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International Marketing Management MBA Second Year (International Business) School of Distance Education Bharathiar University, Coimbatore - 641 046 Author: P K Vasudeva Copyright © 2008, Bharathiar University All Rights Reserved Produced and Printed by EXCEL BOOKS PRIVATE LIMITED A-45, Naraina, Phase-I, New Delhi-110028 for SCHOOL OF DISTANCE EDUCATION Bharathiar University Coimbatore-641046 CONTENTS Page No UNIT I Lesson Introduction to International Marketing Management Lesson Barriers in International Marketing Management 27 UNIT II Lesson Customer Value and Satisfaction 53 Lesson Implementing Total Quality Marketing 66 Lesson Competitive Marketing Strategies 76 UNIT III Lesson Introduction to Marketing Mix 91 Lesson Product Mix Planning 100 Lesson Pricing Strategies 122 Lesson Promotional Strategy 140 Lesson 10 International Distribution and Distribution Strategy 169 UNIT IV Lesson 11 Introduction to Globalization 187 Lesson 12 Global Competitiveness 199 UNIT V Lesson 13 Information Technology and International Business 211 Lesson 14 Future of International Business 223 Model Question Paper 237 INTERNATIONAL MARKETING MANAGEMENT SYLLABUS UNIT I International marketing management - National & International marketing - Barriers in International Marketing Management - P`s in International Marketing UNIT II Managing Marketing-Defining Customer Value and Satisfaction-Retaining customer value and Satisfaction - Implementing Total quality marketing-Competitive Marketing strategies UNIT III Marketing Mix - Product Mix - Product strategies and product planning-Branding and Packaging Decisions-Pricing strategies-Promotional Strategies Distribution - Distribution strategies UNIT IV Globalization and Global Competitiveness: Meaning - stages - Foreign market entry strategies - Pros and Cons of Globalization - Social Issues - Indicators of competitiveness - Competitive Advantage of Nations - Technology and Global competitiveness UNIT V Information Technology: New Information Technologies - Business Process Reengineering (BPR) - E-Business; Future of International Business UNIT I LESSON INTRODUCTION TO INTERNATIONAL MARKETING MANAGEMENT CONTENTS 1.0 Aims and Objectives 1.1 Introduction 1.1.1 Scope 1.1.2 National and International Marketing 1.2 Benefits of International Marketing 1.2.1 Endurance 1.2.2 Progress of Overseas Markets 1.2.3 Sales Promotion 1.2.4 Diversification 1.2.5 Inflation and Wholesale Price Index 1.2.6 Employment and Placements 1.2.7 Standard of Living/Style 1.2.8 Marketing Process 1.3 Transnational Corporations 1.4 Global Marketing 1.5 Global Segment 1.6 International Management Orientations 1.6.1 Ethnocentric 1.6.2 Polycentric 1.6.3 Regiocentric and Geocentric Orientations 1.7 Ps of International Marketing 1.7.1 Product 1.7.2 Price 1.7.3 Placement 1.7.4 Promotion 1.7.5 People 1.8 Let us Sum up 1.9 Lesson End Activity 1.10 Keywords 1.11 Questions for Discussion 1.12 Suggested Readings International Marketing Management 1.0 AIMS AND OBJECTIVES After studying this lesson, you will be able to: Define International Marketing Distinguish between international and domestic marketing Describe various marketing orientations in the context of international marketing 1.1 INTRODUCTION The study of international marketing will not be complete unless we have an understanding of what marketing is and how it operates in an international context There have been large numbers of definitions of marketing which are currently in use But most of these definitions are convergent because all of them define marketing in almost the same way Hence, any definition of marketing should be acceptable as long as it captures the essential idea and as long as the strength and the weaknesses of the definition are acknowledged Marketing can be conceived as an integral part of two processes, viz., technical and social So far as the technical process is concerned, domestic and international marketing are identical The technical process includes non-human factors such as produce, price, cost, brand, etc The basic principles regarding these variables are of universal applicability But the social aspect of marketing is unique in any given stratum, because it involves human elements, namely, the behaviour pattern of consumers and the given characteristics of human society such as customs, attitudes, values, etc It is obvious from this that marketing, as a social process, will be different in varying environments and international marketing, to the extent that it is visualised as a social process, will be different from domestic marketing According to Phillip Kotler, marketing is “analysing, organising, planning and controlling of the firm’s customers – impinging resources, policies, activities with a view to satisfying the needs and wants of a chosen customer group at a profit” Thus, it differs from trading which includes the activities of merchandising (buying and selling), physical distribution (transportation and warehousing) and facilitation (financing, risk bearing, standardisation, pricing, advertising and sales promotion and marketing research) In other words, marketing is an act or operation or service by which the original product and final consumer are linked together In between these two points — producer and consumer — every activity facilitating the movement of goods and services, including market and market research, may be covered under this term We are more concerned here with international marketing, which means marketing activity carried on across national boundaries Thus, international marketing includes activities that direct the flow of goods from one country to the users of another country A definition adopted by the American Marketing Association (AMA) is more appropriate to define international marketing According to AMA, ‘international marketing is the multinational process of planning and executing the conception, pricing, promotion and distribution of ideal goods and services to create exchanges that satisfy individual and organisational objectives’ In this definition, the word multinational has been added to the definition of marketing given by other experts This word implies that marketing activities are undertaken in several countries and that such activities should somehow be coordinated across the nations This definition is not completely free of limitations By placing individual objectives at one end of the definition and organisational objectives at the other, the definition stresses a relationship between a consumer and an organisation It excludes industrial marketing, which involves a transaction between two organisations In the world of international marketing, governments, quasi-government agencies and profit seeking and non-profit entities are frequently buyers Companies such as Boeing, BHEL and Hindustan Earth Movers, for example, have nothing to with consumer products The definition thus fails to justice to the significance of industrial purchases The definition of international marketing has various connotations Firstly, it makes it clear that what is to be exchanged is not restricted to tangible products but can include concepts and services as well When the United Nations promotes such concepts as birth control and breast-feeding, this should be viewed as international marketing Figure 1.1 shows an international effort to fight AIDS Likewise services or intangible products are just as relevant to the definition as airline flights, financial services, advertising services, management consulting services, marketing research and so on as they play a very significant role in affecting trade balance Safe Sex World AIDS Day, Birth Control, Breast-feeding, No-smoking, etc Concepts and Services Figure 1.1: Safe Sex Concept