smu assignments mb0037 iv sem 2011

8/6/2019 Smu Assignments MB0037 IV Sem 2011

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Q.1 What is WTO? What is GATT? Explain both. [10 Marks]

Answers:

The World Trade Organization (WTO) is an organization that intends to supervise

and liberalize international trade. The organization officially commenced on January 1,

1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and

Trade (GATT), which commenced in 1948. The organization deals with regulation of trade

between participating countries; it provides a framework for negotiating and formalizing

trade agreements, and a dispute resolution process aimed at enforcing participants'adherence to WTO agreements which are signed by representatives of member

governments and ratified by their parliaments. Most of the issues that the WTO focuses on

derive from previous trade negotiations, especially from the Uruguay Round (19861994).

The organization is currently endeavoring to persist with a trade negotiation called

the Doha Development Agenda (or Doha Round), which was launched in 2001 to enhance

equitable participation of poorer countries which represent a majority of the world's

population. However, the negotiation has been dogged by "disagreement between

exporters of agricultural bulk commodities and countries with large numbers of subsistence

farmers on the precise terms of a 'special safeguard measure' to protect farmers from

surges in imports. At this time, the future of the Doha Round is uncertain."

The WTO has 153 members, representing more than 97% of total world trade and

30 observers, most seeking membership. The WTO is governed by a ministerial

conference, meeting every two years; a general council, which implements the

conference's policy decisions and is responsible for day-to-day administration; and a

director-general, who is appointed by the ministerial conference. The WTO's headquarters

is at the Centre William Rappard, Geneva, Switzerland.

SUBRAMANI RAJ 520915642 SMU MBA MB0037


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Among the various functions of the WTO, these are regarded by analysts as the

most important:

It oversees the implementation, administration and operation of the covered

agreements.

It provides a forum for negotiations and for settling disputes.

Additionally, it is the WTO's duty to review and propagate the national trade policies,

and to ensure the coherence and transparency of trade policies through surveillance in

global economic policy-making. Another priority of the WTO is the assistance of

developing, least-developed and low-income countries in transition to adjust to WTO rules

and disciplines through technical cooperation and training.

The WTO is also a center of economic research and analysis: regular assessments

of the global trade picture in its annual publications and research reports on specific topics

are produced by the organization. Finally, the WTO cooperates closely with the two other

components of the Bretton Woods system, the IMF and the World Bank

The WTO establishes a framework for trade policies; it does not define or specify

outcomes. That is, it is concerned with setting the rules of the trade policy games. Five

principles are of particular importance in understanding both the pre-1994 GATT and theWTO:

Non-Discrimination. It has two major components: the most favoured nation (MFN)

rule, and the national treatment policy. Both are embedded in the main WTO rules on

goods, services, and intellectual property, but their precise scope and nature differ across

these areas. The MFN rule requires that a WTO member must apply the same conditions

on all trade with other WTO members, i.e. a WTO member has to grant the most favorable

conditions under which it allows trade in a certain product type to all other WTO members."Grant someone a special favour and you have to do the same for all other WTO

members." National treatment means that imported goods should be treated no less

favorably than domestically produced goods (at least after the foreign goods have entered



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the market) and was introduced to tackle non-tariff barriers to trade (e.g. technical

standards, security standards et al. discriminating against imported goods).

Reciprocity. It reflects both a desire to limit the scope of free-riding that may arise

because of the MFN rule, and a desire to obtain better access to foreign markets. A related

point is that for a nation to negotiate, it is necessary that the gain from doing so be greater

than the gain available from unilateral liberalization; reciprocal concessions intend to

ensure that such gains will materialize.

Binding and enforceable commitments. The tariff commitments made by WTO

members in a multilateral trade negotiation and on accession are enumerated in a schedule

(list) of concessions. These schedules establish "ceiling bindings": a country can change its

bindings, but only after negotiating with its trading partners, which could mean

compensating them for loss of trade. If satisfaction is not obtained, the complaining country

may invoke the WTO dispute settlement procedures.

Transparency. The WTO members are required to publish their trade regulations, to

maintain institutions allowing for the review of administrative decisions affecting trade, to

respond to requests for information by other members, and to notify changes in trade

policies to the WTO. These internal transparency requirements are supplemented and

facilitated by periodic country-specific reports (trade policy reviews) through the TradePolicy Review Mechanism (TPRM).The WTO system tries also to improve predictability and

stability, discouraging the use of quotas and other measures used to set limits on quantities

of imports.

