Approaches in International Business
1. ETHNOCENTRIC ORIENTATION :
The ethnocentric orientation of a firm considers that the products, marketing strategies and techniques applicable in the home market are equally so in the overseas market as well. In such a firm, all foreign marketing operations are planned and carried out from home base, with little or no difference in product formulation and specifications, pricing strategy, distribution and promotion measures between home and overseas markets. The firm generally depends on its foreign agents and export-import merchants for its export sales.
2. REGIOCENTRIC ORIENTATION :
In regiocentric approach, the firm accepts a regional marketing policy covering a group of countries which have comparable market characteristics. The operational strategies are formulated on the basis of the entire region rather than individual countries. The production and distribution facilities are created to serve the whole region with effective economy on operation, close control and co-ordination.
3. GEOCENTRIC ORIENTATION :
In geocentric orientation, the firms accept a world wide approach to marketing and its operations become global. In global enterprise, the management establishes manufacturing and processing facilities around the world in order to serve the various regional and national markets through a complicated but well co-ordinated system of distribution network. There are similarities between geocentric and regiocentric approaches in the international market except that the geocentric approach calls for a much greater scale of operation.
4. POLYCENTRIC OPERATION :
When a firm adopts polycentric approach to overseas markets, it attempts to organize its international marketing activities on a country to country basis. Each country is treated as a separate entity and individual strategies are worked out accordingly. Local assembly or production facilities and marketing organisations are created for serving market needs in each country. Polycentric orientation could be most suitable for firms seriously committed to international marketing and have its resources for investing abroad for fuller and long-term penetration into chosen markets. Polycentric approach works better among countries which have significant economic, political and cultural differences and performance of these tasks are free from the problems created primarily by the environmental factors.
ENTRY INTO FOREIGN MARKETS
1. EXPORTING:
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 requirement. The exporting firm takes upon itself the entire responsibility concerning packing, documentation, shipment, credit exchange risks, the Government regulations etc., A company can carry direct export in many ways:
2. JOINT VENTURING :
Joint venturing involves the setting up of enterprises in collaboration with a foreign-based company, for the manufacture and marketing of specific product Joint venturing involves the setting up of enterprises in collaboration with a foreign-based company, for the manufacture and marketing of specific product lines. Such collaborations can take various forms covering such areas as managerial, technical know-how and technology transfer, equity participation, R & D activities, manufacturing & marketing facilities, or combinations thereof. For political or economic reasons, joint ventures may become the only possible technique of entry in a potential export market. Joint venture projects set up in developing host countries could be an important means of import substitution and also help the local industries to benefit from industrial and technological progress of the advanced countries.
Joint ownership has certain drawbacks. The partners may disagree over investment, marketing or other policies and also in matters like reinvestment.
Regardless of these short comings, joint ventures are increasing and for many countries are frequently the only chance of direct investment.
3. LICENSING ARRANGEMENT :
Licensing arrangement represents signing of a franchisee agreement with a foreign based enterprise which grants under the terms of agreement the right use the patents, processing know-how, trade marks of the licenser company etc., usually in exchange for a fee or royalty. 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 foreign investment risk since the licensee sets up his own production and 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 of a third country, thus opening a new avenue of export for the licensee.
4. CONTRACT MANUFACTURING (ALSO CALLED AS MANAGEMENT CONTRACTING):
Contract manufacturing represents various kinds of tie-ups of manufacturing facilities and arrangements agreed upon between two or more manufacturers located in different countries. Such manufacturing activities could be carried on under sub-contracting arrangements for the fabrication of components and accessories and even finished products in a foreign country. The international sub-contracters perform similar functions as the domestic ancillary does for the end-user industries. Management contracting is a low risk method since no capital is invested. The domestic firm is exporting only the management services.