and Services Secondly, the definition removes the implication that international marketing applies only to market or business transactions International non-profit marketing, which has received only scant attention, should not be overlooked The marketing of governments and religions underscores this point The governments are very active in marketing in order to attract foreign investments The US is using a variety of local and international media (including CNN International and BBC World Television Network) to announce the arrival of newly designed $100 bills which would not involve any devaluation and that there would never be any recall of the old bills Religion is also a big business, though most people prefer not to view it that way Religion has been marketed internationally for centuries Tercentenary of the birth of Khalsa (300 years of Sikh religion) was celebrated at Anandpur Sahib in 1999 where a large number of NRIs and foreigners contributed to its success The religious messages were flashed on the Internet all over the world Thirdly, the definition recognises that it is improper for a firm to create a product first and then look for a place to sell it Actually the needs and the wants of the consumers should first be ascertained through market research and then the new product should be produced accordingly Suzuki-Maruti has understood the needs of the Indian consumers for a small car; hence it has become the leader in the car industry though other car manufacturers are also following a similar international marketing strategy Fourthly, the definition acknowledges that “place” (distribution) is just part of the marketing mix and that the distance between the markets makes it neither more nor less important than the other parts of the mix Thus, it is improper for any firm to regard their international function as simply as export available products from one country to another Introduction to International Marketing Management 10 International Marketing Management Finally, the “multinational process” implies that the international marketing process is not a mere repetition of using identical strategies abroad The Ps of marketing (product, place, promotion and price) must be integrated and coordinated across countries in order to bring about the most effective marketing mix In some cases, the mix may have to be adjusted for a particular market for a better impact For example, Coca Cola and Pepsi Cola Inc have created new slogans for marketing in India and new chips that differ both in taste and texture from their American version The Whirlpool Corporation has been able to use more standardised models of washing machines and refrigerators to break down national traditions 1.1.1 Scope The foundation for a successful international marketing programme is a sound understanding of the marketing discipline Marketing is the process of focusing the resources and objectives of an organisation on environmental needs and opportunities The first and the most fundamental fact about marketing is that it is a universal discipline The marketing discipline is equally applicable from China to India, United States to Japan and Australia to Zanzibar Marketing is a set of concepts, tools, theories, practices and procedures and experience Although the marketing discipline is universal markets and customers are quite differentiative This means that marketing practices must vary from country to country Each person is unique and each country is unique This reality of differences means that we cannot always directly apply experience from one country to another If the customers, competitors, channels of distribution and available media are different, it may be necessary to change our marketing plan The scope of international marketing is to have a borderless world like the multinational companies — Coca Cola, Pepsi, MacDonald, Gillette and so on Their products and body marketing mix elements are both international and local in nature A central issue in international marketing is how to tailor the international marketing concept to fit a particular product or business 1.1.2 National and International Marketing The striking difference between international and domestic marketing lies in the environment in which the two take place The important points of difference between the two are: Sovereign Political Entities: Each country is a sovereign political entity and, therefore, they impose several restrictions for import and export of goods and services in order to safeguard their national interests The traders, in international marketing, have to observe such restrictions These restrictions may fall in any of the following categories i Tariffs and customs duties are imposed on import and export of goods and services in order to make them costly in the importing country and not to ban their entry into the country completely In the post-war period, because of the efforts of General Agreement on Tariffs and Trade (GATT), there has been a significant reduction in tariffs globally and on a regional basis due to the emergence of regional economic groupings ii Quantitative restrictions are also imposed with an intention to restrict trade in some specific commodities The major objective behind the restriction is the protection of home industries from competition with foreign commodities iii Exchange control is another restriction imposed by almost every sovereign state The government, in some cases, does not ban the entry of goods in the country but the importer is not allowed the necessary foreign exchange to make payment for goods imported But, in some cases, exchange control and quantitative controls are put together along with the grant of import licence iv Imposition of more local taxes on imported goods with an object to make the imported goods costly is one of the restrictions in international marketing Different Legal System: Different countries operate under different legal systems and they all differ from each other Most countries follow the English Common Law as modified from time to time Japan and Latin American countries are important exceptions to this rule The existence of different legal systems makes the task of businessmen more difficult as they are not sure as to which particular system will apply to their transactions This difficulty does not arise in domestic trade, as laws are the same for the whole country Different Monetary Systems: Each country has its own monetary system and the exchange rates for each country’s currency are fixed under the rules framed by the International Monetary Fund (IMF) and, therefore, they are more or less fixed However, in recent years, the exchange rates have been fluctuating and are being determined by demand and supply forces Some countries operate multiple rates i.e different rates are applicable to different transactions Lower Mobility of Factors of Production: Mobility of different factors of production is less between nations than in the country itself However, with the advent of air transport, the mobility of labour has increased manifold Similarly, the development of international banking has increased the mobility of capital and labour In spite of these developments, the mobility of labour and capital is not as much as it is within the country itself Differences in Market Characteristics: Market characteristics in each segment are different, i.e demand pattern, channels of distribution, methods of promotion, etc are quite different from market to market If we treat each country as a separate market, we can assume different market characteristics there These differences are accentuated due to the existence of government controls and regulations However, this is a difference of degree only Even in one single country, for example India and America, these