International Business

Chapter 1

Overview of Global Business

International Business:

Any business with international sales, sourcing or investment.

A multinational business

Any business with productive activities in two or more countries.

A global business

A business that takes global approach to production and sourcing.

International Business

International business consists of transactions that are devised and carried out across national borders to satisfy the objectives of individuals, companies, and organizations.

·         It includes international trade and foreign manufacturing.

·         It also includes a growing service industry in areas such as: transportation, tourism, advertising, construction, retailing, wholesaling, and mass communication.

·         International Business is all business transactions that involve two or more countries.

·         International Business comprises a large and growing portion of the world’s total business.

·         International Business usually takes place within a more diverse external environment.

·         International trade is a vital part of the economy. Trade has contributed to world wide economic growth.

Why study International Business?

·         To operate in multilingual, multi-cultural environment.

·         Knowledge helps in handling trade-import and export.

·         Better management skills in international environment.

·         Due to different rules and regulation in international business manager needs to have a better understanding of each market.

·         For gaining exposure in business.

·         For better decision making.

Why do International Business?

·         Economies of scale

·         Access resources

·         Better opportunities

·         Distribution of risk/Risk reduction

·         Development of managerial skills experience

·         liberalization

·         New technology

·         Market expansion

·         Networking

Factors Contributing to Rapid Growth of International Business

·         Increase in and expansion of technology

·         Liberalization of cross-border trade and resource movements

·         Development of services that support international business

·         Growing consumer pressures

·         Increased global competition

·         Changing political situations

·         Expanded cross-national cooperation

International Business Vs Domestic Business

·         Difference in Legal system

·         Difference in political system

·         Difference in social environment

·         Difference in currencies

·         Difference in business practices

·         Difference in technology

·         Difference in wider market

·         Difference in high transportation cost.

International business can differ from domestic business for a number of reasons, including the following:

ü  Use of Currency: The countries involved may use different currencies, forcing at least one party to convert its currency into another.

ü  Legal System: The legal systems of the countries may differ, forcing one or more parties to adjust their practices to comply with local law.

ü  Resources: The availability of resources differs by country; the way products are produced and the types of products that are produced vary among countries.

ü  Distance: The distance involved in export of goods in external trade is generally greater than on the domestic trade.

ü  Language differences: There are differences in the languages of the nations of the world. The overseas traders should be very careful in preparing the publicity material in the languages of the trading country.

ü  Cultural difference: A producer should have full knowledge about the market of his products. For exporting goods particularly a thorough research is undertaken.

Challenges of International Business

·         Need of new strategies

·         Competition

·         Information gaps

·         Management skills

Difference of International and Domestic Business.

	Concepts/Aspects	International Business	Domestic Business
1.	Transactions and who enters?	Transactions cross national boundaries and are between us and them.	Transactions are within a nation and among us.
2.	Payments and methods	Through banks or letter of credit under foreign exchange   and regulations.	Money transfer procedures in a national currency.
3.	Political and securities	Politically different units and higher risks.	One political unit, low risks
4.	Factors Mobility	Restricted  and limitations	No limitations
5.	Regulatory or legal-protectionist and revenue oriented.	Foreign countries have different legal or regulatory provisions for trade and investment barriers.	Provisions are well known, no business barriers.
6.	Socio-culture,history,language  and institutions	Foreign countries have unique and different cultures and histories.	Such environments are well known within a country.
7.	Financial and foreign exchange management.	Foreign exchange risks-transactions, translations and economic exposure	There is no foreign exchange risk
8.	Economic policies and levels of development	Diverse levels of development and different fiscal and monetary policies.	No complexities in economic development level and policies.
9.	Market and Consumers	Different practices, terms, standards, taste, attitudes and preferences	Not much difference in practices, terms etc.
10.	Co-ordination, control, HR and production	Management becomes complex and wider in globally dispersed activities.	Simple in case of domestic business activities.
11.	Government and stakeholders’ cooperation	Complicated dealing with government restrictions and social responsibilities.	Simple in dealing with stakeholders.
12.	Business plan and strategies	Different business plan and strategies have to be formulated in consideration of all of the above factors.	Business plan and strategies may not be required to consider foreign environmental factors.

Globalization

Globalization refers to a strategy of crossing national boundaries through globalized production & marketing networks. Deregulation, privatization, trade liberalization, protection of property rights, promotion of foreign direct investment, opportunities for strategic alliance.

According to economist, it refers to an economic inter-dependence between  countries covering increased trade, technology, labour & capital flows.

To a political scientist, globalization refers to an integration of a global community in terms of ideas, norms & values. It means the creation of world government,i.e. WTO,WORLD BANK, IMF.

Widely used definitions :

§  Globalization is a free movement of goods, services, people, capital & information across national boundaries.

§  Globalization is a process by which an activity becomes world wide in scope.

§  Globalization is a process of integration of the world as one market.

ü  Deepening relationships and broadening interdependence among people from different countries. It is the growing interdependences among the economies around the globe.

ü  Free movement of goods, services, people, capital, technology and information from one country to another country on international level.

ü  Process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology.

ü  It promotes economic interdependence of all the countries in the world, integration of national economy into global economy.

ü  It creates a concept as a world without a geographical boundary.

Examples:

A German Doll manufacture company purchases raw materials from China and India, uses manpower from Nepal and technology of Japan, the finished products sell in East Europe.

Global business around the world is boosting among the countries through various economic and regional cooperation like World Trade Organization (WTO), Portfolio Investment, FDI,Multinational Companies (MNCs),Regional Economic Grouping of Nations e.g. :European Union (EU), Association of South East Asian Nations (ASEAN), and South Asian Association for Regional Cooperation (SAARC) etc.

South Asian Free Trade Area (SAFTA),SAARC Preferential Trading Arrangement (SAPTA),BIMSTEC,

Nature of Globalization

·         Integration:

·         Globalization integrates the economic, political & cultural systems across the world.

·         Open market economy:

·         Globalization emphasizes on open market economy. It encourages to the liberal & private economy.

·         Free movement of factors of production: Globalization facilitates free movement of factors of production -capital, manpower, materials, management & technology at the international level.

·         Modern communication & transportation: Globalization needs the use of modern means of communication & transportation system.

International operation:

 Business activities are performed at the international level in which goods & services are moved in any part of the world without legal restriction & barriers.

Categories/Forms of Globalization

ü  Economic Globalization

ü  Political Globalization

ü  Socio Cultural Globalization

ü  Environmental Globalization

Economic Globalization

ü  Process of integration of national economy into global economy through deregulations, liberalization, privatization and free movement of factor of production from country to country.De-licensing trade, removal of quantitative restriction on trade, reduction of tariffs and deregulation of foreign exchanges. Formation of WTO and other many regional blocs like BIMSTEC, ASEAN, SAARC, NAFTA and multinational companies also drive to this process.

Political Globalization

It is the process of reconciling national institutions, policies, laws and regulations into the multilateral framework provided by international treaties, protocols and regulations to exercise globally.

Socio Cultural Globalization

Cross country movement of culture through various sources:

ü  Movement of people from one place to another place, 

ü  Worldwide access of television channels,

ü  Global market of varieties of goods through international trade,

ü  Promote of global marketing campaign people are familiar with foreign culture and social values. It also helps people to bring in close and reduce cultural distances.

Environmental Globalization

ü  Environment pollution, global warming, increasing the volume of carbon and depletion of ozone layer are the common agendas of all countries in the world.

ü  Ecological problem like floods, water and air pollution, deforestation, soil erosion and acid rain are cross boarder problems and only one country can't solve these problems alone.

ü  Joint action plan is required to protect the environment.

Advantages of Globalization

ü  Access to new market opportunities.

ü  Transfer of capital, technology, management

ü  Increase trade.

ü  Increase employment

ü   Utilization of resources.

ü  Increase international relations.

Disadvantages of Globalization

ü  Effects on National Sovereignty

ü  Inequitable distribution of benefits

ü  Tough competition

ü  Environmental degradation

ü  Threats to social and cultural values

ü  Exchange rates uncertainties

o   Less priority of national agenda

Components of globalization

                         

Globalization of Production

The globalization of production refers to the sourcing of the goods and services from locations around the globe to take advantage of national differences in the cost and the quality of factors of production. By doing this companies hope to lower their overall cost structure and improve the quality or functionality of their products offering, thereby allowing them to compete more effectively. 

Vizio flat panel TV is designed in a small office in California

ü  Assembled in Mexico

 From

ü  panels made in South Korea

ü  electronic components made in China

o   microprocessors made in the U.S

The Boeing Company’s commercial jet airliner, the 777, eight Japanese suppliers make parts for the fuselage, doors and wings.

 A supplier in Singapore makes the doors for the nose landing gars; three suppliers in Italy manufactures wing flaps; and so on. In total some 30% of the 777, by value, is built by the foreign companies.

Globalization of Market

ü  Merging of historically distinct and separate national market into one huge global market place.

ü  Facilitated by offering standardized products like Coca-Cola, McDonalds,KFC

ü  Does not have to be a big company to participate.

ü  There are lots of companies around the world with less than 100 employees which deals with foreign exports.

In the past, each country had its own companies in many industries and its own products

But the most global markets are for standard offerings

ü  Agriculture products

ü  Natural resources /Mineral resources

ü  Technology –Mobiles, laptops

ü  Lifestyle –clothing, shoes,

ü  Entertainment –Cinema halls

o   Transportation

DRIVERS OF GLOZBALIZATION

There are major five kinds of drivers of globalization:

ü  Political

ü  Technology

ü  Market

ü  Cost

ü  Competition 

Declining trade & investment barriers-Tariff & non-tariff

ü  Export incentives

ü  Reduction of barriers to FDI

ü  Cutting tariffs on goods, services and agricultural goods.

   Leads to globalization of markets and production e.g. emerging markets

Information, Communication and Transportation technologies

  Better opportunities with access to new market and increase sales by use of technology as direct marketing, direct selling and buying e.g. muncha.com, amazon.com,e-bay.com.

Transportation with high speeds Airways, Train and ships.

ü  Low cost of travelling

ü  Better ports, airports and cargo handling

ü  Examples like DHL,Fedex

Globalization, Jobs and Income

One concern frequently voiced by globalization opponents is that falling barriers to international trade destroy manufacturing jobs in wealthy advanced economies such as the United States and United Kingdom.

The critics argue that falling barriers allow firms to move manufacturing activities to countries where wages rates are much lower and resources are available.

Globalization, Labor Policies and Environment

A second source of concern is that free trade encourages firm from advanced nations to move manufacturing facilities to less developed countries that lack adequate regulations to protect labor and the environment from abuse by the corrupt.

Globalization Debate

•      Supporting

o   Free trade

o   Economic development

§  Reduces poverty, improves education, health and life expectancy

o   Expanded trade creates more and better jobs

• Globalization Concerns

ü  Produces uneven results across nations and people.

ü   has negative effects on labor and labor standards.

ü  contributes to decline in environment and health conditions

1. How might the internet and the associated World Wide Web affect the international business activity and the globalization of the world economy?
2. How have changes in technology contributed to the globalization of markets and production? Would the globalization of production and markets have been impossible without these technical changes?
3. The study of international business is fine if you are going to work in a large multinational enterprise, but it has no relevance for individuals who are going to work in small firms.” Evaluate this statement.
4. Changes in communication, information, and transportation technologies affect international business activity and the globalization of the world economy. Comment.
5. Explain importance of International Business in context to our country Nepal.

                                            Chapter 2

International Trade Theories

Trade is a voluntary exchange of goods, services, assets or money between one person or organization and another.

Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy from another country or what they can produce and sell to another country.

The Benefits of Trade allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country.

International Trade Theories

ü  Why do nations trade what they do?

ü   Is trade a good thing?

ü  The theory of international trade provides answers.

ü  International trade theory provides explanations for the model of international trade and the distribution of the gains from trade.

International trade:

 Trade between residents of two countries. The residents may be individuals, firms, nonprofit organizations or other forms of association

Classical trade theories: 

ü  Explain national economy conditions--country advantages--that enable exchange to happen.

New trade theories:

ü  Explain links among natural country advantages, government action, and industry characteristics that enable exchange to happen.

Classical Country based theories

•      Mercantilism

•      Theory of absolute advantage

•      Theory of comparative advantage

•      Theory of factor endowment

Modern firm based theories

• Product life cycle theory
• Theory based on Economies of Scale

§  Theory of national Competitive Advantage

Mercantilism

ü  The first theory of international trade, mercantilism, emerged in England.

ü  An economic philosophy based on the belief that

•      A nation’s wealth depends on accumulated treasure, usually gold and

•      To increase wealth, government policy should promote exports and discourage imports

ü  Import restrictions using increased custom duty is used

ü  Trade surplus is the main goal and should be compensated by paying in gold or silver

ü  Currency devaluation can be one of the tools for increase in mercantilism to support.

Focus on

               Power =Wealth

               Wealth = Stocks of gold

               Exports increases wealth

                Import decreases wealth

ü  Favorable balance of trade: country is exporting more than it is importing.

ü  Unfavorable balance of trade: country is importing more than it is exporting, i.e. a trade deficit.

ü  Neo-mercantilism: current term to describe the approach of countries that try to run favorable balances of trade to achieve some social or political gains.

For example, critics blame that China is pursuing a neo-mercantilist policy, intentionally keeping its currency value low against the U.S. dollar in order to sell more goods to the United States, and thus accumulate a trade surplus & foreign exchange reserves.

ü  Mercantilism makes a country highly dependent on the sources of wealth; if these disappear, they are weak.

ü  UAE has a good sense for this and is planning a more diversified economy.

ü  Iran does not and is expected to run out of oil in 10 years without possible substitutions.

Argument for and Against Mercantilism 

ü  For

•      Trade surplus

•      Protection of jobs in mercantilist nations

•      Benefit to certain groups like domestic merchants, shippers.

•      Favorable trade balance (balance of payment)

ü  Against

•      Inefficient production and distribution of goods and services

•      Unbalanced theory-International business is the source of FOREX for country than export alone

•      Excludes the fact that in some case it is good to import.

•      If we completely refuse import, the population will have to do without certain consumer items.

•      Country’s reserve is maintained not only on gold and silver but on FOREX too.

Theory of Absolute Advantage
 Adam Smith: Wealth of Nations (1776).

ü  According to Adam Smith, a country’s wealth is based on its available goods & services rather than on gold.

ü   It measures a nation’s wealth by the living standards of its people

ü  It criticizes the mercantilist idea since there is to be gains to both countries party to an exchange.

ü    It criticizes the objective of national governments to acquire wealth through restrictive trade policies.

ü  It believed that countries are at different levels in terms of trade because of natural or acquired advantage.

ü   Resource foundation, country size, technology or resource efficiencies (as absolute advantages) is the basis/reason for trade.

ü  Natural Advantage

A country may have a natural advantage in the production of particular products because of given climatic conditions, access to certain natural resources, the availability of needed labor forces, etc.

ü  Acquired Advantage

An acquired advantage represents a distinct advantage in skills, technology and/or capital assets, offer differentiated product and/or cost-competitive identical products.

ü  It advocates free trade.

ü  Capability of one country to produce more product than another country by using same amount of input.

ü  Exports the commodity which can be produced at lower cost compared with other nations.

ü  Import a commodity which can be produced at lower cost by another nation.

ü  Improve global competence through its participation in free trade.

Assumption:

ü  Two country and two products

ü  Perfect competition with no transportation cost in trade

ü  Free and unregulated/loose market is the assumption

ü  Only one factor of production- labor

ü   It supports that market forces, and not the government, should determine the direction, volume, and work of international trade.

Country	United States	China	Total
Tons of Soybeans	3	1	4
Bolts of Cloths	2	4	6

Theory of Comparative Advantage
David Ricardo: Principles of Political Economy (1817).

•      In 1817, David Ricardo an early nineteenth century British economist, refined the theory of absolute advantage by developing the theory of comparative advantage.

•      This theory states that a country should produce and export  those goods and service for which it is relatively more productive than are other countries and import those goods and services for which other countries are relatively more productive than it is.

•      Ricardo’s theory of comparative advantage holds that a country can maximize its own economic welfare by specializing in the production of those goods it can produce relatively efficiently and enhance global efficiency through its participation in (unrestricted) free trade.

Assumptions

•      Two countries and two commodities

•      One factors of production no impact of technologies developments.

•      Transportation cost exists as firms and workers couldn't move freely between countries

•      No difference in exchange rates and no price differences

•      No place for service industry

•      Globalization of product and globalization of market has been ignored

•      Free resource mobility

•      Effects of trade on income distribution

•      Fixed resources and no change in efficiency.

It seems clear that if one country is better at producing one good and another country is better at producing a different good (assuming both countries demand both goods) that they should trade.

ü  What happens if one country is better at producing both goods?

ü  Should the two countries still trade?

ü  This question brings into play the theory of comparative advantage and opportunity costs.

•      For example, suppose Switzerland can produce either one pound of cheese or two pounds of chocolate in an hour. If it chooses to produce a pound of cheese in a given hour, it forgoes the opportunity to produce two pounds of chocolate. The two pounds of chocolate, therefore, are the opportunity cost of producing the pound of cheese. They sacrificed two pounds of chocolate to make one pound of cheese.

•      A country is said to have a comparative advantage in whichever good has the lowest opportunity cost. That is, it has a comparative advantage in whichever good it sacrifices the least to produce. In the example above, Switzerland has a comparative advantage in the production of chocolate. By spending one hour producing two pounds of chocolate, it gives up producing one pound of cheese, whereas, if it spends that hour producing cheese, it gives up two pounds of chocolate.

•      Thus, the product in which a comparative advantage is good that the country produces most efficiently (for Switzerland, its chocolate). Therefore, if given a choice between producing two goods (or services), a country will make the most efficient use of its resources by producing the good with the lowest opportunity cost, the good for which it holds the comparative advantage. The country can trade with other countries to get the goods it did not produce (Switzerland can buy cheese from someone else).

