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CONTENTS

Lesson Description Author Vetter PageNo.

1. I nt rod uct ion t o I nt er na t ion a l D r. Tejin der S ha r ma P r of. H . B a n sa l

Ma rketing D efinition, Scope,

Importance etc.

2. Interna tiona l Tra de Inst it ut ions P uja S a xena P rof. H . B ansa l

3. B usin ess E nvir on men t for D r. Tejin der Sh ar ma P r of. M.S . Tur an

G lobal Companies

4. Forms of Int erna t iona l D r . At ul D hingra D r . B .S . B odla

Business

5. F oreign Tra de in I ndia a nd D r. Tejinder S ha rm a P rof. H . B a nsa l

Exim Policy

6. I nst it ut ion al In fr ast ruct ure for D r. Neela m D ha nd a D r. B .S . B od la

Export P romotion In India

7. E xport P rocedure a nd D r . Kulbhusha n Cha ndel D r. P . G upt a

Documentation

8. P roduct D ecisions for D r . At ul D hingra D r. B .S . B odla

Interna tional Markets

9. Interna t iona l P ricing D r. Atul D hingra P rof. H . B a nsa l

10. Interna tiona l P romot ion D r. At ul D hingra P rof. M.S . Tura n

11. D ist r ibut ion a nd Logist ics D r. Atul D hingra P rof. H . B ansa l

for Interna tional Markets

N ote : This subject has been converted into SIM format by Dr.Pardeep Gupta, Reader, Department of Business Management,

Guru J ambheshwar University of Science and Technology, Hisar(Haryana).


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Cour se code: IB-417/MM-410 Author: Dr. Tejinder Sharma

Subject: International Marketing Vetter: Prof. H. Bansal

L esson N o.: 1

INTRODUCTION TO INTERNATIONALMARKETING DEFINITION, SCOPE,

IMPORTANCE ETC.

STRUCTURE

1.0 Objective

1.1 Introduction

1.2 Presentation of Contents

1.2.1 Definitions of international marketing

1.2.2 International Trade vs International Business

1.2.3 Comparing domestic and international business.

1.2.4 Multinational Corporation

1.2.5 Approaches to International Marketing/International

Business

1.2.6 Importance of International Marketing

1.2.7 Adverse effects of foreign trade on the National

Economies

1.2.8 Global symbiosis

1.2.9 The process of internationalisation of business.

1.2.10Exporting Vs International Marketing

1.3 Summary

1.4 Keywords

1.5 Self-Assessment Questions

1.6 References/Suggested Readings


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1.0 OBJ ECTIVE

After st udying th is lesson, you w ill be able to-

unders tand the concept of in terna t iona l market ing.

expla in the approaches to in terna t iona l market ing.

understand t he process of internat ional iza t ion of business.

know the ef fects of foreign t ra de on na t ional economies.

1.1 INTRODUCTION

Broadly , in terna t iona l market ing re fers to the exchangeprocess across nations. It has gained prominence with the ever-

increasing global trade and linkages. Whether or not a company

wants to participate directly in international business, i t cannot

escape the ef fect o f numerous companies engaged in exports ,

import s , and/or ma nufa ctur ing abroa d an d the mult ina t iona ls

opera t ing in the domest ic markets g iv ing d irec t and indirec t

competition. The a dva nces in informa tion t echnology ha ve fa cilita ted

th e process of ma rketing a cross count ries. This t rend of globa lizat ion

of the scope of business has made it essential for the corporate

ma na gers to understa nd internat iona l marketing opera tions.

1.2 PRESENTATION OF CONTENTS

1.2.1 Def i n i t i on s of i n t er n a t i o n a l m a r k et i n g

Some of the definitions of int erna tiona l ma rketing a re:

Ca teora (1997) defines int erna tiona l mar keting a s performa nce

of business activities that direct the flow of companys goods andservices to consumers in more th a n one na tion for profit .

J a in (1989) refers to intern a tiona l ma rketing a s excha nges

a cross na tiona l bounda ries for t he sat isfa ction of human needs a nd


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wants .

Terpestra (1972) looks upon internat ional market ing as

ma rketing carr ied on a cross t he na tiona l bounda ries.Keegan (1997) comprehends tha t int erna tiona l ma rketing a s

going beyond th e export ma rketing a nd becoming more involved in

th e mar keting environment in w hich it is doing business.

1.2.2 I n t er n a t i o n a l T r a d e v s I n t er n a t i o n a l Bu si n ess

Internat ional t rade is a term that basica l ly deals with the

movement of goods and services between countries distinct from

normal corporate t ransact ions involving buyers and sel lers in

different countr ies. The interna tional t ra de primar ily reflects ma cro

or a ggrega te supplies a nd dema nd in different countries. The globa l

tr a de, thu s, involves ma jor policy decisions by government s of na tions

with regards to imports and exports as a lso nat ional economic

development. These day s, the tr end is towa rds globaliza tion of tra de.

This ha s resulted in regiona l a s w ell multilat eral globa l a greements.

A predominant role has been accorded to WTO while determining

tr a de policy by each na tion.

