Rift Valley University

Sendafa Campus
International Marketing

Chapter I - Concepts of international marketing

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1.1. Definitions and distinctions
Different scholars define international marketing in different perspective. Some of the definitions
of international marketing are:
 International marketing as performance of business activities that direct the flow of
company’s goods and services to consumers in more than one nation for profit.
 International marketing as exchanges across national boundaries for the satisfaction of
human needs and wants.
 International marketing as marketing carried on across the national boundaries.
 International marketing as going beyond the export marketing and becoming more
involved in the marketing environment in which it is doing business.
International marketing refers to marketing activities by companies that emphasize the
following:
 Reduction of cost inefficiencies and duplication of efforts among their national and
regional subsidiaries
 Opportunities for the transfer of products, brands, and other ideas across subsidiaries
 Emergence of global customers
 Improved linkages among national marketing infrastructures leading to the development
of a global marketing infrastructure
International Marketing:
 Marketing of goods and services outside the basing country
 Set of measures for the sale of goods
 System of planning, implementation, monitoring and analyzing events
 System of measures for the study, development and meet the demand for goods and services
in foreign markets
 Promoting the goods and services to international markets
 Activities of international companies, the scope of industrial and commercial activities are
subject to the international markets
 Condition for an effective feedback between supply and demand on an international scale
 Market management concept of international activities of the company
 Philosophy and tools of international business

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 Developing the marketing strategies to sell goods abroad
 Marketing is based on the integration or standardization of marketing activities in different
geographic markets

1.2. Domestic marketing Vs IM

International marketing is much more complex because a marketer faces two or more sets of
uncontrollable variables originating from various countries. The marketer must cope with
different cultural, legal, political, and monetary systems.
The Company is subject to the risks of doing business internationally, including unexpected
changes in regulatory requirements, fluctuations in foreign currency exchange rates, imposition
of tariffs and other barriers and restrictions, the burdens of complying with a variety of foreign
laws, and general economic and geopolitical conditions, including inflation and trade
relationships.
A firm’s marketing mix is determined by the uncontrollable factors within each country’s
environment as well as by the interaction between the sets. For optimum results, a firm’s
marketing mix may have to be modified to conform to a different environment, though wholesale
modification is not often necessary. The varying environments within which the marketing plan
is implemented may often rule out uniform marketing strategies across countries.

The international marketer is prepared to source product outside the home country in order to
gain greater competitive advantage. The international marketer is less likely to rely upon
intermediaries and is more likely to establish direct representation to coordinate the marketing
effort in target markets.

International marketing 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 for a profit. The
only difference in the definitions of domestic marketing and international marketing is that the
marketing activities take place in more than one country.

Marketing that is targeted exclusively on the homes-country market is called domestic

marketing. A company engaged in domestic marketing may be doing this consciously as a

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strategic choice or it may be unconsciously focusing on the domestic market in order to avoid the
challenge of learning how to market outside the home country.
Difference between International Marketing and Domestic Marketing
Basis Domestic Marketing International Marketing
Definition “It is concerned with the marketing “It is the performance of business
practices within the researchers or activities designed to plan, price, promote
Marketers home country (domestic and direct the flow of a company’s goods
market).” and services to consumers or users in
more than one nation for a profit.”

Role of Politics Political factors are of minor importance. Political factors play a vital role
Languages & One language and culture. Many languages and difference in
Cultures cultures.
Financial Uniform financial climate Variety of financial climate
Climate
Risk Involved. Normal risk is involved Higher risks of different nature are
involved
Control of Control of marketing activities is easy as Control of marketing activities is difficult
Marketing compared to international activities. because of different factors like –
Activities regional, cultural, political, etc.

1.3. International trade concepts

International trade is a term that basically deals with the movement of goods and services
between countries distinct from normal corporate transactions involving buyers and sellers in
different countries. The international trade primarily reflects macro or aggregate supplies and
demand in different countries. The global trade, thus, involves major policy decisions by
governments of nations with regards to imports and exports as also national economic
development. These days, the trend is towards globalization of trade. This has resulted in
regional as well multilateral global agreements. A predominant role has been accorded to WTO
while determining trade policy by each nation.

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1.4. Export marketing and IM
Export marketing is the first stage of addressing market opportunities outside the home country.
The export marketer targets markets outside the home country and relies upon home-country
production to supply product for these markets. The focus in this stage is upon leveraging home-
country products and experience. A export marketer will study target markets and adapt products
to meet the specific needs of customers in each country.

1.5. Complexities In International Marketing

1. Market Differences
In every product category, differences are still great enough across national and cultural
boundaries to require adoption of at least some elements of the marketing mix (product, price,
advertising and promotion, and channels of distribution). Global marketing does not work
without a strong local team who can adapt the product to local conditions.
2. Brand History
Even in cases where the product itself may be a good candidate for globalization, a brand‘s
history may require a distinct and different marketing strategy and positioning in each country.
This is true even for high-potential products such as the image-driven brands. If a brand has an
established identity in national markets, it may not be possible to achieve a single global position
and strategy.
3. Management Myopia
In many cases, products and categories are candidates for globalization, but management does
not seize the opportunity. A good example of management myopia is any company that does not
maintain leadership in creating customer value in an expanding geographical territory. A
company that looks backward will not expand geographically.
4. Organizational Culture
The successful global companies are marketers who have learned how to integrate global vision
and perspective with local market initiative and input.

5. National Controls/Barriers to Entry

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Every country protects local enterprise and interests by maintaining control over market access
and entry. Today, tariff barriers have been largely removed in the high-income countries. The
significant barriers are the so-called non-tariff barriers that make it difficult for foreign
companies to gain access to a domestic market. The worldwide movement toward deregulation
and privatization, by breaking the link between government and enterprise, is an initiative that
will lead to a significant opening up of formerly closed markets.

1.6. Significance Of International Marketing

The role of foreign trade in economic development is considerable. The classical and neo-
classical economists attached so much importance to international trade in a country‘s
development that they regarded it as an engine of growth.
It provides the urge to develop the knowledge and experience that make development possible,
and the means to accomplish it. international trade has made a tremendous contribution to the
development of less developed countries in the 19th and 20th centuries and can be expected to
make an equally big contribution in the future…. And that substantial free trade with marginal,
insubstantial correction and deviations is the best policy from the point of view of economic
development‖.
As a result, unemployment and underemployment are reduced; domestic saving and investment
increase; there is a larger inflow of factor inputs into the expanding export sector; and greater
backward and forward linkages with other sectors of the economy.

The Importance of International Marketing can be classified as Macro and Micro level benefits

(A) Macro level benefits in national perspective: International trade results in macro-economic
effects for each economy. The imports and exports influence the employment, national income
and technology. The direct and indirect benefits emanating from international business are listed
below:

i) Increase in national Income: A country’s export activity promotes industrial and

trade activity that generates employment and income for various sections of society.
The multiplier effect of income increases the level of output and growth rate of

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 economy. Especially the export of wage-goods can help a developing country to
break the vicious circle of poverty and raise the real income of the country.
ii) Efficiency: While exporting, the countries try to attain specialization in production
of goods. In this process, there is optimum and efficient utilization of the resources.
The limited domestic market may act as a deterrent to the growth of industry and a
resultant under-utilization of resources. The international trade can help industry
grow and achieve scale and experience economies.
iii) Employment generation: Exports constitute a significant portion of different nations
and breed opportunities for more and gainful employment. In addition to reducing
direct unemployment, foreign trade reduces underemployment, e.g. exports of Swiss
watches engages the farmers in the watch industry during their free time resulting into
gainful utilization of their skills.
iv) Increased linkages: The staple theory of economic growth recognizes that foreign
trade results into increased backward and forward linkages with other sectors of the
economy. The industrial and trade linkages cause the development of new industries
and enhance efficiency of existing industries.
v) Optimal utilization of resources: International business makes possible the utilization
of agricultural resources as the farmers get a greater access to the overseas markets.
This transforms even the subsistence sector into monetized sector raising the
standards of living of rural populations.
vi) Educative effect: Exports and international business exposes the executives to
overseas market which develops greater skills in them. This removes a great
hindrance, often acknowledged as greater than scarcity of capital goods. The
entrepreneurial and management expertise generally helps an economy grow faster,
and traditional factors of production can be used more effectively.
vii) Promotes Foreign Direct Investment: The level of international business of a
country often becomes a basis for the flow of foreign direct investment in a country.
In today’s economic environment, it is difficult to grow in absence of FDI. Several
economies have grown following the heavy investments from other parts of the
world.

