International Marketing

Lecture week 6International Marketing Environment

Political and economic

Agenda• Discuss how the political environment will affect the

attractiveness of foreign market• Distinguish between political factors in the home country and

host country environment• Political risk analysis• Tariff and non tariff barriers• Discuss how the economic environment will affect the

attractiveness of foreign market• Define regional integration and identify different level of

integration• Benefits and drawbacks of regional economic integration

The International Marketing Environment• Definition

‘Those variables, largely out of the organisation’s control but which it must account for, within which it conducts its business internationally’ (Lee & Carter, 2009)

3Source: Lee and Carter (2009)

Political/legal environment• The political/legal environment comprises

primarily two dimensions:1. the home country environment;2. the host country environment.

Home country environment• A firm’s home country political environment can constrain

its international operations as well as its domestic operations.

• It can limit the countries that the international firm may enter– For example South Africa political pressure induced some

international firms from US and Japan to leave the country altogether.

• Threat from third market other than host and home country. – For example, today European firms face trouble in US if they do

business in Cuba

Home country environment ( contd..)• Concern about bribery and corruption- – in many countries no work is done without bribery and corruption.

• Issue is shall the company give bribe to gain the contract or maintain their moral principles?– Giving bribe to gain contract may lead to loose moral standards

among managers and employees and – may result in a concentration on how best to bribe rather than on

how best to produce and market products.• The global marketer must distinguish carefully between – reasonable ways of doing business internationally – including

compliance with foreign expectations – and – outright bribery and corruption

Promotional activities- sponsored by government organisation

• Government promote exporting• Regulatory supportive activities to make country’s

product more competitive in world market.• Granting of subsidies: – export subsidies to export industries and – tariff to domestic industries: to ensure the profitability of

home country firms when faced with full competition.• Subsidy: lower tax on profit, refunding of various

indirect tax, direct grant.

Financial activities• National government act as a role of international

banker.• Granting subsidies is financial based promotional

activity of national governments.• Credit policy: vital factor for company’s export

marketing programme.– Better payment terms- more sales even though high

price or low quality– Extended credit terms- risk of non payment– Transfer the risk to government through insurance.

Information services• For many companies especially smaller companies or

newcomers to global marketing, national government is the major source of basic marketing information

• Types of information provided by government:– Economic, social and political data on individual countries, including

their infrastructure– Summary and detailed information on aggregate global marketing

transactions– Individual report on foreign firms– Specific export opportunities– List of potential overseas buyers, distributors and agents for various

product in different countries– Information on government regulations both at home and abroad

Export facilitating activities• Number of government activities can stimulate exports– Trade development offices abroad– Government sponsored trade fairs and exhibitions– Sponsoring trade missions of business people

For example: Nepal international trade fair organised by FNCCI ( Federation of Nepalese Chambers of Commerce and Industry) in association with government to promote the commodities that are in the priority list of government. This activity will provide companies low cost ways of making direct contact with potential buyers in overseas markets.

Promotion by private organisations• Various non governmental organisation play a

role in the promotions of global marketing– Industry and trade associations: for e.g. Nepal

Merchant Association, silk association of Nepal– Chamber of commerce: e.g. Nepal chamber of

commerce, FNCCI– Other organisation concerned with trade promotion-

for e.g. organisation carrying out export research– Export service organisations such as banks,

transport companies and trading companies

Host country environment• Managers must continually monitor the

government, its policies and its stability to determine the potential for political change that could adversely affect operations of the firm.

• Political risk– Ownership risk: exposes property and life– Operating risk: interference with ongoing activities– Transfer risk: problem when companies want to

transfer capital between countries

Political risks- action and their effect• Import restrictions-

– force foreign industry to purchase within the host country

• Local content laws- – product sold within the country should contain locally made parts- e.g. EU

requires 45% local content in foreign owned assemblers

• Market control-– prevent foreign companies from competing in certain markets- e.g. US

government boycotted foreign firms trading with Cuba.

• Price control- – on essential product such as pharmaceuticals, food, petrol etc. during

inflationary period to control environmental behaviour of consumers or cost of living.

• Labour restrictions: – labour union persuading government to pass very restrictive laws that

support labour at heavy cost of business.

Political risks- action and their effect• Tax controls:

– tax raised without warning and in violation of formal agreements. E.g. in underdeveloped countries where increase in tax in international firm is the quickest way to find operating funds

• Change of government party: – new government may not honour an agreement that the previous

government has made with the company

• Nationalization: – takeover of foreign companies by the host government. Mexico's seizure

of oil properties owned by U.S. corporations (1938)

• Domestication: – control and restriction placed in foreign firm through imposing different

controls for e.g. decision making power to nationals, more product produced locally etc.