Internat ional business may be defined as those businesstr a nsa ctions am ong individuals, firms or corpora te entities in priva te

or public sector th a t r esult in m ovement of goods or services across

na tiona l bounda ries. The business a ctivity can ta ke any of the form:

import , export of different goods services, t he investm ent of ca pita l;

a nd tra nsa ctions in inta ngible assets (e.g. tra demarks, pa tents a re

th e licensing of ma nufa ctur ing t echnology).

The field of international business is a broad area of study

that covers a wide range of activities. The execution of businessactivit ies between sovereign nations takes place within specific

environment s, and pose cha llenges with w hich a firm in interna tional

business must dea l.Deal ing wi th these problems requires an


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u n d e r s t a n d i n g o f t h e e n v i r o n m e n t a l v a r i a b l e s t h a t a f f e c t

intern a tiona l business. These va ria bles a re economic, politica l, legal,

soc io-cul tura l , t echnologica l and geographic . Al though such

environmental variables are often beyond control of an individual

firm, th e considera tion a nd r ecognition of such fa ctors ena bles th e

ma na gers to work more effectively wit hin t he const ra ints posed by

these variables. In order to incorporate the probable effects of

externa l environment , a w orking know ledge of relevan t descriptions

such a s economics, politica l science, history, g eogra phy, la w , a nd

a nt hropology is desira ble.

The scope of int erna tiona l business can be divided int o tw o

cat egories-rea l an d fina ncia l.

(i) The rea l or non fina ncial side of the t heory of int erna tiona l

bu s iness s t u d ies t r a de t heo r ies , t heo ry o f t he mu l t ina t io na l

enterprises including the reasons for choice of entry mode.

( i i ) T h e f i n a n c i a l s i d e o f t h e t h e o r y c o v e r s s t u d y o f

environment a l fa ctors a ffecting the multina tiona l ent erprises such

a s foreign excha nge rat es, the ba lance of payments a nd interna tiona l

ma rketing syst ems. It a lso involves the stud y of intern a l decisionsaffecting the MNE, such as its appropriate cost of capital and the

opport unities of interna tiona l diversifica tion.

Since int erna tiona l business deals a cross na tions , the role of

governm ents a nd th eir relat ionships wit h MNE s also comes under

th e scope of stud y of interna tiona l business

1.2.3 Com pa r i n g dom est i c an d i n t er na t i ona l bu si n ess.

Though, funda menta lly interna tiona l business opera tions look

like domestic business opera tions, yet some import a nt distinctions

can be perceived follow ing a n ind epth insight. The firms h a ving a n

experience of domestic business can proba bly ha ve a n edge w hile

diversifying into int erna tiona l opera tions. Keeping this in mind, a


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lea ding ma na gement guru, Micheal E . P orter ha s observed t ha t firms

a spiring to be successful globa lly must a tt empt a t being successful

in the domest ic market f irs t . Most f irms l ike IBM, Coca Cola ,

U nilever, P roctor a nd G a mble, Suzuki, Sony opera ting globally infa ct

sta rt ed initially a s domestic compa nies. As th e mag nitud e of their

opera tions grew, th ey found it profita ble to vent ure abr oad by setting

up man ufacturing a nd distr ibution cent res in other count ries. Some

of the points of difference between international and domestic

mar ket ing a re:

(i) Process of marketing: The ma rketing is deemed t o

involve tw o processes viz., technica l a nd socia l. The t echn ical process

essent ially comprises of non hum a n fa ctors such a s product, price,

cost, bra nd. B ut, t he socia l process ta kes care of huma n beha viour,

customs, attitudes, values etc. The latter is unique to a national

ma rket. H ence, this shows tha t internat iona l ma rketing is different

from domest ic ma rket ing. Accordin gly, sociologica l & cultura l fa ctors

predomina te th e decision m a king with regard to ma rketing mix.

(ii) Marketing environment: The environmental and

o p e r a t i o n a l v a r i a b l e s a l s o a s s u m e a d i f f e r e n t s t r u c t u r e i n

intern a tiona l business. The environmenta l factors such a s economic,politico lega l, geogra phic, cultura l a nd competition a re much more

dynamic and uncontrollable in foreign markets as compared to

domestic markets. Different countries have different currencies,

accounting practices, legislation, interest rates, inflation etc. So,

the control lable factors of a f irm (market ing mix) have to be

redesign ed a ccording t o th e needs of individua l count ries. The very

complexi ty o f exchange t ransac t ions across na t ions makes i t

significa nt ly different fr om domestic business opera tions.

1.2.4 Mu l t i n a t i o n a l C or p or a t i on

Historically, international trade simply involved export or

import of goods across national boundaries. The production took


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11. The MNCs have predominant ly concentra ted on building

strengths around their core businesses. Even where

diversifica tion ha s been pra cticed, it h a s been done into

th e ar eas w here the existing r esources ca n be used.

12. Th e M NC s h a v e b een a c t iv el y in s t r um en t a l in t h e

process of l iberal iza t ion and global iza t ion of world

economy, that has relegated the concept of centrally

plann ed economy t o a gr eat extent .

1.2.5 App r oa ches t o I n t er n a t i o n a l Ma r k et i n g /

I n t er n a t i o n a l Bu si n ess

The differences in interna tional orienta tion a nd a pproach canbe used to categorize the international marketing into different

forms. A domestic compa ny ma y initia lly sta rt w ith eth nically close

ma rkets an d extend its operat ions a cross the world in its final st a ge.