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 viii) Stimulates Competition: International business fosters healthy competition and helps
in checking inefficient monopolies. It is established that growth of competitive
economies is higher than the growth rate of protective economies. In recent times, the
nations have realized the benefits of healthy competition. Several developing and
erstwhile communist countries are promoting the same. Switching over to market-led
growth which invokes substantially international operations in business, services and
technology.
ix) Technology Sourcing: In today’s rapidly changing world, it is important to keep pace
with the changing technology. This is possible only when there exist linkages with
other national economies through international trade and business. The technology
driven industries such as information technology telecommunications, automobiles
derive immense synergy by their participation in trade across the world.
(B) Micro level effects of International Business: An individual firm can reap several benefits
by resorting to international marketing and international business.
i) Growth: By all standards, domestic markets have a limitation of growth potential. After a
particular level, it is very difficult for a firm to achieve growth. So, it is left with the option of
either product innovation or extending operations to other markets. The latter option is a better
way of sustaining growth as the product life can increase significantly when it is sold into the
world markets.
ii) Fighting Competition: As the protectionist measures by nations are being reduced, firms
operating in domestic market only are facing increased levels of competition. Instead of utilizing
their resources in fighting competitions, firms continue to look at markets in other countries to
cope up with domestic competition. Hence, international business operations provide avenues for
both survival and growth.
iii) Increased efficiency: By operating on global scale, a firm can select for its expansion
lucrative opportunities. Also, it can reduce its product costs through global sourcing and utilise
world level technology and talent for business operations. All this makes the business operations
more efficient and as a result it can realise higher return per unit investment. This boosts up
shareholder’s value and the company image.
iv) Scale economics: Higher level operations on account of international operations produce
benefits of scale and thus enhance the profitability of firm.
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v) Innovation: By operating in large markets, companies can afford to invest in research and
technology development. It is established that compared to traditional and mind set firms,
innovation driven firms can compete effectively.
vi) Risk Cover: By operating on global scale, the fluctuations of demand levels in an individual
country does not make much difference on the aggregate sales. Consequently, the uncertainties
arising out of risk factors on the operations localized to a country are reduced. Even the financial
risks, physical risks, politico-legal risks etc. can be managed more effectively by virtue of global
operations.

Chapter II - International Marketing Environment

2.1. Internal (Controllable) environment
The internal environment of a firm decides its competence to do business in
foreign countries. It is also called as the controllable component of international
business environment because the company can control it to a great extent. Some
of the components of internal environment are:
Mission: The firm’s mission decides the course of action that a firm will follow in
order to survive and grow. In the present times, the firms develop a few core
competences and develop their entire global business plan on its basis. They do not
dissipate their resources by venturing into too many businesses but concentrate on
their core strengths and do not mind outsourcing the rest.
Strategy: The mission translates into more operational paradigm in the form of
strategy, which operates at various levels. Firms often develop core competences,
but only a few are able to convert it into successful business.
Operations: The operations refer to the operating competence of a company i.e.,
how well it is able to undertake the work at the ground level. It is that paradigm of
the strategy, which can be implemented. A firm’s cost leadership, its marketing

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strategy, its production efficiency and the nature of its human resources have a
significant impact on the success of a company.
Although, the above components are called as the controllable components of
business environment, but in a strict sense, they might not remain controllable at
all times. The external uncontrollable components can become too powerful and
can even influence the strategy of a company.
2.2. External (Uncontrollable) environment
The external environment, also called as uncontrollable, has been divided into two
components, namely foreign and international. The foreign environment comprises
of the environmental conditions prevailing in the host country, while the
international environment refers to the overall international circumstances, which
influence the conduct of business.

2.2.1. Cultural environment

The cultural environment is made up of institutions and other forces that affect a society‘s basic
values, perceptions, preferences, and behaviors. People grow up in a particular society that
shapes their basic beliefs and values. They absorb a world view that defines their relationships
with others.
People in a given society hold many beliefs and values. Their core beliefs and values have a high
degree of persistence. For example, most Indians believe in working, getting married, giving to
charity, and being honest. These beliefs shape more-specific attitudes and behaviors found in
everyday life. Core beliefs and values are passed on from parents to children and are reinforced
by schools, churches, business, and government.
2.2.2. Economic environment
The economic environment consists of factors that affect consumer purchasing power and
spending patterns. Nations vary greatly in their levels and distribution of income. Some countries
have subsistence economies they consume most of their own agricultural and industrial output.
These countries offer few market opportunities. At the other extreme are industrial economies,
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which constitute rich markets for many different kinds of goods. Marketers must pay close
attention to major trends and consumer spending patterns both across and within their world
markets.
Marketers should pay attention to income distribution as well as average income. At the top are
upper-class consumers, whose spending patterns are not affected by current economic events and
who are a major market for luxury goods. There is a comfortable middle class that is somewhat
careful about its spending but can still afford the good life some of the time. The working class
must stick close to the basics of food, clothing, and shelter and must try hard to save. Finally, the
poor class must count their pennies when making even the most basic purchases. Over the past
three decades, the rich have grown richer, the middle class has shrunk, and the poor have
remained poor.
2.2.3. Political – Legal environment
Marketing decisions are strongly affected by developments in the political environment. The
political environment consists of laws, government agencies, and pressure groups that influence
and limit various organizations and individuals in a given society.
Even the most liberal advocates of free-market economies agree that the system works best with
at least some regulation. Well-conceived regulation can encourage competition and ensure fair
markets for goods and services. Thus, governments develop public policy to guide commerce-
sets of laws and regulations that limit business for the good of society as a whole. Almost every
marketing activity is subject to a wide range of laws and regulations.
Legislation affecting business around the world has increased steadily over the years. The States
has many laws covering issues such as competition, fair trade practices, environmental
protection, product safety, truth in advertising, packaging and labeling, pricing, and other
important areas.

2.2.4. Technological environment

The technological environment is perhaps the most dramatic force now shaping our destiny.
Technology has released such wonders as antibiotics, organ transplants, computers, and the
Internet. It also has released such horrors as nuclear missiles, chemical weapons, and assault
rifles. It has released such mixed blessing as the automobile, television, and credit cards.

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New technologies create new markets and opportunities. However, every new technology
replaces an older technology. Transistors hurt the vacuum-tube industry, xerography hurt the
carbon-paper business, the auto hurt the railroads, and compact disks hurt phonograph records.
When old industries fought or ignored new technologies, their businesses declined. Thus,
marketers should watch the technological environment closely. Companies that do not keep up
with technological change soon will find their products outdated. And they will miss new
product and market opportunities.
2.2.5. Demographic Environment
Demography is the study of human populations in terms of size, density, location, age, gender,
race, occupation, and other statistics. The demographic environment is of major interest to
marketers because it involves people, and people make up markets.
The world population is growing at an explosive rate. The explosive world population growth
has major implications for business. A growing population means growing human needs to
satisfy. Depending on purchasing power, it may also mean growing market opportunities.
The world‘s large and highly diverse population poses both opportunities and challenges. Thus,
marketers keep close track of demographic trends and developments in their markets, both at
home and abroad. They track changing age and family structures, geographic population shifts,
educational characteristics, and population diversity.
2.2.6. Natural Environment
The natural environment involves the natural resources that are needed as inputs by marketers or
that are affected by marketing activities. Marketers should be aware of several trends in the
natural environment. The first involves growing shortages of raw materials. Air and water may
seem to be infinite resources, but some group see long-run dangers. Air pollution chokes many
of the world‘s large cities and water shortages are already a big problem in some parts of the
world. Renewable resources, such as forests and food, also have to be used wisely.
Nonrenewable resources, such as oil, coal, and various minerals, pose a serious problem. Firms
making resources, such as oil, coal, and various minerals, pose a serious problem. Firms making
products that require these scarce resources face large cost increases, even if the materials do
remain available.