Trade barriers from home country to host country

• Advantage of free trade between nations– Increase output levels beyond their domestic markets– Allowing significant economies of scale– Increase in competition-

• price of goods falls in importing countries and increase in profit in exporting countries

• Trade barriers:– trade laws that favours local firms and discriminate against

foreign ones. – Degree of control on foreign trade varies from country to

country

Reasons for levying tariffs• To protect domestic producers• To generate revenue

Types of barriers• Tariff – Direct taxes and charges imposed on imports– Generally straightforward and easy for the company

to administer– They are visible and known quantity and so can be

accounted for by companies when developing their marketing strategies

– Used as a means for collecting revenues and protecting domestic industries

– Useful tool for politicians to show that they are actively trying to protect their home markets.

Types of barriers• Tariff – Common form of tariffs are

• Specific- charges are imposed on particular product by weight or volume

• Ad valorem: charge is the straight percentage of the value of goods• Discriminatory: charge is for goods coming from particular countries

– For example, Company XYZ produces cheese in Scotland and exports the cheese, which costs $100 per pound, to the United States. • A 20% ad valorem tariff would require Company XYZ to pay the U.S.

government $20 to export the cheese. • A specific tax would involve charging $30 dollars per pound of

cheese whether cheese sold for $100 or $200 per pound.

Non tariff barriers• Non-tariff barriers are much more elusive and can

be more easily disguised• Their effect can be more devastating because

they are unknown quantity and are much less predictable

• Non-tariff barriers could be in the form of– Quotas– Embargoes– Administrative delays– Local content requirements

Quotas • A restriction on the amount of good that can enter or

leave a country during a period of time• Two reason for imposing import quotas– Protect domestic producers by placing the limit on amount

of goods allowed to enter the country. • Domestic producers win by protecting the market share but

consumers lose because of high price and less selection due to lower competition.

• Other loser could be the domestic producers who need to import intermediate goods for the production.

– To force the companies of other nations to compete against one another for the limited amount of imports allowed.

Quotas • Reason for imposing export quotas– To maintain adequate supplies of product in the

home market: • for e.g. companies exporting natural resources

– Restrict supply on world markets to increase the price of the goods: • for e.g. Middle east countries attempts to restrict the

world’s supply of crude oil to earn greater profits.

Embargoes • A complete ban on trade in one or more

products with a particular country• Typically applied to accomplish political goals• Example: US embargo on trade with Cuba.

Administrative delays• Regulatory controls designed to impair the rapid

flow of imports into a country• Examples– Requiring international air carriers to land at

inconvenient airports– Requiring product inspections that damage the

product itself– Purposely under staffing customs offices to cause

unusual delays – Requiring special licences that take long time to obtain

Local content requirements• Law stating that a certain portion of end product

consists of domestically produced goods• Employ local resources in their production

especially labour.

The political risk analysis procedure• This includes analysing the potential political events and

identifying the probable impact and responses to the firm.• This help firm make the informed decision based on the ratio

of return to risk, – firm can enter or stay in a country when the ratio is favourable and – avoid or leave a country when the ratio is poor.

• Generally political risk are addressed through the building of relationships with the various stakeholders of the companies– Government– Customers– Employees– The local community

The political risk analysis procedure• Government: – lobbying, corruption/bribery

• Customers: – considerable support from them if there is good

relationship as they fear losing the benefits that the firm provides

• Employees: – key to their own survival

• The local community: – good local citizen and reinvest in the local community

The economic environment

The economic environment• Economic factors that have effects on the

working of the business. – Policies and nature of an economy, – trade cycles, – level of income, – distribution of income and wealth.

• It is very dynamic and complex in nature and does not remain the same.

The economic environment• Economic development results from on of the

three types of economic activity:– Primary: • concerned with agriculture and extractive processes e.g.

coal, iron ore, gold, fishing

– Secondary: • manufacturing activities

– Tertiary: • these activities are based upon services for example

tourism, insurance and health care.

Exchange rate and business activities• Movement of exchange rates affects the activities of

both domestic and international companies• When a country’s currency is weak- valued low

relative to other currencies- the price of the export on the world market decline and the price of the import increases.– Lower prices makes the country’s export more appealing

in world markets and hence take market share away from companies whose product are highly priced in comparison

– On the other hand this devaluation of currency reduces the consumers buying power

Exchange rate and business activities• Company selling in country with a strong

currency while paying workers in a country with a weak currency improves its profits

• Therefore managers prefers exchanges rates to be stable – for the accuracy of financial planning including cash

flow forecasts.• Insuring against potential adverse exchange rate

movements.