5. FOREIGN DIRECT INVESTMENT :
Direct and unilateral investment abroad involves establishment of assembly, processing, packaging or even complete manufacturing, distributing and marketing facilities in foreign countries, usually under the finance and management of the holding company. Such a subsidiary established in the host country becomes the part of that country's economic life and can contribute to the economic growth of the country. This also enlarges the profit base of the investing company.
The main disadvantages are that there are risks associated with it such as blocked currency or devalued currencies, worsening markets, etc., and the firm has no choice but to accept these risks if it wants to operate in the host country.
6. CONSULTING / TURNKEY PROJECTS :
Entry into foreign markets can be made by offering various kinds of consulting services to the foreign customers (Government or private), starting from feasibility studies and eventually entering into contract for setting up turnkey projects. Thus project export could open up yet another avenue not only for supplies of machinery, components and equipments for installation but also for continued supply of spares and replacements over a long period.
Piggyback Exporting
Allowing another company, which already has an export distribution system in place, to sell your company's product in addition to its own is called piggyback exporting.
Piggyback exporting has several advantages. This arrangement can help your gain immediate foreign market access. Also, all the requisite logistics associated with selling abroad are borne by the exporting company
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INTERNATIONA BUSINESS ENVIRONMENT
FOREIGN ENVIRONMENT:
The home-based or the domestic export expansion measures are necessarily related to the conditions prevailing in possible markets. An Exporter has to overcome various constraints and adapt plans and operations to suit foreign environmental conditions. The main elements of foreign environment affecting marketing activities of a firm in a foreign country consist of the following.
A) POLITICAL DIMENSION:
Nations greatly differ in their political environment. Govt. policies, regulations and control mechanisms regarding the countries, foreign trade and commercial relations with other countries or groups of countries. At least four factors should be considered in deciding whether to do business in a particular country. They are
Attitudes towards International Buying:
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Some nations are very receptive, indeed encouraging, to foreign firms, and some others are hostile. For e.g.: Singapore, UAE and Mexico are attracting foreign investments by offering investment incentives, removal of trade barriers, infrastructure services, etc.
Political Stability:
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A country's future and stability is another important issue. Government changes hands sometimes violently. Even without a change, a region may decide to respond to popular feeling. A foreign firm's property may be seized; or its currency holdings blocked; or import quotas or new duties may be imposed. When political stability is high one may go for direct investments. But when instability is high, firms may prefer to export rather than involve in direct investments. This will bring in foreign exchange fast and currency convertibility is also rapid.
3. Monetary Regulations:
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Sellers want to realise profits in a currency of value to them. In best situations, the Importer pays in the seller's currency or in hard world currencies. In the worst case they have to take the money out of the host country in the form of relatively unmarketable products that they can sell elsewhere only at a loss. Besides currency restrictions, a fluctuating exchange rate also creates high risks for the exporter.
4. Government Bureaucracy:
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It is the extent to which the Government in the host country runs an efficient system for assisting foreign companies: efficient customs handling, adequate market information, etc. The problem of foreign uncertainty is thus further complicated by a frequently imposed "alien status", this increases the difficulty of properly assessing and forecasting the dynamic international business. The political environment offers the best example of the alien status.
A foreign political environment can be extremely critical; shifts in Government often means sudden changes in attitudes that can result in expropriation, expulsion, or major restrictions in operations. The fact is that a foreign company is foreign and thus always subject to the political whim to a greater degree than a domestic firm.
CULTURAL ENVIRONMENT:
The manner in which people consume their priority of needs and the wants they attempt to satisfy, and the manner in which they satisfy are functions of their culture which moulds and dictates their style of living. This culture is the sum total of knowledge, belief, art, morals, laws, customs and other capabilities acquired by humans as members of the society. Since culture decides the style of living, it is pertinent to study it especially in export marketing. e.g. when a promotional message is written, symbols recognizable and meaningful to the market (the culture) must be used. When designing a product, the style used and other related marketing activities must be culturally acceptable.
Every country (even regional groups within each country) has cultural traditions, preferences and taboos that the market must study.