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A second environmental trend is increased pollution. Industry will almost always damage the
quality of the natural environment. Consider the disposal of chemical and nuclear wastes; the
dangerous mercury levels in the ocean; the quantity of chemical pollutants in the soil and food
supply; and the littering of the environment with non-biodegradable bottles, plastics, and other
packaging materials.
A third trend is increased government intervention in natural resource management. The
governments of different countries vary in their concern and efforts to promote a clean
environment.

CHAPTER III - MARKET ENTRY DECISIONS

 INTERNATIONAL MARKET ENTRY STRATEGIES

Entry decision of global market will heavily influence the firm‘s other marketing-mix decisions.
Several decisions need to be made. The firm has to decide on (1) the target product/market, (2)
the goals of target markets, (3) the mode of entry, (4) the time of entry, (5) a marketing-mix plan,
and (6) a control system to monitor the performance in the entered market. This section will
cover the major decisions that constitute market entry strategies.
A crucial step in developing a global expansion strategy is the selection of potential target
markets. Companies adopt many different approaches to pick target markets. A four step
procedure as given below may explain the initial screening process.
Step 1: Select indicators and collect data.
First, you need to pick a set of socioeconomic and political indicators you believe are critical.
The indicators that a company selects are, to a large degree, driven by the strategic objectives
spelled out in the company‘s global mission.

Step 2: Determine importance of country indicators.

The second step is to determine the importance weights of each of the different country
indicators identified in the previous step. One common method is the constant-sum allocation
technique. Here, you simply allocate one hundred points across the set of indicators according to
their importance in achieving the company‘s goals (e.g., market share). So, the more critical the
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indicator, the higher the number of points it gets allocated. The total number of points should add
up to 100.
Step 3: Rate the countries in the pool on each indicator.
Next, you give each country a score on each of the indicators. For instance, you could use a 7-
point scale (1 meaning very unfavorable; 7 meaning very favorable). The better the country does
on a particular indicator, the higher the score.
Step 4: Compute overall score for each country.
The final step is to derive an overall score for each prospect country. To that end, you simply
sum up the weighted scores that the country obtained on each indicator. The weights are the
importance weights that were assigned to the indicators in the second step.

 CHOOSING THE MODE OF ENTRY

Several decision criteria will influence the choice of entry mode. In general, two classes of
decision criteria can be distinguished. 1. Internal (firm specific) criteria 2. External
(environment-specific) criteria. Let us first consider the major external criteria.

 Market Size and Growth: The key determinant of entry choice decision is the
size of the market. Large markets justify major resource commitments in the form of joint
ventures or wholly owned subsidiaries. Market potential can relate to the current size of
the market. However, future market potential as measured via the growth rate is often
even more critical, especially when the target markets include emerging markets.

 Risk: Another major concern when choosing entry modes is the risk factor. Risk
relates to the instability in the political and economic environment that may impact the
company‘s business prospects. Generally speaking, the greater the risk factor, the less
eager companies are to make major resource commitments to the country (or region)
concerned.
 Government Regulation: Government requirements are also a major consideration in
entry mode choices. In scores of countries, government regulations heavily constrain the
set of available options. Trade barriers of all different kinds restrict the entry choice
decision.

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  Competitive Environment: The nature of the competitive situation in the local
market is another driver.

 Local Infrastructure: The physical infrastructure of a market refers to the

country‘s distribution system, transportation network, and communication system. In
general, the poorer the local infrastructure, the more reluctant the company is to commit
major resources (monetary or human).

All these factors combined determine the overall market attractiveness of the countries being
considered. Markets can be classified in five types of countries based on their respective market
attractiveness.
Platform countries can be used to gather intelligence and establish a network.
Example include Singapore and Hong Kong.
Emerging countries include Vietnam and the Philippines. Here the major goal is
to build up an initial presence for instance via a liaison office.
Growth countries such as China and India can offer early mover advantages.
These often encourage companies to build up a significant presence in order to
capitalize on future market opportunities.
Maturing and established countries include South Korea, Taiwan, and Japan.
These countries have far fewer growth prospects than the other types of markets.

Overview of the key internal criteria:

1. Company Objectives: Corporate objectives are a key influence in choosing entry
modes. Firms that have limited aspirations will typically prefer entry options that entail a
minimum amount of commitment (e.g., licensing). Proactive companies with ambitious strategic
objectives, on the other hand, will usually pick entry modes that give them the flexibility and
control they need to achieve their goals.
2. Need for Control: Control may be desirable for any element of the marketing-mix
plan: positioning, pricing, advertising, product design, branding, and so forth,
3. Internal Resources, Assets, and Capabilities: Companies with tight resources (human
and/or financial) or limited assets are constrained to low commitment entry modes such as
exporting and licensing that are not too demanding on their resources. Even large companies

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should carefully consider how to allocate their resources between their different markets,
including the home market. In some cases, major resource commitments to a given target market
might be premature given the amount of risk. On the other hand, if a firm is overly reluctant with
committing resources, the firm might miss the boat by sacrificing major market opportunities.
Internal competencies also influence the choice of-entry strategy. When the firm lacks certain
skills that are critical for the success of its global expansion strategy, the company can try to fill
the gap by forming a strategic alliance.

4. Flexibility: An entry mode that looks very appealing today is not necessarily attractive
five or ten years down the road. The local environment changes constantly. New market
segments emerge. Local customers become more demanding or more price conscious. Local
competitors become more sophisticate. To cope with these environmental changes, global
players need a certain amount of flexibility. The flexibility offered by the different entry-mode
alternatives varies a great deal. Given their very nature, contractual arrangements like joint
ventures or licensing tend to provide very little flexibility. When major exit barriers exist, wholly
owned subsidiaries are hard to divest, and, therefore offer very little flexibility compared to other
entry alternatives.

 Exporting
Exporting has two distinct advantages. First, it avoids the costs of establishing manufacturing
operations in the host country. Second, exporting may help a firm achieve experience curve and
location economies. By manufacturing the product in a centralized location and exporting it to
other national markets, the firm may realize substantial scale economies from its global sales
volume.
A domestic company can sell its products to foreign buyers directly or indirectly. For direct
exports, it establishes direct contact with foreign customers (actual users or importer distributors)
and ships the goods as per the customer’s orders and requirements.

The exporting firm takes upon itself the entire responsibility concerning packing, documentation,
shipment, credit exchanges risks, the government regulations etc. A company can carry direct
export in many ways:

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 (a) Domestic based export department or division: An export sales manager,
supporting sales staff, with some clerical assistants carry on actual selling and draw on
marketing assistance as needed. It might evolve into a self-contained export department
or sales subsidiary carrying out all the activities involved in export and possibly operating
as a profit center.
(b) Travelling Export Sales Representatives: The Company can send home-
based sales representatives abroad at certain times to find and promote business.
(c) Foreign based Sales Branch or Subsidiary: An overseas sales branch allows
the manufacturer to achieve greater presence and programmed control in the foreign
market. The sales branch handles sales distribution and may handle warehousing and
promotion as well. It also serves as a display and customer service center.
(d) Foreign Based Distributor or Agents: Foreign based distributor would buy
and own the goods. Foreign-based agent would sell the goods on behalf of the company.
They may be given exclusive right to represent the company in that country or only
general rights.
In the case of indirect exporting, a firm can use a variety of middlemen who operate in
the international markets. Companies typically start with indirect exporting because the
firm does not have to develop an export department, an overseas sales force, or a set of
foreign contacts. It also involves fewer risks because international marketing
intermediaries bring know-how and services. Various types of domestic middlemen are
available for the company.
 Domestic Based Export Merchant: The middlemen buy the
manufacturer’s product and sell it abroad on his own account.
 Domestic Based Export Agent: The agent simply agrees to seek and
negotiates with foreign buyers for a commission. He may also render
certain services but does not take title to the product. Trading companies
are also included in this group.
 Resident Agent/ Representatives of Foreign Buyers: Who buys in the
exporting country on behalf of importers abroad?