Safety valves. In specific circumstances, governments are able to restrict trade.

There are three types of provisions in this direction: articles allowing for the use of trade

measures to attain no economic objectives; articles aimed at ensuring "fair competition";

and provisions permitting intervention in trade for economic reasons. Exceptions to theMFN principle also allow for preferential treatment of developed countries, regional free

trade areas and customs unions



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The General Agreement on Tariffs and Trade (typically abbreviated GATT) was

negotiated during the UN Conference on Trade and Employment and was the outcome of

the failure of negotiating governments to create the International Trade Organization (ITO).

GATT was signed in 1947 and lasted until 1993, when it was replaced by the World Trade

Organization in 1995. The original GATT text (GATT 1947) is still in effect under the WTO

framework, subject to the modifications of GATT 1994. In 1993, the GATT was updated

(GATT 1994) to include new obligations upon its signatories. One of the most significant

changes was the creation of the World Trade Organization (WTO). The 75 existing GATT

members and the European Communities became the founding members of the WTO on 1

January 1995. The other 52 GATT members rejoined the WTO in the following two years

(the last being Congo in 1997). Since the founding of the WTO, 21 new non-GATTmembers have joined and 29 are currently negotiating membership. There are a total of

153 member countries in the WTO. The original GATT member, Syria and the SFR

Yugoslavia has not rejoined the WTO. Since FR Yugoslavia, (renamed to Serbia and

Montenegro and with membership negotiations later split in two), is not recognized as a

direct SFRY successor state; therefore, its application is considered a new (non-GATT)

one. The General Council of WTO, on 4 May 2010, agreed to establish a working party to

examine the request of Syria for WTO membership. The contracting parties who founded

the WTO ended official agreement of the "GATT 1947" terms on 31 December 1995.

Serbia and Montenegro are in the decision stage of the negotiations and are expected to

become the newest members of the WTO in 2012 or in near future. Whereas GATT was a

set of rules agreed upon by nations, the WTO is an institutional body. The WTO expanded

its scope from traded goods to trade within the service sector and intellectual property

rights. Although it was designed to serve multilateral agreements, during several rounds of

GATT negotiations (particularly the Tokyo Round) plurilateral agreements created selective

trading and caused fragmentation among members. WTO arrangements are generally a

multilateral agreement settlement mechanism of GATT.



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Q.2 What is MNC? Explain the 3 stages of evolution. [10 Marks]

Answers:

A multinational corporation (MNC) or enterprise (MNE), is a corporation or an

enterprise that manages production or delivers services in more than one country. It can

also be referred to as an international corporation. The International Labour Organization

(ILO) has defined an MNC as a corporation that has its management headquarters in one

country, known as the home country, and operates in several other countries, known as

host countries.

The Dutch East India Company was the first multinational corporation in the world

and the first company to issue stock. It was also arguably the world's first megacorporation,

possessing quasi-governmental powers, including the ability to wage war, negotiate

treaties, coin money, and establish colonies.

The first modern multinational corporation is generally thought to be the East India

Company. Many corporations have offices, branches or manufacturing plants in different

countries from where their original and main headquarters is located.

Some multinational corporations are very big, with budgets that exceed some

nations' GDPs. Multinational corporations can have a powerful influence in local

economies, and even the world economy, and play an important role in international

relations and globalization.

It may seem strange that a corporation can decide to do business in a different

country, where it does not know the laws, local customs or business practices. Why is it not

more efficient to combine assets of value overseas with local factors of production at lower

costs by renting or selling them to local investors?

One reason is that the use of the market for coordinating the behaviour of agents

located in different countries is less efficient than coordinating them by a multinational

enterprise as an institution. The additional costs caused by the entrance in foreign markets

are of less interest for the local enterprise. According to Hymer, Kindleberger and Caves,

the existence of MNCs is reasoned by structural market imperfections for final products. In



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Hymer's example, there are considered two firms as monopolists in their own market and

isolated from competition by transportation costs and other tariff and non-tariff barriers. If

these costs decrease, both are forced to competition; which will reduce their profits. The

firms can maximize their joint income by a merger or acquisition, which will lower the

competition in the shared market. Due to the transformation of two separated companiesinto one MNE the pecuniary externalities are going to be internalized. However, this does

not mean that there is an improvement for the society.