An Exporter must have an understanding of the religious, educational, familiar and social institutions in the target market which influence his marketing system. Consumer preferences, life styles, tastes, consumption habits etc. would be visibly different from one culture to another even though there may be closer similarities in economic and political conditions.
E.g.: A Frenchman uses almost twice as many cosmetics and beauty aids as does his wife.
Only one Frenchman out of three brushes his teeth The Dutch never touch Vodka.
Germans eat more spaghetti and more often than the Italians.
Similar cultural differences or similarities in consumption habits, attitudes and behaviour are found all over the world, an understanding and knowledge of which would prove an effective tool in competitive marketing of consumer goods in foreign countries.
ECONOMIC ENVIRONMENT:
In considering the international market, each Exporter must consider the importing country's economy. Two economic characteristics reflect the country's attractiveness as an export market. They are the country's industrial structure and the country's income distribution by employment industrialisation and socio economic justices.
The country's industrial structure shapes its products and services, the requirements, income levels, employment levels and so on.
Four types of industrial structure can be distinguished:
1. Subsistence Economics:
Here vast majority of the people engage in simple agriculture. They consume most of their output and barter the rest for simple goods and services. They offer few opportunities for Exporters.
2. Raw - materials Exporting Economies:
These countries are rich in one or more natural resources and poor in other products. Much of their revenue comes from exporting these resources. E.g. Chile (tin & copper), Malaysia (Rubber), Arab Countries (Oil). These countries are good markets for extractive equipment, material handling equipment, tools, supplies, etc., They are also good markets for western style commodities and luxury items.
3. Industrializing Economies:
In an industrializing economy, manufacturing accounts for 10 to 20 percent of the country's GNP. Examples include Egypt, Brazil, India and Philippines. In such industrializing economies, the countries rely on heavy imports of heavy machinery, raw materials and less on finished products like paper, automobiles, etc. The industrialization results in a new rich class and a small but growing middle class both demanding new types of goods and some of which can be satisfied only through imports.
4. Industrial Economies:
They are major exporters of manufactured goods and investment funds. They trade manufactured goods among themselves and also to the other types of economies in exchange for raw materials and finished goods. The large and varied manufacturing activities of these industrial nations and their sizable middle class makes them rich markets for all sorts of goods.
The second economic characteristic mentioned is the country's income distribution levels. Income distribution is related not only to the industrial structure but also to the political systems. Economic indicators like the GNP, rate of growth, distribution of wealth etc., should be analyzed by international marketers. Balance of payment position and dependability on imports are indicators of economic vitality.
LEGAL DIMENSION:
The legal dimension of international Business environment includes all laws and regulations regarding product specification and standards, packaging and labelling, copyright, trademark, patents, health and safety regulations particularly in respect of foods and drugs. There are also controls in promotional methods, price control, trade margin, mark-up, etc., These legal aspects of marketing abroad have several implications which an exporting firm needs to study closely.
TRADE BARRIERS
Trade barriers may be (i) Tariff Barriers and (ii) Non Tariff Barriers or protective barriers.
i) TARIFF BARRIERS : Tariff barriers have been one of the classical methods of regulating international trade. Tariffs may be referred to as taxes on the imports. It aims at restricting the inward flow of
goods from other countries to protect the country's own industries by making the goods costlier in that country. Sometimes the duty on a product becomes so steep that it is not worthwhile importing it. In addition, the duty so imposed also provides a substantial source of revenue to the importing country. In India, Customs duty forms a significant part of the total revenue, and therefore, is an important element in the budget. Some countries use this method of imposing tariffs and Customs duties to balance its balance of trade. A nation may also use this method to influence the political and economic policies of other countries. It may impose tariffs on certain imports from a particular country as a protest against tariffs imposed by that country on its goods.
Tariffs may be classified according to (a) the purpose (b) how they are levied. As far as the purpose of taxes are concerned tariffs may again be classified as Revenue Tariffs and Protective Tariffs.