differences in market patterns may be found from state to state Differences in Procedure and Documentation: The laws of countries and customs of trade in each country demand different procedures and documentary requirements for the import and export of the goods and services Traders residing in the territory have to comply with these regulations and customs if they want to import and export goods and services As there are differences in legal and monetary systems, in government regulations and controls, in market characteristics, in mobility of factors of production and in procedures, practices and documentation in foreign trade, the two marketing systems – international and domestic – are quite different As each country has to protect its own interests – political, financial and social – it has to put certain restrictions on foreign trade Restrictions are also there in domestic marketing, but the procedures, systems and the rules and regulations are applicable equally in all parts of the country and these are well known to the traders concerned 11 Introduction to International Marketing Management LESSON 14 FUTURE OF INTERNATIONAL BUSINESS CONTENTS 14.0 Aims and Objectives 14.1 Introduction 14.2 Implications of WTO on International Marketing 14.2.1 The System Helps to Keep the Peace 14.2.2 The System allows Disputes to be Handled Constructively 14.2.3 A System based on Rules rather than Power Makes Life Easier for all 14.2.4 Free Trade Cuts the Cost of Living 14.2.5 It Gives Consumers More Choice and a Broader Range of Qualities to Choose from 14.2.6 Trade Raises Incomes 14.2.7 Trade Stimulates Economic Growth, and that can be Good News for Employment 14.2.8 The Basic Principles make the System Economically more Efficient and they Cut Costs 14.2.9 The System Shields Governments from Narrow Interests 14.2.10The System Encourages Good Government 14.3 Geneva Framework Agreement 2004 and Hong Kong Ministerial 2005 14.4 Let us Sum up 14.5 Lesson End Activity 14.6 Keywords 14.7 Questions for Discussion 14.8 Suggested Readings 14.0 AIMS AND OBJECTIVES After studying this lesson, you will be able to: Describe future prospects of international business Discuss the role of WTO in promoting international marketing 224 International Marketing Management 14.1 INTRODUCTION According to the latest McKinsey Global Survey, top global executives believe that the growing number of consumers in emerging markets (and the resulting changing consumer tastes) will be the most important trend for global business during the next five years In this new millennium, few executives can afford to turn a blind eye to global business opportunities Japanese auto-executives monitor carefully what their European and Korean competitors are up to in getting a bigger slice of the Chinese auto-market Executives of Hollywood movie studios need to weigh the appeal of an expensive movie in Europe and Asia as much as in the US before a firm commitment The globalizing wind has broadened the mindsets of executives, extended the geographical reach of firms, and nudged international business (IB) research into some new trajectories Under the auspices of the General Agreement on Tariffs and Trade (GATT), from 1947 to 1994 the beggar-thy-neighbor protectionism that characterized the inter-war period was gradually reversed As a result, trade increased substantially among the members of the GATT, bringing economic growth in its wake With the conclusion of the Uruguay Round in 1994, administration of the GATT and associated agreements was transferred to the WTO 14.2 IMPLICATIONS OF WTO ON INTERNATIONAL MARKETING From the money in our pockets and the goods and services that we use to a more peaceful world – the WTO and the trading system offer a range of benefits, some wellknown, others not so obvious The world is complex – this text highlights some of the benefits of the WTO’s “multilateral” trading system, but it doesn’t claim that everything is perfect – otherwise there would be no need for further negotiations and for the rules to be revised Nor does it claim that everyone agrees with everything in the WTO That’s one of the most important reasons for having the system: it’s a forum for countries to thrash out their differences on trade issues That said, there are many over riding reasons why we are better off with the system than we would be without it Here are 10 of them The system helps promote peace Disputes are handled constructively Rules make life easier for all Free trade cuts the costs of living It provides more choice of products and qualities Trade raises incomes Trade stimulates economic growth The basic principles make life more efficient Governments are shielded from lobbying 10 The system encourages good government 14.2.1 The System Helps to Keep the Peace This sounds like an exaggerated claim, and it would be wrong to make too much of it Nevertheless, the system does contribute to international peace, and if we understand why, we have a clearer picture of what the system actually does Sales people are usually reluctant to fight their customers Peace is partly an outcome of two of the most fundamental principles of the trading system: helping trade to flow smoothly, and providing countries with a constructive and fair outlet for dealing with disputes over trade issues It is also an outcome of the international confidence and cooperation that the system creates and reinforces History is littered with examples of trade disputes turning into war One of the most vivid is the trade war of the 1930s when countries competed to raise trade barriers in order to protect domestic producers and retaliate against each other’s barriers This worsened the Great Depression and eventually played a part in the outbreak of World War II Two developments immediately after the second World War helped to avoid a repeat of the pre-war trade tensions In Europe, international cooperation developed in coal, and in iron and steel Globally, the General Agreement on Tariffs and Trade (GATT) was created Both have proved successful, so much so that they are now considerably expanded – one has become the European Union, the other the World Trade Organization (WTO) How Does This Work? Crudely put, sales people are usually reluctant to fight their customers – usually In other words, if trade flows smoothly and both sides enjoy a healthy commercial relationship, political conflict is less likely What’s more, smoothly flowing trade also helps people all over the world become better off People who are more prosperous and contented are also less likely to fight But that is not all The GATT/WTO system is an important confidence-builder The trade wars in the 1930s are proof of how protectionism can easily plunge countries into a situation where no one wins and everyone loses The short-sighted protectionist view is that defending particular sectors against imports is beneficial But that view ignores how other countries are going to respond The longer term reality is that one protectionist step by one country can easily lead to retaliation from other countries, a loss of confidence in freer trade, and a slide into serious economic trouble for all – including the sectors that were originally protected Everyone loses Confidence is the key to avoiding that kind of non-win scenario When governments are confident that others will not raise their trade barriers, they will not be tempted to the same They will also be in a much better frame of mind to cooperate with each other The WTO trading system plays a vital role in creating and reinforcing that confidence Particularly important are negotiations that lead to agreement by consensus, and a focus on abiding by the rules 14.2.2 The System allows Disputes to be Handled Constructively As trade expands in