Law of one price• The law of one price stipulates that – an identical product must have an identical price in all

countries – when price is expressed in common denominator

currency.• Exchange rate doesn’t tell us – whether a specific product will actually cost us more or

less in a particular country.• The usefulness of the law of one price is that – it helps us determine whether the currency is over or

under valued. (big mac index)

Law of one price• Big mac index: Based on Purchasing Power parity

theory– Dollar should buy the same amount in all countries

• Assumption is that the Big Mac in any country should equal the price of the Big Mac in the United States after being converted to a dollar price

• A country’s currency will be overvalued – if the big Mac price in dollar in foreign country is

higher than the US price and vice versa.

Less developed countries (LDC’s)• Underdeveloped and developing countries– GDP per capita less than $3000– Limited amount of manufacturing activity– Very poor and fragmented infrastructure such as in transport,

communications, education and health care.– Public sector is slow moving

• Heavily reliant on one product for example – Cuba- sugar; – Colombia- Coffee.

• Without real prospect of economic development private sources of capital are reluctant to invest in such countries.

• Therefore rely heavily on world aid programmes.

Classification by income• Countries can be classified based on national

income(GDP or GNP per capita) and the degree of industrialization.

• GDP– Gross domestic product is the value of all goods and services

produced by the domestic economy over a one year period• GNP– Gross national product is the income generated both by

domestic production and by the country’s international activities.

– GNP per capita is simply the GNP divided by its population

Regional economic integration• Economic integration has been one of the main

economic developments affecting world markets.• Economic cooperation – to use their respective resources more effectively and – to provide large markets for member-country producers

• There is danger that it could fail as a result of – perceptions of unequal benefits from the arrangement

or a parting of the ways politically

Level of economic integration• Free trade area– Free trade among members

• Customs union– Common external trade policy

• Common market– Factor mobility

• Economic union– Harmonization of economic policies

Free trade area• All barriers to trade such as tariffs and quotas

among member countries are removed• But each trade member maintains its own trade

barriers for non members.• For e.g – European Free Trade Area (EFTA) 1960– US and Canada signed a free trade agreement in

1989– NAFTA ( North American free trade agreement) 1994

Custom union• In addition to free trade area, the custom union

establishes a – common trade policy with respect to non-members.

• Import from non-members are – subject to same tariff when sold to any member

country.• For e.g. Benelux countries ( Belgium, Netherland

and Luxemborg) formed a custom union in 1921 which later became part of European economic integration

Common market• Same feature as custom union but in addition – factors of production (labour, capital and technology) are

mobile among members.• Restriction on immigration and cross border

investment are abolished• For example– East African common market (Burundi, Kenya, Rwanda,

Tanzania and Uganda)– West African common market (Benin, Burkina Faso, Cote

d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo)

Economic union• Integration of economic policies in addition to

free movement of goods, services and factor of production across borders.

• Under and economic union, members harmonize monetary policies, taxation and government spending.

• Common currency which leads to fixed exchange rates

• For example European Union (EU)

Benefits of regional integration• Imagine there's no countries

It isn't hard to doNothing to kill or die for

And no religion tooImagine all the peopleLiving life in peace...

Benefits of regional integration• Trade creation– Consumer and industrial buyers in the nation are

faced with wider selection of goods and services– Can acquire goods and services at low cost

• Political cooperation– Group of nations can have significantly greater

political weight in the world rather than the nations have individually

– Reduces the military conflict between member nations

Drawbacks of regional integration• Trade diversion– Reduced trade with more efficient non member

producer and increased trade with less efficient producer within trading bloc

• Shifts in employment• Loss of national sovereignty

Per capita income• The statistic most frequently used to describe a country

economically is its per capita income.• Shorthand expression for country’s – level of economic development – degree of modernization and – progress in health education and welfare.

• It is used mostly to evaluate foreign economy is partially because – it is commonly available and widely accepted. – good indicator of the size or quality of market.

• Per capita income of Nepal- $742 (2012)• Per capita income of US- $42,693 (2012)

Criticism of per capita income figures• Uneven income distribution– Per capita figures are an average– Not necessary that there will be equal distribution of income

among people– For e.g. Brazil: lowest 20% of people receive less than 3% of

the national income whereas highest 20% receive 63% of that income

• Lack of comparability– European union budget: mostly on food clothing and shelter– Less developed countries these basics may be self provided

and are therefore not reflected in national income totals.

POVERTY AS A MARKET OPPORTUNITY????

Conclusion • Opportunities for successful business conduct

depend largely on the structure and the content of that environment

• Marketers has to assess carefully the political/legal and economic environment of the international market