This could also be the case if there are few substitutes or limited licenses in a

foreign market. The consolidation is often established by acquisition, merger or the vertical

integration of the potential licensee into overseas manufacturing. This makes it easy for the

MNE to enforce price discrimination schemes in various countries. Therefore Hymer

considered the emergence of multinational firms as "an (negative) instrument for restrainingcompetition between firms of different nations".

Market imperfections had been considered by Hymer as structural and caused by

the deviations from perfect competition in the final product markets. Further reasons are

originated from the control of proprietary technology and distribution systems, scale

economies, privileged access to inputs and product differentiation. In the absence of these

factors, market are fully efficient. The transaction costs theories of MNEs had been

developed simultaneously and independently by McManus (1972), Buckley & Casson

(1976) Brown (1976) and Hennart (1977, 1982). All these authors claimed that market

imperfections are inherent conditions in markets and MNEs are institutions that try to

bypass these imperfections. The imperfections in markets are natural as the neoclassical

assumptions like full knowledge and enforcement do not exist in real markets

Three Stages of Evolution

Export Stage(i) initial inquiries result in first exports.(ii) Initially, firms rely on export agents. expansion of export sales(iii) foreign sales branch or assembly operations are established(to save transport cost)



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Foreign productionstage

Why?(i) There is a limit to foreign exports, due to tariffs, quotas andtransportation costs.(ii) Wage rates may be lower in LDCs.(iii) Environmental regulations may be lax in LDCs (e.g., China).Itai-Itai disease in Japan since the 1920s was caused by cadmiumpoisoning. Contaminated effluents flowed into rice paddies andwater source.) Watch the movie, Erin Brochovich.(iv) meet Consumer demands in the foreign countries

DFI versus LicensingOnce the firm chooses foreign production as a method of delivering goods to foreign markets, it must decide whether toestablish a foreign production subsidiary or license the technologyto a foreign firm.

Licensing

Licensing is usually first experience (because it is easy)e.g.: Kentucky Fried Chicken in the U.K.Licensing does not require any capital expenditureFinancial risk is zero.royalty payment = a fixed % of salesProblem: the mother firm cannot exercise any managerial controlover the licensee (it is independent)The licensee may transfer industrial secrets to other independentfirms, thereby creating rivals.

Direct Investment

It requires the decision of top management because it is a criticalstep.(i) it is risky (lack of information, large capital requirement)US firms tend to establish subsidiaries in Canada first. Singer Manufacturing Company established its foreign plants in Scotlandand Australia in the 1850s.(ii) plants are established in several countries(iii) licensing is switched from independent producers to itssubsidiaries.(iv) export continues (exports and FDI may be substitues or complements)

Multinational StageThe company becomes a multinational enterprise when it begins toplan, organize and coordinate production, marketing, R&D,financing, and staffing.For each of these operations, the firm must find the best location.



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How to tell whether afirm is multinational?

Rule of Thumb

A company whose foreign sales are 25% or more of total sales.This ratio is high for small countries, but low for large countries,e.g. Nestle (98%: Dutch), Phillips (94%: Swiss).Examples: Manufacturing MNCs24 of top fifty firms are located in the U.S.9 in Japan6 in Germany.Petroleum companies: 6/10 located in the U.S.Food/Restaurant Chains. 10/10 are headquartered in the U.S.US Multinational Corporations: Exxon, GM, Ford, etc.



9/23

Q.3 Mention the differences between currency markets and exchange rate markets in thecontext of international business environment. [10 Marks]

Answers:

The currency markets - also called foreign exchange or forex - are the largest in the

world. Regardless of economic conditions, when one currency falls, another must rise. So

there are always opportunities to make money - and its becoming easier to trade.

The currency market includes the Foreign Currency Market and the Euro-currency

Market. The Foreign Currency Market is virtual. There is no one central physical location

that is the foreign currency market. It exists in the dealing rooms of various central banks,

large international banks, and some large corporations. The dealing rooms are connectedvia telephone, computer, and fax. Some countries co-locate their dealing rooms in one

center. The Euro-currency Market is where borrowing and lending of currency takes place.

Interest rates for the various currencies are set in this market.