Domest ic ma rket ing exten sion (E th no-cent ric) concept.

Mult i domest ic ma rket (P oly-cent ric) concept

G lobal ma rket ing (Regio-cent ric) concept

Domestic Marketing Extension (Ethnocentric) concept:

The compan ies guided by t his a re casua l pla yers in overseas ma rkets.For them the overseas markets serve as conduits for directing

surplus production. They use overseas markets as a buffer for

checking th e dema nd fluctua tions in th e domestic ma rket. The ma in

focus of the company remains domestic markets. This concept is

usua lly preferred by sm a ll compa nies, or even by la rge compa nies

opera tin g in a competit ive indus tr y. The oversea s opera tions of such

compa nies a re usua lly restr icted t o export s in certa in niches such

a s a pproach is also known a s ethnocentric in the EP RG schema.

Multi domestic marketing (polycentric) concept: As t he

overseas opera tions of the compa nies grow, t hey r ecognize the need

for a different a pproach to interna tiona l mar keting. The opera tions


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of compa nies ca n a cquire forms of oversea s joint vent ures, licensing

a g r e e m e n t s , o v e r s e a s m a n u f a c t u r i n g a n d m a r k e t i n g . T h e

subsid ia r ies opera t ing in overseas markets a re recognized as

independent business units with autonomy to operate in their

ma rkets. Within t heir respective ma rkets, th e subsidia ries beha ve

a s domestic compa nies, deriving only st ra tegic guidelines from t heir

hea d o f f i ces . T he co mp a nies u su a l l y beco me mu l t ina t io na l

corpora tions a t t his sta ge. The controls ar e decent ra lized to facilita te

local opera tions under the EP RG schema , such firms a re classified

as polycentric.

Global Marketing (Regiocentric) Concept: As t he

compa nies direct th eir a pproach t o become a globa l compa ny, t hey

acquire a global perspective in their operations. Such companies

look for lucra tive business a nd investment opport unities on global

ba sis. They derive synergy by s ourcing t he r esources fr om a cross

th e globe by selecting th ose ma rkets w hich ca n provide the inputs

to business in most cost-effective manner. Such companies do not

trea t t he SB U s opera ting in different ma rkets as t ota lly independent

entit ies, but as the SB U s w hich a re contributing towa rds the growt h

of the compa ny a s a w hole. Cert a in degree of th e controls an d policyma t ters may extend to a l l the SB U s, a l though a l lowa nces may be

ma de to accommodate regiona l diversities. Under t he EP RG schema,

global companies are often classified as regiocentric or geocentric

companies.

1.2.6 Im por t a n c e of I n t er n a t i o n a l M a r k et i n g

(A) Macro level benefits in national perspective:

Internat ional t rade results in macro-economic ef fects for each

economy. The imports and exports influence the employment,

national income and technology. The direct and indirect benefits

emana ting from interna tiona l business ar e listed below :


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i) I n c r ea se i n n a t i on a l I n c om e: A countrys export

ac t iv i ty promotes indust r ia l and t rade ac t iv i ty tha t genera tes

employment and income for var ious sec t ions o f soc ie ty . The

mult iplier effect of income increa ses th e level of out put a nd gr owt h

rate of economy. Especially the export of wage-goods can help a

developing count ry to brea k t he vicious circle of poverty a nd ra ise

th e real income of the count ry.

ii) Ef f i c iency : While export ing, th e count ries try to a tt a in

specializat ion in production of goods. In this process, there is

optimum and efficient utilization of the resources. The limited

domestic ma rket ma y a ct a s a deterrent t o the growth of industry

and a resultant under-utilization of resources. The international

trade can help industry grow and achieve scale and experience

economies.

iii) Em p l o ym en t g en er a t i o n : E x p o r t s c o n s t i t u t e a

significa nt port ion of different na tions a nd br eed opport unities for

more and gainful employment . In addit ion to reducing direct

unemployment , fo re ign t rade reduces underemployment , e .g .

exports of Sw iss wa tches engages the farmers in th e wa tch industry

during t heir free time resulting int o ga inful utilisat ion of th eir skills.

iv) I n c r eased l i n k ages: The staple theory of economic

growth recognizes t ha t foreign t ra de results into increased ba ckwa rd

and forward l inkages with other sectors of the economy. The

indust r ia l and t rade l inkages cause the development o f new

indust ries a nd enh a nce efficiency of existing ind utr ies.

v) Op t i m a l u t i l i za t i on o f r esou r c es: I n t e r n a t i o n a l

business ma kes possible th e utilisat ion of agr icultur a l resources a s

the farmers get a greater access to the overseas markets. This

tr a nsforms even the subsistence sector int o monetized sector ra ising

th e sta nda rds of living of rura l populat ions. The strengt hs of Indian


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a gricultur e a re likely t o open n ew vist a s of business opport unities

in the days to come as the world trade is likely to become more

libera lised a s a result of WTO provisions.

vi) Ed u ca t i ve ef fect : Exports a nd interna tiona l business

exposes t he executives t o overseas ma rket w hich develops gr eat er

skills in t hem. This removes a grea t hindr a nce, often a cknowledged

as greater than scarcity of capital goods. The entrepreneurial and

ma na gement expert ise genera lly helps an economy grow fa ster, a nd

tr a ditiona l fa ctors of production can be used more effectively.

vii) Pr omo tes For ei gn D i r ec t I nvestm en t : The level of

international business of a country often becomes a basis for the

flow of foreign direct investment in a count ry. In toda ys economic

environment , i t is di f f icult to grow in absence of FDI . Several

economies ha ve grown follow ing t he hea vy investment s from other

part s of the world.

viii) S t im u l a t es Com pet i t i o n : In t e rna t io na l bu s iness

fosters heal thy compet i t ion and helps in checking ineff ic ient

monopolies. It is esta blished th a t growt h of competitive economies

is higher than the growth rate of protective economies. In recent

times, th e na tions ha ve realized t he benefits of health y competit ion.