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  Co- operative Marketing Organization: A cooperative organization
carries on the exporting activities of its members and may be partly under
their control. This form is used usually by producers of primary products,
fruits, vegetables, nuts, and so on.
 Combination Export Manager: Who acts as an overseas selling agent
for a number of companies and practically acts as the “Export
Department” for the firms it represents.
 Export Management Companies: These types of companies manage a
company’s export activities for a fee.

 Licensing
Licensing arrangement represents signing of an agreement with a foreign-based enterprise. It is
an arrangement whereby a licensor grants the rights of intangible property to another party,
called licensee, for a specified period, and in return receives a royalty fee. Intangible property
includes patents, processing know-how, trademarks, inventions, formulas, copyrights, and
designs etc. of the company.
Through this agreement, licenser can enter the foreign market at little risk and the licensee gets
the benefits of gaining the manufacturing technology and marketing of a well-known product or
brand. Licensing does not involve marketing facilities. If the cost of production is comparatively
lower in the licensee’s country, the licenser can import the product from the licensee to improve
its competitive position in its own market.
Licensing is an alternative entry and expansion strategy with considerable appeal. Companies
with technology know how, or a strong brand image can use licensing agreements to supplement
its bottom-line profitability with no investment and very limited expenses. The only cost is the
cost of signing the agreements and of policing their implementation. Licensing, therefore, is very
lucrative for firms lacking the capital to develop operations overseas. In addition, licensing can
be attractive when a firm is unwilling to commit substantial financial resources to an unfamiliar
or politically volatile foreign market.
Licensing is often used when a firm wishes to participate in a foreign market but is prohibited in
doing so by barriers to investment. Finally, licensing is frequently used when a firm posses some
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intangible property that might have business applications, but it does not want to develop those
applications itself.

Licensing also has some serious drawbacks. First, it does not give a firm the tight control over
manufacturing, marketing, and strategy that is required for realising experience curve and
location economies. Second, competing in a global market may require a firm to co-ordinate
strategic moves across countries by using profits earned in one country to support competitive
attacks in another. By its very nature, licensing limits a firm’s ability to do this. A licensee is
unlikely to allow a multinational firm to use its profits, beyond those due in the form of royalty
payments, to support a different licensee operating in another country.

Another problem with licensing is the risk associated with licensing technological know-how to
foreign companies. Technological know-how constitutes the basis of many multinational firms’
competitive advantage. Most firms wish to maintain control over how their know-how is used,
and a firm can quickly lose control over its technology by licensing it.

There are ways of reducing the risk of this occurring. One way is by entering into a cross-
licensing agreement with the foreign firm. Under a cross-licensing agreement, a firm might
license some valuable intangible property to a foreign partner, but in addition to a royalty
payment, the firm might also request that the foreign partner license some of its valuable know-
how to the firm. Such arrangements are believed to reduce the risks associated with licensing
technological know-how, since the licensee realises that if it violates the licensing contract, by
using the knowledge obtained to compete directly with the licensor, the licensor can do the same
to it. Cross-licensing agreements enable firms to hold each other hostage, which reduces the
probability that they will behave opportunistically toward each other.

FRANCHISING
Franchising is similar to licensing, although it tends to involve longer-term commitments than
licensing. Franchising is basically a specialized form of licensing in which the franchiser not
only sells intangible property to the franchisee, but also insists that the franchisee agree to abide
by strict rules as to how it does business. The franchiser will often assist the franchisee to run the

19
business on an ongoing basis. As with licensing, the franchiser typically receives a royalty
payment, which amounts to some percentage of the franchisee’s revenues. Whereas licensing is
persued primarily by manufacturing firms, franchising is employed by service firms.

The advantages of franchising are very similar to those of licensing. The firm is relieved of many
of the costs and risks of opening a foreign market on its own. Instead, the franchisee typically
assumes those costs and risks.
The disadvantages are less pronounced than in the case of licensing. Franchising may also hinder
the firm’s ability to take profits out of one country to support competitive attacks in another.
Quality control is also very difficult to achieve the world over.

 JOINT VENTURES
A joint venture entails establishing a firm that is jointly owned by two or more otherwise
independent firms. The advantages of this strategy include the sharing of risk and the ability to
combine different value chain strengths. One company may have in depth knowledge of a local
market, and extensive distribution system, or access to low-cost labor or raw materials. Such a
company might link up with a foreign partner possessing considerable know-how in the area of
technology, manufacturing and process applications.

Joint ventures have a number of advantages. First, a firm benefits from a local partner’s
knowledge of the host country’s competitive conditions, culture, language, political systems, and
business systems. Second, when the development costs and/or risks of opening a foreign market
are high, a firm might gain by sharing these costs and/or risks with a local partner. Third, in
many countries, political considerations make joint ventures the only feasible entry mode.

Despite these advantages, there are major disadvantages with joint ventures. First, a firm that
enters into a joint venture risk giving control of its technology to its partner. The second
disadvantage is that a joint venture does not give a firm the tight control over subsidiaries that it
might need to realise the experience curve or location economies. A third disadvantage with joint
ventures is that the shared ownership arrangement can lead to conflicts and battles for control
between the investing firms if their goals and objectives change or if they take different views as

20
to what the strategy should be. These conflicts tend to be greater when the venture is between
firms of different nationalities, and they often end in the dissolution of the venture.

 WHOLLY OWNED SUBSIDIARIES

The most extensive form of participation in global markets is 100% ownership, which may be
achieved by start up from the scratch, called green field strategy or by acquisition. Ownership
requires the greatest commitment of capital and managerial effort and offers the fullest means of
participating in a market. Companies may move from licensing or joint venture strategies to
ownership in order to achieve faster expansion in a market, greater control, or higher profits.

Large-scale direct expansion can be expensive and require a major commitment of managerial
time and energy. Alternatively, acquisition is an instant but less expensive approach to market
entry. While full ownership can yield the additional advantage of avoiding communication and
conflict of interest problems that may arise with a joint venture or co-production partner,
acquisitions still present the demanding and challenging task or integrating the acquired
company into the worldwide organization and coordinating activities.
When a firm’s competitive advantage is based on technological competence, a wholly owned
subsidiary will often be preferred because it reduces the risk of losing control over the
competence.
Acquisitions have three major points in their favour. First, they are quick to execute. By
acquiring an established enterprise, a firm can rapidly build its presence in the target foreign
market.
Second, in many cases firms make acquisitions to preempt their competitors. The need for
preemption is particularly great in markets that are rapidly globalizing, such as
telecommunications, where a combination of deregulation within nations and liberalisation of
regulations governing cross-border foreign direct investment has made it much easier for
enterprises to enter foreign markets through acquisitions.
Third, managers may believe acquisitions to be less risky than green field ventures. When a firm
makes an acquisition, it buys a set of assets that are producing a known revenue and profit
stream.

21
In contrast, the revenue and profit stream that a green-field venture might generate is uncertain
because it does not yet exist. When a firm makes an acquistion in a foreign market, it not only
acquires a set of tangible assets, such as factories, logistics systems, customer service systems,
and so on, but it also acquires valuable intangible assets including a local brand name and
managers’ knowledge of the business environment in that nation. Such knowledge can reduce the
risk of mistakes caused by ignorance of the national culture of the country entered. Despite these
arguments, acquisitions often produce disappointing results.