Limitation

• Does not explain why certain goods are cheaper in certain countries.
• Immobile resources, all resources are not interchangeable.
• Different goods use resources in different proportions

Theory of Factor Endowments

Eli Heckscher and Bertil Ohlin developed the theory of relative factor endowment, now often referred to as the Heckscher-Ohlin theory. The theory states that a country will have a comparative advantage in producing products that intensively use resources (factor of production) that it has in abundance. It introduces the factor of production.

•      It states that international and interregional differences in production cost occur because of difference in supply of production factors.

•      E.g. China should export labor intensive goods, Netherland with relatively more capital than labor should specialize in capital intensive goods.

A country should

•      Export products which use intensively its relatively abundant factors

•      Import products which use intensively its relatively scarce factors

Assumption

ü  There are two countries involved.

ü  Each country has two factors (labor and capital).

ü  Each country produce two commodities or goods (labor intensive and capital intensive).

ü  More innovation, skilled labor and better technology

ü  Factors are freely mobile within a country but immobile between countries.

ü  Two countries differ in factor supply.

ü  Trade is free

ü  There are no transportation costs.

Leontief's Paradox

The concept that countries with a great deal of capital available import capital intensive commodities and export labor intensive commodities. In 1953 by economist Wassily Leontief led to rejection or revision of the Heckscher-Ohlin theorem. Example: U.S. (the most capital-abundant country in the world) exported labor-intensive commodities and imported capital-intensive commodities, in challenge with Heckscher-Ohlin theory.

Product Life Cycle (PLC) Theory

Raymond Vernon’s PLC it is based on US economy and it states that the location of production of certain kinds of products shifts as they go through their life cycle, which consists of four stages;

As product moves in the life cycle mature industries move to lower cost locations

ü  Introduction

ü  Growth

ü  Maturity

o   Decline

Introduction Stage

ü  Innovation, production, sales in the domestic (innovating) country and  also export done by the domestic country. Since the product is not yet standardized, the production process tends to be relatively labor intensive, and domestic customers tend to accept relatively high introductory prices. Evolving product characteristics with the market demand.E.g. US develop product for their own market so do French Companies for French market.

Features

Product location	In innovating (usually industrial) country
Market Location	Mainly in innovating country with some export
Competitive factors	•      Near monopoly competition •      Sales based on uniqueness rather than price •      Evolving product characteristics
Production Technology	•       Short Production run •       Evolving methods to agree with product evolution •       High labor input and labor skills relative to capital input

Theory of Comparative Advantage David Ricardo: Principles of Political Economy (1817).

•      In 1817, David Ricardo an early nineteenth century British economist, refined the theory of absolute advantage by developing the theory of comparative advantage.

•      This theory states that a country should produce and export  those goods and service for which it is relatively more productive than are other countries and import those goods and services for which other countries are relatively more productive than it is.

•      Ricardo’s theory of comparative advantage holds that a country can maximize its own  economic welfare by specializing in the production of those goods it can produce relatively efficiently and enhance global efficiency through its participation in (unrestricted) free trade.

 Assumptions

•      Two countries and two commodities

•      One factor of production no impact of technologies developments.

•      Transportation cost exists as firms and workers couldn't move freely between countries

•      No difference in exchange rates and no price differences

•      No place for service industry

•      Globalization of product and globalization of market has been ignored

•      Free resource mobility

•      Effects of trade on income distribution

•      Fixed resources and no change in

Theory of Comparative Advantage

David Ricardo: Principles of Political Economy (1817).

It seems clear that if one country is better at producing one good and another country is better at producing a different good (assuming both countries demand both goods) that they should trade.

 What happens if one country is better at producing both goods?

 Should the two countries still trade?

 This question brings into play the theory of comparative advantage and opportunity costs.

•      A country is said to have a comparative advantage in whichever good has the lowest opportunity cost.

•      That is, it has a comparative advantage in whichever good it sacrifices the least to produce.

•       In the example above, Switzerland has a comparative advantage in the production of chocolate.

•       By spending one hour producing two pounds of chocolate, it gives up producing one pound of cheese, whereas, if it spends that hour producing cheese, it gives up two pounds of chocolate.

•       Thus, the product in which a comparative advantage is good that the country produces most efficiently (for Switzerland, its chocolate).

•       Therefore, if given a choice between producing two goods (or services), a country will make the most efficient use of its resources by producing the good with the lowest opportunity cost, the good for which it holds the comparative advantage.

•       The country can trade with other countries to get the goods it did not produce (Switzerland can buy cheese from someone else).

                                     

     

                                         Limitation

•  Does not explain why certain goods  are cheaper in certain countries.
• Immobile resources, all resources are not interchangeable.
• Different goods use resources in different proportions

•       Comparative advantage not only affects the production decisions of trading nations, but it also affects the prices of the goods involved.

•       After trade, the world market price (the price an international consumer must pay to purchase a good) of both goods will fall between the opportunity costs of both countries

Theory of Comparative Advantage

                    David Ricardo: Principles of Political Economy (1817).

•      Assume Ghana is more efficient in production of both cocoa and rice.

Scenario 1:

•      In Ghana it takes 10 resources to produce 1 ton of cocoa and 13 1/3 resources to produce 1 ton of rice.

•      Thus with 200 resources Ghana can produce 20 tons (200/10)of cocoa and no rice. Or 15 tons of rice(200/13.33) and no cocoa or any combination of the two.

•      In South Korea it takes 40 resources to produce 1 ton of cocoa and 20 resources to produce 1 ton of rice.

•      Thus , with 200 resources Korea can produce 5(200/40) tons of cocoa and no rice or 10 tons of rice and no cocoa or any combination of the two.

Theory of Comparative Advantage

 David Ricardo: Principles of Political Economy (1817).

Scenario 3: International Trade takes Place:

Cocoa to Rice Ratio in Ghana:  10: 7.5 or 4:3 or 1: 0.75

Cocoa to Rice ratio in Korea: 2.5:5 or 1:2

Cocoa is cheaper in Ghana.  So Ghana can sell 1 unit of cocoa to Korea and get 2 units of Rice whereas she can only get 0.75 units of rice in exchange of giving up 1 unit of cocoa production in her own country.

So, Ghana would export cocoa and import rice.

 On the other hand,

Rice to cocoa Ratio in korea:5:2.5 or 1:0.5

Rice to cocoa Ratio in Ghana:7.5:10 or 1: 1.33

 Rice is cheaper in Korea because Korea can sell 1 unit of Rice to Ghana and get 1.33 units of cocoa whereas she can only get 0.5 units of cocoa by sacrificing the same amount of rice in her own country.

SO Comparative Advantage comes into effect

Theory of Factor Endowments

Eli Heckscher and Bertil Ohlin developed the theory of relative factor endowment, now often referred to as the Heckscher-Ohlin theory.

The theory states that a country will have a comparative advantage in producing products that intensively use resources(factor of production)that it has in abundance.

It introduces the factor of production.

•      It states that international and interregional differences in production cost occur because of difference in supply of production factors.

•      E.g.

•      China should export labor intensive goods

•      Netherland with relatively more capital than labor should specialize in capital intensive goods.

•       A country should

•      Export products which use intensively its relatively abundant factors

•      Import products which use intensively its relatively scarce factors

                        

   Assumption

ü  There are two countries involved.

ü  Each country has two factors (labor and capital).

ü  Each country produce two commodities or goods(labor intensive and capital intensive).

ü  More innovation, skilled labor and better technology

ü  Factors are freely mobile within a country but immobile between countries.

ü  Two countries differ in factor supply.

ü  Trade is free

ü  There are no transportation costs.

Leontief's Paradox

The concept that countries with a great deal of capital available import capital intensive commodities and export labor intensive commodities.

 In 1953 by economist Wassail Leontief led to rejection or revision of the Huckster-Ohlin theorem.

Example: U.S. (the most capital-abundant country in the world) exported labor-intensive commodities and imported capital-intensive commodities, in challenge with Huckster-Ohlin theory.

Product Life Cycle (PLC) Theory

 Raymond Vernon’s PLC  it is based on US economy and it states that the location of production of certain kinds of products shifts as they go through their life cycle, which consists of four stages;

As product moves in the life cycle mature industries move to lower cost locations

ü  Introduction

ü  Growth

ü  Maturity

ü  Decline

                                      

Introduction Stage

ü  Innovation, production, sales in the domestic (innovating) country and  also export done by the domestic country.

ü  Since the product is not yet standardized, the production process tends to be relatively labor intensive, and domestic customers tend to accept relatively high introductory prices.

ü  Evolving product characteristics with the market demand.

ü  E.g. US develop product for their own market so do French Companies for French market.

                                       Features

Product location	In innovating (usually industrial) country
Market Location	Mainly in innovating country with some export
Competitive factors	•      Near monopoly competition •      Sales based on uniqueness rather than price •      Evolving product characteristics
Production Technology	•       Short Production run •       Evolving methods to agree with product evolution •       High labor input and labor skills relative to capital input

Growth

ü  Sales grows and increase foreign demand

ü  Competitors enter the market and increase in competition.

ü  Increase in the export by the innovating country.

ü  FDI to accelerate by the innovator or competitors in abroad/other countries.

ü  Increased capital intensity.

ü  Increase sales create chances in development of process technology

ü  Production technology may not be well developed due to variation in product by

   the competitors.

ü  Production process still be labor intensive.

ü  Experiences loss of some export ma

Maturity

ü  Global demand begins to peak.

ü  A decline in exports from the innovating country

ü  Production processes are relatively standardized and global price competition forces production site relocation to lower cost developing countries.

ü  More capital intensity

                           Features

Product location	Multiple countries
Market Location	•       Growth in developing countries •       Some decrease in industrial countries.
Competitive factors	•       Overall stabilized demands •       Number of competitors decreases •       Price is very important, especially in developing countries
Production Technology	•       Long production runs using high capital inputs •       Less labor skill needed

                                              

 Decline

ü  Market in industrial countries decline fast than in least developing countries since rich customer demand new products.

ü   Market factors and cost pressures dictate that almost all production occur in developing countries and the export done in declining or small niche markets in industrial countries.

                                            Features

Product location	Mainly in developing countries
Market Location	•       Mainly in developing countries •       Some developing countries export
Competitive factors	•       Overall declining demand •       Price is key weapon •       Numbers of producers continue to decline
Production Technology	•       Unskilled labor on mechanized long production runs

                   Limitation

•      Exceptions to the typical pattern of the international product life cycle would include: products that have very short life cycles, luxury goods, products that require specialized labor, products that can be differentiated and products for which transportation costs are relatively high.

            

           Challenges of the Product Life Cycle these days

ü  Dealing with a very short Introduction Stage, due to technological competitiveness

ü  Extending the length of the PLC through market modification and product modification.

               New Trade Theory

ü  Recognized in the 1970s.

ü  Based on economies of scale.

ü  Also called theory of country size.

ü  It states that as output expands with specialization, an industry’s ability to use economies of scale increases and unit costs decrease.

 Specialization due to

ü  Economies of scale- It also exists learning effects.

         Learning effects are cost savings that come from “learning by doing” –it decreases variable cost and as output increases fixed cost decreases.

ü  First movers advantage: chemical industry, computer software,  Tire industry.

Ø   Larger markets-economies of scale, lower cost, variety of goods due to trade.

Ø  Size of market limits economies of scale and variety of goods.e.g Nepal

                    

National Competitive Advantage

•      Michael Porter made research to reason why some nations succeed and other fails in international competition.

•      Answers why some nations succeed in particular industries.E.g. Japan Automobiles, Swiss in precision instruments, US in chemicals.

•      It points out  the importance of domestic demand and domestic competition.

 Four attributes that shape the environment and this promotes the creation of competition advantage.

ü  Factor endowment/Factor condition

ü  Domestic demand/Demand Condition

ü  Related and supported Industries

ü  Firm strategy, structure and rivalry

ü  These four attributes considered as diamond

ü  Each attribute complements the other

                              Factor Condition

Basic factor:

Natural resources, climate, location and demography

Advanced factor:

Communication, infrastructure, skilled labor, research facilities and technological know how.

Basic factor provides initial advantage this can be supported by investment in advanced factors.

Advanced factors more significant for competitive advantage.

Lack of natural factor has caused nations to invest in the creation of advance factors

                                  Demand Condition

The nature of home demand for the industry’s product or service. Greater the domestic demand greater the pressure in developing better products. Greater consumer awareness and knowledge, higher demands  will help the better product development, production of sophisticated products. Gradually, the country will achieve competitive advantage in such production. Development of cellular phones.

                            Related & Supportive Industries

Development of one type of industry either helps existing industry to develop or leads

to development of a new industry.Better pharmacy technology and demands leads to development of volume drug manufacturers, better R & D.

Eg, Establishment of shoe industry either helps the existing industry or leads to development of a new industry.

            Firm strategy, structure and rivalry

• The firm’s has their own strategy, there is no fixed rule regarding the adoption of a particular strategy.
• The strategic decisions of the firm have lasting effects on their future competitiveness.
• Equally important is the industry structure and rivalry among different companies.
• The greater the rivalry, the greater the competitive strength of the industry.eg. NTC and Ncell.
• Intense domestic competition results innovation, better quality, lower costs by investment in advanced factors.

 Understand theories that attempt to explain why certain  goods are traded internationally

Why do nations trade? Mercantilist did so to build up storehouses of gold. Later, Adam Smith showed that a nation would export goods that it could produce with less labor than other nations. Ricardo then proved that even though it was less efficient than other nations, a country could still profit by exporting goods if it held a comparative advantage in the production of those goods.

The idea that a nation would tend to export products requiring a large amount of a relatively abundant factor was offered by Huckster and Ohlin in their theory of factor endowment. The international product life cycle theory states that many products first produced in the US or other developed countries are eventually produced in less developed nations and become imports to the vary countries in which their production began.

In the 1920s, economist realized the economies of scale affect international trade because they permit the industries of a nation to become low cost producer without having an abundance of a class of production factors. As in the case of comparative advantage, nations specialize in the production of a few products and trade to supply the rest. Porter claimed that four attributes of variable affect a country’s ability to gain a competitive advantage: demand condition, factor condition, related and supported industries and firm strategy structure and rivalry.

Chapter -4

World trading system & regional trade agreements

      

Trade Barriers

ü  Trade barriers are also known as trade restrictions or trade control on international business.

ü  The international trade is generally characterized by trade barriers.

ü  It is natural that countries use trade barriers for protecting their domestic  products, but now we countries use them also as a retaliation/revenge against those foreign countries that have discriminated against our products.

ü  Countries have no control over the export which the foreign country controls but they can control or restrict is the imports from foreign countries.

Reason for using Trade Barriers

ü  To correct balance of payments deficit

    Deficit occurs when the total payments leaving a country are greater than the money in receipts entering from abroad. The country then tries to limit imports and increase exports. To do so, trade barriers on imports are used.

ü   To ensure national security and supply

    Nation sometimes restrict exports of critical raw materials, high technology  or equipment when such export supposedly might harm its own welfare or national security .

Reason for using Trade Barriers

To protect their own industries against the competition of foreign goods-Country usually offers protection to its domestic industries by taxing imports of similar foreign goods. When a tariff is added to the price of a foreign product coming into a country ,it raises the price  of the item to the consumer.

Types of Trade Barriers   

Tariff Barriers

ü  They are largely import duties that serve as barriers to international trade.

ü   They are defined as  the taxes or duties charged on imported goods  primarily for the purpose of raising their selling price in the importing nations market to reduce competition for domestic products.

ü  Tariff are designed to penalize or discourage domestic consumers and foreign producers and to favor domestic producers and the government.

ü   Tariffs are charge not only for protection of domestic producers but also for enlarging government revenue.

Types of tariff barriers

Tariff are generally of two broad types;

ü  Import duties

ü  Official duties

i.                   Import duties

    The duties imposed by a nation on its imported goods are known as import duties. They are of the following types:

1. Ad valorem duty-An imported duty charged as a percentage of the invoice value of imported goods usually on dollars and rupees. Such duties are stated as a fixed percentage of the invoice value of the imported goods

ii.                  Import Duties

ü  Specific Duty-

    It is a fixed sum of money charged on a physical unit of an imported product like weight ,other measure of quantity. They are specific rates of so many dollars or rupees for a given unit of measure,eg. US$ 1 per gallon ,Rs 2 per ton etc

ü  Compound Duty-It is the combination of specific duty and ad valorem duties. It is also called combined rates.

ü  Countervailing Duty- It is a permanent additional charge imposed on certain imports when products are subsidized by foreign investments. It is charged on those imported goods to which the exporter’s country have had given subsidy.Thus,such duties compensate a special advantage or subsidy allowed by the exporter’s government.

Import duties

Official prices

ü  They are included in the custom tariff of some nations, so that they are the basis for calculating ad valorem duty whenever the actual invoice price of the invoiced goods is lower.

ü  So, the practice is that the importer sends the difference between the false invoice price and true price of the commodity

ü  In countries like Nepal, where under-invoicing is widespread among the businessman, official prices should be applied to check such trade malpractices is explained by the experts.

The transition from tariffs to non-tariff barriers

ü  One of the reasons why industrialized countries have moved from tariffs to NTBs is the fact that developed countries have sources of income other than tariffs.

ü  Historically, in the formation of nation-states, governments had to get funding. They received it through the introduction of tariffs. This explains the fact that most developing countries still rely on tariffs as a way to finance their spending.

ü  Developed countries can afford not to depend on tariffs, at the same time developing NTBs as a possible way of international trade regulation.

ü  The second reason for the transition to NTBs is that these tariffs can be used to support weak industries or compensation of industries, which have been affected negatively by the reduction of tariffs.

ü   The third reason for the popularity of NTBs is the ability of interest groups to influence the process in the absence of opportunities to obtain government support for the tariffs.