volume, in the numbers of products traded and in the numbers of countries and companies trading, there are more opportunities for trade disputes to arise The WTO system helps resolve these disputes peacefully and constructively The countries in dispute should always conform to the agreement There could be a down side to trade liberalisation and expansion More trade means more opportunities for disputes to rise Left to them, those disputes could lead to serious conflict But in 225 Future of International Business 226 International Marketing Management reality, a lot of international trade tension is reduced because countries can turn to organisations, in particular the WTO, to settle their trade disputes Before the World War II, that option was not available After the War, the world’s community of trading nations negotiated trade rules, which are now entrusted to the WTO Those rules include an obligation for members to bring their disputes to the WTO and not to act unilaterally When they bring disputes to the WTO, the WTO’s procedure focuses their attention on the rules Once a ruling has been made, countries concentrate on trying to comply with the rules, and perhaps later renegotiating the rules – not on declaring war on the other Nearly 200 disputes have been brought to the WTO since it was set up in 1995 Without means of tackling these constructively and harmoniously, some could have led to more serious political conflict The fact that the disputes are based an WTO agreements means that there is a clear basis for judging who is right or wrong Once the judgment has been made, the agreements provide any further actions that need to be taken The increasing number of disputes brought to GATT and its successor, the WTO, does not reflect increased tension in the world Rather, it reflects the closer economic ties throughout the world, the GATT / WTO expanding membership and the fact that countries have faith in the system to solve their differences Sometimes the exchanges between the countries can be acrimonious, but they always aim to confirm with the agreements and commitments that they themselves negotiated 14.2.3 A System based on Rules Rather than Power Makes Life Easier for all The WTO cannot claim to make all countries equal But it does reduce some inequalities, giving smaller countries more voice and, at the same time, freeing the major powers from the complexity of having to negotiate trade agreements with each of their numerous trading partners Smaller countries enjoy more bargaining power and life is simpler for bigger countries Decisions in the WTO are made by consensus The WTO agreements were negotiated by all members, were approved by consensus and were ratified in all members’ parliaments The agreements apply to everyone Rich and poor countries alike can be challenged if they violate an agreement and they have an equal right to challenge others in the WTO’s dispute settlement procedures The result for smaller countries is some increased bargaining power Without a multilateral regime such as the WTO’s system, the more powerful countries would be freer to impose their will unilaterally on their smaller trading partners Smaller countries would have to deal with each of the major economic powers individually and would be much less able to resist unwanted pressure In addition, smaller countries can perform more effectively if they make use of the opportunities to form alliances and to pool resources Several countries are already doing this There are matching benefits for larger countries The major economic powers can use the single forum of the WTO to negotiate with all or most of their trading partners at the same time This makes life much simpler for the bigger trading countries The alternative would be continuous and complicated bilateral negotiations with dozens of countries simultaneously And each country could end up with different conditions for trading with each of its trading partners, making life extremely complicated for its importers and exporters The principle of non-discrimination built into the WTO agreements avoids that complexity The fact that there is a single set of rules applying to all members greatly simplifies the entire trade regime 14.2.4 Free Trade Cuts the Cost of Living We are all consumers The prices we pay for our food and clothing, our necessities and luxuries and everything else in between are affected by trade policies According to one calculation, consumers and governments in rich countries pay $ 350 billions per year supporting agriculture – enough to fly their 41 million dairy cows first class around the world one and a half times Protectionism is expensive: it raises prices The WTO’s global system lowers trade barriers through negotiation and applies the principle of non-discrimination The result is reduced costs of production (because imports used in production are cheaper) and reduced prices of finished goods and services and ultimately a lower cost of living There are plenty of studies showing just what the impacts of protectionism and of free trade are Food is Cheaper When you protect your agriculture, the cost of your food goes up – by an estimated $1500 per year for a family of four in the European Union; by the equivalent of a 51% tax of food in Japan; by $3 billion per year added to US consumers’ grocery bills just to support sugar in one year (1998) Negotiating agricultural trade reform is a complex undertaking Governments are still debating the roles agricultural polices play in a range of issues from food security to environmental protection But WTO members are now reducing the subsidies and the trade barriers that are the worst offenders In 2000, new talks started on agriculture Clothes are Cheaper Import restrictions and high customs duties combined to raise US textiles and clothing prices by 58% in the late 1980s UK consumers pay an estimated pound 500 million more per year for their clothing because of these restrictions For Canadians, the bill is around C$780 million For Australians, it would be $300 annually per average family, if Australian custom duties had not been reduced in the late 1980s and early 1990s The textiles and clothing trade is going through a major reform – under the WTO – that will be completed in 2005 The programme includes eliminating restrictions on quantities of imports If custom duties were also to be eliminated, economists calculate the result could be a gain to the world of around $23 billion, including $12.3 billion for the US, $0.8 billion for Canada, $2.2 billion for the EU and around d $8 billion for developing countries 227 Future of International Business 228 International Marketing Management The Same Goes for Other Goods When the US limited Japanese car imports in the early 1980s, car prices rose by 41% between 1981 and 1984 – nearly double the average for all consumer products The objective was to save American jobs but the higher prices were an important reason why one million fewer new cars were sold, leading to more job losses Similar French restrictions added an estimated 33% of French car prices TVs, radios, vidos are or were all more expensive under protectionism And Services Liberalisation in telephone services is making phone calls cheaper – in the 1990s by 4% per year in developing countries and 2% per year in industrial countries, taking inflation into account In China, competition from a second mobile phone company was at least part of the reason for a 30% cut in the price of a call In Ghana the cut was 50% Sometimes the lower costs of services are related to lower trade barriers for goods: when the EU created its single market by removing internal trade barriers, telecommunications equipment costs fell by an average of 7% over years And so it goes on The system now entrusted