Chapter IV - Product Policy Decisions

4.1. Product standardization/ Modification
Product policy realized by a company on the international market is usually quite different than
the one realized on a domestic market. It is affected by the fact that in this case both the macro-
environment of the company and its competitive environment may be extremely different from
22
the domestic environment. Decisions concerning a product on foreign markets are the first step
of a firm in planning the whole composition of marketing-mix, comprising also an assessment,
distribution and promotion. The effectiveness on international markets depends on proper
balancing the proportions between the elements of product which may be universal and those
which require adjustment to specific requirements of different markets. The aim of the company
activities concerning a project is developing its features and functions in such a way as to
increase chances to gain competitive advantage on the international market. The success is
conditioned by a sufficiently strong connection of these features with the needs and expectations
of potential purchasers, which are partly universal and partly diversified across countries and
regions. Prior to making decision about the proportions between the product features which may
be global and those which should be considered as specific, diversified requirements of potential
clients, all reasons for the product standardization or its adaptation should be analyzed in-depth.
Standardization means offering by the company the same or similar product on all foreign
markets, whereas adaptation (individualization) relies on its adjustment to the requirements
resulting from cultural, social, political and economic differences occurring between foreign
markets. The scope of these differences determines selection of a suitable strategy and
introducing necessary changes in the product. Division of product strategies on the international
market due to the degree of changes in the product is shown in the Figure.

The use of standardization strategy allows to

 Achieve economies of scale: extension of production lines leads to diminishing unit
costs,

23
  Decrease in funds for research and development: which may be allocated to seeking
new solution or product and not on adjusting a product to the predilections and
preferences of final consumers,
 Savings in promotion budget resulting from harmonization of strategies,
 Strengthening consumer loyalty: if a product can be bought during a foreign trip (e.g.
Hilton hotel services, Coca-Cola or Wrigley chewing gum).
Unfortunately, not all products are equally suited for standardization. Among consumer goods,
durable products are easier to standardize than non-durable ones. The products which are more
than other susceptible to standardization comprise e.g. electronic equipment, household goods,
luxury goods (jewelry or perfumes), sports equipment, computers or mobile phones.

Foodstuffs are more difficult to standardize, they are adapted to tastes, styles and habits of local
consumers.

Adaptation of material product features to the specificity of foreign market may result from the
conditionings whose sources are different elements of the international environment. Some of
them are imposed by e.g. legal regulation or some objective physical conditions. The others
should be taken into consideration as specific requirements of competitiveness on a given
market. The adaptation strategy is supported by the following premises:
 Different specificity of the market (consumer tastes and preferences in respective
countries which differ from consumers in other countries),
 Different conditions of use (e.g. climatic and physical conditionings),
 Legal regulations concerning the labeling, packaging or the use of particular raw
materials,
 Demand for additional varieties of product
 Activities of competition,
 Firm’s internal factors

Adaptation strategy may be forced or voluntary therefore its two varieties should be
mentioned:

24
Strategy of market-driven individualization: is an adjustment of product features to foreign
market requirements, irrespectively of the fact if the firm wants to make these changes or not; the
reason for the changes in the product are usually legal regulations or technical conditions

Strategy of voluntary individualization: to a considerable extent may be controlled by the

firm; its application is predominantly influenced by cultural and economic factors, e.g. income
level, education level or consumer tastes in respective countries.

Adaptation may refer to various elements of product:

 Packaging
 Size
 Product symbol
 Color

4.2. Branding on the International Market

While entering international markets, enterprises should adjust their offer and marketing tools
appropriately to specific character of these markets. One of the most important and clearly
visible tools of marketing influence on the market and consumers is brand. The essence of brand
comprises it abilities to create certain concepts and convictions among customers, which should
lead them to make purchase. It exists in consumer minds as information, and experiences
connected with it.
Brand is a psychologically added value: reputation, associations, experiences, convictions,
dreams but also illusions associated with a product. The elements which may contribute to create
positive associations and link a brand with customer’s mind include: name, logo, advertising
slogans or catch phrases and proper associations. A set of these assets makes up the content of a
brand. The name should be short and energetic, excluding any possibility of a spelling mistake,
understandable for the international environment. If a brand is to fulfill its mission on
international markets, it cannot be difficult to pronounce or remember, its wording cannot be
either ridiculing or derogative, it must evoke positive associations.

25
Brand is an important strategic resource of a company operating in conditions of
internationalization and globalization of economy. For companies operating on the international
market, branding of their products is a problem more complicated that for the businesses
operating on the domestic market. A firm may take into consideration four kinds of activities on
the international market with reference to brands:
 Branding or not branding its products,
 Using the producer’s or distributor’s brand,
 Using one or several brands on the same market,
 Using global brand or local brand.
Global brand strategy on all markets is particularly useful when a firm offers one product and the
brand name sounds good on local markets. A portfolio of global brands is developed by firms in
order to improve the efficiency of their operations on world markets. They assume that a brand is
worth more if it is a part of a bigger portfolio owned by the company.
Portfolio of local brands is a strategy of diversifying brands on individual markets. The selection
of this strategy is influenced among others by language diversification. The sound of brand is
important. It should be easy to pronounce and should not evoke the wrong associations.
Advantages disadvantages
 fast penetration of the local market – higher marketing costs
Local brand  possible adjustment of the quantity and – loss of the economies of scale
quality to individual markets – fuzzy image
– maximum marketing effectiveness – assumption of market homogeneity
– reduction of advertisement costs – problems with “black market”
– uniform image on all markets – possible negative associations
Global brand
– desired for prestige goods; free of cultural – required constant quality level
collocations – legislative problems
– easily identified by travellers

4.3. Packaging
Packaging becomes very important in international exchange. Offering products on international
markets requires adjustment of packaging to specific economic, cultural or civilizational
conditions but also to legal regulations. Packaging constitutes an integral element of a product. It
is a visual means of communication, which should be attractive, point to the producer and inform
a customer about the contents. External characteristics of packaging are extremely important,
because a vast majority of purchasers responses most strongly to visual stimuli. The relationship
of packaging with the other elements of marketing mix has been illustrated by the Figure below.
26
Currently structural form, material and the kinds of applied packaging have been undergoing
certain unification all over the world. In view of the above, adjustment of packaging to foreign
market conditions comprises decisions about the size, shape or possible re-use, but also decisions
concerning the content of information on the packaging.
The attributes which distinguish them include also artwork and coloring of packaging. The
coloring of packaging is to enable product identification, but it may be also change due to
different meaning of colors in various cultures. For instance, packaging of product sold in
various countries may contain common logo and artwork, however the coloring of the packaging
may differ depending on the country.
In the processes of choice and making purchasing decision, the impressions caused by packaging
become transformed in consumer’s mind into feelings about the kind and quality of the product.
Only the goods, whose packaging fulfill the needs, preferences and tastes of consumers will be
accepted on the market in a given country. Modern, original design meets far better developed
aesthetical requirements of the customers and helps to make a product well visible on the market.
However, one should remember about differences in the area of customer aesthetical needs in
individual countries.

27
 Chapter V - Promotion strategy in international context
5.1. Introduction
The purpose of promotion is both to communicate with buyers and to influence them. Effective
promotion requires an understanding of the process of persuasion and how this process is
affected by environmental factors. The potential buyer must not only receive the desired
information but should also be able to comprehend that information.
Promotion is a term taken from Latin promovere, which means moving from one end to another.
In marketing, promotion means all those tools that help a marketer to make his product move
from the factory to the customer and hence involves advertising, sales promotion, personal
selling, and publicity etc. The marketing communications mix (also called the promotion mix)
consists of five major tools that are as follows:
(i) Advertising: Any paid form of non-personal presentation and promotion of ideas,
goods, or services by an identified sponsor.
(ii) Direct Marketing: Use of mail, telephone, and other non-personal contact tools to
communicate with or solicit a response from specific customers and prospects.
(iii) Sales Promotion: Short-term incentives to encourage trial or purchase of a product
or service.
(iv) Public Relations and Publicity: A variety of programmes designed to promote and/or
protect a company’s image or its individual products.
(v) Personal Selling: Face-to-face interaction with one or more prospective purchasers
for the purpose of making sales.