Trading on the Foreign Exchange Market establishes rates of exchange for

currency. Exchange rates are constantly fluctuating on the forex market. As demand rises

and falls for particular currencies, their exchange rates adjust accordingly. Instantaneous

rate quotes are available from a service provided by Reuters. A rate of exchange for currencies is the ratio at which one currency is exchanged for another.

The foreign exchange market has no regulation, no restrictions or overseeing board.

Should there be a world monetary crisis in this market; there is no mechanism to stop

trading. The Federal Reserve Bank of New York publishes guidelines for Foreign Exchange

trading. In their "Guidelines for Foreign Exchange Trading", they outline 50 best practices

for trading on the forex market.

Spot Exchange

The spot exchange is the simplest contract. A spot exchange contract identifies two

parties, the currency they are buying or selling and the currency they expect to receive in

exchange. The currencies are exchanged at the prevailing spot rate at the time of the



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exchange rates that determines the swap price. There is also something called a currency

swap. This is a method to exchange an income stream of one currency for another.

Currency Options

A currency option gives the holder the right, but not the obligation, either to buy (call)from the option writer, or to sell (put) to the option writer, a stated quantity of one currency

in exchange for another at a fixed rate of exchange, called the strike price. The options can

be American, which allows an option to be exercised until a fixed day, called the day of

expiry, or European, which allows exercise only on the day of expiry, not before. The option

holder pays a premium to the option writer for the option.

The option differs from other currency contracts in that the holder has a choice, or

option, of whether they will exercise it or not. If exchange rates are more favorable than therate guaranteed by the option when the holder needs to exchange currency, they can

choose to exchange the currency on the spot exchange rather than use the option. They

lose only the option premium. Options allow holders to limit their risk of exposure to

adverse changes in the exchange rates.

Hedging

It is also common for currency options to be used to hedge cash positions.Companies are not typically in the business of gambling with their profits on deals. It is in

the company's best interest to lock in an exchange rate they can count on. They are

motivated to insure that their profits are as expected. Two ways they might do this are to

enter forward contracts or to buy options.

They would select an exchange rate that would be acceptable but not too expensive.

They might choose to buy a slightly out-of-the-money call option to cover them if the

currency exchange rate falls. If it stays the same or rises, they will exchange at the spotexchange rate at the time the payment is due. The exchange rates (also known as the

foreign-exchange rate, forex rate or FX rate) between two currencies specify how much

one currency is worth in terms of the other. It is the value of a foreign nations currency in

terms of the home nations currency. For example an exchange rate of 91 Japanese yen



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used in British newspapers and are also common in Australia, New Zealand and the

eurozone.

direct quotation: 1 foreign currency unit = x home currency units

indirect quotation: 1 home currency unit = x foreign currency units

Note that, using direct quotation, if the home currency is strengthening (i.e., appreciating, or

becoming more valuable) then the exchange rate number decreases. Conversely if the

foreign currency is strengthening, the exchange rate number increases and the home

currency is depreciating.



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Q.4 a) Explain the role of privatization in international business. [05 Marks]

Answers:

Privatization is the transfer of government owned assets to the private sector. As a

result of changing economic policies, privatization took place at a significant pace around

the world during the last decade of the 20th century. Ranging from the desire to downsize

government in developed countries, to the demise of communism in Eastern and Central

Europe, and to the opening of the economies of various Latin American countries,

privatization has significant direct and indirect effects on international business and

international law.

Reasons for privatization vary and depend on the history, politics, and needs of each

country involved. It is helpful, however, to look at whether a country is developed or

undeveloped. In addition, its history as a capitalistic, communist, or closed economy affects

the decision to privatize.

Although privatization is most frequently discussed with respect to developing

countries, it is also taking place in developed, democratic, market-oriented countries.

Privatization was conceived by Great Britain's Thatcher government, and it has many

advocates in other developed countries such as the United States. In the United States,

privatization is seen as a mechanism to be used to "downsize" government, cut costs for government, cut taxes for citizens, and promote balanced government budgets. Thus, in

the United States, on a federal level, there is pressure on government from some parties

(not including environmentalists) to sell oil drilling rights to federal lands and on offshore

fields. In addition, there are proposals that the federally run air traffic control system be

privatized. On the state and local levels, in some states and municipalities there has been

privatization of garbage collection, health care, and ambulance services, usually under

contracts between the government and a privately owned business. In some states, the

government contracts to place prisoners in privately owned and operated detention

facilities. Schools have been another target for privatization in the 1990s. Demand for

spaces in public schools decreases when government-subsidized vouchers are given to

students who, in turn, use them at private schools. Or, for example, privately run charter

schools in Michigan receive government funding under the theory that they can provide



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more choice and better education to students than that which is offered through the public

schools.