Severa l developing an d erstw hile commu nist count ries ar e promoting

the same. Switching over to market- led growth which invokes

substantially international operations in business, services and

technology.

ix) Tech n o logy Sou r c i n g : In todays rapidly changing

world, it is important to keep pace with the changing technology.

This is possible only w hen th ere exist linkages w ith oth er na tiona l

economies t hrough int erna tional tr a de a nd business. The t echnology-d r i v e n i n d u s t r i e s s u c h a s i n f o r m a t i o n t e c h n o l o g y

telecommunicat ions, a utomobiles derive immense syn ergy by th eir

part icipa tion in t ra de across th e world.


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(B) Microlevel effects of International Business: An

individual firm ca n rea p several benefits by resort ing to interna tional

ma rketing a nd interna tiona l business.

i ) Gr ow t h : By all standards, domestic markets have a

limitation of growth potential. After a particular level, it is very

difficult for a firm t o achieve growt h. S o, it is left w ith t he option of

either product innovat ion or extending opera tions to oth er ma rkets.

The lat ter option is a better w a y of susta ining growth a s the product

life ca n increase significa nt ly w hen it is sold into the w orld mar kets.

i i ) F i gh t i n g Com pet i t i on : As t he protectionist m easur es

by na tions a re being reduced, firms opera ting in d omestic ma rket

only a re fa cing increased levels of competition. Inst ead of utilizing

their resources in fighting competitions, firms continue to look at

ma rkets in other count ries to cope up with domestic competition.

H ence, interna tiona l business opera tions provide a venues for both

surviva l a nd growt h.

i i i ) I n c r ea sed ef f i c i en cy: B y opera ting on globa l sca le, a

firm can select for its expansion lucrative opportunities. Also, it

can reduce its product costs through global sourcing and utilise

w orld level technology a nd t a lent for business opera tions. All this

ma kes th e business opera tions more efficient a nd a s a result it can

r e a l i s e h i g h e r r e t u r n p e r u n i t i n v e s t m e n t . T h i s b o o s t s u p

sha reholders value an d the compa ny ima ge.

i v) Sca l e econ om i cs: Higher level operations on account

of internat ional operat ions produce benefi ts o f sca le and thus

enha nce th e profita bility of firm.

v) I n n ova t i on : B y operat ing in large ma rkets, compan iescan a fford t o invest in r esea rch a nd t echnology development. I t is

es tabl ished tha t compared to t rad i t iona l and mind se t f i rms,

innovat ion driven firm s ca n compete effectively.


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vi ) R i sk C ov er : B y o p e r a t i n g o n g l o b a l s c a l e , t h e

fluctua tions of deman d levels in a n individua l country does not ma ke

m u c h d i f f e r e n c e o n t h e a g g r e g a t e s a l e s . C o n s e q u e n t l y , t h e

uncert a inties a rising out of risk factors on t he opera tions localized

to a country are reduced. Even the financial risks, physical risks,

politico-legal risks etc. can be managed more effectively by virtue

of global opera t ions.

1 .2 .7 Ad ver se ef f ec t s o f f or ei gn t r ad e on t h e N a t i ona l

Econom i es

I t ha s often been ar gued tha t interna tiona l tra de ha s a strong

ba ckwa sh effect a s less developed count ries i.e. its opera tions a refunda menta lly bia sed in favour of the richer a nd progressive regions

and is in disfavour of less developed countries. It has also been

pointed out by the economists that international trade leads to

international transfer of income from poor to rich countries. The

U N r eport (1998) on h uma n r esource indicat ors shows a w idened

ga p in the living st a nda rds of the people of rich an d poor na tions.

This widening of gap has increased in the last decade ever since

globalization of the world economies started. Also, international

t rade can adversely a f fect the process of capita l format ion in

underdeveloped countries.

However, there is still a lack of empirical evidence to prove

that the development of export sector has been a t the cost o f

domestic sector. Foreign t ra de ha s not a lwa ys st ood in t he wa y of

domest ic investment . The adverse ef fects seem to have been

exaggerated. I t may be mentioned that in todays environment,

globalizat ion is a reality a nd it is importa nt to accept it in the right

perspective inst ead of nurt uring th e old protectionist beliefs.