5.2. Deciding on the Promotion Mix for international markets

The basic framework and concepts of international promotion are essentially the same wherever
employed. Six steps are involved:
1. Study the target market (s);
2. Determine the extent of worldwide standardization;
3. Determine the promotional mix (the blend of advertising, personal selling, sales
promotion, and public relations);

28
 4. Develop the most effective message (s);
5. Select effective media; and
6. Establish the necessary controls to assist in monitoring and achieving worldwide
marketing objectives.
Many factors influence the marketer’s choice and mix of promotional tools in global context.
We will examine these factors in the following paragraphs.

5.3. Nature of each promotional tool

Each promotional tool has its own unique characteristics and costs. Marketers have to understand
these characteristics in selecting them.
5.3.1. Advertising:
As there are many forms and uses of advertising, it is difficult to make all embracing
generalizations about its distinctive qualities as a component of the promotional mix. Yet the
following qualities can be noticed:
Public Presentation: Advertising is a highly public mode of communication. Its public nature
confers a kind of legitimacy on the product and also suggests a standardized offering. Because
many persons receive the same message, buyers know that their motives for purchasing the
product will be publicly understood.
Pervasiveness: Advertising is a pervasive medium that permits the seller to repeat a message
many times. It also allows the buyer to receive and compare the messages of various
competitors. Large-scale advertising by a seller says something positive about the seller’s size,
power, and success.
Amplified Expressiveness: Advertising provides opportunities for dramatizing the company and
its products through the artful use of print, sound, and colour. Sometimes, however, the tool’s
very success at expressiveness may dilute or distract from the message.
Impersonality: Advertising cannot be as compelling as a company sales representative can. The
audience does not feel obligated to pay attention or respond. Advertising is able to carry on only
a monologue, not a dialogue, with the audience.

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 5.3.2. Personal selling
Personal selling, also commonly known as salesmanship, is used at every distribution level. The
cost of personal selling is high. In spite of the high cost, personal selling should be emphasized
when certain conditions are met.

Although advertising is often equated with the promotional effort but in the early stages of
globalization of company’s operation, marketers rely heavily on personal contact. The
differences between advertising and personal selling may also be contrasted in terms of the
communication process. Advertising is a one-way communication process that has relatively
more “noise, “whereas personal selling is a two-way communication process with immediate
feedback and relatively less “noise.”

The marketing of industrial goods, especially of high priced items, requires strong personal
selling efforts at global level. In some cases personal selling may be truly global.

Personal selling is also the most cost-effective tool at the later stages of the buying process,
particularly in building up buyers’ preference, conviction, and action. The reason is that personal
selling, when compared with advertising, has three distinctive qualities:

Personal Confrontation: Personal selling involves an alive, immediate, and interactive

relationship between two or more persons. Each party is able to observe each other’s needs and
characteristics at close hand and make immediate adjustments.

Cultivation: Personal selling permits all kinds of relationships to spring up, ranging from a
matter-of-fact selling relationship to a deep personal friendship. Effective sales representatives
will normally keep their customers’ interests at heart if they want long run relationship.

Response: Personal selling makes the buyer feel under some obligation for having listened to the
sales talk. The buyer has a greater need to attend and response; even if the response is a polite
‘thank you.

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 5.3.3. Public relations/ publicity
Publicity is the non-personal stimulation of demand that is not paid for by a sponsor which has
released news to the media. Advertising and publicity are quite similar in the sense that both
require media for a non-personal presentation of the promotional message.

One difference between the two is that, with publicity, a company has less control over how the
message will be used by the media. Another difference is that publicity is presumed to be free in
the sense that the media are not paid for presentation of the message to the public. In practice, a
publicity campaign is not cost free because someone must be assigned to generate the publicity,
and there are several direct and indirect costs. However, the cost of publicity is minimal when
compared to the benefit.

Publicity offers several advantages. In addition to the low cost, the material presented is not
recognized as paid advertising per se because it occurs in an editorial setting that makes it appear
to have been generated by approval of the editorial staff. The material thus has more credibility,
and consumers tend to accept it as news information rather than as advertising. This perception is
particularly useful in countries where it is difficult to buy commercial time or advertising space.

A significant part of public relations activity focuses on portraying international companies as

good citizens of their host markets. Public relations activity includes anticipating and countering
criticism. The criticism range from general ones against all multinationals to specific complaints.
The appeal of public relations is based on its three distinctive qualities:
High credibility: News stories and lectures seem more authentic and credible to readers than ads
do.
Off guard: Public relations can reach many prospects that might avoid salespeople and
advertisements. The message gets to the buyers as news rather than as a sales-directed
communication.
Dramatization: Public relation has, like advertising, a potential for dramatizing a company or
product.

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 5.3.4. Sales promotion
Sales promotion consists of those promotional activities other than advertising, personal selling,
and publicity. As such, any promotional activities that do not fall under the other three activities
of the promotion mix are considered to be sales promotion.

The trade often uses the term indiscriminately. Business people may use the term “promotion”
when they actually mean “sales promotion.” In this module, promotion is a broad term that
encompasses sales promotion as well as the other three promotional activities. The techniques of
sales promotion are varied and numerous. The common ones used are coupons, sweepstakes,
games, contests, price-offs, demonstrations, premiums, samples, money refund offers, and
trading stamps. A combination of these may be used and is sometimes used in the same
campaign.

Sales promotion is temporary in nature. Not being self-sustaining, its function is to supplement
advertising, personal selling, and publicity.
Although sales promotion tools – coupons, contests, premiums, and the like – are highly diverse,
they have three distinctive characters:
Communications: They gain attention and usually provide information that may lead the
consumer to the product.
Incentive: They incorporate some concession, inducement, or contribution that gives value to the
consumer.
Invitation: They include a distinct invitation to engage in the transaction now.

5.3.5. Direct Marketing:

Although direct marketing has several forms: direct mail, telemarketing, and electronic
marketing, and so on. It has a few distinctive characteristics:
Non-public: The message is normally addressed to a specific person and does not reach others.
Customized: The message can be customized to appeal to the addressed individual.
Up-to-date: A message can be prepared very quickly for delivery to an individual.

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 Chapter VI - Pricing and terms of Payment
6.1. Concepts of International pricing
Price is defined as the particular value of exchange or money quoted for a particular commodity
at a particular time of a particular day
In the global marketing management, Price refers to the Export Price mainly. The global
marketing management should pay a special attention to the development of suitable policies for
pricing. They are analyzed thoroughly as product policies. Therefore, the Global Marketing
Management must consider the Price as the integral part of the whole global marketing strategy.
The Price is very closely related to the utility, as utility in the ability of a commodity to satisfy
human wants.
International market and trade brings additional cost issues unique to that particular market.
These issues (including after-sales service and guarantees, modifications, promotion/ advertising,
packaging and direct marketing expenses) should be addressed prior to pricing a product. The
cost issues associated with the marketing effort vary from country to country and therefore affect
pricing issues. If there is proactive approach to coordinating the pricing decisions across
international markets, a company has to select the appropriate strategy. This has to be determined
by two factors: the level of local resources available and the level of environmental complexity.
People travelling abroad are often surprised to find goods that are relatively inexpensive in their
home country priced outrageously higher in other countries. It is also possible that goods priced
reasonably abroad may be priced enormously high in the home market. This happens due to
different factors influencing the price setting for the foreign market. These factors are the
challenges an international marketing firm must react to groups these factors into 4 areas

– strategic objectives
Company Factors
– elements of marketing mix (4Ps)
33
 – the structure of costs
– product life cycle

Product factors
– product range and differentiation, unique selling propositions
– substitute products
– product features
– payment conditions
– customers (perceptions, expectations and ability to pay)

Market factors – government interventions

– possibility of product adaptation
– distribution channels
– trade barriers
– competition
– exchange rate, currency fluctuations, tariffs
Environmental
Factors – grey market
– macroeconomic factors
– socio-cultural and psychological issues influencing consumer
attitudes