Non-tariff Barrier

ü  Non-tariff barriers to trade  represent administrative regulations, policies, and procedures, i.e., quantitative and qualitative barriers, that directly or indirectly  hamper international trade.

ü  (NTBs) are trade barriers that restrict imports but are not in the usual form of a tariff.

ü  Their use has risen sharply after the WTO rules led to a very significant reduction in tariff use.

ü  In other forms, they are criticized as a means to avoid free trade rules such as those of the World Trade Organization (WTO), the European Union (EU), or North American Free Trade Agreement (NAFTA) that restrict the use of tariffs.

NTB with direct price effect

The following non-tariff barriers directly make change in the price of the commodity

ü  Subsidies

ü  Aids and Loans

ü  Customs Valuation

Subsidies

ü  Subsidies are basically meant for making companies more competitive in the international business like for the emerging economies like Nepal to find foreign markets for their products

ü  International Business managers should be aware that  government sometimes make direct payments to domestic companies to compensate them for losses or expenses incurred from selling abroad such as US subsidies to cotton exporters and other agro farming exports. It has made those American products more competitive in terms of price so other companies are protesting against the US subsidies

ü  Government provide not only cash but also other types of assistance to make the product cheaper or more profitable for domestic firms to sell overseas.

    For example, most countries offer their potential  exporters different services like providing counseling services, relevant information, sponsoring trade  exhibition and establishing foreign contacts.

   

    Trade Promotion Centre a government organisation for providing  such service to Nepalese businessman in Nepal.

   

Aids and Loans

ü  Government also gives aid and loans to another countries to make their product competitive in those receiver countries. Such fund assistance is known as tied aids or loans.

ü  Tied aid is especially important in winning large contracts for infrastructure such as telecoms, railways and power projects in other countries

Customs Valuation

ü  Since it is difficult for custom officials to determine, is the invoice prices are honest, they may randomly increase value and so design other valuation procedures that they control the trade.

ü  Since Nepal traders tend to use under-invoicing of their imports, the custom valuators are said to be generalized the cases and applied randomly valuation methods.

    All the above mentioned instruments are those that governments use in changing prices so that their domestic products become more competitive internationally

ii. NTB with Quantity  Control Effect

The following non-tariff barriers control the quantity or volume of the commodity to be imported:

ü  Quotas

ü  Border Regulation and standards

ü  Buy-local Legislation

ü  Specific permission Requirements

ü  Administrative Delays

ü  Reciprocal Requirements

ü  Restriction on services

Quotas

ü  The most common type of import or export restriction based on quantity.

ü  They are the numerical limits placed on specific classes of imports

ü  They mostly limits the quantity of a product permitted to be imported in a given year.

ü  This restriction on supply usually increases the consumer price because there is little incentive to use price as a means of increasing sales.

Quotas may be like

ü  Absolute: If quota is absolute, once level is reached no more import is permitted.

ü  Global :Total amount is fixed without regard to source  countries or from where they have be imported.

ü  Allocated :Here there is chances that the government of the importing countries assign quantities to specific countries.eg US quota allocation of sugar and garments to different countries such quotas also called discriminatory quotas.

ü  Tariff quotas: Imports exceeding a specified quantity are charged with customs duty or tariff it is called tariff quota

ü  Unilateral (one-sided)quota: It is the one in which the importing county imposes tariff by themselves without consulting the exporting country.

ü  Bilateral quota: It refers to the quota which is fixed under consultation of sides: importing and exporting countries

Buy local legislation/Local Content Requirements

ü  Such laws, government purchases give preference to domestically  made goods.

ü  By introducing such ‘buy local’ laws, government sometimes legislate preference for domestic products i.e. they specify a content restriction –that a certain percentage of the product be of local origin.

Border Regulation and Standards

ü  The importing country’s government can also impose its rules and regulation on the border administration. Such a regulation mostly include:

•      Product standard Certificates like ISO certificate

•      Hygienic and phyto-hygienic standards for human and plant health respectively.

•      Environment certificates like Eco-label.

•      Social clauses like prohibition of use of child labor.

Countries have set standards, classification and labeling in the manner that allows the sell of domestic products but bars that of foreign made ones.

Administrative Delays

ü  They create uncertainty and raise the cost of carrying inventory.

ü  They increases legal import procedures for imported goods  due to which goods reach late in the market which affects the quality or demand for goods

ü  Countries like Japan, South Korea 

ü  In south Korea it takes 30 days to clear the imported goods adding to inventory cost.

Specific Permission Requirements

ü  When countries require that potential importers or exporters secure permission from government authorities before conducting trade transactions, the requirement is known as an import Liscense.

ü  Another requirement is a foreign exchange control,which requires an importer of a given product to apply to a government agency to secure the foreign currency to pay for the product.

Reciprocal Requirements

Under this provision ,exporters promise to buy merchandise or service in the country to which they export.

Such practice is common in aerospace and defense industries-mostly importer is short of foreign currency to purchase what it wants.

Restriction on services

Apart from goods sales ,countries also gain from sale of such service like transportation, insurance, consulting and banking such service value for nearly 20% of the value of International trade. Countries restrict trade  for three main reasons

Essentiality– Countries consider certain service industries to be essential because they serve strategic purpose or because to provide social assistance to their citizen.

Restriction on service

Standards: Government impose such standards on professional skills of HRs or professionals delivering the service so that the foreign professionals cannot enter their countries and take away their citizen well paid jobs.In many parts of the world accounting or legal firms from one country cannot easily do business in another due to vast difference in professional requirements or standards imposed by the respective governments.

Immigration –government require companies to obtain  work permits if they are to bring workers from foreign countries such activities result uneasy immigration which aims to protect own citizen job

Effects of Tariff

ü  Consumption effect-Due to tariffs making  the import costlier, consumption of those products will decrease.

ü  Production effect-Because of the increase price and decreased consumption, the demand for imported goods falls. Then production of domestic goods increases.

ü  Revenue effect-Increase in tariff increases revenue of the government. luxurious goods may be very heavily taxed to increase government revenue.

ü  Redistribution effect –tariff on imported goods also affect the transformation of income from consumers to producers. It is to redistribute wage to labor, interest & dividend to capital and rent to land.

Redistribution Effect refers to the transfer of real income from the consumers to the producers as a result of tariff. The tariff-imposed price increase  results in the loss of consumer's surplus equal to the amount. Of the total loss suffered by the consumers,  amount is transferred to the domestic producers

International Financial System

ü  Financing is important to the operations of MNC’s and importers and exporters involved in the international trade.

ü  It  is a necessary precondition for smooth functioning and expansion of international business.

ü  Importer seek financing for the purchase of merchandise.

ü  Exporters need financing for the manufacturing of their products and maintenance of inventories.

ü  Multinational companies need financing for their operations.

International Financial System

International business managers face a lot of issue relating to the financial system concerned with their operation.

The financial system involves such key components as foreign exchange market and its operation, currency exchange control subsystem, central and commercial banking subsystem.

MNC’s as well as import and export companies must understand dynamics of foreign exchange and exchange rates if they were to survive in the market.

International financial System

ü  In a business setting, making payments in the domestic market is basically different from doing so abroad.

ü  In a domestic transaction, companies use only one currency.

ü  However, they can use two or more currencies in a foreign transaction.

Foreign Exchange and Foreign Exchange Market

ü  Foreign Exchange

    It is the money denominated(marked)in the currency of another country or group of countries.

ü  Foreign Exchange Market

   The market in which these foreign exchange transaction takes place is called foreign exchange market. It can be in the form of cash, funds available on credit and debit cards,traveller’s cheques, bank deposits or other short term claims.

International Financial System

ü  Exchange Rate

    It is the price of currency, usually in relation to another currency. The exchange rate is the number of one currency that buys one unit of another currency, and this is number under the play of the market forces may change everyday.

ü  Exchange rates make international price and cost comparisons possible.

ü  Currencies are mostly national like Nepali Rs., Chinese Yuan or US $.But with the emergence of economic union like European, a common currency euro has also been brought into the market.

ü  Foreign exchange transaction involve the purchase or sale of one national currency against the another like

    1 US $= NRS 88

ü  Firms needs to make payment for international business transactions may not have enough foreign currency on hand so they need to seek those parties who deals on those exchange. So, there is need of foreign exchange market for all individuals and institutions in order to contact one another for this purpose

Foreign Exchange Market

ü  The foreign exchange market (FOREX., FX, or currency market) is a form of exchange for the global decentralized trading of international currencies.

ü  Financial centers around the world function as anchor (i.e. secure) of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends.

ü  The foreign exchange market determines the comparative values of different currencies.

Parties in FOREX Market

ü  There is no central trading floor of foreign exchange market where buyer and seller would meet.

ü  Most Forex trade activities are completed by banks and foreign exchange dealers, using telephones,cellphones, cables and mails.

ü  As a worldwide market, the foreign exchange market operates 24 hours a day. The Forex market never sleeps.

                                                             (Parties in the FOREX Market)

                                                                 1.Exporter and Importers

                                                                  2. Parties involved in FDIs

                                                                     3.Portfolio Investors                

Parties in foreign exchange market

ü  The foreign exchange market is made up of many different players.

ü  Some players buy and sell foreign exchange because they are exporters and importers of goods and services.

ü  Other players buy and sell foreign exchange because of FDIs-both investing capital into and pulling dividends out of a country .

ü  Others are portfolio investors –they buy foreign stocks, bonds and mutual funds hoping to sell them at a more profitable exchange rate later.

ü  Other player are those investors who buys a foreign currency, because s/he hopes to sell the currency at a higher rate in the future (in technical language the currency "appreciates").

ü  These players objectives in buying and selling Forex are different and the players influence supply and demand for those currencies.

        Forex Market

       The Forex market has two major segments

ü  The “Over-the-Counter”(OTC)Market

ü  Securities Exchanges(The exchange-Traded Market)

OTC Market

ü  OTC market is not an organisation but an intangible market for the purchaser and sellers of securities not listed by the organized exchange.

ü  It is not a formal exchange like organized stock exchange.

ü  It includes banks(commercial and investment banks),speculators and brokers and it is where most of the Forex market activity of the country take place.

ü  It operates without any control as it has no government intervention and no government regulatory mechanisms.

Security Exchanges

ü  This market is comprised of securities exchange such as the Chicago Mercantile Exchange where certain types of Forex instrument are traded.

Characteristics of Forex Market

ü  A place where FOREX. instrument are traded.

ü  Remarkable for its size, composition, and location

     As per the information based on BIS, 1998 survey(Bank for International Settlements)the Forex market is such big that US $ 1.5 trillion is traded everyday in traditional instruments. This market is composed of several currency units with US $ dominating others in terms of its acceptability in the world. The market is located in several top cities of countries  like US,Japan,Singapore,UK

ü  The Forex market is characterized by the USD as the most widely used and dominant currency

Why the US $ is so widely traded ?

ü  US$ is an investment currency in many capital markets like New York, Mumbai Capital market.

ü  US$ is a reserve currency held by many central banks around the world like in our country NRB.

ü  The US$ is a major transaction currency in far many international commodity markets.

ü  The US$ is an invoice currency in many contracts.

ü  The US$ is an intervention currency employed by monetary authorities in market operations to influence their own exchange rates.

Function of Forex Market

ü  To transfer Purchasing Power

               The Forex market function for the transfer of purchasing power from one country to another and from one currency to another. It facilitates international trade and investments(capital movements).

ü  To provide for credit

              The Forex market make provisions for use of the credit required for international trade and investment. Exporter can get pre-shipment(packing credit) and post-shipment loans from financial institution and importers can get credit facilities like trust-receipt loans against LC documents.

ü  To provide hedging facilities

     Hedging is trying to protect one against losses due to fluctuations in currency exchange rates. In international trade, hedging tries to cover the export risk which provides mechanism to exporters and importers to guard themselves against losses arising from fluctuation in the exchange rates.

Role of Forex market

ü  Convert currency of one country to another

ü  Provide insurance against foreign exchange risks.

Different Forex Instruments

v  Spot

v  Outright forward

v  Currency Swap

v  Options

v  Future contract

Spot

ü  Spot rate is the number of units of one currency per unit of another currency.

ü  Spot Exchange Market deals with currency for immediate delivery. 

ü  Currencies are received 1 or 2 business days after an exchange has been agreed upon.

ü  The exchange rate used in spot transactions is called the spot exchange rate. It is the rate refers to the current exchange rate in FOREX trade

ü  It involve the purchase of and payment of foreign currency with delivery and settlement to be completed normally on the following day.

Outright Forward/Forward Contract/FX Forward

ü  It is the single purchase or sale of currency for future delivery

ü  It involves the exchange of currency three or more days after the date on which the traders agree to the transaction.

ü  In international banking system the forward rate is committed for delivery in the future commonly 30,60,90, or 180 days.

ü  Outright forwards valuable to importers and exporters

            Example:  You will import wine from France, to be delivered and paid for in 6 months.

You have agreed to a price of 500,000 francs.  With the spot exchange rate of .1457, this comes to $72,850.

Suppose the dollar weakens over the next 6 months, and the $/F exchange rate rises to .20.

The wine would cost you $100,000.  This is an example of foreign exchange risk!

Swap

ü  A swap that involves the exchange of principal and interest in one currency for the same in another currency. It is considered to be a foreign exchange transaction and is not required by law to be shown on a company's balance sheet.

ü  “ A swap is an agreement to buy or sell foreign exchange at pre-specified exchange rates where the buying and selling are separated in time, or borrowing one currency and lending another.”

ü  Swaps valuable to international investors and borrowers. In FX swap, one currency is swapped for another on one date and then swapped back on a future date.

ü  The reason companies use cross-currency swaps is to take advantage of comparative advantages. For example, suppose a U.S.-based company needs to acquire Swiss francs and a Swiss-based company needs to acquire U.S. dollars. These two companies could arrange to swap currencies by establishing an interest rate, an agreed upon amount and a common maturity date for the exchange.

Options

ü  Currency options give buyers the right or opportunity, but not obligation, to buy or sell foreign exchange at a pre-agreed exchange rate, the strike exchange rate.

ü  Call Option: Right to purchase

ü  Put Option: Right to sell

Future Contract

ü  A futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed today (the futures price or strike price) with delivery and payment occurring at a specified future date, the delivery date. The contracts are negotiated at a futures exchange, which acts as an intermediary between the two parties.

ü  It is traded on an exchange, not OTC .Instead of working with a banker, companies work with exchange brokers when purchasing future contracts.

ü  Let's say, for example, that you decide to subscribe to cable TV. As the buyer, you enter into an agreement with the cable company to receive a specific number of cable channels at a certain price every month for the next year. This contract made with the cable company is similar to a futures contract, in that you have agreed to receive a product at a future date, with the price and terms for delivery already set. You have secured your price for now and the next year - even if the price of cable rises during that time. By entering into this agreement with the cable company, you have reduced your risk of higher prices.

Cause of Exchange Rate Fluctuation

Differentials in Inflation

ü  As a general rule a country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies.

ü   During the last half of the twentieth century, the countries with low inflation included Japan, Germany and Switzerland, while the U.S. and Canada achieved low inflation only later.

ü  Those countries with higher inflation typically see depreciation in their currency in relation to the currencies of their trading partners.

ü  This is also usually accompanied by higher interest rates.

Differentials in interest rate

Interest rates, inflation and exchange rates are all highly correlated. By manipulating interest rates, central banks exert influence over both inflation and exchange rates, and changing interest rates impact inflation and currency values.

ü   Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise.

ü   The impact of higher interest rates is mitigate, however, if inflation in the country is much higher than in others, or if additional factors serve to drive the currency down.

ü  The opposite relationship exists for decreasing interest rates - that is, lower interest rates tend to decrease exchange rates.

Current-Account Deficits

The current account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest and dividends.

    A deficit in the current account shows the country is spending more on foreign trade than it is earning, and that it is borrowing capital from foreign sources to make up the deficit.

     In other words, the country requires more foreign currency than it receives through sales of exports, and it supplies more of its own currency than foreigners demand for its products.

    The excess demand for foreign currency lowers the country's exchange rate until domestic goods and services are cheap enough for foreigners, and foreign assets are too expensive to generate sales for domestic interests.

Terms of Trade

ü  A ratio comparing export prices to import prices, the terms of trade is related to current accounts and the balance of payments. If the price of a country's exports rises by a greater rate than that of its imports, its terms of trade have favorably improved.

ü    Increasing terms of trade shows greater demand for the country's exports. This, in turn, results in rising revenues from exports, which provides increased demand for the country's currency (and an increase in the currency's value). If the price of exports rises by a smaller rate than that of its imports, the currency's value will decrease in relation to its trading partners.

Political Stability and Economic Performance

ü  Foreign investors certainly seek out stable countries with strong economic performance in which to invest their capital.

ü   A country with such positive attributes will draw investment funds away from other countries perceived to have more political and economic risk. Political disorder, for example, can cause a loss of confidence in a currency and a movement of capital to the currencies of more stable countries.

Foreign Exchange Control

ü  Exchange control limit or prohibit the legal use of a currency in international transaction.

ü  Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by nonresidents.

ü  Official rates for currencies are considered currency exchange control. When we see the notation “official rate” next to a currency rate quotation. we will have  to know that the country has currency exchange control.

ü  Exchange Controls are applied mostly because the local currency is overvalued and thus causing imports to be paid for in smaller amounts of currency. Buyers then try to use the relatively cheap foreign exchange to obtain items either unavailable or more expensive in the local currency.

ü  Exchange control also limits the length of time and amount of money an exporter  can hold for goods sold. French exporters for example, must exchange the foreign currencies for francs within one month.