1 .2 .8 G loba l sym b iosi s

Over a period of time, t he mind set for a chieving self sufficiency


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a s a na tiona l goa l has given wa y to at t a ining synergies from global

interdependence. The count ries ha ve rea lised t he benefits a ccruing

from fostering a healthy symbiotic relationship based on mutual

gains for both countries. The goal of self sufficiency of yesteryears

w a s right in those t imes, but w ith contempora ry cha nges sweeping

business and society, an order based on synergies out of mutual

benefits is more likely to be accepted. The low levels of national

popula t ions a long wi th l imi ted means o f communica t ion and

tr a nsporta tion encoura ged self-sufficiency a s a na tional goa l. A fast er

indust ria l grow th followed by efficient tr a nsport a tion an d logistics

and the revolution in information technology have resulted in a

closely knit ted w orld. Toda y, a ll na tions depend on ea ch oth er forcapita l, technology, ma rkets a nd supplies. Concomita nt w ith t his is

a worldwide struggle for ma rkets, fuels and ra w m a terial .

The market power of nations has shifted. The West is no

longer supremely domina nt a nd th e world has a cquired a multipolar

cha ra cter in contr a st to bipolar cha ra cter of the yesteryears. Russia

ha s shifted from being a centr a lly pla nned economy t o a more open

market based economy. She continues to derive advantages from

the strength s of the factors such a s na tura l resources and a tra inedma npow er. Sh e also cont inues to be the biggest oil producer . C hina

with population over one billion is getting organized to face the

challenges in th e emerging w orld economic order. S he ha s ma de a

conscious tr a nsition towa rds a ma rket ba sed economy. A number of

less developed countr ies a re bui ld ing indust ry tha t combine

significant technology, low cost labour and cheap resources to

produce products and services that are marketed worldwide. In

the past f ive years, their manufactured exports have more than

doubled. Ta iwa n n ow sells TVs a nd st eel to J a pan. And J a pan ha s

moved ahea d. In th e 1980s J a pan w a s ma king fourth genera tion

computers, the highest of the high technologies. The phenomenal

growt h of informa tion technology sector in I ndia is an example of


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how opportuni t ies for India a re crea ted as a resu l t o f g loba l

interdependence.

1 .2 .9 Th e p r ocess o f i n t er n a t i ona l i sa t i on o f bus i n ess.

The studies of corporates expanding as MNCs indicate that

firms attain the multinational character over t ime. Mostly, this

process does not occur through conscious design at early stage.

U sua lly it is th e unplann ed result of a series of corporat e responses

to a wide-variety of threat s a nd opportunit ies appea ring a t r an dom.

These responses result into progressively more elaborate and

sophist ica ted stra tegies leading to internat ional iza t ion of their

business opera tions. The firms move from a rela tively low risk retu rn ,export-oriented strategy to a higher risk-higher return strategy

empha sizing interna tiona l production. In effect, the firm is investing

in informa tion, learn ing enough a t ea ch st a ge to significa nt ly improve

cha nces at the next st a ge.

The firms usua lly sta rt a s domestic firms. As th ey ta ke decision

to go intern a tiona l, export s a re the first st ep. Next in t he sequence

comes setting up a foreign sa les subsidia ry a nd securing licensing

agreements . In the wake o f sus ta inable market , a f i rm could

Exporting

Sales Subsidiary

Overseas Production

Licensing

Exhibit 1: Typical Sequence of overseas expansion


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eventually establish its own production facility in most markets.

The following diagram shows a typical sequence of operations

expa nding oversea s.

Exporting: In v iew o f cha ng ing dema nd a nd bu s iness

conditions a nd competition, a compa ny ma y look for export ing a s

a n a dditiona l outlet for excess production to foreign ma rkets. The

exports provide direct benefits of low capita l requirement a nd st a rt

up costs. The risk is low in exports a nd t he profits a re immedia te

with a lmost negligible gesta t ion periods. Exports a lso provide

significant learning opportunit ies to the managers operating in

domestic ma rket. The understa nding of dema nd a nd other ma rket

c o n d i t i o n s , c o m p e t i t i o n , c h a n n e l s o f d i s t r i b u t i o n , p a y m e n t

conventions a nd export opera tion helps the compa nies to plan th eir

future courses of a ction. Initially, a sma ll company ma y st a rt exports

through intermediaries and later acquire the control of markets

themselves. How companies imbibe export orientation shall be

described in t he subsequ ent d iscussion on export beha viour t heories

Licensing: When th e compan ies do not w a nt to ma ke a hea vy

investment, w a it long for returns a nd t a ke high risks, licensing comes

a s a viable option t o direct investm ent in production facilities a broad.

Often, licensing is a precursor to setting up overseas production

facilities. The companies license a local firm in foreign country to

manufacture companys products in return for royalties and other

f o r m s o f p a y m e n t . T h i s m o d e o f e n t r y i s u s e d w h e r e h o s t

governm ents r estrict FD I, or th e volume of opera tions is not via ble

to support investment by not achieving economies of scale . The

loca l par tn er ma y be a ble to cont rol the loca l fa ctors m ore efficiently

th a n a foreign compa ny. L icensing is a preferred mode of entry intechnology-driven businesses such a s softw a re, electr onic ha rdw a re,

pha rma ceuticals etc.


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The disad va nt a ge of licensing is tha t t here might be difficulty

of cont rol of foreign opera tions. The licensee ma y not a dh ere to the

qu a l i t y a nd o t her o p era t io na l no rms which ma y da ma ge t he

credibility of licenser. Also, cha nces of fra udulence etc. by licensee

a lso exist w hich ma y put licenser at losses.

