taxes on PSI consignments shall be made according to the following procedures: x On receiving a request for a Single Bill of Entry (SBE) from the importer, the Inspection Agent (IA) shall give three copies of the SBE printed on non-security paper. For ease of identity this printout shall be stamped “Tax Assessment Notice” (TAN). x The importer shall go to the relevant bank and pay the assessed duties and taxes. x The bank shall stamp the three copies of the TAN and give one copy back to the importer along with a receipt of payment. x The importer shall return to the IA and present the stamped copy and the bank receipt. x The IA shall keep the stamped copy and a copy of the receipt for their records, and issue to the importer an SBE printed on security paper. x The importer shall use the SBE printed on security paper for clearance of goods as usual.

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x x x

Twice a day the IA shall collect one of the copies retained by the bank for bank reconciliation. The IA shall issue two daily reports to the Tanzania Revenue Authority (TRA), one with the list of TANs issued to importers and one with a list of paid-up SBEs. Once weekly the IA shall issue to the TRA a report with a list of TANs for which no payment has been made.

Chapter Summary This chapter has focused on financing international marketing transactions and commercial documentation. In particular, the chapter describes the following aspects: x International financing risks, including commercial risks, foreign currency risks, transfer risks, and political risks. International firms must be aware of these risks and the methods available to reduce them. x There are various methods of payment in international markets, the key ones being drafts covering export, cash in advance, sale on a consignment basis, letters of credits, and bills of exchange. x The key commercial documents in international markets are as follows: pro forma invoices, commercial invoices, certified invoices, weight notes, packing lists, specification sheets, manufacturer’s analysis certificates, and third-party certificates of inspection. x The official documents needed in the export of goods include consular invoices, legalized invoices, certificates of origin, blacklist certificates, and health, veterinary, and sanitary certificates. x The insurance documents required are letters of insurance and insurance certificates, while the transport documents needed are airway bills, combined bills of lading, house bills of lading, rail consignment notes, roadway bills, and bills of lading. Others are short form bills of lading, conditions of carriage, bills of lading (liner), non-negotiable seaway bills, and mate’s receipts. x The financial and financing documents required in export are bills of exchange, promissory notes, inspection and sampling orders, delivery orders, and trust receipts.

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Review Questions 1. 2. 3. 4.

5.

With specific examples, discuss the main international financing risks faced by a Tanzanian exporting firm. Discuss the methods of payment available to an international marketer. Describe and discuss the basic export documents used in export trade. Briefly explain the following: i. Bills of exchange ii. Open account iii. Export agent iv. Letter of credit v. Duty draw back scheme. Discuss methods used in financing exports, showing the circumstances under which the use of a particular method may be appropriate.

BIBLIOGRAPHY

Main Readings Alam, Q. and Pacher, J. (2003). Internationalization of Australian SMEs: Challenges and Opportunities in Globalization and Entrepreneurship. Cheltenham: Edward Elgar. Albaum, G., Strandskov, J., Duerr, E., and Dowd, L. (1994). International Marketing and Export Management (2nd Ed.), Reading: AddisonWesley. Ali, M. (2000). Export Promotion Programs and Export Performance: A Study of SME Managers’ Awareness and Usage of Export Promotion Programs. In Enderwick, P. and Rose, E. (Eds), Proceedings of the Australia New Zealand International Business Academy Conference, Auckland: The University of Waikato and The University of Auckland, 1-10. Andersen, O. (1997). Internationalization and Market Entry Mode: A Review of Theories and Conceptual Frameworks. Management International Review, 37(2), 27. Anderson, W. and Saidi, S.A. (2011). Internationalization and Poverty Alleviation: Practical Evidence from Amani Butterfly Project in Tanzania. Journal of Poverty Alleviation and International Development, 2(2), 17-45 Anderson, W. (2011): Internationalization Opportunities and Challenges for Small and Medium-Sized Enterprises from Developing Countries, Journal of African Business, 12(2), 198-217. —. (2012). A Gender-based Comparison of Marketing Strategies of SMEs. International Journal of Marketing Principles and Practices, 2(1), 3242. —. (2016). Examining the Effects of the Socio-cultural Environment on Internationalization: The Exporters’ Perspective. Business Management Review, 18(1). Anderson, W. and Nicodemus, G. (2016). Contribution of Tourism FDI to Poverty Alleviation: A Selected Case from Hunting Safaris in Tanzania. Business Management Review, 18(2).