ü  From  a developing country’s point of view, exchange controls are the means to be used to achieve a number of national objectives include:

v  To improve the BOP position of the country.

v  To restrict inessential imports and highly luxurious consumption.

v  To facilitate import of priority items

v  To control the capital outflow

v  To maintain the external value of the currency

v  Banning the use of foreign currency within the country

v  Banning locals from possessing foreign currency

v  Restricting currency exchange to government-approved exchangers

v  Fixed exchange rates

v  Restrictions on the amount of currency that may be imported or exported

Exchange Control Technique

ü  To control the forex,the entire Forex resources of the country including those currently occurring to it are brought under the direct control of the country’s exchange control authority, which is mostly its Central Bank.

ü  It will so regulate that the exporters for example, will have to surrender the foreign exchange earnings in exchange for home currency and obtain the permission of the exchange control authority for making payments in foreign currency.

ü  Usually, the central banks or other central authority of the country administers the exchange control. Nevertheless it is usually the ‘registered’ private exchange dealers, largely the Forex departments of commercial banks that handle the day to day business of buying and selling Forex,under the regulatory supervision of the central bank

Forex Implication for International Business

ü  It is critical that international business understand the influence of exchange rates on the profitability of trade and investment deals. Adverse change in exchange rates can make ‘apparently profitable deals 'unprofitable.

ü  The risk introduced into international business transaction by changes in exchange rate is referred to as foreign exchange risk. Forward exchange rates and currency swap allow companies to insure against such Forex risks.

ü  Managers of International Business should also understand the forces that influence the exchange rates. If a company wants to know how the value of a particular currency is likely to change over the long term period on the Forex market, it should look closely at those economic fundamentals that appear to predict long run-exchange rate movements(i.e., the growth in a country’s money supply, its inflation rate, and its nominal interest rates)

Forex Implications for International Business

ü  For example, an international business should be very cautious about trading with or investing in a country with a recent history of rapid growth  in its domestic money supply.

ü  Due to rise in inflation, a profitable business in the foreign market may turn out to be unprofitable. In such a situation, the international business manager should take some precaution before doing so, such as buying currency forward on the foreign exchange market or structuring the deal around a counter-trade arrangement.

ü  The issue of currency convertibility complicates International Business. Due to currency convertibility restricted by the governments, international  trade and investment gets less lubrication(smoothness).

ü  Therefore, international business need to explore alternative mechanisms for facilitating international trade and investment that do not involve currency conversion. Counter trade can be an obvious mechanism.

Trends and types of Foreign Exchange Rate System

ü  Floating Exchange Rate System

     It is one in which market forces govern the Forex so that the exchange rate of two currencies is determined by the currencies’ demand and supply.

     It allows the market to determine the Forex rate on the parity(similarity) basis, expecting that the market corrects the differences, if any in the equilibrium

ü  Fixed Exchange Rate System

     It is the system that maintains the Forex rate at a fixed level through government participation in the market.

     The goal of doing so is to support the country’s development plans and balance its international balance and trade.

     The fixed Forex rate would change through currency devaluation and /or revaluation ,if the rate failed to maintain the country’s balance of trade and payment

Controlled(Managed)Exchange Rate System

ü   It is opposite of floating system. It is the system in which not the demand and supply forces of the currencies, but the government –usually its Central Bank- determines the rate.

ü  The government controls the rate as per the changes in its economic and monetary policy.

ü  The government doesn’t permit Forex trading in the market ,and control  the rate by means of monopoly purchase and sale of Forex through its central bank and government agencies.

ü  The system may be operated either with fixed rate-Controlled fixed rate system or with floating rate-Controlled floating system.

 Pegged Exchange Rate System

It is the system in which the value of currency is tied up to another foreign currency’s value or to the average value of basket of major foreign currencies.

ü  Weaker currencies are mostly pegged to stable foreign currencies. Currencies of Bhutan and Nepal have been pegged to Indian Rupees and Hong Kong, Angola and Panama to US dollars.

ü  Being pegged with the Indian Currency ,exchange rate of Nepalese do not directly change with the fluctuation of US dollars.

Role of International Financial Institution

ü  These supra-national and international organizations make up institutional arrangements for international business. Experts acknowledge the role of the following institution in international business

v  International Monetary Fund

v  Asian Development Bank

v  World Bank System or Group including IDA,IFC,IBRD,MIGA and ICSID

     With the end of World War II the major countries focused on establishing peace through UNO. After that in 1944,they gathered at Bretton Woods,In New Hampshire USA.They made decision to boost International trade economic growth to achieve monetary stability in global economy. The following organisation are outcome of  conference they are:IBRD and the World Bank Group,IMF and International Trade Organisation

International Monetary Fund

ü  IMF is the intergovernmental organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments.

ü  It is an organization formed with a stated objective of stabilizing international exchange rates and facilitating development through the enforcement of liberalizing economic policies on other countries as a condition for loans, restructuring or aid.

ü  The IMF was created to support orderly international currency exchanges and to help nations having balance of payment problems through short term loans of cash.

ü  Its headquarters are in Washington, United States.

HISTORY

ü  The International Monetary Fund was conceived in July 1944 originally with 45 members and came into existence in December 1945 when 29 countries signed the agreement

ü  IMF started to make service with IBRD in 1947.

ü  The IMF works to improve the economies of its member countries

Purposes of the IMF

ü  Promote international monetary cooperation.

ü  Expansion and balanced growth of international trade.

ü  Promote exchange rate stability.

ü  The elimination of restrictions on the international flow of capital.

ü  Help establish multilateral system of payments and eliminate foreign exchange restrictions.

ü   Make resources of the Fund available to   members

ü  Shorten the duration and lessen the degree of disequilibrium in international balances of payments.

ü  Promote international monetary cooperation, exchange stability, and orderly exchange arrangements.

ü  Faster economic growth and high levels of employment.

ü  Temporary financial assistance to countries to help the balance of payments adjustments

ROLE OF IMF

ü  Focusing on its core macroeconomic and financial areas of responsibility.

ü  Working in a complementary fashion with other institutions established.

ü  Collection and allocation of reserves. Rendering advice to member countries on their international monetary affairs.

ü  Promoting research in various areas of international economics and monetary economics.

ü   Providing a forum for discussion and consultation among member countries. Being in the center of competence.

FUNCTIONS OF IMF

ü  Surveillance (like a doctor) Gathering data and assessing economic policies of countries.

ü  Technical Assistance (like a teacher) Strengthening human skills and institutional capacity of countries.

ü  Financial Assistance (like a banker) Lending to countries to support reform

World Bank

Since inception in 1944, the World Bank has expanded from a single institution to a closely associated group of five development institutions. The world bank is  composed of four organization they are:

v  IBRD(International Bank for Reconstruction and Development)

v  International Finance Corporation(IFC)

v  International Development Association(IDA)

v  Multilateral Investment Guarantee Agency(MIGA)

v  International Centre for Settlement of Investment Disputes(ICSID)

v  On July 1, 2012, Jim Yong Kim became the 12th president of the World Bank Group.

1.International Finance Corporation

About IFC

IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector in developing countries. 

Established in 1956, IFC is owned by 184 member countries, a group that collectively determines our policies. Our work in more than a 100 developing countries allows companies and financial institutions in emerging markets to create jobs, generate tax revenues, improve corporate governance and environmental performance, and contribute to their local communities.

IFC’s vision is that people should have the opportunity to escape poverty and improve their lives.

Our Strategic Priorities:

·         Strengthening the focus on frontier markets

·         Addressing climate change and ensuring environmental and social sustainability<="" li="" style="margin: 0px;">

·         Addressing constraints to private sector growth in infrastructure, health, education, and the food-supply chain

·         Developing local financial markets

·         Building long-term client relationships in emerging markets

ü  It is another affiliate of the world bank.

ü   It is in “private sector arm” of the world bank.

ü  It came into force on July 20,1956.

   Objectives

ü  Further economic development by encouraging productive private enterprise in its member countries.

ü  It also aims at mobilizing capital in the international financial markets and providing technical assistance and advice to goods and businesses.

2.International Development Association

ü  Established in Sept 24,1960 is an affiliate of world bank and its head office is  in Washington D.C.

ü  It assists poor countries(with per capita income below 600$).

ü  Its main objective is to help the under-developed  countries in the task of raising their living standard.

ü  Its investment are focused on productive sectors like agriculture,industry,communications,water resources, education and transportation as well as technological and administrative services.

3. IBRD

International Bank for Reconstruction and Development Available in: العربية, Español, Français The International Bank for Reconstruction and Development (IBRD) aims to reduce poverty in middle-income countries and creditworthy poorer countries by promoting sustainable development through loans, guarantees, risk management products, and analytical and advisory services. Established in 1944 as the original institution of the World Bank Group, IBRD is structured like a cooperative that is owned and operated for the benefit of its 188 member countries. IBRD raises most of its funds on the world's financial markets and has become one of the most established borrowers since issuing its first bond in 1947. The income that IBRD has generated over the years has allowed it to fund development activities and to ensure its financial strength, which enables it to borrow at low cost and offer clients good borrowing terms.

ü  It was conceived at the Bretton Woods Conference in July 1994.

ü  Its operation began in June 25,1964.It is the first among the five organisation of World Bank.

ü  The bank aims at assisting reconstruction and development of member countries by facilitating investment capital for productive purposes.

ü  It also works to promote foreign investment and supplement private investment.

ü  Nepal became the member of World Bank on September 6,1961 under the Bretton Woods Agreement’s provision.

4.MIGA

ü  It focuses to encourage the foreign direct investment in developing countries by providing guarantees to foreign investor against losses caused by non-commercial risks such as currency convertibility, transfer restriction etc.

ü  It also provides technical assistance and advisory services to help countries strengthen the capacity of investment promotion intermediaries and distribute information on investment opportunities.

5. ICISD

ü  Investors all over the world  seek a dependable forum where their investment related disputes can be settled.

ü  Such a provision would rid them of the worries  about investments.

ü    ICISD is a component of the World Bank System that deals with this need.

ü  It helps to encourage foreign investment by providing international facilities for reconciliation and settlement of investment disputes.

ü  It also conducts research and publishing activities in the areas of settlement law  and foreign investment laws.

Asian Development Bank

ü  It is a multilateral development finance institution dedicated to reducing poverty in Asia and pacific.

ü  Established in 1966,the ADB is now owned by 63 members, mostly from the Asian region.

ü  Its headquarter is in Manila. It has 24 other offices around the world.

Objectives

ü  Reducing poverty in the Asian continent-Asia and Pacific.

ü  Promoting economic growth.

ü  Operationalisation of managing for development results.

ü  Managing for development results in support of poverty reduction in south Asia.

GATT  General Agreement On Trade and Tariff

ü  GATT (General Agreement on Trade and Tariffs) was established in 1947 by 23 countries.

ü  Objective of GATT was to negotiate reduction on trade restrictions and work towards common procedures for handling imports and exports.

ü  WTO is successor of GATT which is established  in 1995 January 1 after number of ministerial and other level meeting and exercised from 1986 to 1994.

ü  GATT rules follow four fundamental principles:

v  Consultation-Member countries need to consult each other in matters of trade and trade related problems.

v  A stable basis of trade-A stable and predictable basis of trade is provided under this rules.

v  Trade without discrimination.

v  Protection through tariffs-Protection to home industries can be provided only through custom tariff and not through any means to make the extent of protection clear to make competition possible.

GATT -Trade related Intellectual Property Rights

ü  The rules in the TRIPS agreement cover specific areas-copyrights, patents, trademarks, geographical names used to identify products, industrial design, integrated circuit, layout design and undisclosed information.

ü  TRIPS agreements state how ‘intellectual property’ should be protected when international trade is involved. The agreement on TRIPS lays down minimum standards of protection, which countries must provide for intellectual property rights.

ü  The agreement provides rules specifying the detailed obligations on governments to provide effective means of action by any right holder, foreign or domestic, to secure the enforcement of his or her rights.

Other key subjects of  GATT are

ü  General Agreement on Trade in Services-Promotes economic growth of all trading partners and development of developing nations by expanded trade in services under the condition of transparency and progressive liberalization.

ü  Technical Barriers to trade- It aims to ensure that technical regulations and standards are not formulated and applied so as to create unnecessary barriers to trade.

ü  Trade-related Investment Measures-WTO is also concerned with the removal of various controls imposed on the inflow of foreign capital into the third world countries.

GATT: Anti-dumping measures

ü  WTO allows members to apply anti-dumping measures. Such measures can be imposed on imports, if such dumped imports cause injury to a domestic industry.WTO provides procedures to be followed in initiating and conducting anti-dumping investigations.Anti-dumping measures can imposed as a defense against dumped imports, such measures are import quota, tariff duty, Voluntary Export Restraints(a type of import quota imposed by the exporting nation typically at the request of the importing country’s government.)

ü  NOTE- Dumping is an unfair trade practice. Instead of dumping their goods into sea or else, a firm may sell those dumpable or useless  goods in a poor country market at a very low price; sometimes even below their production cost. As example in Nepalese market there are goods like useless pen-torch batteries that firms from our neighboring countries have dumped into our market. Such low quality, dumpable batteries would never sell in developed  markets like Canada and USA,but are sold in our country as here the customer are poor and price sensitive. Here consumer are to suffered in terms of damaged product and  electric goods. Along with that in market other good products cannot compete in terms of price with such dumped goods, it affects the competition.

World Trade Organization

ü  The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations.

ü  It became effective since January 1,1995

ü  Nepal joined WTO in April 23,2004.

ü  Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.

ü  The goal is to help producers of goods and services, exporters, and importers conduct their business.

ü  The goal is to improve the welfare of the peoples of the member countries

World Trade Organization (WTO)

Principles of WTO:

1. Promote trade fairly without discrimination

2. National treatment – once goods have

entered

3. Predictable and growing access to markets

4. Promotion of fair competition

5. Transparency.

6.Encouragement to development and economic reform

7. Non discrimination provision

8. Rule based trading system

9. Competitive principle.

World Trade Organization (WTO)

Objectives of WTO

1. Raising standard of living and incomes,
2. promoting full employment
3. Expanding production and trade
4. Optimum utilization of world's resources,

5. Facilitate to the least development countries for the better share of trade.

World Trade Organization (WTO)

Function of WTO

1. Administer and implement trade agreement

2. Act as a forum for multi trade negotiations

3. Seek to resolve trade dispute

4. Oversee national trade policy

5. Cooperate with other international institutions involved in global economy policy making.

6.Maintain trade related database and provide technical support to the developing countries.

7. Act as a watch dog of international trade, constantly examining the trade regimes of individual members.

Opportunities and Expected Benefits

1.Trade Opportunities

     The biggest benefits of WTO for developing nations like Nepal is the increased opportunities of trade.Specifc trade opportunities expected are discussed below.

v  Security of market access opportunities after being member of WTO.

v  Uniform set of rules at customs has result all WTO members to work easily in international business.

v  Fair trade opportunities through elimination of quotas and subsidies.

2. Predictable Trading environment

     Trade policy review body in particular works to ensure that trade and custom rules of member states are harmonized under WTO system. As a result of the harmonized system, International business managers can predict how their products are treated in any other WTO member countries.

Opportunities and Expected benefits

3. Counter to unfair trade practices

     WTO provides for fighting unfair trade practices and trade distortion(worse) plans. It also helps safeguard domestic industries. Nepal can protect itself from those countries that would ever practice dumping of their goods in Nepali market and do unfair on Nepali goods.

4. Access to dispute settlement body

    Nepal, as a WTO member, has now secured the access to its DSB that offers a rule-based dispute settlement mechanism.

    WTO helps Nepal protect trade against rights and interest through its powerful Dispute Settlement Body(DSB)

Challenges and Constraints

1.  Market access Constraints/limits

v  Reduction of use of tariff preference which our country enjoyed before joining WTO.

v  Continuous reduction of  export commodity prices like price of Nepalese carpet is decreasing in international market.

v  Tariff barriers to poor countries to restrict them to export in rich nations.eg US use para tariff to discourage imports of agricultural goods from poor countries.

2.Threat to Domestic Industry from free imports

  It happens due to low competitiveness of Nepalese domestic industries.

3.Revenue loss to government due to reduced or removed tariff on import goods after joining WTO.

4. Intellectual property right and Bio-diversity Protection-Restriction of foreign companies on trade of agricultural goods and herbs by imposing IPR rights.

Regional Economic Groupings

ü  Two or more than two countries agree to follow the common tariff, para tariffs and non tariffs in particulars goods and service item can form a regional economic grouping.

ü  REG is possible among the close geographical proximity or neighboring countries.

ü  Each member of groupings should receive benefits from this agreement.

ü  Started from Europe in 1950.

ü  There are more than 30 economic groupings / trading blocs around the world,

ü  One third of the global trade occurs between countries that have some regional trading arrangements.

ü  Nepal entered in regional grouping in 1985 as a member of SAARC, and entered in regional economic grouping in 1993 as a member of SAPTA.

Some Regional Economic Groupings

1. South Asia Free Trade Agreement (SAFTA)
2. North American Free Trade Agreement (NAFTA)
3. Asia Pacific Economic Cooperation (APEC)
4. Association of South East Asian Nation (ASEAN)
5. Bay of Bengal Initiatives for Multi Sectoral Economic Cooperation (BIMST-EC)
6. ASEAN Free Trade Area (AFTA)
7. Central American Integration System (SICA)
8. Central European Free Trade Agreement (CEFTA)
9. Common Market for Eastern and Southern Africa (COMESA)
10. Gulf Cooperation Council (GCC)
11. Southern African Development Community (SADC)
12. Trans-Pacific Strategic Economic Partnership (TPP)

Implication of Economic Integration

Opportunities

ü  Business is opened within the region.Therefore,the trade barrier like quotas, tariff etc are removed. The efficient business firms can enter and expand to all the member countries within the region.

ü  The more efficient business help the less efficient business firms in other countries of the region in acquiring competencies in order to meet the challenges of business.

ü  The overall business performance in terms of productivity, quality price, delivery and customer service will increase.

ü  Customer get the best product at the lowest possible price.

ü  Employment opportunities in the region will increase.

ü  Economies of scale can be achieved within the bloc because of the target market.