to the WTO has been in place for over 50 years In that time there have been eight major rounds of trade negotiations Trade barriers around the world are lower than they have ever been in modern trading history They continue to fall and we are all benefiting 14.2.5 It Gives Consumers More Choice and a Broader Range of Qualities to Choose from Think of all the things we can now have because we can import them: fruits and vegetables of season, food, clothing and other products that used to be considered exotic, cut flowers from any part of the world, all sorts of household goods, books, music, movies, and so on Life with and without imports Think also of the things people in other countries can have because they buy exports from elsewhere and us Look around and consider all the things that would disappear if all our imports were taken away from us Imports allow us more choice – both more goods and services to choose from and a wider range of qualities Even the quality of locally produced goods can improve because of the competition from imports The wider choice isn’t simply a question of consumers buying foreign finished products Imports are used as materials, components and equipment for local production This expands the range of final products and services that are made by domestic products and it increase the range of technologies they can use When mobile telephone equipment became available, services sprang up even in the countries that did not make the equipment, for example Sometimes, the success of an imported product or service on the domestic market can also encourage new local producers to compete, increasing the choice of brands available to consumers as well as increasing the range of goods and services produced locally If trade allows us to import more, it also allows others to buy more of our exports It increases our incomes, providing us with the means of enjoying the increased choice 14.2.6 Trade Raises Incomes Lowering trade barriers allows trade to increase, which adds to incomes – national incomes and personal incomes But some adjustment is necessary The fact that there is additional income means that resources are available for governments to redistribute The WTO’s own estimates for the impact of the 1994 Uruguay Round trade deal were between $109 billion and $510 billion added to world income (depending on the assumptions of the calculations and allowing for margins of error) Other economists have produced similar figures In Europe, the EU Commission calculates that over 1989-93, EU income increased by 1.1-1.5% more than they would have done without the single market So trade clearly boosts incomes Trade also poses challenges as domestic producers face competition from imports But the fact that there is additional income means that resources are available for governments to redistribute the benefits from those who gain the most — for example to help companies and workers adapt by becoming more productive and competitive in what they were already doing, or by switching to new activities 14.2.7 Trade Stimulates Economic Growth, and that can be Good News for Employment Trade clearly has the potential to create jobs In practice there is often factual evidence that lower trade barriers have been good for employment But the picture is complicated by a number of factors Nevertheless, alternative protectionism is not the way to tackle employment problems Careful policy making harnesses the job-creation powers of freer trade This is a difficult subject to tackle in simple terms There is strong evidence that trade boosts economic growth and that economic growth means more jobs It is also true that some jobs are lost even when trade is expanding But a reliable analysis of this poses at least two problems First, there are other factors at play For example, technological advance has also had a strong impact on employment and productivity, benefiting some jobs, hurting others Second, while trade clearly boosts national income (and prosperity), this is not always translated into new employment for workers who lost their jobs as a result of competition from imports The picture is not the same all over the world The average length of time a worker takes to find a new job can be much longer in one country than for a similar worker in another country experiencing similar conditions In other words, some countries are better at making the adjustment than others This is partly because some countries have more effective adjustment policies Those without effective policies are missing an opportunity There are many instances where facts show that the opportunity has been grasped – where freer trade has been healthy for employment The EU Commission calculated that the creation of its single market means that there are somewhere in the range of 3,00,000-9,00,000 more jobs than there would be without the single market 229 Future of International Business 230 International Marketing Management Often, job prospects are better in companies involved in trade In the United States, 12 million people owe their jobs to exports; million of those jobs were created between 1993 and 1997 And those jobs tend to be better paid with better security Between 1987 and 1992, employment growth in companies involved in exporting was around 18% higher than in other comparable companies Facts also show how protectionism hurts employment The example of the US car industry has already been made: trade barriers designed to protect US jobs by restricting imports from Japan ended up making cars more expensive in the US, so fewer cars were sold and jobs were lost In other words, an attempt to tackle a problem in the short-term by restricting trade turned into a bigger problem in the longer term Even when a country has difficulty making adjustments, the alternative of protectionism would simply make matters worse 14.2.8 The Basic Principles make the System Economically more Efficient and they Cut Costs Many of the benefits of the trading system are more difficult to summarise in numbers but they are still important They are the result of essential principles at the heart of the system and they make life simpler for the enterprises directly involved in trade and for the producers of goods and services Discrimination complicates trade Trade allows a division of labour between countries It allows resources to be used more appropriately and effectively for production But the WTO’s trading system offers more than that It helps to increase efficiency and to cut costs even more because of important principles enshrined in the system Imagine a situation where each country sets different rules and different customs duty rates for imports coming from different trading partners Imagine that a company in one country wants to import raw materials or components – copper for wiring printed circuit boards for electrical goods, for example – for its own production It would not be enough for this company to look at the prices offered by suppliers around the world The company would also have to make separate calculations about the duty rates it would be charged on the imports (which would depend on where the imports came from) and it would have to study each of the regulations that apply to products from each country Buying some copper for circuit boards would become very complicated That, in simple terms, is one of the problems of discrimination Imagine now that the government announces it will charge the same duty rates on imports from all countries and it will use the same regulations for all products, no matter where they come from, whether imported or locally produced Life for the company would be much simpler Sourcing components would become more efficient and would cost less Non-discrimination is just one of the key principles