J oint Ventures:The joint ventur es ar e esta blished by MNCs

w ith loca l part ners with the a im of reducing the risks associat ed

w ith w orking in foreign ma rkets. The loca l pa rt ners a re not MNCs

th emselves in order t o ensur e longer st a bility of pa rt nerships. The

MNCs provides inputs that give f irms specif ic advantage e.g .

technology, capital, knowledge etc to the operation coupled with

th e local capa bilities of the par tn er. The levels of investment a nd

risks a ssociat ed with w orking in a foreign ma rket a re less in joint

ventures a s compa red t o overseas production. In certa in cases, local

government also makes it essential for the MNCs to engage local

partners. The disadvantages associated with joint ventures are

inadequacy of control and dif ference in working styles of two

part ners wh ich can lea d to prema ture termina tion of pa rtn erships.

Turnkey project: A turnkey project is a package deal in

w hich t he MNCs constr uct a production facility a nd provide tra ining

for the personnel necessary to operate it , such that the facility is

rea dy to begin opera tions on t he competition of th e project. U sua lly,

tur nkey projects a re for production of sta nda rdized product. Thus,

a turn key project involves the sa le of w ha t w ill be a fully opera tional

production facility. The MNCs provide a package deal to a host

na tion, firm or governm ent. On occa sions, during t he negotia tions

over a project, t he MNCs m a y decide to be forced t o reta in a sma ll

share of the project.

The tu rnkey project ca n be a n a lterna tive to export ing or to

MNC a ctivity w hen a h ost governm ent ha s imposed restrictions on

th ese modalities. In a ddition, the host count rys mar ket ma y be too


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sma ll or th e risk of FDI t oo high to wa rra nt a n investment by t he

MNC. An added benefit of the turnkey project can also expect to

license additional managerial or technological expertise to host

na tion. However, the MNC must give up some cont rol to the host

governm ent (w hich usua lly ow ns t he facility). For this rea son, the

MNC risks dissipat ion of its firm-specific a dva nt a ge. The MNC must

determine wh ether th e plan t a nd personnel involved in the tur nkey

project can event ua lly become a n int erna tiona l competitor a ga inst

th e MNC before it enters int o such a ventur e..

Overseas Production:E xporting an d other techniques ma y

limit a company to release sales potentials for various products.

Also in case of exporting, it is difficult t o esta blish bra nds a nd h a ve

a direct contract with the customers. So, the ult imate aim of all

companies aspiring to be multinational corporations is to start

overseas production fa cilities. How ever, t he investment a nd r isks

a ssociat ed with t he sam e a re tremendous. The ca pita l requirement

in foreign currency is huge and the overseas projects have long

gestat ion periods. The companies have to operate in uncertain

business envir onment s of foreign count ries. The exam ples of Ca rgill

sa lt , En ron and Therma x who sta rted th eir operat ions in India showhow difficult it is to cope up with na tiona l politica l a nd economic

scena rio of oversea s opera tions.

N e v e r t h e l e s s , t h e o v e r s e a s p r o d u c t i o n c a n r e s u l t i n

tr emendous opportun ities an d benefits. Once it is over wit h teeth ing

problems, overseas plant s become lucra tive business profit centr es

contributing to corporate growth. The operations of Unilevers in

India in the form of Hindustan Levers Ltd has been a lucrative

profit centre for the parent company. The ROI of HLL is highereven tha n t he parent company U nilevers. Once a company a cquires

a multinational character, significant proportions of revenue are

cont ributed by overseas production.


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1.2.10 Exp or t i n g Vs I n t er n a t i on a l M a r k et i n g

E xport ing is often considered a s t he first step in t he process

of interna tiona lizat ion of a business. In general, t he firms engagedin export opera tions ha ve to concentra te on ma na ging t he 4 ps of

ma rketing mix i.e. product, price, pla ce and promotion. E xport ing

is prima rily a tra nsa ctiona l approa ch t o marketing w herein goods

a re excha nged for va lue on deal to deal basis. Int ernat iona l mar keting

on the other ha nd extends from identifying th e customer needs to

a chieving customer sa tisfa ction. Int erna tionals ma rketing requires

greater commitment of the executives time and resources than

exporting.

Exporting is usually a short-term solution to an immediate

problem of under-capacity of production or over-capacity of the

stocks. However, intern a tiona l mar keting is a long-term a pproach

t o su s t a ined bu s iness f ro m a ma rke t . I t he lp s t o b r idge t he

information gap between a company and the final consumer of its

product. While, exporting may involve agents or intermediaries,

th e ma rket a nd ma rketers are more close in mar ket ing. The

differences in export ing a nd intern a tiona l mar keting ca n be shown

in t he form of the follow ing t a ble.

Table 1: Differences in Export Sale and International

Marketing

Export Sales International Marketing

To rea lise S hort run To rea lize long-run goa ls(e.g.