ü  The level of cross-border merger, acquisition and technology transfer can increase.

Implication of Economic Integration

Threat

ü   The removal of trade barriers provides the opportunities to the efficient firms.Consequently,they compete with the less efficient firms. Most of these less efficient firms face the problem of even survival.

ü  A single market vanishes the price differentials.Consequently,the firm with the cost advantage wins the battle. The other firms having less cost advantage will have to go for various other measures to reduce the cost.

ü  The resources of less efficient economy in the region will be exploited by the firms of the developing countries of the region.

ü  The less developed countries of the region will become mostly a consumption centers while the advanced ones will become the production centers.

Association of Southeast Asian Nations (ASEAN)

ü  Formed in 1967 by 5 members – Indonesia, Malaysia, the Philippines, Singapore, and Thailand and joined Brunei, Laos, Vietnam, Cambodia and Myanmar ( total members are 10).

ü   These countries are growing rapidly, with growth rate around 7%.

Asia Pacific Economic Cooperation (APEC)

ü  established by the East Asian and Pacific countries in 1989 having currently 21 members :

ü  Australia, Brunei, Canada, Chile, China, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, Philippines, Republic of Korea, Singapore, Taiwan, Thailand, and USA.

ü  The secretariat is in Singapore.

ü  APEC is centre for economic dynamism and world economic growth.

NAFTA (North American Free Trade Agreement)

ü  The North American Free Trade Agreement or NAFTA is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America.

ü  Came into force on January 1, 1994.

ü  This agreement focus on breaking down the trade barriers and liberalization of government rules  concerning trade in services, Intellectual property rights and environment protection.

ü  It has led to significant flow of trade and investment across the borders of these countries.

Levels of Economic Integration

Regional Economic Grouping

1. Preferential Trading Agreement (PTA):

ü   Loosest form of Regional Economic Integration,

ü  Countries are agree to trade goods and services on preferential terms,

ü  Tariffs rate are reduced and quotas are fixed

ü  It is just an agreement but not an economic integration.

ü  Example – South Asian PTA  (SAPTA)

Regional Economic Grouping

2. Free Trade  Area(FTA):

ü  One step more free than PTA.

ü   Eliminate tariffs and non tariffs restrictions among  regional members.

ü  Either applicable particular items or all items

ü  Existing FTAs : NAFTA, ASEAN FTA (AFTA), European FTA (EFTA)

ü  Free to impose tariffs on their imports from third country.

Regional Economic Grouping

3. Custom Union

ü  One step more free than FTA.

ü  Free trade within a union / member countries,

ü  Common external tariffs countries which is applied to imports from the rest of the world.

ü  The resources raised through this tariff system are shared among the member countries proportionately.

Regional Economic Grouping

4. Common Market:

ü  One step more free than Custom union.

ü  Free movement of factors of production : capital, labour, enterprises, and technology among the member countries,

ü  All business methods, rules on competition, procedures and policies are harmonized among the member countries.

Regional Economic Grouping

5. Economic Union (EU):

ü  One step more free than Common Market.

ü  It is integration of economic policies.

ü  All members use a common currency,

ü  Harmonies monetary policies, taxation and government  spending,

ü  Member countries abandon the national interest for the common interest of the member countries ( union)

ü  European union is the example of EU.

Regional Economic Grouping

6. Political Union (PU):

ü  Ultimate goal of economic union is the eliminate of the political border of the member countries,

ü  In PU, all member countries follow single foreign policy, security policies,

ü  Federal system is the example of the PU.

Regional Economic Grouping

SAARC:

ü  South Asian Association for Regional Cooperation ( SAARC) has been established in December 7, 1985 aiming to work together for the regional socio economic development of the members countries through mutual cooperation.

ü  It is a regional groupings of Eight (then Seven ) countries ( Afghanistan, Bangladesh, Bhutan, India, Pakistan, Maldives, Nepal and Sri Lanka).

ü  Regional cooperation has play important roles in development of the regional economies. In Asia there are various regional economic groups like BIMSTEC, APEC, ASEAN, SAARC.

European Union

ü  The European Commission now called EU was formally established by the Treaty  of Rome in 1957.

ü  It is an institution of 27 independent countries that have committed to develop close economic and political cooperation.

ü  EU is therefore, the largest and most complete of all the regional economic groups in the world.

ü  It had started just as an custom union, but the formation of the European Parliament and the establishment of a common currency, the euro, has made it the most ambitious and advanced of all the regional trade groups.

ü  The countries that are member of EU are still independent sovereign nations but they pool their sovereignty in order to gain a strength and influence the world which the country individually or independently cannot achieve.

South Asian Preferential Trade Arrangement (SAPTA )

ü  SAPTA is an important milestone for regional economic cooperation in South Asia.

ü  SAPTA was signed in April 1993 and came into operation from 1995.

ü  It is an agreement on trade of SAARC countries which provides each other the preferential treatment to reduce import tariffs on preferential items in South Asian countries.

Basic principles of SAPTA

ü  Overall reciprocity and mutuality of advantages.

ü  Step by step negotiations and periodic reviews to improve and extend preferential trade arrangement in successive stages

ü  Inclusion of all products ( raw, semi processed and processed)

ü  Special and favourable treatment to least developed countries ( Bangladesh, Bhutan and Nepal).

Objectives of SAPTA:

ü  Concession on Tariff ( Custom duties), Non tariff measures ( rules and regulations, quotas, subsidies, Local content requirements)

ü  Promoting mutual trade, contracts for imports and supply.

ü  Negotiate step by step improving and extending in successive stages with periodic reviews.

South Asian Free Trade Agreement ( SAFTA)

ü  SAPTA is an agreement on trade of the SAARC countries which provides each other the preferential treatment to reduce import tariffs on preferential items.

ü  SAARC countries created the South Asia Free Trade Agreement (SAFTA) a framework for the establishment of a free trade area.

ü  It was signed on January 6, 2004 but went into force on January 1, 2006. Under this agreement, SAARC members will bring their duties down to 20 per cent by 2007.

ü  This agreement will be fully implemented by December 31, 2015.

Objectives of SAFTA

ü  to strengthen intra-SAARC economic cooperation and maximize the region's economic and social potential through various instruments of trade liberalization to reduce tariffs to 0-5 per cent by December 31, 2015.

ü  to make benefit the small economies of countries like Bhutan, Maldives and Bangladesh.

ü  to strengthen intra-SAARC economic cooperation

ü  to maximize the realization of the region’s potential for trade and the development of their people.

ü  to eliminate barriers to trade and facilitating the cross-border movement of goods between contracting states promoting conditions for fair competition;

ü  to eliminate of tariffs, para tariffs, and non tariff barriers.

ü  to create a ‘South Asian Economic Union’.

Impact of SAPTA and SAFTA

ü  Increase in trade, investment and promotion of the tourism sector,

ü  Decrease price of the imported goods, reduces the conflict.

ü  Accelerate the economic growth.

Limitation / Barriers on implementation of SAFTA

ü  Members countries are not similar in their size, GDP, population and socio cultural aspects.

ü  Conflict between countries, production of similar agricultural goods

ü  Informal trade is increasing in border.

ü  Intra regional flow of capital and technology is very limited due to the greater flow of primary commodities within the region.

BIMSTEC

ü  Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation

ü  Member countries - Bangladesh, India, Sri Lanka and Thailand agreed to establish BIST-EC on 6 June 1997 as a new sub regional grouping .

ü  On 22 December 1997, Myanmar received membership and the name changed to BIMST-EC.

ü  Nepal and Bhutan  received full membership in 2004.  Now, total 7 countries are member of BIMST-EC

Objectives of BIMST-EC

ü  to create an enabling environment for rapid economic development, accelerate social progress in the sub-region,

ü  to promote active collaboration and mutual assistance on matters of common interest, provide assistance to each other in the form of training and research facilities,

ü  to co-operate more effectively in joint efforts that are supportive of, and complementary to national development plans of member states,

ü   to maintain close and beneficial cooperation with existing international and regional organizations, and cooperate in projects that can be dealt with most productively on a sub regional basis and which make best use of available synergies.

Different bt. SAFTA & BIMST-EC

SAFTA & BIMST-EC

BIMSTEC Priority Sectors

1.Trade & Investment,

2. Technology,

3. Energy,

4. Transport & Communication,

5. Tourism,

6. Fisheries,

7. Agriculture,

Nepalese Business in South Asia

Major regions in Asia:

1. East Asia
2. South East Asia
3. South  Asia

East Asia & South East Asia

East Asian Countries : Japan, South Korea, Taiwan, China with Hongkong

South East Asian Countries : Cambodia, Myanmar, Indonesia, Laos (Landlocked), Thailand, Singapore, Philippines, Brunei, Malaysia, Vietnam, and Paua New Guinea.

East Asia & South East Asia

Features :

ü  Ranges the economies from high income economy to  low income economies.

ü  Heterogeneity in culture & economies

ü  Common features – high saving rates, high investment and high level of intra-regional cooperation.

Growth Potential of South Asia

ü  Market share is expanding in western countries in commodities like readymade garments, carpet, tea, cotton, leather, processed foods, gems and jewelry, computer software, agri- products.

ü  Natural resources base is very wide.

ü  Great potential in tourism, education, finance and information technology sector.

ü  Multilateral trading system in South Asia  helps to reduce poverty  through sustainable development.

ü  Market is expanding  since the population of South Asia is growing faster than other continents.

East Asia & South East Asia

ü   Can exploit the cheap labor market.

Barriers:

ü  Mass poverty

ü  Poor infrastructure

ü  Less facilities in trade

Questions to be discussed ?

ü  "Integration of local economy to the international economy has both merits and demerits". Comment this statement from the perspective of least developed country like Nepal.

ü  Discuss the arguments for and against Nepal's membership of WTO.

Chapter 5

International Strategic Management

•            A company’s strategy consists of the set of competitive moves and business approaches that management is employing to run the company

•            Strategy is management’s “game plan” to

–         Attract and please customers

–         Stake out a market position

–         Conduct operations

–         Compete successfully

–         Achieve organizational objectives

International strategic management

üInternational strategic management is a comprehensive and ongoing management planning process aimed at formulating and implementing strategies that enable a firm to compete effectively internationally.

üIt is also called global strategic management

üIt is the extended form of management that manages international business  through  strategic planning  and decision making , organizing ,leading and controlling functions in the global  context for achieving organisation goals that all concerned parties or stakeholders are satisfied.

International Strategic Management

ü  International strategic management results in the development of various international strategies, which are comprehensive frameworks for achieving a firm's fundamental goals.

ü  Managers developing a strategy for a domestic firm must deal with one national government, one currency, one accounting system, one political and legal system, and, usually, a single language and a comparatively homogeneous culture.

ü   Managers responsible for developing a strategy for an international firm must understand and deal with multiple governments, multiple currencies, multiple accounting systems, multiple political systems, multiple legal systems, and a variety of languages and cultures. These and other differences in domestic and international operations and how they affect a firm's strategy

Factors affecting international business

ü   Language

ü   Culture

ü   Politics

ü   Economy

ü   Governmental interference

ü   Labor

ü   Labor relations

ü   Financing

ü   Market research

ü   Advertising

ü   Money

ü   Transportation/ communication

ü   Control

Source of competitive Advantage

ü   International businesses have the ability to exploit three sources of competitive advantage unavailable to domestic firms.

ü   Global efficiencies. International firms can improve their efficiency with location efficiencies, economies of scale, and economies of scope. These are discussed on the next slide.

ü   Multinational flexibility. There are wide variations in the political, economic, legal, and cultural environments of countries, and these environments are constantly changing: new laws are passed, new governments are elected, economic policies are changed, new competitors may enter (or leave) the national market, and so on. International businesses thus face the challenge of responding to these multiple diverse and changing environments.

ü   Worldwide learning. The diverse operating environments of MNCs may also contribute to organizational learning. Differences in these operating environments may cause the firm to operate differently in one country than another. An smart firm may learn from these differences and transfer this learning to its operations in other countries. 

Global Efficiencies

Global Efficiencies

ü  International firms may achieve location economies by locating their facilities anywhere in the world that yields them the lowest production or distribution costs or that best improves the quality of service they offer their customers.

ü  Similarly, by building factories to serve more than one country, international firms may also lower their production costs by capturing economies of scale.

ü   By broadening their product lines in each of the countries they enter, international firms may enjoy economies of scope, lowering their production and marketing costs and enhancing their bottom lines.

Pressure of cost reduction and local responsiveness

Firms operating in the global marketplace typically face two types of competitive pressures:

•                  Pressures for cost reductions

•                  Pressures for local responsiveness

•          Pressures for Cost Reductions and Local Responsiveness

Pressure for cost reduction

ü   They are the pressure on the firm to reduce cost of production i.e. value creation.

ü   Then, the firm will have to go for mass production and manufacturing a standardized product at a cheaper location.

Pressure for cost reduction

Pressure for local responsiveness

ü   This pressure demand the firm to be responsive towards the local needs and problems of the foreign country where it is operating.

ü   Pressure for local responsiveness arises from

v Difference in consumer tastes and preferences in different countries.

v Differences in infrastructure and traditional practices in different countries.

v Differences in distribution channels in different countries.

v Demands of host-government , federations of trade unions and civil society.

“You do not choose to become global.
  The market chooses for you,                  
  it forces your hand.”

Four Basic Strategies

International strategy

ü   In this approach ,a firm utilizes the core competency or firm-specific advantage it developed at home as its main competitive weapon in the foreign markets that it enters.

ü   It means it takes what it does exceptionally well in its home market and attempts to duplicate it in foreign market.

ü   Create value by transferring valuable core competencies(skills, product) to foreign markets that local /indigenous competitors lack.

ü    Centralize product development functions at home like R & D.

international strategy

ü   Establish manufacturing and marketing functions in local country but head office exercise tight control over it

v Limit customization of product offering and market strategy.

ü   McDonalds, IBM, Kellogg’s, Procter & Gamble, Wal-Mart, Microsoft ,Chaudhary Group-wai wai

ü   This strategy is effective if firm faces weak pressures for local responsive and cost reductions

advantages of international strategy

ü   Ability to exploit transfer core competencies to foreign markets.

ü   Increased market size.

ü   Greater returns on major capital investments or new products or processes.

ü   Greater economies of scale, scope or learning.

ü   A competitive advantage through location.

Disadvantages of International strategy

ü   Lack of local responsiveness(that may prompt protests and opposition in foreign countries)

ü   Inability to realize location economies

ü   Inability to exploit experience curve effect

Multi-Domestic Strategy

ü   Multi domestic strategy is a strategy by which companies try to achieve maximum local responsiveness by customizing both their product offering and marketing strategy to match different national conditions.

ü    Multidomestic strategy means companies implement a strategy that is more responding to local needs, values and demands. This usually happens on a regional basis, e.g. Mc Donald, Philips

ü   Production, marketing and R&D activities tend to be established in each major national market where business is done.

Multi-domestic strategy

ü   It is viewed as a collection of relatively independent operating subsidiaries, each of which focuses on a specific domestic market. In addition, each of these subsidiaries is free to customize its product, its marketing campaigns and its operations techniques to best meet the needs of its local customer.

ü   Product customized for each market.

ü   Decentralization control-local decision making

Advantages of multi-domestic strategy

ü   Customize product offering and marketing with accordance with Local responsiveness

ü   Minimized exchange rate risk

ü   Ability to make prompt decision to changing policies and market change and opportunities in the market.

Disadvantages of Multi-domestic Strategy

ü   Possess high cost structure

ü   Inability to realize location economies

ü   Inability to exploit experience curve effect

ü   Failure to transfer core competencies to foreign markets.

ü   Possibility to decrease in profit(due to high flexibility to the management of the subsidiary)

Global strategy

ü   A global corporation views the world as a single marketplace and has as its primary goal the creation of standardized goods and service that will address the needs of customers worldwide.

ü   The global strategy is almost the exact opposite of the multi-domestic strategy.

ü   Focus is on achieving a low cost strategy by gathering cost reductions that come from experience cost effects and location economies.

ü   This strategy does not focus on customize of firm’s product offering and market strategy to local conditions of the foreign countries, because customization raises cost

Global strategy

ü   This strategy enables the firm to go with aggressive pricing in the world market since it has the cost advantage over other firms.

ü   This strategy focus on pursuing low cost tactics.

ü   Effective where strong pressures for cost reduction and low demand for local responsiveness.

ü   Examples companies using global strategy are: Motorola, Texas Instruments and Intel

Advantages of global strategy

ü   Ability to exploit experience curve effect.

ü   Ability to exploit location economies.

Disadvantages of global strategy

ü   Lack of local responsiveness(that may prompt protests and opposition in foreign countries)

ü   Difficulty in handling the conflict from subsidiary employees over production system and marketing techniques.

Transnational strategy

ü   The transnational corporation attempts to combine the benefits of global scale efficiencies such as those pursued by a global corporation, with the benefits and advantages of local responsiveness, which is the goal of multidomestic corporation.

ü   To meet competition, firms aim to reduce cost, transfer core competencies while paying attention to pressure for local responsiveness.

Transnational strategy

ü   Many companies across the world have tried to adopt a transnational strategy, as firms are now so competitive. But it is not easy to implement.

ü   This strategy can be recommended when a firm faces high pressures for both cost reduction and local responsiveness and where there are opportunities for influencing valuable skills within the firm’s global network of operations.

Global learning

v Valuable skills can develop in any of the firm’s worldwide operation

v Transfer of knowledge from foreign subsidiary to home country, to other foreign subsidiaries.

Advantages of Transnational strategy

ü   Ability to exploit experience curve effect.

ü   Ability to realize location economies.

ü   Ability to customize product offerings and marketing in accordance with local responsiveness.

ü   Ability to gather benefits of global learning.

Disadvantages of Transnational strategy

ü   High cost of exercising flexibility form the headquarters.

ü   High cost of controlling and monitoring of subsidiaries.