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GLOSSARY

Absolute advantage: One country enjoying total lower costs of production than another country or countries. Adaptation: Goods or services adapted in either product, distribution, or advertising form to take account of unique conditions in any one country or countries. Ad valorem duty: This duty is expressed as a percentage of the value of goods. As definitions of customs value vary from country to country, it is best to secure valuation policy information first. Advertising: Any form of marketing communication in the paid media, under clear sponsorship. Agent: A channel institution which represents one or more suppliers for a fee. Aggressive exporter: An organization which develops clear marketing strategies for what it intends to do in foreign markets. Attitudes and values: A predisposition toward a person or object based on cultural mores and values which is a precursor of behavior. Balance of payments: A measure of all economic transactions between one country and all other countries. Barter: The direct exchange of goods and services between two parties, often without cash considerations. Bill of lading: The receipt given by the shipping company to the shipper for goods accepted for carriage by sea (as distinct from an airway bill of lading, for goods carried by air). Bill of exchange: An unconditional order in writing, addressed by one person (drawer) to another (drawee), signed by the person giving it (drawer), requiring the person to whom it is addressed (drawee) to pay on demand, at a fixed or determinable future date, a certain sum in money to, or to the order of, a specific person (payee) or to bearer. Broker: A channel institution which puts specific buyers and sellers in contact with one another in one or more commodity or service, with a view to achieving a sale or benefit. Budget: An amount of money set aside to cover the total cost of a communication campaign or other marketing activity. CIF: A contract of sale of the documents of title, not the goods, whereby the buyer is under an obligation to pay against the shipping documents

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irrespective of the arrival of the goods. Stands for “cost, insurance, freight.” Comparative advantage: One country enjoying a lower production ratio (input to output) than another country under total specialization. Comparative analysis: Comparing the same set of statistics within a category of one country with another for the purpose of estimating potential demand. Competition: A product, organization, or individual, in either the same or another category, which can be directly substituted one for the other in fulfilling the same needs or wants. Competitive strategy: The adoption of a specific target market and marketing mix stance in the marketplace. Cooperative: A collection of organizations or individuals that pools resources in order to gain commercial or non-commercial advantage in buying, selling, or processing goods and/or services. Countertrade: An agreement by the customer to buy goods on condition that the seller buys some of the customer’s own products in return. Culture: The sum total of learned behavioral characteristics or traits that are manifest and shared by members of a particular society. Currency swaps: A method to gain access to foreign capital at favorable rates, comprising contracts to exchange cash flow relating to the debt obligations of the two counterparts to the agreement. Decentralized plans: A planning system taking into account differences in product or market conditions. Decision Support Systems for Global Marketing: The coordinated collection of data, systems, tools, and techniques, complemented by supporting software and hardware designed for the gathering and interpretation of business and environmental data. Demand pattern analysis: The analysis of in-country industrial sector growth patterns. Devaluation: The reduction in the value of one currency vis-à-vis other countries. Diffusion theory: A classification for the adoption of innovations through social phenomenon, characterized by a normal distribution. Distribution channel: An institution through which goods or services are marketed that gives time and place utilities to users. Dumping: The selling of goods or services in a buying country at less than the production unit price in the selling country, or the difference between normal domestic price and the price at which the product leaves the exporting country.