In developing countries, privatization is creating unprecedented opportunities for

investment by businesses and businesspeople from around the world including, but not

limited to, those based in the United States. In formerly communist countries of Eastern

and Central Europe, conversion to a market-based economy, with privately owned and

operated businesses, has resulted in massive privatization programs. There are multiple

benefits of such privatization, including the following eight. First, sale of government-owned

businesses can generate cash for the government. Second, following sale of an

unprofitable business, the government can discontinue subsidies to it. A third, related

benefit is that the government gets rid of inefficient labor and "hidden" unemployment.

Communist governments were obliged to retain nonproductive workers and operateinefficient facilities in order to provide employment, but privately owned businesses have

incentives and opportunities to release nonproductive workers. Fourth, privatized

businesses can provide employment for workers released from inefficient state-owned

businesses. Fifth, privatized businesses can become tax-paying entities, which, in turn,

generate sorely needed funds for local and national governments. Sixth, privatized

businesses promote competition. Seventh, as government-owned monopolies are

privatized and competition increases, the public gains access to higher quality goods and

services at lower prices. Eighth, privatization can facilitate foreign investment and trade.

(Or, in the alternative, through laws allowing the sale of formerly government owned

businesses, privatization can be used to promote domestic investment and restrict the

inflow of foreign business.)



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Q.4 b) Mention the relevance of these international commercial terms: FCA, EXW, DES,CIF and DDP . [05 Marks]

Answers:

Free Carrier (named places)

The seller hands over the goods, cleared for export, into the custody of the first

carrier (named by the buyer) at the named place. This term is suitable for all modes of

transport, including carriage by air, rail, road, and containerised / multi-modal sea transport.

This is the correct "freight collect" term to use for sea shipments in containers, whether LCL

(less than container load) or FCL (full container load). The FCA has attained some

credibility, by e.g. taking part in public drug policy discussions and debates, and

occacionally co-operating governmental health sector organisations as well as with other

harm reduction groups. However, a long-standing problem for the association has beenthat it is not always taken seriously, and instead is dismissed by many as a "bunch of

drugged-out hippies".

EXW Ex Works (named place)

The seller makes the goods available at his premises. The buyer is responsible for

all charges.

This trade term places the greatest responsibility on the buyer and minimum obligations on

the seller. The Ex Works term is often used when making an initial quotation for the sale of

goods without any costs included.

EXW means that a seller has the goods ready for collection at his premises (Works,

factory, warehouse, plant) on the date agreed upon.

The buyer pays all transportation costs and also bears the risks for bringing the goods to

their final destination.

Delivered Ex Ship (named port)

Where goods are delivered ex ship, the passing of risk does not occur until the ship

has arrived at the named port of destination and the goods made available for unloading to



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the buyer. The seller pays the same freight and insurance costs as he would under a CIF

arrangement. Unlike CFR and CIF terms, the seller has agreed to bear not just cost, but

also Risk and Title up to the arrival of the vessel at the named port. Costs for unloading the

goods and any duties, taxes, etc are for the Buyer. A commonly used term in shipping

bulk commodities, such as coal, grain, dry chemicals - - - and where the seller either ownsor has chartered, their own vessel.

CIF stands for A trade term requiring the seller to arrange for the carriage of goods

by sea to a port of destination, and provide the buyer with the documents necessary to

obtain the goods from the carrier. Contracts involving international transportation often

contain abbreviated trade terms that describe matters such as the time and place of

delivery, payment, when the risk of loss shifts from the seller to the buyer and who pays the

costs of freight and insurance. The most commonly known trade terms are Incoterms,published by the International Chamber of Commerce (ICC). These are often identical in

form to domestic terms (such as the American Uniform Commercial Code), but have

different meanings. As a result, parties to a contract must expressly indicate the governing

law of their terms.

It's important to realize that because this is a legal term, its exact definition is much

more complicated and differs by country. Contact an international trade lawyer before using

any trade term.