ü   Difficulty of implementation due to organisation problems and complexity of the strategy.

Components of International business strategy

ü   After determining the overall international strategic philosophy of their firm, managers who engage in international strategic planning then need to address the four basic components of strategy development.

ü   These components are distinctive competence, scope of operations, resource deployment, and synergy. Each will be discussed on the following slides.

Distinctive competence

ü   Distinctive competencies answers the questions "What do we do exceptionally well, especially as compared to our competitors?”

ü   A firm's distinctive competence may be cutting-edge technology, efficient distribution networks, superior organizational practices, or well-respected brand names.

ü   Without a distinctive competence, a foreign firm will have difficulty competing with local firms that are supposed to know the local market better.

ü   The Disney name, image, and portfolio of characters, for example, is a distinctive competence that allows the firm to succeed in foreign markets. Whatever its form, this distinctive competence represents an important resource to the firm.

Distinctive competence

ü   A firm often wishes to use this advantage by expanding its operations into as many markets as its resources allow.

Scope of operations

ü  The scope of operation answers the question:” where are we going to conduct business.”

ü  Scope may be defined in terms of geographical regions, such as countries, regions within a country, and/or group of countries.

ü   It may focus on market or product niches within one or more regions, such as the premium-quality market niche, the low-cost market niche, or other specialized market niches.

Scope of operations

ü   Because all firms have finite resources and because markets differ in their relative attractiveness for various products, managers must decide which markets are most attractive to their firm.

ü   Scope is tied to the firm's distinctive competence: if the firm possesses a distinctive competence only in certain regions or in specific product lines, then its scope of operations will focus on those areas where the firm enjoys the distinctive competence.

Resource deployment

ü   Resource deployment answers the questions “Given that we are going to compete in these markets , how will we allocate our resources to them?”.

ü    Resource deployment might be specified along product lines, geographical lines, or both.

ü   This part of strategic planning determines relative priorities for a firm's limited resources.

ü   For example: even though Disney will soon have theme park operations in four countries, the firm does not have an equal resource commitment to each market.

Synergy

ü   Synergy answers the question “How can different elements of our business benefit each other?”.

ü   The goal of synergy is to create a situation where the whole is greater than the sum of the parts.

ü    Disney has excelled at generating synergy in the United States.

ü    People know the Disney characters from television, so they plan vacations to Disney theme parks.

ü   At the parks they are bombarded with information about the newest Disney movies, and they buy merchandise featuring Disney characters, which encourage them to watch Disney characters on TV, starting the cycle all over again.

Levels of international strategy

ü   Given the complexities of international strategic management, many international businesses, especially MNCs,find it useful to develop strategies for three distinct levels within the organization.

ü    These levels of international strategy are illustrated in Figure in the text.

ü   Each will be discussed on the following slides.

 Levels of International strategy

Levels of Strategy

Corporate level strategy

ü  Corporate strategy attempts to define the field of businesses the firm intends to operate.

ü   The single-business strategy calls for a firm to rely on a single business, product, or service for all its revenue. The most significant advantage of this strategy is that the firm can concentrate all its resources and expertise on that one product or service. However, this strategy also increases the firm's weakness to its competition and to changes in the external environment.

ü   Related diversification, the most common corporate strategy, calls for the firm to operate in several different but fundamentally related businesses, industries, or markets at the same time. This strategy allows the firm to leverage a distinctive competence in one market in order to strengthen its competitiveness in others. The goal of related diversification and the basic relationship linking various operations are often defined in the firm's mission statement.

ü  A third corporate strategy international businesses may use is unrelated diversification, whereby a firm operates in several unrelated industries and markets.

business strategy

•          Whereas corporate strategy deals with the overall organization, business strategy focuses on specific businesses, subsidiaries, or operating units within the firm. Business strategy seeks to answer the question "How should we compete in each market we have chosen to enter?"

•          Firms that pursue corporate strategies of related diversification or unrelated diversification tend to bundle sets of businesses together into strategic business units (SBUs).

•          In firms that follow the related diversification strategy, the products and services of each SBU are somewhat similar to each other.

•          A differentiation strategy attempts to establish and maintain the image (either real or perceived) that the SBU's products or services are fundamentally unique from other products or services in the same market segment.

business strategy

•          The overall cost leadership strategy calls for a firm to focus on achieving highly efficient operating procedures so that its costs are lower than its competitors'. This allows it to sell its goods or services for lower prices. A successful overall cost leadership strategy may result in lower levels of unit profitability due to lower prices but higher total profitability due to increased sales volume.

•          A focus strategy calls for a firm to target specific types of products for certain customer groups or regions. Doing this allows the firm to match the features of specific products to the needs of specific consumer groups. These groups might be characterized by geographical region, ethnicity, purchasing power, tastes in fashion, or any other factor that influences their purchasing patterns.

Functional strategy

ü  Functional strategies attempt to answer the question "How will we manage the functions of finance, marketing, operations, human resources, and research and development (R&D) in ways consistent with our international corporate and business strategies?“

ü   International financial strategy deals with such issues as the firm's desired capital structure, investment policies, foreign-exchange holdings, risk-reduction techniques, debt policies, and working-capital management. Typically, an international business develops a financial strategy for the overall firm as well as for each SBU.

ü  International marketing strategy : concerns the distribution and selling of the firm's products or services . It addresses questions of product mix, advertising, promotion, pricing, and distribution.

International operations strategy : deals with the creation of the firm's products or services. It guides decisions on such issues as sourcing, plant location, plant layout and design, technology, and inventory management.

International human resource: strategy focuses on the people who work for an organization. It guides decisions regarding how the firm will recruit, train, and evaluate employees and what it will pay them, as well as how it will deal with labor relations.

 International R&D strategy is concerned with the size and direction of the firm's investment in creating new products and developing new technologies.

strategic planning process

ü   International strategic planning it totally based on the prior research and data collection and analysis of market situations and other external environmental forces.

ü   It is necessary to consider the principles of competitive strategy formulation

ü   Plans are normally formulated by the middle level management or professionals after carefully considering SWOT analysis that involves strength and weakness of the company and opportunities and threat identified through the studies of the external environment forces in the world markets.

International strategic plan

It is a strategic document that

•              Guides to implement a corporate strategic and tactical activities

•              Presents the rationales behinds the strategies

•              Inform external environmental pressure for cost reduction or price differentiation.

•              Inform which and how a company should use or develop its competencies and innovative strategies.

•              Advices on the measures to deal with challenge or threat

StrategiC Planning

ü   Strategic planning is usually the responsibility of top-level executives at corporate headquarters and senior managers in domestic and foreign operating subsidiaries.

ü    Most larger firms also have a permanent planning staff to provide technical assistance for top managers as they develop strategies. Disney is the opening case for this chapter.

ü   Disney's planning staff, for example, gathered demographic and economic data that the firm's decision-makers used to select the French site for Euro Disney and the Hong Kong site for its latest Asian park.

strategiC planning process

•              Selection of priority markets(Assessing and analyzing of markets).

•              External environmental analysis(domestic, foreign, international).

•              Internal environmental Analysis(company’s internal environment )

•              Vision,mission,value,objective and quantitative goals.

•              Formulation of company strategies-basic organisation strategies, market expansion and entry strategies, operational strategies.

•              Implementation facilitators- sales forecast, budget, policies, procedures and performance evaluation.)

International Strategic planning process

A .Selection of priority market

ü  When a company decides to expand its sales by entering into a foreign market the executive of the company must actively and wisely select the priority markets. So, market research is necessary to identify the most promising markets.

ü  The most promising markets are selected by scanning and screening process of political, economic , legal , social , monetary etc.Three important areas are normally considered in selecting prospective markets

•               General market trends-market growth rates, market size, demand and supply, buyers preference and requirements, areas covered, economic factors, seasonality , transport cost, infrastructure and distribution system

International StrategiC planning process

Competition : Brand domination, competitors in the markets, roles of competitors ,product differentiation

Technology :Types of technology, prospect for  introducing new technology

B . Analysis of company’s external environments:

        When one or a group of markets is selected as prospective market for a company business expansion, second process in formulation of international strategic plan is to analyze the over all external environmental forces like the domestic or national environmental forces,         foreign environmental forces and international environmental forces.

 International Strategic planning process

C. Internal Environmental Analysis:

ü   Analysis of internal environmental forces involves review of forces that are under the company’s control and command.

ü   It involves not only situational analysis but also forecast of future strength and potential risks.

ü   Analysis of internal environmental forces involves all value creating activities starting from raw materials procurement process to the output reaches the end users. This analysis is also called value chain.

ü   Here, a company’s CEO or strategic Planning Committee will be ready to prepare SWOT analysis. It also forms the basis for the next process.

International StrategiC planning proCess

D. Vision,mission,value,objective and Target:

ü  After a SWOT analysis is ready it is possible for the executive or CEO to define a company’s mission, vision and value and also to set the company objectives and quantify goals.

ü  Mission defines the purpose of a company’s business and existence. Vision statement is the description of the expected future position. And the value statement refers to the company’s fundamental values and beliefs. The objective statement indicates the company’s course of action towards the vision and mission. Target is associated with the quantification of the objectives. This will help to reach towards fulfilling objective and it will also form a basis for evaluation of success or failure in meeting objectives of a company.

International StrategiC planning proCess

E. Formulation of international strategy:

     International strategies are the action plans of company to achieve to enable  it to achieve the objectives. These action plans are also called competitive strategies. There are three broad areas where management of an international company has to make strategic decision are

     I . Basic organization strategies : international , global, multi-domestic , transnational strategy.

     ii. Entry modes : Various modes into international markets.

     iii. Operational strategies: Operational strategies are the action plans or programmes in various aspects of management that include production , financial , personnel and marketing. Managers or CEO has to bring out the operational plans or tactical plans that give in detail how the objectives and goals will be reached.

International StrategiC planning process

F. Implementation and evaluation mechanism:

     Once a company has detailed action plans it is important to have clear arrangements on programme implementation and performance evaluation. The main subjects and areas that have to be clearly indicated on strategic plans are:

•              Sales forecast(revenue)

•              Expenditures for implementation of action plans(budget)

•              Policies guidelines, with working manuals to the lower level managers.

•              Procedures on how the activities will be carried out and how budgets and reports are prepared in specified formats.

                                                                                                           

chapter 6

Entry into International Business and Strategic Alliances

Basic Entry Decisions

*            Which markets to enter?

*            When to enter the markets?

*            What scale of entry?

Which foreign Market ?

*             The choice among different foreign markets must be made on the basis of an assessment of their long run profit potential.

*             The attractiveness of a country as a potential market for an international business depends on balancing the

*          Benefits

*          Costs

*          And risk associated with doing business in that country.

*              The long run economic benefits of doing business in a country are a function of factors such as

*          The size of a market(in terms of demographics),

*          The present wealth(purchasing power)of consumers in that market,

*             One other factor of importance is the value that international business can create in a foreign market.

*             This depends on the suitability of its product offering to that market, and the nature of local competition.

*             If the international business can offer a product that has not been widely available in that market and that satisfies an unmet need, the value of that product to consumers is likely to be much greater than if the international business simply offers the same.

International Location Selection(Where)

*             Where, that is country and location within country depends upon a number of factors among them are:

*             Cost/Tax factors :

   Transportation, wage, availability of land and its costs, construction cost, materials cost , financing costs , tax rates, investment incentives , profit repatriation(take back home) costs.

*             Demand factors:

    Market size and growth, customer presence, local competition.

International Location Selection(Where)

*             Strategic factors: Investment infrastructure, industrial concentration, supply/distribution linkages, workforce productivity.

*             Regulatory /Economic factors: Industrial policies, foreign direct investment policies, availability of economic zones.

*             Socio-political factors: Political risk and instability, cultural barriers and openness, local practices, government efficiency and corruption, attitudes towards foreign business, community characteristics, pollution control.

Favorable

*          Politically stable developed and developing nations

*          Free market systems

*          No dramatic rise in inflation or private-sector debt

Unfavorable

Politically unstable developing nations.

Timing Of Entry/When should a firm enter the  foreign market ?

*             This relates to timing of market entry in comparison to other enterprises.

*             Timing is important because it determines the risks and potential returns from the investment.

*                           Once attractive markets are identified, the firm must consider the timing of entry

•      Entry is early when the firm enters a foreign market before other foreign firms

•      Entry is late when the firm enters the market after firms have already established themselves in the market

Why enter a foreign market early ?

First mover advantages include 

*                       the ability to block rivals and capture market share by establishing a strong brand name.

*                       the ability to build up sales volume and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants

*                       the ability to create switching costs that tie customers into products or services making it difficult for later entrants to win business(break into the market)

Why enter the foreign market late ?

*             The disadvantages associated with entering a foreign market before other companies are called first mover disadvantages and include pioneering costs or the costs that an early entrant has to bear that a later entrant can avoid. 

*             Studies have shown that the probability of failure is lower if a company enters a market after several other firms have already successfully entered the market.

*             What makes these pioneering costs so critical? 

*                       pioneering costs :arise when a business system in a foreign market is so different from that in a firm’s home country that the company has to devote lots of resources like time, and capital to learning the rules of the game.

*                   the costs of business failure if the firm, due to its lack of knowledge of the foreign environment, makes some major mistakes.

*                   the costs of promoting and establishing a product offering, including the cost of educating customers.

*                   The first mover could suffer if the regulation change, market changes or value of investment decreases.

Scale Of Entry & Strategic Commitment

On What Scale Should A Firm Enter Foreign Markets?

*             An international business also needs to decide on the scale of its entry into foreign market.

*             Entering a market on a large scale involves the commitment of significant resources to that project.

*             While not all companies have the resources necessary to enter on a large scale ,even some large enterprises prefer to enter foreign markets on a small scale and then build their presence slowly over time as they become familiar with the foreign market.

*             The consequence of entering of a significant scale are associated with the value of the resulting strategic commitments.

*             A strategic commitment is a decision that has a long term impact and is difficult to reverse.

*             Deciding to enter a foreign market on a significant scale is a major strategic commitment. Strategic commitment such as large scale market entry, can have an important influence on the nature of business.

Scale of Entry

Large scale entry

*          Strategic Commitments - a decision that has a long-term impact and is difficult to reverse.

*          May cause rivals to rethink market entry.

*          May lead to indigenous/local  competitive response.

Small scale entry:

*          Time to learn about market.

*          Reduces exposure risk.

*             Is There A “Right” Way To Enter Foreign Markets?

*            No, there are no “right” decisions when deciding which markets to enter, and the timing and scale of entry - just decisions that are associated with different levels of risk and reward

Entry Modes

*            Exporting

*            Turnkey Projects

*            Licensing

*            Franchising

*            Management contract

*            FDI

*           Greenfield strategy

*          Acquisition strategy

*          Joint Venture

Exporting

*             The simplest form of international business.

*             It can be defined as making a product in the firm’s domestic market place and selling it in another country.

*             It is generally performed through

•        Export agencies

•        Overseas marketing subsidiaries

*             Here in this method of international business ,it minimizes financial risk involved.

Advantages:

*         Avoids cost of establishing manufacturing operations.

*         May help achieve experience curve and location economies.

Disadvantages:

*         May compete with low-cost location manufacturers.

*         Possible high transportation costs.

*         Tariff barriers.

*         Possible lack of control over marketing representative.

Turnkey  Project

*             Is a contract under which a firm agrees to fully design, construct and equip a facility and then turn the project over to the purchaser when it is ready for operation.

*             Here a contractor agrees to deliver a project to a foreign party with technology, arranged supply of required inputs and trained operating supply of required  inputs and trained operating personnel and hand over key when it is fully operational.

*             There are contractors or producers of factories who have expertise to work under BOT( Build, Operate, Transfer)principle.

*             Such project is done mostly in petroleum refinery, Power generation and civil construction.

Advantages:

*         Can earn a return on knowledge asset.

*         It is less risky as it involves sales contract or technology transfer only. There is no longer term investment exposed to political, economic and legal risks.

Disadvantages:

*         No long-term interest in the foreign country(Absence of long term market presence)

*         There is transfer of technology in this business so it may create competition for exporting business of home country with the host country business as both uses same exporting technology.

Licensing

*             Here, a domestic company(Licensor) enters into a contract with the foreign company( Licensee)to perform certain specified tasks.

*             A firm called licensor sells the right to use its intellectual property –technology, works methods,patents,copyright brand names or trademarks to another firm called licensee in return for a fee.

*             A license agreements contains main provisions for terms(time),fee, territory and renewals.

*             Firms are not advised to use licensing in countries that offer weak protection for intellectual property, since they may have difficulty enforcing licensing  agreements in the host country’s courts.

*             The use of licensing may be encouraged by high tariffs and Non-tariff, which discourage imports or by host country restrictions on FDI or repatriation of profit.

*             Issues of licensing

*          Boundaries of the agreement

*          Compensation

*          Rights and privileges

*          Dispute resolution/decision

*          Duration of the contract.

Advantages:

*          Reduces costs and risks of establishing enterprise.

*          Useful in a country having restrictive FDI policies with many investment barriers.

*          Others can develop business by use of intangible property.

Disadvantages:

*          Low control over the use of technique and strategy.

*          Cross-border licensing may be difficult.

*          There is no chance to gain advantages of location and experience.

Franchising

*             Franchising is also a form of license that permits selling of goods or services in foreign market under a well known logo, brand name, trademarks.

*             Franchising allows the franchisor more control over the franchisee and provides for more support from the franchisor to the franchisee than is the case in the licensor and licensee relationship.

*             Here ,the franchisor  grants the independent operator the right to distribute its products, techniques and trademarks for a royalty or fee.

*             Various support services like advertisement, training etc are commonly made available by the franchisor.

*             The agreement normally lasts for five to thirty years

Franchising in Nepal

General terms in Franchising

*             The franchisor receives a fixed payment plus  a royalty based on the franchisee’s sales.