of the WTO’s trading system Others include: Transparency (clear information about policies, rules and regulations) Increased certainty about trading conditions (commitments to lower trade barriers and to increase other countries, access to one’s markets are legally binding) Simplification and standardisation of customs procedure, removal of red tape, centralised databases of information and other measures designed to simplify trade that come under the heading “trade facilitation” Together, they make trading simpler, cutting companies costs and increasing confidence in the future That in turn also means more jobs and better goods and services for consumers 14.2.9 The System Shields Governments from Narrow Interests The GATT/WTO system, which evolved in the second half of the 20th century, helps governments take a more balanced view of trade policy Governments are better placed to defend themselves against lobbying from narrow interest groups by focusing on tradeoffs that are made in the interests of everyone in the economy Governments are better placed to ward off powerful lobbies One of the lessons of the protectionism that dominated the early decades of the 20th century was the damage that can be caused if narrow sectoral interests gain an unbalanced share of political influence The result was an increasingly restrictive policy that turned into a trade war that no one won and everyone lost Superficially, restricting imports looks like an effective way of supporting an economic sector But it biases the economy against other sectors which shouldn’t be penalised – if you protect your clothing industry, everyone else has to pay for more expensive clothes, which puts pressure on wages in all sectors, for example Protectionism can also escalate as other countries retaliate by raising their own trade barriers That’s exactly what happened in the 1920s and 30s with disastrous effects Even the sectors demanding protection ended up losing Governments need to be armed against pressure from narrow interest groups and the WTO system can help The GATT-WTO system covers a wide range of sectors So, if during a GATT-WTO trade negotiation, one pressure group lobbies its government to be considered as a special case in need of protection, the government can reject the protectionist pressure by arguing that it needs a broad-ranging agreement that will benefit all sectors of the economy Governments just that regularly 14.2.10 The System Encourages Good Government Under WTO rules, once a commitment has been made to liberalise a sector of trade, it is difficult to reverse The rules also discourage a range of unwise policies For business, that means greater certainty and clarity about trading conditions For government, it can often mean good discipline The rules include commitments not to backslide into unwise policies Protectionism, in general, is unwise because of the damage it causes domestically and internationally, as we have already seen Particular types of trade barriers cause additional damage because they provide opportunities for corruption and other forms of bad government One kind of trade barrier that the WTO’s rules try to tackle is the quota, for example restricting imports or exports to no more than a specific amount each year 231 Future of International Business 232 International Marketing Management Because quotas limit supply, they artificially raise prices creating abnormally large profits (economists talk about “quota rent”) That profit can be used to influence policies because more money is available for lobbying It can also provide opportunities for corruption, for example in the allocation of quotas among traders There are plenty of cases where that has happened around the world In other words, quotas are a particularly bad way of restricting trade Governments have agreed through the WTO’s rules that their use should be discouraged Nevertheless, quotas of various types remain in use in most countries and governments argue strongly that they are needed But they are controlled by WTO agreements and there are commitments to reduce or eliminate many of them, particularly in textiles Many other areas of the WTO’s agreements can also help reduce corruption and bad government Transparency (such as making available to the public all information on trade regulations), other aspects of “trade facilitation”, clearer criteria for regulations dealing with the safety and standards of products and non-discrimination also help by reducing the scope for arbitrary decision making and cheating Quite often, governments use the WTO as a welcome external constraint on their policies: “we can’t this because it would violate the WTO agreements” Check Your Progress 1 Define the WTO trading system How free trade cuts the cost of living? 14.3 GENEVA FRAMEWORK AGREEMENT 2004 AND HONG KONG MINISTERIAL 2005 India welcomed the 'July Framework Agreement' drafted by the General Council of the World Trade Organisation (WTO) signed in Geneva on 31st July 2004, terming it as a victory for the country's negotiating team led by Commerce and Industry Minister Mr Kamal Nath This has been described as a breakthrough that would eliminate billions of dollars in farm subsidies As the accord has reached on the principle of give and take, poor economies also will have to make some concessions However, the time will tell whether in the long run the developed economies gain more than the poor especially in the areas of non-agriculture market access One wonders how is the victory claims of New Delhi are justified, when China has labeled it as "not bad, though the developing countries are not fully satisfied" According to Mr Celso Amorim, Foreign Minister of Brazil (a strong Indian ally of G-20 in the WTO battle), said, "Obviously, developing nations did not get everything they asked for in Geneva But the overall direction is clear: This is the beginning of the end to export subsidies; the stage is set for a substantial reduction in all types of trade-distorting domestic support; market access negotiations will open up new opportunities for trade, without prejudice to the needs of developing countries." This statement can be just interpreted as making polite noises India's claim as a "major victory" seems to be an over reaction because the real battle will begin only with the talks on modalities, when the "give and take" will translate into actual tariff cuts and so on The upbeat official assessment from Brazil and India are is on the expected line since they were part of the group of five (G5) identified as "five interested parties" (FIP) that extracted an agreement out of a situation in which none was in sight It includes the US and the EU (representing the developed countries) and Australia (representing the Cairn group of agricultural exporters) The framework has given hortatory and declaratory comfort in the decision making pertaining to Doha negotiations beyond the end of 2004 which is the biggest gain of the WTO accord after intense and emotive sessions of bargaining between the rich and the poor nations meaning thereby that the WTO negotiations will continue with no new deadline However, another road maker has been set for political inputs at the Sixth Ministerial Conference at Hong Kong in December 2005 The decision includes some new dates: Recommendations on special and differential treatment by July 2005; revised market opening offers in services by May 2005; and on implementations issues a report to the Trade Negotiations Committee and General Council by May 2005 with any appropriate action by the Council by July 2005 The main issues that have seen light of the accord are agriculture, special and differential treatment, implementation issues and services, however, there are certain issues on which the US, Japan