Delivered Duty Unpaid (named destination place)

This term means that the seller delivers the goods to the buyer to the named place

of destination in the contract of sale. The goods are not cleared for import or unloaded from

any form of transport at the place of destination. The buyer is responsible for the costs and

risks for the unloading, duty and any subsequent delivery beyond the place of destination.

However, if the buyer wishes the seller to bear cost and risks associated with the importclearance, duty, unloading and subsequent delivery beyond the place of destination, then

this all needs to be explicitly agreed upon in the contract of sale.



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Q.5 Give short notes on Letter of credit and Bill of Lading [10 Marks]

Answers:

A standard, commercial letter of credit (LC) is a document issued mostly by a

financial institution, used primarily in trade finance, which usually provides an irrevocablepayment undertaking.

The letter of credit can also be source of payment for a transaction, meaning that

redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in

international trade transactions of significant value, for deals between a supplier in one

country and a customer in another. In such cases the International Chamber of Commerce

Uniform Customs and Practice for Documentary Credits applies (UCP 600 being the latest

version). They are also used in the land development process to ensure that approvedpublic facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a

letter of credit are usually a beneficiary who is to receive the money, the issuing bank of

whom the applicant is a client, and the advising bank of whom the beneficiary is a client.

Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without

prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In

executing a transaction, letters of credit incorporate functions common to giros and

Traveler's cheques. Typically, the documents a beneficiary has to present in order to

receive payment include a commercial invoice, bill of lading, and documents proving the

shipment was insured against loss or damage in transit.

A bill of lading (BL - sometimes referred to as BOL or B/L) is a document issued by a

carrier to a shipper, acknowledging that specified goods have been received on board as

cargo for conveyance to a named place for delivery to the consignee who is usually

identified. A through bill of lading involves the use of at least two different modes of

transport from road, rail, air, and sea. The term derives from the verb "to lade" whichmeans to load a cargo onto a ship or other form of transportation.

A bill of lading can be used as a traded object. The standard short form bill of lading

is evidence of the contract of carriage of goods and it serves a number of purposes:



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It is evidence that a valid contract of carriage, or a chartering contract, exists, and it may

incorporate the full terms of the contract between the consignor and the carrier by

reference (i.e. the short form simply refers to the main contract as an existing document,

whereas the long form of a bill of lading (connaissement intgral) issued by the carrier sets

out all the terms of the contract of carriage);

It is a receipt signed by the carrier confirming whether goods matching the contract

description have been received in good condition (a bill will be described as clean if the

goods have been received on board in apparent good condition and stowed ready for

transport); and

It is also a document of transfer, being freely transferable but not a negotiable

instrument in the legal sense, i.e. it governs all the legal aspects of physical carriage, and,

like a cheque or other negotiable instrument, it may be endorsed affecting ownership of the

goods actually being carried. This matches everyday experience in that the contract a

person might make with a commercial carrier like FedEx for mostly airway parcels, is

separate from any contract for the sale of the goods to be carried; however, it binds the

carrier to its terms, irrespectively of who the actual holder of the B/L, and owner of the

goods, may be at a specific moment.



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Q.6 Discuss the entry methods in international business with relevant examples .

[10 Marks]

Answers:

A mode of entry into an international market is the channel which your organizationemploys to gain entry to a new international market. This lesson considers a number of key

alternatives, but recognizes that alteratives are many and diverse. Here you will be

consider modes of entry into international markets such as the Internet, Exporting,

Licensing, International Agents, International Distributors, Strategic Alliances, Joint

Ventures, Overseas Manufacture and International Sales Subsidiaries. Finally we consider

the Stages of Internationalization.

It is worth noting that not all authorities on international marketing agree as to whichmode of entry sits where. For example, some see franchising as a stand alone mode, whilst

others see franchising as part of licensing. In reality, the most important point is that you

consider all useful modes of entry into international markets - over and above which

pigeon-hole it fits into. If in doubt, always clarify your tutor's preferred view.