*             The franchisee agrees to stick to the franchisor’s requirement for appearance, financial reporting and operating procedures. However some degree of flexibility allowed to meet the local custom and taste.

*             The franchisor helps the franchisee establish the new business

*             Advertising

*             Corporate image.

*             Example: KFC,Bata shoes, coca cola company

Basic Issues in International Franchising

*             International franchising is likely to succeed when certain market condition exists:

Ø   The franchisor has been successful domestically because of unique products and advantageous operating procedures and systems.

Ø   The factors that contributed to domestic success are transferrable to foreign locations.

Ø   The franchisor has already achieved considerable success in franchising in its domestic market.

Ø   Foreign investors must be interested in entering into franchise agreements.

Advantages:

*          Franchisees can enter a business that has established and proven product and operating systems.

*          Franchisors can expand internationally with relatively low risk and cost.

*          Access to knowledge about local market.

Disadvantages:

*          Sharing profits.

*          Quality control/Maintaining standards.

Management Contract

*             It is a contract under which a domestic enterprise provides management services in all or some specific areas to a foreign firm for a fee.

*             A management contract is an arrangement under which operational control of an enterprise is vested(power and authority) by contract in a separate enterprise which performs the necessary managerial functions in return for a fee.

*             Management contracts involve not just selling a method of doing things (as with franchising or licensing) but involve actually doing them.

*              A management contract can involve a wide range of functions, such as technical operation of a production facility, management of personnel, accounting, marketing services and training.

*             In Asia, many hotels operate under management contract arrangements, as they can more easily obtain economies of scale, a global reservation systems, brand recognition etc.

*              It is not unusual for contracts to be signed for 25 years, and having a fee as high as 3.5% of total revenues and 6-10% of gross operating profit.

*             Management contracts have been used to a wide extent in the airline industry, and when foreign government action restricts other entry methods.

*             Management contracts are often formed where there is a lack of local skills to run a project.

*              It is an alternative to foreign direct investment as it does not involve as high risk and can yield higher returns for the company.

*             Many foreign management consultants are engaged in managing commercial banks and manufacturing units in Nepal like Himalayan Bank by Habib Bank of Pakistan,Surya Nepal by ITC of India

^*               The first recorded management contract was initiated by Qantas and Mr Duncan Upton in 1978^.

Foreign Direct Investment

*             Foreign direct investment (FDI) is direct investment into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

*              The investing company may make its overseas investment in a number of ways - either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture. 

*             Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region.

*             An example of foreign direct investment would be an American company taking a majority stake in a company in China.

*             Another example would be a Canadian company setting up a joint venture to develop a mineral deposit in Chile.

*             Exporting, Licensing and Franchising are specialized strategies that allow firms to enter internationalize its business without investing in foreign factories or facilities.

*             However, many firms prefer to enter international markets through ownership of assets in host countries.

*             Some firm establish themselves in foreign market through exporting, licensing or franchising.

*             After gaining knowledge of and expertise in that market then they focus on FDI.

*             Such FDI allows the firm increase control over its international business operations as well as increased profitability.

*            There are three methods for FDI:

*            Building new facilities (Called the Greenfield strategy)

*            Buying existing assets in a foreign country(called the acquisition strategy or the Brownfield strategy)

*            Participating in joint venture.

Greenfield Strategy

*             Starting a new operation from scratch .

*             The firm buys or leases land, construct new facilities, hires and /or transfers in managers and employees and then launches the new operation.

*             A Greenfield strategy is to enter into a new market without the help of another business who is already there.

*             It involves the establishment of a wholly new operation in a foreign country.

*             It is the direct investment that occurs when a firm headquartered in one country builds operating facilities or subsidiaries  in a foreign country.

*             The foreign operations  then become wholly own subsidiaries of the firm.

Advantages

*             Firm can select the sites that meet its requirements; often local communities offer economic development incentives to attract such facilities.

*             Clean start; no debts and past history

*             Can adjust itself to the new national business at its own pace.

Disadvantages

ü   Successful implementation takes time and patience.

ü   Often land in the desired location is unavailable or very expensive.

ü   In building new factory the firm must comply with various local and national regulations and oversee the factory’s construction.

ü   Must recruit local workforce and train it to meet the firms performance.

Joint Venture

*             It is an entity formed between two or more parties to undertake economic activity together.

*             Here, the parties in a JV agree to create a new entity by both contributing equity, and they then share in the revenue, expenses and control of the enterprise.

*             A new entity is formed either by two international companies for doing business in a third country or by an international company with a local partner or company.

*             The venture can be for one specific project only, or a continuing business relationship such as Fuji Xerox joint Venture.

Joint venture is often formed for four reasons

*             Competition to create a stronger competitive edge so as to influence structural evolution of industry of fight with the giants;

*             Strategic to complement synergies, technology and skills and to diversify the operation;

*             Legal-foreign laws prohibit sole ownership for an enterprise by foreign interest as in case of China and India.

*             Internal build on company strengths by improving access to financial resources , technology, critical Intellectual property, customers and innovative managerial practices.

Advantages:

*          Benefit from local partner’s knowledge.

*          Shared costs/risks with partner.

*          Reduced political risk.

*          Achieve local co-ordination &

   Co operation

Disadvantages:

*          May not realize experience curve or location economies

*          Shared ownership can lead to conflict.

Joint Venture

Examples are

*            Auto Alliance International(Ford + Mazda)

*            NUMMI(General Motors + Toyota)

*            CW Television Networks(Nokia + Siemens AG)

*            Verizon Wireless(Verizon Communications + Vodafone)

Acquisition

ü   It is also known as takeover, is the buying of one company by another.

ü   A merger of a bigger firm with smaller is normally termed as acquisition.

ü   A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm.
Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own.

ü   They occur when a company of relatively bigger in size or operation acquires another established company in the foreign market.

ü   It is a good strategy when a company wants to enter a foreign market rapidly and yet retains maximum control.

Why acquisition ?

ü   For product and geographic diversification

ü   For gaining expertise on marketing, technology and management.

ü   For having rapid entry into the market.

Merger

ü   Merger happens when two enterprises agree to go forward as a single entity, rather than remain separate.

ü   Stocks of both companies are surrendered and new company stocks are issued in its place.eg.

ü   Daimler –Benz and Chrysler were merged to form a new company called Daimler Chrysler .

ü   Two firms of about the same size are often merged.

ü   A merger happens when two companies decide to combine  into one large entity.

Merger & Acquisition

ü   Synergy advantage

ü   Economies of scale

ü   Staff reduction

ü   Acquire new technologies

ü   Improve production

ü   Marketing expertise.

Wholly owned Subsidiary Company

*             It is 100% owned and controlled by a parent company usually headquartered in a foreign country.

*             It is a separate entity in foreign country with its own management and financial structures.

*             Its scope is more than that of a foreign branch having less independency.

*             A subsidiary located outside the country operates more independently as separate division of a corporation

*             It can be established through Greenfield  investment or merger and acquisition.

*            Since, the parent company has the absolute control over it, then it becomes easier to achieve corporate objectives as there would be consistency in the policies and strategies.
Wholly Owned Subsidiary

Advantages:

*          No risk of losing technical competence to a competitor.

*          Tight control of operations.

*          Realize learning curve and location economies.

Disadvantage:

*          Bear full cost and risk.

Comparison of Greenfield and Acquisition

Nature :

A Greenfield investment involves the establishment of a wholly new operation in a foreign country. On the other hand, in case of acquisition, the firm only acquires an operating unit in a foreign market.

Speed of execution:

    Acquisition are quicker to execute than Greenfield investments. By strategy, it is an important consideration. If firms do not acquire a desirable target firm, then their competitors will.

Level of risk

    foreign firms are acquired because those firms have valuable strategic assets such as brand loyalty, customer relationship, trademarks or patents, distribution systems.

    Independence and flexibility

   Greenfields provide more independence and flexibility to the managers whereas managers feel it relatively rigid and inflexible when acquiring other firms or their subsidiaries. It is not easy and smooth to bring the acquired firm and its people and system into the parent company. It is easier in green fields, as they involve a wholly owned structure and independent management.

Strategic Alliances

*             They are those in which two or more firms jointly co-operate for mutual benefits.

*             It is a business to business collaboration or partnership to pursue a set of agreed upon goals or to meet a critical business need.

*             Here, there is alliances with resources or synergy is formed for joint efforts in production  capability,product,project finance,marketing,sales, distribution, design collaboration,   equipment, knowledge, expertise, technology licensing, intellectual property or research and development.

*             Each partner expects that benefits from the alliance will be greater than those from individual efforts.

Strategic Alliances

*             Moreover, it allows each partner to concentrate on activities that best match its capabilities ,and to learn developing competences that may be more widely exploited elsewhere.

*             The expanding global competition, need to reduce the cost of research and development ,urgent need for innovative product and service development and marketing, the need to move faster in carrying out their global strategies, and survive through increasing and diversifying exports by creating new businesses opportunities are the reasons for strategic alliances.

*             The objectives of strategic alliance are to achieve faster market entry and start up; gain access to new products, technologies and markets; gain  access to new products, technologies and markets; share costs, resources and risks; and take advantages of scale ,scope and speed.

*             IBM of the USA, Toshiba of Japan, and Siemens of Germany were major competitors at the international market level. But they formed an alliance or partnership to develop new generations of computer chips to defend themselves against the constant and unpredictable threats from small chip makers and copycats worldwide. These partners share the risks and rewards of the alliance.

Global Alliances, however, are different

*            Companies join to attain world leadership

*            Each partner has significant strength to bring to the alliance

*            A true global vision

*            Relationship is horizontal not vertical

*            When competing in markets not part of alliance, they retain their own identity

Characteristics of a Global Alliance

*            Players are independent prior to the creating of the alliance

*            Players share

*          benefits of the alliance

*          control over operations

*            Players continue to contribute

*          technology

*          products

Characteristics of a Strategic Alliance

*             Cooperative agreements between potential or actual competitors.

Advantages:

*         Facilitate entry into market.

*         Share fixed costs.

*         Bring together skills and assets that neither company has or can develop.

*         Establish industry technology standards.

Disadvantage:

*         Competitors get low cost route to technology and markets.

Alliances Are  Popular

*            High cost of technology development

*            Company may not have skill, money or people to go it alone

*            Good way to learn

*            Good way to secure access to foreign markets

*            Host country may require some local ownership

*            Problems with Strategic Alliances

*            Have to give up some authority/control

*            Could be strengthening a future competitor

*          Technology transfer

*          Management practices

*          Operating procedures

Selecting an Entry Mode

Entry Mode and Competitive Advantage

*             Advantage Based on Technological Know-How

*          Exporting, Licensing, or Wholly-owned subsidiaries

*          Examples: Honda, Intel

*             Advantage Based on Management Know-How

*          Franchising, Joint Ventures, or subsidiaries

*          Examples: McDonalds, Marriott

Questions

ü   As an international business person, how do you think do strategic alliances help you in expansion of global business? Explain

ü   How does the firm enter into international market?

ü   How does firm choice entry mode in international trade?

Chapter 7

Entry into International Business and Strategic Alliances

International Marketing

ü   When companies  go into international business, they need to have an understanding of global marketing.

ü   International marketing  can be defined as a marketing process of focusing the resources and objectives on global marketing opportunities.

ü   To identify those global marketing opportunities for developing marketing programme, organization need to perform market analysis.

ü   There are two factors that make international marketing more complex and different from domestic marketing. They are

ü   a. Global competition and b. global business environment.

Global competition

ü    Competitors with different strengths now come from all over the world. As the WTO and multilateral trade agreements also at the regional level has provided market access to so many countries, competition in all markets has unprecedentedly increased.

Global business environment

ü    It presents big differences in national government policies, cultural and income levels

International Marketing Management

American Marketing Association

    It is the multinational process of planning and executing the conception,pricing,promotion and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives.

Philip Cateora

     It is the performance of business activities that direct the flow of a company ‘s goods and services to consumers or users in more than one nation.

International Marketing Management

ü   It is a managerial process of responding to the internationally different uncontrollable factors in the firm’s environment while manipulating the controllable factors.

The primary goal of international marketing

ü   To take advantage of opportunities for growth and expansion

ü   To survive in the competitive market.

Primary goal of International Marketing

To take advantage of opportunities  for growth and expansion

ü   Companies need to create customer value and competitive advantage by maintaining focus/particular customer or market.

ü   It has to be more focused, which requires target marketing.

ü   Market segmentation is the tool for target marketing.

ü   Focus on using management  orientation  like geo-centrism, ethnocentrism and regiocentrism and polycentrism  as it provides basic guidelines to the marketing managers in dealing with the market.

To survive in the competitive market

ü   Companies failing to take advantage of the global opportunities for growth and expansion has to face the threat to their survival.

ü   It is because the markets all over the world have become more competitive and unpredictable.

ü   Such inefficient companies will eventually lose even their domestic  markets, because stronger and more competitive global competitors push aside the inefficient firms.

ü   Here, importance of global marketing is extremely high.

ü    The dynamic interplay of several driving  and restraining forces both market and organizational has made it more important today.

International Marketing

ü   The driving forces include market needs and wants,technology,transportation improvements cost,quality,global peace and harmony, world economic growth and recognition of opportunities to develop influence by operating globally.

ü   The restraining or limiting forces largely include market differences, management nearsightedness, organizational culture and national controls through law and practices.

Importance of International Marketing Management

ü   Growing world trade and foreign direct investment

ü   Growing share of export trade in the world GNP

ü   Growing number of multinational Companies

ü   Enhancement in information and technology

ü   Growing share of service sector in GDP and total trade

ü   Growing interdependence

ü   Globalization

Characteristics of International Marketing

ü    Multiple country operations: International marketing spread through in two or more countries as it relates to marketing in multiple countries. It is involved in movement of products across borders.

ü   Value creation: It creates value in global markets. The handmade woolen carpets and pashmina products gain added value when they are marketed in Europe and American markets.

ü   Customer satisfaction: It is based on the exchanges that satisfy individual and organizational customers in the global markets through simultaneous performance of social responsibilities.

ü   Target Marketing: It is more focused in its orientation as it is based on target marketing.

ü   Involvement of Global Programmes: It involves developing and implementing marketing programmes that relate to product, pricing and distribution areas for the global market.

ü   Gaining competitive advantage: It works for taking competitive advantage from the global market opportunities.

ü   Impact of international organisations:Its activities are influenced by international/supra-national organizations like the World Bank, WTO and IMF and so on.

ü   Impact of difference systems and rules: It is influenced by different economic systems and country specific rules. Economic systems vary from country to country.

ü   Concerned with MNCs:

    It is concerned with MNCs with global image ,as marketing globally involves MNCs in its dealing in one way or the other.

ü   Result of economic interdependence:

    Its activities not only result from economic interdependence among the countries but also grow on it.

International Marketing Positioning

ü   It is the global strategy to occupy the consumers minds with our company’s offerings, image and other marketing programmes including distribution network.

ü   It can also be said as to lead the company’s global customer credibly.

ü   It is about how to establish trustworthiness, confidence and competence for customers.

ü   If the company has those elements, customers will then have the “being" of the company or product within their minds.

ü   There is not so difference between domestic market and global market positioning.

ü   The only differences lies in the fact that in domestic market positioning  there is focus on domestic market and environment but in global market positioning we deal about the global market and environment.

ü   Positioning creates the company or its product image in consumers in relation to directly competitive products(e.g. compare wai wai and Indian Maggi noodles ) as well as other products marketed by the same company like close up and pepsodent both of the Unilever of Nepal.

ü   After the product is positioned, a degree of  differential advantage has to be indentified.

ü   A differential advantage refers to any feature of an organisation or brand perceived by customers to be desirable and different from those of the competition. At the same time, company has to avoid a differential advantage for its product.

ü   Re-positioning involves changing the identity of a product, relative to the identity of competing products, in the collective minds of the target market .

ü   The marketers plan position that distinguish their products from competing brands and give the greatest strategic advantage in their target market. For example, some of the ad lines of the car are

ü   Mercedes-”Engineered like no other care in the world”

ü   Ford Taurus- "Built to last”

ü   Jaguar –”A blending of art and machine”

Positioning Strategies

1.    Positioning in Relation to competitors

      For some products, the best option is to position its product directly against the competitors.

     This strategy is especially suitable for a firm that already have a solid differential advantage or trying to set such an advantage Example Coca Cola and Pepsi-Cola compete directly with each other in nearly every element of the marketing mix.(even in celebrity endorsement).

     Bollywood actor Amir Khan was made Coke’s brand ambassador to compete with Pepsi’s duo of Shahrukh Khan and Saif Ali Khan

2. Positioning in Relation to a Product Class or Attribute

    Sometimes a company’s positioning strategy requires associating its product with (or dissociating it from) a product class or attribute.

   Some firms promote their goods as being in a desirable class such as “made in America", or having an attribute, such as “low energy consumption "or “environmentally friendly.”

    Sometime what’s left out (rather than what’s in of)the product is emphasized e.g., low fat and cholesterol control, no added sugar etc.

3. Positioning by price and Quality

    Certain producers and retailers are known for their high quality and high prices. Example include Rolls Royce car and Toyota Car, Harley Davidson bike and a normal Indian bike.Here,the former example is for its high cost whereas the last example is popular for its cheapness.

4.Position in Relation to target market.

    Regardless of which positioning strategy is used, the need of the target market always must be considered. In this positioning strategy “Target market "is the focal point in positioning the product. For example: in case of Distillery company, they have liquors of different price and quality especially targeted towards the target market.

Process of International Market Positioning

1.Global Market Segmentation: Global market positioning starts with market segmentation. It involves two basic activites

–          Define the market

–          Segment the market in terms of measureablity,accessibility,profitablity and capturability .

2. Global Segmentation Evaluation: The segments identified and defined should be evaluated in terms of country attractiveness and competitive strength, large market size requiring invetment,joint venture etc.

3. Global target market/Segment Selection

     The segment evaluated best and most suitable for the company’s goal, resource and market reality are selected to develop as target markets.