Revenue Tariffs are basically intended to raise the Government's revenue. It does not intend to protect any industry of the country. It is levied at a very low rate and does not obstruct the free flow of trade.
Protective Tariffs on the other hand aim at protecting the domestic industries and are generally levied at a very high rate and therefore, obstruct the free flow of imports. Its purpose is hence not to provide revenue to the Government but to safeguard the domestic industries. On the basis of how tariffs are computed, they may be put into two categories as:
Specific Duties, imposed on the basis of per unit of any identifiable characteristic of merchandise such as per unit volume, weight, length, etc. The duty schedules so specified must specify the rate of duty as well as the determining factor such as weight, number, etc. and basis of arriving at the determining factor such as gross weight, net weight or tare weight.
Ad valorem Tariffs are based on the value of imports and are charged in the form of specified percentage of the value of goods. The schedule should specify how the value of imported goods would be arrived at. Most of the countries follow the practice of charging tariffs on the basis of CIF cost or FOB cost mentioned in the invoice. As tariffs are based on the cost, sometimes unethical practices of under invoicing are adopted whereby Customs revenue is affected. In order to eliminate such malpractices, countries adopt a fair value (given in the schedule) or the current domestic value of the goods as the basis of computing the duties.
One example is edible oils. India's production from oilseeds cannot meet the demand of refined oil for cooking and other uses, leading us to necessarily import the balance requirements. The major import is crude palm oil from Malaysia / Indonesia.
In order to protect the domestic industry, our Govt. revises customs duties upwards whenever the fob ( ex exporting country ) cost or cif ( cost insurance, freight at any Indian port ) cost of crude palm oil goes down, to enable the Indian manufacturer to have a level playing field. In other words, the tariff on raw material, crude palm oil, is adjusted so that there is a level playing field between the indigenous manufacturer ( from crude palm oil ) and the refiner ( from imported palm crude ).
ii) NON - TARIFF MEASURES (BARRIERS)
To protect the domestic industries against unfair competition and to give them a fair chance of survival various countries are adopting non-tariff measures. Some of these are :
Quantity Restrictions, Quotas and Licensing Procedures :-
Under quantity restriction, the maximum quantity of different commodities which would be allowed to be imported over a period of time from various countries is fixed in advance. The quota fixed normally depends on the relations of the two countries and the needs of the importing country. Here, the Govt. is in a position to restrict the imports to a desired level. Quotas are very often combined with licensing system to regulate the flow of imports over the quota period as also to allocate them between various importers and supplying countries.
Foreign Exchange Restrictions -
Exchange control measures are used widely by a number of developing countries to regulate imports. Under this system an importer has to ensure that adequate foreign exchange is available for imports by getting a clearance from the exchange control authorities of the country.
Technical Regulations -
Another measure to regulate the imports is to impose certain standards of technical production, technical specification, etc. The imported commodity has to meet these specifications. Stringent technical regulations and standards beyond international norms, expensive testing and certification, and complicated marking and packaging requirments.
Consular Formalities -
A number of countries specify that the shipping documents must accompany the consular documents such as certificate of origin, certified invoices, etc. Sometimes, it is also insisted that the document should be drawn in the language of the importing country. Fees charged for such documentation is also very heavy.
Voluntary Export Restraint:
The agreement on 'voluntary' export restraint is imposed on teh exporter under the threat of sanctions to limit the export of certain goods in the importing country. Similarly, establishment of minimum import prices should be strictly observed by the exporting firms in contracts with the importers of the country that has set such prices. In case of reduction of export prices below the minimum price level, the importing country imposes anti-dumping duty which could lead to withdrawal from the market. Voluntary export restraints mostly affect trade in textiles, footwear, dairy products, cars, machine tools, etc.
Local Content Requirement:-
A local content requirement is an agreement between the exporting and the importing country that the exporting country will use some amount or, content of resources of the importing country in its process of production. If the exporting country agrees to do that only then the importing country will import their goods.
Embargo:-