The Internet

The Internet is a new channel for some organizations and the sole channel for alarge number of innovative new organizations. The eMarketing space consists of new

Internet companies that have emerged as the Internet has developed, as well as those pre-

existing companies that now employ eMarketing approaches as part of their overall

marketing plan. For some companies the Internet is an additional channel that enhances or

replaces their traditional channel(s). For others the Internet has provided the opportunity for

a new online company. More

Exporting

There are direct and indirect approaches to exporting to other nations. Direct

exporting is straightforward. Essentially the organization makes a commitment to market

overseas on its own behalf. This gives it greater control over its brand and operations

overseas, over an above indirect exporting. On the other hand, if you were to employ a



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home country agency (i.e. an exporting company from your country - which handles

exporting on your behalf) to get your product into an overseas market then you would be

exporting indirectly. Examples of indirect exporting include:

Piggybacking whereby your new product uses the existing distribution and logistics

of another business.

Export Management Houses (EMHs) that act as a bolt on export department for your

company. They offer a whole range of bespoke or a la carte services to exporting

organizations.

Consortia are groups of small or medium-sized organizations that group together to

market related, or sometimes unrelated products in international markets.

Trading companies were started when some nations decided that they wished to

have overseas colonies. They date back to an imperialist past that some nations might

prefer to forget e.g. the British, French, Spanish and Portuguese colonies. Today they exist

as mainstream businesses that use traditional business relationships as part of their

competitive advantage.

Licensing

Licensing includes franchising, Turnkey contracts and contract manufacturing.

Licensing is where your own organization charges a fee and/or royalty for the use of its

technology, brand and/or expertise.

Franchising involves the organization (franchiser) providing branding, concepts, expertise,

and infact most facets that are needed to operate in an overseas market, to the franchisee.

Management tends to be controlled by the franchiser. Examples include Dominos Pizza,

Coffee Republic and McDonald's Restaurants.

Turnkey contracts are major strategies to build large plants. They often include a the

training and development of key employees where skills are sparse - for example, Toyota's

car plant in Adapazari, Turkey. You would not own the plant once it is handed over.



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International Agents and International Distributors

Agents are often an early step into international marketing. Put simply, agents are

individuals or organizations that are contracted to your business, and market on your behalf

in a particular country. They rarely take ownership of products, and more commonly take a

commission on goods sold. Agents usually represent more than one organization. Agents

are a low-cost, but low-control option. If you intend to globalize, make sure that your

contract allows you to regain direct control of product. Of course you need to set targets

since you never know the level of commitment of your agent. Agents might also represent

your competitors - so beware conflicts of interest. They tend to be expensive to recruit,

retain and train. Distributors are similar to agents, with the main difference that distributors

take ownership of the goods. Therefore they have an incentive to market products and to

make a profit from them. Otherwise pros and cons are similar to those of internationalagents.

Strategic Alliances (SA)

Strategic alliances is a term that describes a whole series of different relationships between

companies that market internationally. Sometimes the relationships are between

competitors. There are many examples including:

Shared manufacturing e.g. Toyota Ayago is also marketed as a Citroen and a Peugeot.

Research and Development (R&D) arrangements.

Distribution alliances e.g. iPhone was initially marketed by O2 in the United Kingdom.

Marketing agreements.

Essentially, Strategic Alliances are non-equity based agreements i.e. companies remain

independent and separate.

Joint Ventures (JV)



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Joint Ventures tend to be equity-based i.e. a new company is set up with parties

owning a proportion of the new business. There are many reasons why companies set up

Joint Ventures to assist them to enter a new international market:

Access to technology, core competences or management skills. For example, Honda's

relationship with Rover in the 1980's.

To gain entry to a foreign market. For example, any business wishing to enter China needs

to source local Chinese partners.

Access to distribution channels, manufacturing and R&D are most common forms of Joint

Venture.

Overseas Manufacture or International Sales Subsidiary

A business may decide that none of the other options are as viable as actually

owning an overseas manufacturing plant i.e. the organization invests in plant, machinery

and labor in the overseas market. This is also known as Foreign Direct Investment (FDI).

This can be a new-build, or the company might acquire a current business that has suitable

plant etc. Of course you could assemble products in the new plant, and simply export

components from the home market (or another country). The key benefit is that your

business becomes localized - you manufacture for customers in the market in which youare trading. You also will gain local market knowledge and be able to adapt products and

services to the needs of local consumers. The downside is that you take on the risk

associated with the local domestic market. An International Sales Subsidiary would be

similar, reducing the element of risk, and have the same key benefit of course. However, it

acts more like a distributor that is owned by your own company.


smu assignments mb0037 iv sem 2011

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