(e.g. immedia t e sa les) long- t erm goa ls (e.g.

development of long term market)

No syst ema tic select ion S yst ema tic select ion of ma rket s

of ma rkets


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M in im u m r esou rces com m it m en t S u ff ici en t r esou r ce com m it m en t g et

t o ga in immedia te sa les perma nent ma rket posit ion

N o s ys t em a t ic ch oice for m od e S y st em a t ic ch oice of mos t a ppr opr ia t e m od e of

ent ry of ent ry

D evelopm en t of pr oduct s for D evelopm en t of pr odu ct s for bot h

home ma rket home a nd foreign ma rket s

Minor product a dap ta t ion necessa ry Major product a dap ta t ion to su it t o sa t i s fy

ma nda t ory lega l obliga tions foreign buyers

N o effor t t o con tr ol ch a nn els E ffor t to con tr ol ch a nn els t o s uppor t of ma r ket

objectives /goa ls

P r i ces ba sed on d om es t ic f ul l cos t P r i ces fi xed in t er m s of dem a n d

w i t h som e a d h oc a d ju st m en t s t o con d it i on s , com pet it i on a n d cos t .

specific sa les situa tions

P r om ot ion m ix m a in ly con fin ed P r om ot ion mi x in clu des a dv er t is in g,

to foreign tours or le ft t o middlemen sales promotion and foreign tours

1.3 SUMMARY

In todays environment even firms that do not seek to do

business outside their national boundaries have no choice but to

a w a re of the intern a tional business scene. The India n economy a s is

tr ue of th e economies of oth er indust ria lized na tions, is so int ricat ely

l inked to in terna t iona l economics tha t even s t r ic t ly domest ic

business is affected by w ha t t a kes pla ce in other count ries. Alth ough

ba sic ma rketing decisions do not cha nge a s ma rketers expa nd t heir

business from the domestic field to the international field, the

environment can be profoundly different . The ma jor a spects of theinterna tional m a rketing environment include th e economic, cultura l,

legal a nd politica l environment .


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A firm a spiring to ent er the int erna tiona l scene may choose

from the various entry modes exporting, contractual agreement,

joint venture, stra tegic a llia nce, a nd w holly-ow ned subsidiary. E a ch

entry mode provides different opportun ities a nd risks. Int erna tional

ma rketing in par ticular is required beca use, of all of the functiona l

a reas of a business, ma rketing problems a re the most funda menta l

and most frequent . Todays thrust for growth in internat ional

business comes from MNCs. The leaders of these companies will

require an increasing awareness of the needs of host countries in

th e environment in t he future.

1.4 KEYWORDS

International Business:All business tra nsa ctions involving

privat e compa nies or government s of tw o or m ore countries.

J oint Venture: A direct investment of which two or more

compa nies shar e the ow nership.

Multinational Corporation: A c o m p a n y t h a t h a s a n

integrated global philosophy encompassing both domest ic and

overseas opera tions, sometimes used synonymously w ith MNE ortra nsna tiona l corpora tion.

Polycentrism: Ch a ra cteristic of a n individua l or orga nisa tion

tha t feels tha t differences in a foreign country , real a nd ima ginary ,

grea t a nd sma ll, need to be accounted for in ma na gement decisions.

Turnkey Operations:An opera ting facility th a t is considered

under contract and transferred to the owner when the facility is

rea dy t o begin opera tions.

1.5 SELF-ASSESSMENT QUESTIONS

1. Def ine in t erna t iona l ma rket ing . Why is it essen t ia l for


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a company t o ma ster the ar t of interna tiona l marketing

in t he present competitive times?

2. D ifferent ia te bet ween(a ) In t erna t iona l bus iness a nd in t erna t iona l t r a de

(b) E xpor t in g a n d in t er na t ion a l m a rket in g

3. S t a t e w h et h er t h e follow i ng a ct iv it ies a r e d om es t ic

business, internat iona l business or internat ional tra de:

a ) A t r a der sells pr od uct s t o a n ot h er t r a der in

Europe.

b) A t r a d e r sel ls t h e pr od u ct s t o a 1 00% ex por t

orient ed unit.

c) A t r a d er pu rch a ses a pr od uct f rom a n im por t er .

d ) Th e g ov er n men t r eceiv es gr a n t fr om U n it ed

Nations.

e ) The government receives loa n from IMF

f) The government purchases ammunit ion from U.S .

g) The government receives a id from J apan for flood

relief.

1.6 REFERENCES/SUGGESTED READINGS

1 Ash egh ia n P a n d E br a him i B (1990) I nt er na t ion a l

B usiness H a rper Collins P ublishers, New York pp 1-48.

2 C a t eor a P h ilip R (1997), I nt er n a t ion a l Ma r ket in g, 9t h

Edition, Irw in/McG ra w HI U ,

3 Terpes t ra , Vern (1972) In t erna t iona l Ma rket ing , Ha l t ,

Reinha rt a nd Winsten Inc.