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Duty: The actual customs duty based on an imported good either on an ad valorem or specification amount per unit, or a combination of these two. Ethnocentrism: A home-country orientation but with export of surplus production. Exchange rate: The ratio of exchange of one currency to another. Export credit guarantee fund: A facility provided by a government treasury to guarantee the development costs of exports or legal claims arising therefrom. Export processing zone: A zone designated within a country that enjoys tax privileges or other special status, into which goods and services can be brought, then reprocessed and re-exported. Exporting: The marketing of surplus goods produced in one country into another country. Expropriation: The annexation or seizure of national assets as an extreme form of political action. FAS: A contract of sale whereby the seller undertakes to place the goods alongside a ship ready for boarding and carry all charges up to that point. Stands for “free alongside.” FOB: A contract of sale whereby the seller undertakes to place the goods on board a named ship at a named port and berth and carry all charges up to delivery over the ship’s rail. Stands for “free on board.” Foreign exchange: Facilities business across national boundaries, usually expressed in foreign currency bought or sold on the foreign exchange market. Forward rates: A mechanism whereby the risk of changes in exchange rates can be covered by obtaining a new rate quote for a future exchange of currencies. Future: A legally binding contract to deliver or take delivery on a specified date of a given quality and quantity of a commodity at an agreed price. General Agreement on Tariffs and Trade (GATT): An institutional framework producing a set of rules and principles with the intention of liberalizing trade between member countries. Geocentrism: A world orientation with world market strategies. Global environment: All semi-controllable or uncontrollable factors which a marketer has to account for in carrying out global operations. Global evaluation: A four-stage organizational development process, evolving from a first-stage domestic focus to a fourth-stage global marketing strategy of extension, adaptation, and creation of market opportunities.

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Global marketing: Marketing on a worldwide scale, reconciling or taking commercial advantage of global operational differences, similarities, and opportunities in order to meet global objectives. Global products: Products designed to meet global market segments. Gross domestic product (GDP): The value of all goods and services produced by a country’s domestic economy in one year. Gross national product (GNP): The market value of all goods and services outputted by residents of a country in one year, including income from aboard. Hedging: A mechanism to avoid the risk of a decline in the future market of a commodity, usually by entering into futures markets. Hierarchy of needs: The ordering of a person’s needs into a hierarchy of relative potency, such that as lower-order needs are fulfilled, unfulfilled higher-order needs emerge, which require fulfillment. High-context culture: Minimal reliance on explicit verbal or written conversations, more on what is “implied.” Ideology: An individual’s organization or a country’s political belief. Income elasticity measurements: A description of the relationship between the demand for goods and changes in income. Income per capita: The market value of all goods and services outputted by a country divided by the total number of residents of that country. Inflation: A condition where demand outstrips supply or costs escalate, causing an upward change in prices. Information system: A system for gathering, analyzing, and reporting data aimed at reducing uncertainty in business decision-making. Interactive plans: A planning system whereby headquarters sets a policy and framework, and subsidiaries interpret these under local conditions. International Monetary Fund (IMF): A fund with worldwide country membership (UN) which lends money to countries on a short-term basis to assist them with balance of payments problems. International product life cycle: A model which suggests that products go through a cycle: high-income, mass-consumption countries begin by exporting a product, then lose exports, before finally becoming importers of that same product. International products: Goods or services seen as having extended potential into other markets. Joint venture: An enterprise in which two or more investors share ownership and control over property rights and operations. Letter of credit: A method of international payment whereby the buyer instructs his own country bank to open a credit with the seller’s own