and the EU may not in the end easily allow some concrete steps to be taken The outcome on the services talks could also benefit India, but not if merely used to expand outsourcing opportunities The 148 member states of WTO has this time successfully negotiated a global trade deal after spectacular failure at the Fifth Ministerial Conference at Cancun in September 2003 The Doha Development Agenda can now be negotiated with fresh round of detailed talks on the basis of the accord reached at the end of July This could provide a big boost for the world economy and could add more than $520,000 million to the world trade by 2015 According to World Bank report, all this may also elevate living standards of some 500 million farmers including sixty seven million Indian farmers The two major advances are in the area of agriculture and the so-called Singapore issues With regard to the later the agreement has agreed under explicit consensus, to negotiate on 'Trade Facilitation' and drop other Singapore issues like investment, competition, and government procurement from the Doha Work Programme These are distinct gains, however, an important footnote stipulating namely, "without prejudice to the possible format of the final result of the negotiations" and "allow considerations of various forms of outcomes" need to be considered seriously by the developing countries As for government procurement, to take one example of how it affects trade, if a government offers an incentive for the level of indigenisation in procuring a good that clearly would affect the trade Here again, there is a plurilateral agreement, involving 28 countries, but the attempt is to reach an agreement between all the 148 members of the WTO The developing countries cannot denude its citizens for getting incentives on procurement of quality goods within the country As things stand, there are as many as 2100 (UNCTAD estimate) bilateral investment treaties, there is no multilateral agreement on 'how to deal with foreign direct investment Similarly competition policy would also have an impact on the volume of the trade One of the things an international agreement on competition policy would need to look at its cartels in various industries, which are estimated to cost developing countries billions of dollars a year due to overpricing 233 Future of International Business 234 International Marketing Management On the issue of transparency in government procurement, the Indian position is that while the principle is entirely acceptable, there cannot be a universal determination of what constitutes transparent procedures, because they differ from country to country The developed countries felt that for international trade to be genuinely free and fair, these issues would need to be incorporated They pointed out, for instance, that of the total global trade in goods and services of $ 6.1 trillion in 1995, as much as one-third was trade within companies - between the subsidiaries of the same MNC or between a subsidiary and its headquarters Clearly, there is a considerable link between the trade and investment On the issues like investment and competition policy, India feels that having a multilateral agreement would be a serious impingement on the sovereign rights of countries Investment is seen as an area in which ceding sovereign rights would leave governments, particularly developing countries, with too little room for maneuver in directing investments into areas of national priority Check Your Progress What is the main conclusion of Mckinsey Global Survey about the future of international business? What is Geneva Framework of WTO? Trade facilitation refers essentially to simplifying procedural hassles in international trade, in terms of the documentation required by customs department and so on Obviously, this too has an impact on trade This clause of the Singapore issues has been retained for further discussion and arriving at an agreement at the next Ministerial at Hong Kong On trade facilitation India has argued that once again idea is unexceptionable, developing countries may not have the resources – by way of technology or other wise – to bring their procedures in line with those in the developed world over the short to medium term Some of the key interests of India and the other developing countries have been safeguarded These include: The ability to provide up to 10 percent of agriculture output without any cuts if "almost all" is on support for marginalized and resource poor farmers This gives India the leeway to redirect payments to such farmers in India Ability to designate special products and with a new Special Safeguard Mechanism for developing countries, and overall for Special and Differential Treatment of developing countries On the high level of subsidies in developed countries perhaps a course is set for their reduction A tiered formula has been evolved for harmonized reduction by the developed countries of their "overall trade distorting support" in agriculture The 'trade-distorting subsidies' by the US, illegally classified as in the 'green box', are to be capped and cut, but in a process that could in fact increase them A new 'blue box' has been created so to say for the US, EU and other developed countries for farm support On export subsidies of the US and the EU, an end date to be set for elimination, with some special provisions on food aid In agriculture, the framework binds the developed countries into doing away with direct and indirect subsidies provided to their exports It also extracts a promise of substantial reduction of domestic support provided to their farmers This primarily comes in the form of an agreement to substantially reduce, based on negotiations, the sum total of Final Bound levels of the Aggregate Measure of Support (AMS), de minimis (or minimal acceptable) support and Blue Box measures Such reduction is to occur through a tiered formula involving larger reductions by those currently providing higher levels of support, leading to some "harmonization" of support levels In particular, the framework requires that there would be a minimal reduction in such support to 80 percent of pre-existing levels in the very first year and throughout the period of implementation While a major compromise in the form of the continuation of the Blue Box has been made a promise to cap Blue Box support at percent of the value of production, however, no substantial gain has been extracted Early in the negotiations, there were two major gains in the agriculture area, which the US and the EU managed to obtain, which are taken for granted now The first was the "preserve-as-is" attitude to permitted Green Box support measures The second was the continuation of the Blue Box, which was to be phased out at the end of the Uruguay Round implementation period These gains have only been strengthened in the final framework agreement The agreement clearly states that the "basis concepts, principles and effectiveness" of the Green Box remain untouched, subject to a review to ensure that its trade-distorting effects are 'minimal' Further, not only can members take recourse to existing forms of Blue Box support, but also new measures can be negotiated subject to the condition that such payments will be less trade distorting than AMS measures Clearly then, the idea is to maximize support which is provided to agriculture by offering an appropriate combination of Green Box and Blue Box support, rather than through measures conventionally defined as trade-distorting 14.4 LET US SUM UP In this new millennium, few business houses can afford a turn a blind eye to global business opportunities According to the latest Mckinsey Global Survey, top global executives believe that the growing number of consumers in emerging markets will