6.2. Price standardization

Compared to product decisions, pricing decisions are typically much more dissimilar from
country to country. There are three approaches to international pricing strategies
1. An ethnocentric pricing policy, or standardization: the price of an item is the same all
over the world (each customer pays the same price for the product as it leaves the
factory), but they are expected to pay transport and import duties themselves, either
directly or indirectly, and this leads to considerable differences in the price to the final
consumer. This type of pricing strategy is often used when selling a product with a low
degree of differentiation.
2. A polycentric pricing policy or adaptation: it allows the local subsidiary or affiliates to
establish whatever price they consider to be most appropriate for local conditions, and no

34
 attempt is made to coordinate prices from country to country. The only constraints relate
to transfer pricing within the corporate structure. The weakness of this policy is the lack
of control the headquarters have over the prices set by the subsidiary operations.
Significantly different prices must be set in adjacent markets, and this can reflect badly
on the image of multi-national firms. It also encourages the creation of grey markets
whereby products can be purchased in one market and sold in another, benefiting from
the price difference
3. A geocentric pricing policy or invention: it takes an intermediate position by neither
fixing a single price worldwide, nor allowing a complete freedom of local decision.
Whilst the need to take account of local factors is recognized, particularly in the short
term, the firm still expects local pricing strategies to be integrated into a company-wide
long-term strategy.
The choice of pricing policy is influenced also by the centralized or decentralized decision
making in the particular company. An ethnocentric pricing policy requires centralized
decision-making, whereas the opposite is true for a polycentric pricing policy. Different local
factors in each market make it very difficult to apply and achieve the seemingly easy and
preferable theory of price standardization.
Identified five characteristics of the product that are important in pricing:
 Degree of necessity: if a product is essential for its users, price changes are unlikely
to affect the market, except in countries with extreme poverty where people cannot
afford even the most basic necessities.
 Frequency of purchase: frequently purchased products (e.g. petrol, tea and bread)
tend to be very price-sensitive in all markets, whereas occasional purchases are not.
 Unit price: high-priced products (such as holidays and cars) are evaluated in greater
detail in terms of the consumer‘s perceptions of value for money, so many aspects are
extremely important to consumers besides price (e.g. reliability, style and features).
 Degree of comparability: consumers are less price-conscious about insurance policies
than grocery products, because the alternatives are more difficult to compare. The
same is the situation with certain services, such as advertising, consultancy and
accountancy, which have a different perceived value from country to country.

35
  Degree of fashion or status: the high prices of luxury goods are perceived as a mark
of their quality, and it is usually the goods with prestige image (even often created in
other countries) that are not price-sensitive.

6.3. Methods of payment and quotation terms

Essential elements of pricing policy are payment and delivery terms, including insurance against
risks. The price quotation must include terms of sale, it is recommended to use Incoterms
(International Commercial Terms) published by the International Chamber of Commerce (ICC).
Incoterms are a set of pre-defined commercial rules used in foreign trade transactions which
define the tasks, costs and risks of transportation and delivery of goods under sales contracts,
therefore it reduces uncertainties by eliminating misinterpretations of foreign trade terms.
Payment terms include agreement about the method and time of payment for delivered goods
while the aim of payment instruments is to eliminate risks related to agreed terms (e.g. risk of
failure to pay, currency-exchange rate risk). The risk of insufficient customer credit worthiness
can be mitigated by credit insurance which covers the buyer’s inability to pay. The advantages
are protection against buyer insolvency, greater borrowing power and higher sales. However, the
insurance does not cover the buyer’s unwillingness to pay (e.g. because of his dissatisfaction
with the goods). The Figure shows payment methods according to their relation to costs and risk.

Cash In Advance: Preferable for the seller, especially if the buyer is financially weak or
has unknown credit risk, when there are unstable economic/political conditions in the buyer’s

36
country or the seller is not interested in assuming credit risk. It enables immediate use of money
and gives maximum protection for sellers, on the other hand, the buyer is usually not eager to
bind money.

Letter Of Credit (L/C): Frequently used in international trade. The seller can be sure
that if he acts in compliance with agreed terms he receives the paid claim after submitting
documents to the bank, and at the same time the buyer has the certainty the bank pays the
particular value of L/C to the seller after submitting certain documents about meeting the
undertaking (trade, insurance and transport documents, specified time period, until the
transaction shall be carried out, description of the goods and further conditions as requested).
The bank agrees to allow the seller to collect payment from the correspondent bank abroad.
Several banks may be involved in the process such as the issuing bank; advising bank and
confirming bank.

The disadvantage of this method is its lack of flexibility and complexity, and it does not work
well with unusual transactions. Several types of letters of credit include revocable, irrevocable,
confirmed, unconfirmed, standby, back-to-back and transferable L/C.

Revocable letter of credit

Without prior notification to the seller, the issuing bank can cancel or modify its obligation at
any time before payment even after shipment has already been made (minimum protection to the
seller).

Irrevocable letter of credit

A much preferred type. Once the L/C is accepted by the seller, it cannot be amended in any way
or cancelled by the buyer or the buyer’s bank without all parties’ approval. The irrevocable and
confirmed L/C ensures maximum security and earliest payment for the seller

Confirmed letter of credit

37
The confirmation of the L/C through a bank in the exporter’s country gives an additional
guarantee of payment from the confirming bank. It is more desirable for the exporter when
payment is guaranteed by two banks instead of one.

Unconfirmed letter of credit

In this case, the L/C is not confirmed by a bank in the seller’s country, therefore the certainty is
less and payment slower. It is acceptable as long as the issuing foreign bank is financially strong

Standby letter of credit (bid or performance l/c)

Its purpose is to guarantee a seller’s obligation under a contract or agreement, for performance
bond, bid bond, surety bond and loan agreement. Here, the buyer requires the seller to open an
L/C naming the buyer as a beneficiary (it is thus a bank’s guarantee to the beneficiary that a
payment will be received by the beneficiary under certain conditions.

Bill of exchange (draft)

It is a request for payment, an unconditional order in written form from one person (drawer,
usually the exporter) requiring the person to whom it is addressed (drawee, usually the buyer) to
pay the payee or bearer on demand or at a fixed or determinable time. The payee may be the
exporter or his bank, the bearer, or any specified person. The bill of exchange allows banks to
make adjustments by debiting or crediting accounts maintained in buyer or seller names with
other banks.

The two main types of bill of exchange are sight and time. A sight draft is paid when it is first
seen by the drawee and is commonly used for either credit reasons or for the purpose of title
retention. A less secure time (usance or date) draft is for financing the sale or temporary storage
of specified goods for a specified number of days after sight. It specifies payment of a stated
amount at maturity. Compared with an open account, this has a negotiable instrument evidencing
the obligation. Since this document may be sold to factors and discounted immediately, the seller
can obtain cash before maturity. A variation of this kind of draft is documents against payment
(D/P) when bills of lading, invoices and the like accompany the draft. If financial documents are

38
omitted or if bills of lading come from countries where drafts are not used, it is a case of cash
against documents.

Bankers’ acceptance

This is a time draft with maturity less than six months, where the bank endorses the time draft as
“accepted” and it becomes the bank’s obligation to pay at maturity and a negotiable instrument
that may be bought or sold in the market like a certificate of deposit (CD) or commercial paper.
Drafts drawn on and accepted by nonbank entities are called trade acceptances.

Open account

It is similar to selling with an invoice at the domestic market. The buyer orders goods and states
the maturity date on the invoice. The buyer can pick up goods without having to make payment
first. The advantages include export in shortest time possible, simplicity and no credit charges to
banks.

In return the seller expects that the invoice will be paid at the agreed time. A major weakness is
the absence of safeguard against default and the lack of payment instrument, therefore the buyer
often delays payment until the merchandise is received. Precautions should be taken, such as
credit investigation.

Several organizations can provide credit information (commercial credit agencies, chambers of
commerce and trade associations, government sources, even commercial banks and their
overseas branches or correspondent banks). In addition, the importing country’s political risk and
economic conditions should be considered, too.