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country bank specifying the documents which the seller has to deliver to the bank for him/her to receive payment. Levy: A tax imposed by government, to meet a specific objective. Licensing: A method of foreign operation cooperation whereby an organization in one country permits a firm in another country to use manufacturing techniques, processing, trademark, know-how, or some other skill provided by the licensor. Local products: Goods or services seen as only suitable in one single market. Low-context culture: High reliance on explicit verbal or written communications or other explicit format. Market entry: The way in which an organization enters foreign markets either by direct or indirect export or production in a foreign country. Market holding price: The charging of a price at what the market can bear in order to hold market share. Market positioning: The adoption of a specific market stance – e.g. leader, challenger, follower, flanker, or adopter – vis-à-vis the competition. Marketing: Planning, executing, and controlling the conception, pricing, promotion, and distribution of ideas, goods, and services in order to build lasting, mutually profitable exchange relationships that satisfy individual and organizational objectives. Matrix organization: A complex form of organizational structure bringing together the competencies of geographic knowledge, product knowledge and know-how, and functional competencies – financial, production, and marketing – with a knowledge of the customer, the industry, and its needs. Media scheduling: A timetable for the allocation of advertising messages in the media over a given time horizon. Media: Any paid-for communication channel, including television, radio, posters, etc. Mercantilism: A nationalist doctrine of one nation prospering at the expense of another nation. Message: An informative communication about a product or service placed in a communication channel. Multinational products: Goods or services adapted to the perceived unique characteristics of national markets. Multiple factor indices: An indirect measure of potential demand that uses, as proxies, variables that either intuition or statistical analysis suggest can be closely correlated with the potential demand for the product under view.

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Nationalism: The assertion of indigenous culture by an individual, organization, or country. Non-tariff barriers: Measures, public or private, that cause internationally traded goods or services to be allocated in such a way as to reduce potential real world income. Passive exporter: An organization that awaits orders or comes across them by choice. Penetration price: The charging of a low price in order to gain volume sales conducted under conditions of little product uniqueness and elastic demand patterns. Physical distribution: The act and functions of physically distributing goods and services including the elements of transport, warehousing, and order processing. Price ceiling: The maximum price that can be charged, taking into account competition and what the market can bear. Price escalation: The difference between the domestic price and the target price in foreign markets due to the application of duties, dealer margins, and/or other transaction costs. Price floor: The minimum price that can be charged, bounded by product cost. Primary data: Unpublished data from individuals or organizations. Product strategy: A set of decisions regarding alternatives to the target market and the marketing mix, given a set of market conditions. Product: A good or service offered by an organization that affords a bundle of benefits both objective (physical) and subjective (image) to a user. Promotion: The offer of an inducement to purchase, over and above the intrinsic value or price of a good or service. Purchasing power parity: The rate at which one unit of currency will purchase the same amount of goods and services as it bought in an equilibrium period, despite differential rates of inflation. Quota: A specific imported amount imposed by one country on another, which once filled cannot be exceeded within a given time. When a quota is in force the price mechanism is not allowed to operate. Retailer: A channel institution which acts as an intermediary between other channel institutions and the end user and which usually breaks bulk, charging a margin for its services. Revaluation: The increase in the value of one currency vis-à-vis other currencies. Secondary data: Published accessible data from a variety of sources.

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Self-reference criterion: Perceptual distortion brought about by an individual’s own cultural experience. Skimming price: The charging of a high price in order to gain maximum revenue, conducted under conditions of product uniqueness and inelastic demand patterns. Specific duties: import duties expressed as a specific amount of currency per unit of weight, volume, length, or other unit of measurement, e.g. 25 cents per kg. Usually specific duties are expressed in the currency of the importing country. Standardization: The same goods or services marketed in either product, distribution, or advertising form, unchanged in any country. Standardized plan: A uniform planning system applied globally, based on economies of scale and consumer uniformity. Strategic business unit: A self-contained grouping of organizations, products, or technologies which serves an identified market and competes with identified competitors. Tariff: An instrument of terms of access – normally the imposition of a single or multiple excise rates on an imported good. Terms of access: The conditions imposed by one country which apply to the importation of goods from another country. The World Bank: Known also as the International Bank for Reconstruction and Development (IBRD). A bank with worldwide country membership (UN) which provides long-term capital for economic development. Transfer pricing: The price at which goods or services are transferred between one country and another within the same organization. Wholesaler: A channel institution which purchases and sells in bulk from either original suppliers and/or other channel intermediaries, charging a margin for its services.