be the most important trend for global business during the next five years On 15th April 1994, trade ministers of 123 countries signed the Final Act of the GATT Uruguay Round of negotiations at Marrakech, brining the WTO into being on 1st January 1995 As of November 1998, the WTO had 132 member countries The object of the Act is the liberalisation of world trade By it, member countries undertake to apply fair trade rules covering commodities, services and intellectual property It provides for the lowering of tariffs on industrial goods and tropical products; the abolition of import duties on a variety of items; the progressive abolition of quotas on garments and textiles; the gradual reduction of trade distorting subsidies and import barriers, and agreements on intellectual property and trade in services 235 Future of International Business 236 International Marketing Management 14.5 LESSON END ACTIVITY Discuss the provisions of World Trade Organisation (WTO) What are implications of WTO agreements on international business 14.6 KEYWORDS International Business: It is the performance of business across two different countries Global Business: The performance of business activities that direct the flow of goods and services to consumers or users in more than one nation 14.7 QUESTIONS FOR DISCUSSION Discuss the present scenario and future prospects of international business What is role of WTO is promoting international business? Check Your Progress: Model Answers CYP 1 The WTO trading system plays a vital role in creating and reinforcing the confidence The WTO system helps resolve and handle the disputes peacefully and constructively As consumer, whatever price we pay for our food and clothing, our necessities and luxuries and everything else in between are affected by trade policies Import restrictions and high custom duties increase the prices, thus free trade cuts the cost of consumer goods like, clothes, food and other goods and thereby makes a cut in the cost of living CYP According to the latest Mckinsey Global Survey, top global executives believe that the growing number of consumers in emerging markets will be the most important trend for global business during the next five years Geneva Framework: Geneva framework was drafted by the General Council of the World Trade Organisation (WTO) and signed in Geneva on 31st July, 2004 This has been described as a breakthrough that would eliminate billions of dollars in farm subsidies 14.8 SUGGESTED READINGS PKVasudeva, International Marketing, Excel Books, New Delhi, 2006 Shyam Shukla, International Business, Excel Books, New Delhi, 2008 Philip R Catero, International Marketing Keegan, Global Marketing Management MODEL QUESTION PAPER MBA Second Year Sub: International Marketing Management Time: hours Total Marks: 100 Direction: There are total eight questions, each carrying 20 marks You have to attempt any five questions Why is the task of the international marketer more complex and difficult than that of the domestic marketer? Describe the role of human resource management in implementing total quality marketing What are the components of competitive marketing strategy? Discuss What are the elements of marketing mix for international market? What are the factors that make it feasible to offer a standardised product? Offer your comments for product adaptation Distinguish between direct and indirect selling channels What are the advantages and disadvantages of each? Discuss the features of ‘Global Competitiveness Report’ prepared by World Economic Forum Write short-notes on any two of the following: (a) Non-Tariff Barriers (b) Total Quality Marketing (c) International Marketing Mix (d) Global Competitiveness [...]... universal discipline of marketing to the international opportunities found in the world markets One way to understand the concept of international marketing is to examine how international marketing differs from such similar concepts as domestic marketing, foreign marketing, comparative marketing, international trade, international business and multinational marketing The basic goals of marketing are to create...12 International Marketing Management 1.2 BENEFITS OF INTERNATIONAL MARKETING The importance of international marketing is neither understood nor appreciated by consumers though they are carrying out international marketing daily Government officials, especially bureaucrats, seem to always point a negative aspect of international business Many of their charges on international marketing are... multinational marketing (g) global marketing and (h) world marketing 7 Distinguish among (a) ethnocentricity (b) polycentricity and (c) geocentricity 25 Introduction to International Marketing Management 26 International Marketing Management Check Your Progress: Model Answers CYP 1 1 Environment, 2 Excellent markets, 3 Affect, 4 Domestic CYP 2 1 International Marketing: It refers to the marketing of... 2 Management Orientations (i) Ethnocentric Orientation (ii) Polycentric Orientation (iii) Regiocentric Orientation (iv) Geocentric Orientation 1.11 SUGGESTED READINGS PKVasudeva, International Marketing, Excel Books, New Delhi, 2006 Shyam Shukla, International Business, Excel Books, New Delhi, 2008 Philip R Catero, International Marketing Keegan, Global Marketing Management LESSON 2 BARRIERS IN INTERNATIONAL. .. fostering competition and efficiency 1.2.8 Marketing Process International marketing should be considered a special case of domestic marketing It has earlier been explained that there is very little difference between domestic and international marketing Only thing is that the word multinational has been added in the international marketing process Otherwise, the marketing mix is the same for both With... and cultures While many companies who sell internationally are successful following a standardized marketing strategy it is a mistake to assume this approach will work without sufficient research that addresses this question 17 Introduction to International Marketing Management 18 International Marketing Management Possibly the most challenging concept in marketing deals with understanding why buyers... believe that marketing adaptation is not necessary In contrast, polycentric, regionocentric and geocentric firms export to psychologically distant markets Check Your Porgress 2 1 Define International Marketing 2 What are the various management orientations for International Marketing? 1.7 5Ps OF INTERNATIONAL MARKETING We will study the international. .. International Marketing has become indispensable in the economic development of a developing country” Comment with respect to the Indian situation 5 Why is the task of the international marketer more complex and difficult than that of the domestic marketer? 6 Distinguish among (a) domestic marketing (b) foreign marketing (c) comparative marketing (d) international trade (e) international marketing (f)... context of marketing? 1.9 KEYWORDS Marketing: It is the performance of business activity, directing the flow of products from producer to consumer International Marketing: It is the performance of marketing across two different countries Domestic Marketing: It is the form of marketing in which the firm faces only one set of competitive, economic and market issues Global Marketing: The performance of business... or remove a majority of the members of the administrative, management or supervisory body 15 Introduction to International Marketing Management An associate is an incorporated enterprise in the host country in which an investor owns a total of at least 10%, but not more than half, of the shareholders' voting power 16 International Marketing Management A branch is a wholly or jointly owned unincorporated
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