6.4. Transfer pricing

Prices of goods transferred from operations or sales units in one country to a company‘s units
elsewhere are known as transfer pricing or intercompany pricing. They may be adjusted
according to the objectives of the company. The objectives of the transfer pricing system
include:
 Maximizing profits for the corporation as a whole,
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  Strengthening parent-company control,
 Coordinated management at all levels and creating an adequate basis for maintaining,
developing profitability.
The benefits of transfer pricing are as follows:
 Lowering duty costs by shipping goods into high-tariff countries at minimal transfer
prices so duty base and duty are low,
 Reduction of income taxes in high-tax countries by overpricing goods transferred to units
in such countries; profits are eliminated and shifted to low-tax countries,
 Promoting dividend repatriation when it is curtailed by government policy,
 To show more or less profit in crucial times (e.g. new emission, government rules, to
please shareholders or to show the good performance of new/old management

6.5. Counter Trading

Countertrade belongs to the oldest forms of trade where products are exchanged for other
products instead of cash. Countertrade may involve multiple deals (separable transactions linked
with a contract), several products moving at different points in time while involving several
countries, and it may or may not include monetary compensation. As its main advantage,
countertrade provides benefits in market access, foreign exchange and pricing. Various types of
countertrade are often used nowadays in international trade, such as a trade alternative to
countries with international debt and liquidity problems, and their use is to increase substantially,
especially in trading with emerging countries. Countertrade has several types: buyback, counter
purchase, offset, switch trading, clearing arrangements and barter

Countertrade

Buyback Counter Switch trading Clearing

Purchase Offset arrangements Simple barter
With monetary compensation Without monetary compensation

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The simplest form of countertrade is barter, a one-time direct and simultaneous exchange of
products of equal value without the use of any money. Usually, no third party is involved to
carry out the transaction.
A single contract covers the entire transaction. Bartered goods can range from hams to iron
pellets, mineral water, furniture or olive oil. Though one of the oldest forms of countertrade, it is
very seldom used these days. It is most common in deals that involve subsistence economies.
Barter is also sometimes introduced into existing contracts to recover debt through goods when
the debtor cannot pay cash. Barter makes it possible for cash-tight countries to buy and sell.

A clearing agreement is clearing account barter between two governments with no currency
transaction required. Each party sets up an account in its own central bank, the trade in this case
is continuous, until the exchange reaches an agreed value or volume of trade tabulated or
calculated in nonconvertible “clearing account units”. Imbalances at the end of the contract
period are cleared through payment in hard currency or goods.
A variant of clearing arrangements is switch trading which is a triangular trade agreement.
When goods, all or part, from the buying country are not easily usable or saleable, it may be
necessary to involve a third party (a specialized trader switch trader) to dispose of the
merchandise. The third party pays hard currency for the unwanted merchandise at a considerable
discount. The price differential (surplus credit or margin) is accepted as being necessary to cover
the costs of doing business this way. The third party uses then the credits to buy goods from the
deficit country. The remaining forms involve two parallel agreements (with use of money): the
original sales agreement and a second contract where the supplier commits himself to purchase
goods in the customer’s country.

Counter purchase (parallel barter) is the most popular form of countertrade. Here, two
parallel contracts for two separate transactions are negotiated each with its own cash value. The
seller agrees to sell a facility or a product at a set price to a buyer and receives payment in cash
(first contract) while at the same time the original seller orders a specified amount of goods from
the buyer within a specified period (second contract). The goods to be purchased in the second
contract are generally of greater variety.
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 Offset is a variation of counter purchase. In an offset, a foreign supplier is required to
manufacture or assemble the product locally (may not be economically optimal) and / or
purchase local components as an exchange for the right to sell its products locally. Offset is very
common with defense contracts, in purchases of aircraft and military equipment. With direct
offset, the supplier agrees to use materials or components sourced from the importing country.
Indirect offset is a contractual arrangement containing goods or services unrelated to the core
goods to be exported.

A compensation trade (buyback) is much more mutually beneficial than the other forms of
countertrade. It requires a company to provide technology, machinery equipment, factories, or
turnkey plants and to buy products made from this machinery over an agreed period. The two
contracts here are highly related. Under a separate agreement, the seller either agrees to accept as
partial payment a certain portion of the output, or he receives full price initially but agrees to buy
back a certain portion of the output. Export leasing as an alternative option to direct selling is an
important financing method especially when buying equipment with costly investment. Leasing
represents a particular form of a lease contract where the lessee (tenant) pays the rental fee for a
fixed period for the right to use the leased subject. Terms of the leases usually run one to five
years, with payments made monthly or annually. The rental fee includes servicing, repairs and
spare parts. Often happens that lease contracts that include maintenance and supply parts can
lead to heavy losses towards the end of the contract period due to inflation in the country.

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 Chapter VII - Distribution Strategies in International Context
7.1. Concepts of distribution
Distribution is the ways to make customers and consumers get their products right on time
wherever and whenever they want to use them. It is the potential to make sure that consumers
prefer those products which they need, want, desire and possibly purchase in case it is in the
channel and time they are ready to buy them.
A channel is a passageway that allows the happening of certain processes. Marketing is
understood to be an exchange process. Marketing channels help this exchange process to take
place. A marketing channel can be defined as a group of exchange relationships, which create
customer value in acquiring, consuming and disposing of products and services.
International marketing involves coordinating the firm’s marketing activities in more than one
nation. The international marketing strategy is effectively realized by choosing the suitable
international marketing channel. The channel is the medium through which the firm’s global
marketing strategy is communicated among the customers scattered all around the globe.
Marketing Channels are set of interdependent organizations involved in the process of making a
product or service available for use or consumption.

7.2. Types of international marketing channels

The starting point in selecting the most effective channel is a clear determination of the market
target for the company’s marketing effort and a determination of the needs and preferences of the
target market. Customer preference must be carefully determined because there is as much
danger to the success of a marketing program in creating too much utility as there is in creating
too little. Moreover, each market must be analyzed to determine the cost of providing channel
services.
International and domestic marketing channels differ along one or more of four dimensions: (1)
function, (2) composition, (3) power structure, and (4) number of intermediaries.
(i) Function: It is a mistake to assume that a foreign wholesaler is purely a wholesaler and
that a foreign retailer is just a retailer. Functional specialization of this sort is not a
reality in many countries.

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(ii) Composition: The components of marketing channels are manufacturers, intermediaries
(including middlemen, wholesalers, and retailers), and consumers. In developing
countries, channels are likely to have more middlemen, and they do not have clear-cut
functions.
(iii) Power Structure: All marketing channels have a channel captain who exercises channel
leadership. The channel captain influences the composition of the channel, the specific
tasks of various middlemen, the performance criteria, the way channel members are
rewarded, and the way communication is maintained among them.
(iv) Length: Most marketing channels in overseas markets, particularly in developing
countries, have a longer string of intermediaries than developed countries channels. The
reason for this is that individual intermediaries are generally small enterprises, have ill-
defined functions, and perform a small number of tasks rather than a broad spectrum of
tasks.

7.3. Factors affecting channel selection

In much of the world, channel relationships are long lasting. Generally, once the decision on an
international marketing channel is made, it is difficult to change. Selecting a marketing channel
that will serve the international firm well results from thorough appraisals of both internal and
external factors.
(a) Internal factors: Although diverse internal factors influence specific channel selection
situations, the most important are (1) company size, (2) the need for distribution control,
(3) required special functions, (4) product characteristics, (5) desired entry speed, and (6)
desired penetration.
(b) External Factors: Certain external factors also influence the choice of an international
marketing channel. Four of these external factors are (1) competition, (2) market
characteristics, (3) legal barriers, and (4) availability

7.4. Documents for distribution in global trade

Various documents are needed for distribution channel. Some of the major documents are like
 Export documentation
 Commercial documentation
 Official documentation
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 Insurance documentation
 Transport documentation

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