4. Global market Positioning

     Here, the company position its product, service and image along with marketing programmes into target market.

The  International Marketing mix

ü  International marketing mix involves the plans and programmes on 4Ps (product,price,place,promotion)in the international market. A layout of external environment and internal factors influences the designing of the marketing mix. After an international firm has decided to enter a particular foreign market ,further marketing decisions must be made .In particular, international marketing managers must address four issues as given below or the international managers should consider the following mix.

v    International product policy and strategy(How to develop the firm’s product )

v    International pricing Policy (How to price those products )

v    International Promotion and Advertising Policy (How to sell those products )

v    Policy on International Distribution and Channels (How to distribute those products to the firm’s customers )

Standardization Vs Customization

ü   A firm’s marketers usually choose from three basic approaches in deciding whether to standardize or customize their firm’s marketing mix.

ü   Ethnocentric approach

ü   Polycentric approach

ü   Geocentric approach

Ethnocentric Approach

ü   With this approach the firm simply markets its good in international markets using the same marketing mix it uses domestically ,thereby avoiding the expense of developing new marketing techniques to serve foreign customers.

ü   When some firm first internationalize they adopt this approach believing that a marketing mix that worked at home should be as successful abroad.

Polycentric Approach

ü   This approach is far more costly because international marketers attempt to customize the firm’s marketing mix in each market it enters in order to meet the personal needs of customers in that market.

ü   Customization may increase the firm’s revenue if its marketers are successful in this task.

Geocentric approach

ü   This approach calls for standardization of the marketing mix, allowing the firm to provide essentially the same product or service in different markets and to use essentially the same marketing approach to sell that product or service globally.

Product Policy

ü   A key product policy decision facing international marketers is the extent to which their firm’s products should be standardized across markets or customized within individual markets.

ü   The laws and regulation of host countries may also affect the product policies adopted by international firms.

ü   Countries often imposes detailed labeling requirements and health standards on consumer products, that firms both foreign and domestic must follow strictly.

ü   International firms often must adapt their products to meet the cultural needs of local market.

ü   One typical adaptation is to translate the labeling on the product’s package into the primary language of the host country.

ü   A country’s level of economic development may affect the desired attributes of a product.

ü   A fundamental policy decision that the IB manager has to take is whether to sell to foreign markets the firm’s existing product or modify it to match with the needs of each foreign country. To be specific ,the product policy options are:

ü   Standardization: Exporting the home market product (standardized product)to foreign markets.

ü   Adaptation: Adapting the home market product to meet foreign customer’s needs more closely.

ü   Innovation : Developing new, innovative products to meet the specific needs of those foreign buyers.

ü   Deciding which one of the above options to choose requires the following activities

v      Analysis of foreign market needs

v      Appraisal of the market opportunity

v      Detailed product planning

1.Product standardization :It is to export/market a  product originally designed for a local market with almost no change in the product, except for the translation of words,eg Revlon exports successful product abroad without changing product formulation, packaging and advertising.

Why product standardization?

v  For simplicity and cost factor

Economies possible in production & D and marketing.

v  For consistent company image/product image

v  For marketing non-modifiable products

Recorded songs, work of art

v  For maintaining industry specifications

In case of high technology products, it removes confusion

v  For cultural universals

 A consumer segment shares similar needs

2. Product adaptation:

    It is also known as localization. It is to adapt the product to the condition of international target market. Hulas Biscuits and Confectionary adapts its product to the Indian market condition, which differs from Nepal’s. It aims at suiting the things in packaging and product attributes to local needs of the foreign market.

Why product adaptation?

v  To provide to differing conditions of product use

    -left hand drive vs. right hand drive

v  To adapt to different socio-economic activities

v  To address cultural differences

v  To match with legal conditions

v  To match with technological modifications

3.New Product Development(Innovation)

    It is to develop a new product for the new foreign market. Thus this product policy may also be described as  a variation on the product adaptation policy.

Why product innovation?

v  Innovative products carry significant  export potential

v  The marketers whose products face declining sales in one foreign market may find another foreign market with encouraging  demand for his product.

v  Innovative products improve the staying power of the international firm

Pricing Policy and Issue

    Pricing Policy is especially important in international marketing as it makes substantial effects on the following:

ü   Product Positioning

ü   Market Segmentation

ü   Demand Management

ü   Market Share dynamics

    Pricing is a important weapon or strategy. Many firms have used pricing as a strategy to survive and win the competition.

    Decisions on international pricing policy are influenced by so many factors. They require managers to consider Nature of product, Location of product locations, type of distribution system used and Economic climate of the foreign market.

The key pricing policies in international marketing are:

A.   Standardized pricing and Local pricing

      An international firm has to decide whether it uses standardized price in all foreign markets or use local pricing. Local pricing is the one in which different prices are charged in different markets, reflecting differences in consumer purchase power, distribution costs, tax systems or other market traits. Another option for the managers is standardized pricing in which the same price is charged for a product in all foreign markets.

B. Pricing Components :

ü   Pricing normally includes fixed cost, variable cost and profit.

ü    The price of the product depends on the cost measured in terms of fixed cost, variable cost and profit involved in production, management and distribution of the product.

ü   Besides that the pricing policy also considers demand and supply of the product as well as legal, economic and political forces in the foreign country market.

C. Aggressive Export Pricing:

ü    The pricing policy is to decide whether the firm chooses aggressive  export pricing or dynamic incremental pricing.

ü   Aggressive export pricing is the one adopted to gain market share and/or to remain competitive in international markets.

ü    One example of applying aggressive export pricing is dynamic incremental pricing: here it assumes certain fixed costs and does not feature in international promotion costs for domestic distribution and such pricing policy of the firm’s, product cost reflects only the variable cost of the product.

D.Penetration Pricing and Skimming Pricing

ü   Penetration Pricing is the policy in which a product is first priced below the price of competitors’ product so that it could quickly penetrate the market and then raise it to the target levels.eg.Compaq in European markets.

ü   Skimming Pricing is where the product is priced above that of competitors’ product when competition is minimal ,so that the firm can quickly recover investments. This pricing influences those buyers who are more concerned with quality, uniqueness and status of product rather than its price.

E. Transfer Pricing

 It involves the value of goods and services brought and sold by the different units or subsidiaries of a same company.

ü   On different occassions,they buy and sell goods between units or subsidiaries. Pricing the product for such intra-firm sales is known as transfer pricing.

ü   Example : McDonald’s branch in Amsterdam sells Potatoses to McDonalds in Bangkok and its branch in Toronto sells wheat flour to McDonald’s in Tokyo ,the objective of transfer pricing is to reduce cost of operation by bulk procurement, to ensure low cost supplies at high tariff markets etc.

International firms generally adopt one of three pricing policies

ü   Standard price pricing

ü   Two-tiered pricing

ü   Market pricing

    An international firm following a geocentric approach to international marketing will adopt a standard pricing policy, whereby it charges the same price for its products and services despite of where they are sold or the nationality of the customer.

ü   An international firm that follows an ethnocentric approach will use a two-tiered pricing policy whereby it sets one price for all its domestic sales and a second price for all its international sales.

ü    An international firm that follows a polycentric approach to international marketing will use a market pricing policy. A firm utilizing market pricing customizes its price on a market by market basis to maximize its product in each market.

ü   International Promotion and advertising Policy relates to the firm’s attempt on communicating with target customers in foreign markets.

ü   Communicating with its customer in foreign markets is more important in international marketing because geographical and psychological distances separate a firm from its intermediaries and customers.

ü   International promotion and advertising policies relate to the following decisions:

v  Choosing standardization or adaptation of promotion

v  Selecting media and methods

v  Selecting creative strategy

ü   International promotion Policy concentrates more particularly on advertising as personal selling is not much possible in international markets.

ü   However, there is some room for conducting direct marketing and sales promotion tools.

ü   The key issues in international advertising is whether the firm should standardize its advertising messages or adapt them to match with needs of particular foreign markets.

ü   Advertising strategy is an integral part of the promotion strategy which is an element of overall marketing strategy, International Advertising policy and strategy should be formulated within the framework of the marketing strategy  and its role needs to be clearly defined in helping achieve marketing goals.

Policy on standardization and Adaptation

ü    Standardization of advertising is the process of globalizing a company‘s promotional policy and strategy so that the promotional message is uniform in all its target markets.

ü   Adaptation of advertising is the act of changing a company’s promotional mix to each country or market, or creating local campaigns.

Policy on choice of media and Methods of Advertising

    Media are the vehicle of the promotion or advertisement of the firm, as it carries the promotional message and delivers it to groups. The ‘primary Areas” for setting media policy or strategy are:

ü       Availability of media

ü       Coverage of media

ü       Appropriateness/effectiveness of media

ü       cost of media

    The media chosen should be the one that is available and has the coverage to the foreign country market as planned and expected by the firm. The manager should select the media that is appropriate and effective for the planned purpose.

    For initiating its promotion and advertising campaign, an international business firm has two option to choose from

v      Using ad agencies (external)

v      Using company’s own advertising personnel(internal)

Policy on Creative Strategy

    Effectiveness of any promotional effort depends on creativity also. International business manager should also develop a creative strategy appropriate for its purpose. An international creativity strategy involves the following considerations, they are:

Language factors:

ü   A promotion message should be short and avoid slang or idioms. The foreign countries with low literacy rates, companies should not use more print or verbal ads, here visual aids will be best to use in such market.Eg the ads of European and Japanese companies are purely visual.

ü   The translation of language of the ad is also essential in many countries.Mc Donald’s in Japan and Thailand use local currency languages in their signboard  and other advertising pieces.

ü   There are chances of errors while encoding and decoding the firm’s slogans and tag lines in different national and cultural contexts. For example: the slogan  of KFC is “Finger-Lickin’ good "it would be translated into Chinese as “eat your fingers off”.’Come Alive with pepsi”would be culturally translated in Germany as “come alive out of the grave”

Legal factor:

ü   The promotional message although may be creative must not be used if the law of the country does not permit .

ü   Like in Japan, Korea and South Asia ,physically intimate scene between men and women are considered bad and illegal in Saudi Arab  and other Arab nations.

ü   Advertisement should not violate local cultures.

ü   Governmental controls and regulations relating to promotion and advertising should also be considered  like in Nepal ,government has banned the advertisement of Tobacco through electronic media.

Socio-cultural factor:

ü   Firm’s must consider the cultural diversity in different countries.

ü   The firm must be careful while using colors and man-women relationship like in Asia white relates with death and red relates with wedding and in western societies white gown is meant for bride. Thus ads should consider colors.

Production and Cost Factors:

     Highly artful advertisement shows creativity but it may be difficulty and costly to produce, it can be used if it can be made at low cost and focus is also to be made as the cost of commercials in different countries may vary (higher or lower).

International Distribution

ü   Distribution is one of the 4Ps of marketing mix, adds utility or value through distribution channels. Distribution assumes more a crucial place when the business goes international.

ü   International distribution system and channel link manufacturers and final international consumers.Internationally,distribution channels vary greatly from one region to another; and from one market to another.

ü   For most markets, consumer product channels of distribution be likely to be longer than industrial product channels.

ü   The channel characteristics differ worldwide. The following example shows such differences.

ü   In Japan, there are many more levels of distributors for consumer products than in most other countries, whereas, for most industrial goods, large export trading or export management companies deal directly with retailers there.

ü   In countries that follow socialism (economic system),distributors are huge state-run enterprise that often carry unrelated products. It is happening not only in China, but also in Nepal where government run or public enterprises National Trading Ltd. has been distributing goods ranging from manufacturing tools, to consumer goods like apparels, kitchen wares, to sugar.

ü   Most of the countries in Eastern and Central Europe are former communists .In those emerging markets, network Marketing is rapidly becoming  a very popular channel of distribution like Amway is the market leader and in Nepal like Unity and Herbo in the past days.

ü   After the production of goods and services, they should be put to the right place,i.e where the demand for them exists or where customers feel convenient to purchase them.

ü   It is so because the effectiveness of marketing depends on making the product available at the right place at the right time at minimum possible distribution costs.

ü   The way the product is delivered to the consumer is determined by the firm’s entry strategy as distribution strategy is a critical element in a firm’s international marketing mix.

ü   In the above figure, a typical international distribution system consists of a channel that includes a wholesaler(wholesaler distributor) and a retailer.

ü   If the firm manufactures its product in the particular country ,it can sell directly to the consumer, to the retailer, or to the wholesaler.

ü   The same options are available to a firm that manufactures outside the country.

ü   Along with that the firm decide to sell to an import agent, which then deals with the wholesaler, the retailer, or the consumer.

    Selecting a firm’s distribution system and channels in international markets is a critical policy decision in international marketing management .Generally, the key international distribution issues are as under:

1. Alternatives of established channels and building own channels.

     It is really challenging for companies to enter a new market abroad. In most cases, competitors already have the hold on existing distribution channels, and they naturally try to block new entrants. It may require the firm to build its own channel in the foreign market.However,initial channel selection is very important because once a company is in channel relationship ;it will be bound to that relationship ,and many not legally be allowed to change distribution channels later. So, company should make appropriate choice of these two alternatives.

Established Channel

    They are those distribution channels that already exists in a particular foreign country market. As discussed above, competitors may try to block new firms by keeping a hold on established channels. There are other obstacles to using established channels. The distribution channel may charge too higher on the new firms. Example: Philip Morris is a well Known world tobacco firm; it had to use overpriced distribution to enter the Hongkong market for selling its Kraft product.

Building own channels

     It is an alternative of creating new distribution channels especially necessary in situations in which there are no channels at all, or there are no channels that meet the company’s needs. The best example is what Coca-Cola faced in Eastern Europe after the fall of Communism in 1990.Although its competitor Pepsi had already been present in East European countries since the late 1960s,coke did not enter many of those countries until 1990s.When coke decided to enter this markets, it found that old state-run enterprises were distributing Pepsi products, operating with low efficiency. As, a result Coke had to create its new channels for which it had to work with independent truck drivers who had some experience working with soft drink retailers .It was much costlier to Coca-Cola

2. International physical distribution management (IPDM)

    It basically involves physical movement and handling of goods in international trade. It is the process by which products are made available to foreign market buyer when and where they want them. In recent years, the IPDM includes two categories of issue:

•          New/emerging Issue

•          Traditional Issue

New/Emerging Issue

a. Containerization:

    The global business and trade is moving towards containerized system of materials that are imported and exported across the borders. Containerization is a system that carries the traded goods in a container which is extremely safe from climatic effects, and secure from theft, breakage and damage. It is said that Containerization is a bonus to land locked countries like Nepal ,that have to depend on other countries 'port and transit route. There are many example where the goods are either stolen or damage in transit and even at the port. It requires dry port or ICD

b. Dry Port or ICD operations:

    Inland Clearance Depot or Inland Container Depot is also known as dry port. Such port are opened not on sea but on land. In Nepal’s case containerized goods-once at the port say Calcutta/Kolkata Port-are uploaded on a broad gauged railway and the whole container is forwarded to Sirsiya of Birgunj where is the Full fledged ICD (Dry port) of Nepal. Nepal has built the ICD in Birgunj under the World Bank’s IDA loan assistance; the Birgunj ICD has been connected with a broad gauged railway built under the Indian Government assistance from Kolkata Port

ü   In this process the service of multimodal transporters, clearing and forwarding agents as well as commercial banks involved in the L/C transactions is also extremely important.

    Normally, the physical distribution issues include order processing ,warehousing, inventory management and transportation. Order Processing includes the following three jobs:

ü    Order entry: It is one in which the order is actually entered into a company’s information system.

ü   Order handling: It involves locating and assembling into distribution.

ü   Order delivery : It is the process by which products are made available to the buyer in a foreign market.

ü   Warehousing : It is the process of storing the goods until they are sold.

ü   Inventory management: It is to ensure that a company neither runs out of manufacturing components or finished goods nor incurs any expense and risk of carrying excessive stocks of these items.

ü   Transportation: It relates to decisions on which of five methods to be used to move the firm’s goods; truck(road transport),air,water,rail or ropeway. Some countries also offer pipeline and cable cars as other means of transportation

Channels of Distribution

ü       A distribution channel consists of the set of people and firms involved in the transfer of title to a product as the product moves from producer to ultimate consumer or business user.

ü   Influenced by the international environment factors such as socio-cultural ,economic, government and legal and technological factors, the international distribution channel involves several individuals and institutions such as producers,suppliers,industrial users,brokers,import agents,wholesalers,retailers and consumers.

ü   The distribution channel system is exclusively characterized by the flow of physical goods and communication from the producer to foreign consumer. It also consists of  the flow of information and payments from the consumer to the foreign producer. The whole channel system is shown below:

   

Extra readings

Market screening/selection

ü   Method of scanning desirable markets based on environmental factors that disallow undesirable markets.

ü   Market screening is a useful first step for retailers or developers who are trying to identify the best locations in a large geography.

Decision criteria for international Marketing ?

ü   Political risk

ü   Market access conditions

ü   Factors availability and costs

ü   Infrastructure facilities and their cost

ü   Policy and regulations

Selection of target market

ü   Market access conditions

ü   Market size,trends and level of unit price

ü   The competitive position

ü   Regulatory environment

Market screening/selection

ü   Method of scanning desirable markets based on environmental factors that disallow undesirable markets.

ü   Market screening is a useful first step for retailers or developers who are trying to identify the best locations in a large geography.

Market screening/selection

ü   Method of scanning desirable markets based on environmental factors that disallow undesirable markets.

ü   Market screening is a useful first step for retailers or developers who are trying to identify the best locations in a large geography.

ü      What is market positioning in the context of international business? How it is achieved? Explain with examples.

ü   Identify the main pricing strategies available to international firms?

ü   A globally standardized advertising campaign, which uses the same marketing message all over the world has economic advantage but it fails to account for differences in culture. Do you agree or disagree? Why?