4 J a in, S .C . (1989) In terna t iona l Ma rket ing Ma na gement ,

CB S P ublishers & Dist ributors, 2nd ed, pg. 16, pg 23.5 Keegan, Warren J . (1997) Globa l Market ing Mangement ,

P rentice Ha ll of India P vt . Ltd. , New D elhi


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Cour se code: IB-417/MM-410 Author: Pooja Saxena

Subject: International Marketing Vetter: Prof. H. Bansal

L esson N o.: 2

INTERNATIONAL TRADEINSTITUTIONS

STRUCTURE

2.0 Objectives

2.1 Introduction

2.2 Presentation of Contents2.2.1 World Bank/International Bank for Reconstruction and

Development (IBRD)

2.2.2 International Monetary Fund (IMF)

2.2.3 United Nations Conference on Trade And Development

(UNCTAD)

2.2.4 World Trade Organisation (WTO)

2.3 Summary

2.4 Keywords

2.5 Self Assessment Questions2.6 References/Suggested Readings

2.0 OBJ ECTIVES

After st udying th is lesson, you would be able to-

unders tand the funct ions , membership and s t ructure of

World Ba nk.

understand the functions, membership and structure of

Int ernat iona l Moneta ry Fund.

k n ow t h e m a i n pu r pos es of U N C TAD a n d i t s r ol e i n

economic co-operation


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unders tand the purposes , membership and organisa t ion

of World Tra de Orga nisa tion.

2.1 INTRODUCTION

The Int erna tiona l B a nk for Reconstruction an d development

(IBRD) popularly known as the World Bank owes its birth to the

de l ibera t io ns o f t he Uni t ed Na t io ns Mo net a ry a nd F ina nc ia l

Conference which met a t B rit ton Woods, New H a mpshire. The World

B a nk w a s esta blished on 1 J uly 1944. The Hea dqua rters of world

B a nk is in Wa shingtan D .C.

The global w a r h a d completely disloca ted t he multilat eral t ra dea nd h a d caused ma ssive destr uction of life and propert y. While the

need for promptly reconstructing the war damaged economies, it

w a s a lso recognised th a t st a ble w orld pea ce wa s thr eatened from

th e presence of great disparit ies in th e sta nda rds of living betw een

th e developed a nd u nder developed countr ies. Thus, t he World B a nk

wa s established.


2.2.1 Wor l d Ba nk /I n t er n a t i o n a l B an k f or

Recon st r u c t i on a nd Devel opm en t ( I BRD )

Membership and Structure: Any country is eligible for

membership of th e World B a nk if it subscribes to its cha rt er under

the Banks articles of agreement. Only those countries which are

members of the IMF ca n be considered for m embership of the IB RD .

The total membership of the World Bank at present is 184. A

member can withdraw at anytime its membership however, i t iseffective upon receipt by the Bank of a writ ten notice from the

member to that effect.


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The Bank has a Board of Governors, Executive Directors, a

president a nd other sta ff . All pow ers of the B a nk a re vested in th e

Board of Governors consisting of one governor and one alternate

a ppoint ed for five year s by ea ch m ember. The B oard of Governors

meets once every year. The annual meeting deals with matters

requiring formal action and informal exchange of views on major

Int erna tional problems.

The executive directors function in continuous session and

meet regular ly once a month.

Function: The World Bank has one centra l purpose of

promot ing economic & social progress in developing count ries. Thema in functions of th e World B a nk a re-

(i ) to ass is t in the reconst ruct ion and development of the

territories of its member governments by facilitating

investment of capital for productive purposes.

(i i) to promote foreign pr iva te inves tment by guarantees

o f o r t h r o u g h p a r t i c i p a t i o n i n l o a n s a n d o t h e r

investments of capital for productive purposes.

(iii) To ma ke loa ns for productive purposes out of its own

resources or out of funds borrowed by it w here privat e

ca pita l i t not a vailable on rea sona ble terms.

(iv) To promote the long range growth of Internat ional t ra de

a nd t he ma intenan ce of equilibrium in the ba lance of

pay ments of members.

The World B a nks loan s a re directed to help the m embers to

bu i ld fo u nda t io n o f so u nd eco no mic g ro wt h . Lo a ns ma de o rgua ra nt eed by World B a nk a re, except in s pecia l circumsta nces for

t he purpose of specific projects of reconstr uction a nd development .


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The Ban k m akes l oans to member s in any one or mor e of t he

foll owi ng ways-

(i ) by gra n t ing or pa r t i cipa t ing in d irect loa ns ou t of it sown funds.

(ii ) by grant ing loans out of the funds ra ised in the market

of a member or otherw ise borrow ed by the ba nk.

(iii) by guara nteeing in whole or par t loans ma de by pr iva te

investors.

B efore a loan is ma de or gua ra nteed, the B a nk ensures

tha t the-

(i ) project for which the loan is asked has been carefu lly

examined by a competent committee as regards the

merits of the proposal.

(ii) B orrower has reasonable prospects for repayment of

loan.

(i ii) Loan is mea nt for product ive purposes.

(iv) Except in specia l circumstances the loan is meant tofina nce the foreign excha nge r equirements of specific

projects of reconstruction and development.

The World B a nk norma lly ma kes medium a nd long term loa ns.

The interest r a te cha rged by the B a nk on its loans is the estimat ed

Cost to the B a nk a nd is uniform w ithout a ny dist inction being ma de

a mong the borrowers.

Technical Assistance and other Activities:World Bank

a lso gives t echnica l a ssistan ce to members on ma tt ers rela t ing t olea rn opera tions par ticularly in r egard t o-

(i ) def in ing pr ior i t ies among d if ferent projects .


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(ii) Modificat ions in the technica l plan s for projects designed

reduce its cost or make it more efficient.

(iii) Adminis t ra t ive or organisa t iona l a rrangements for aprojects or a s t o plan s for its fina ncing.

T h e B a n k h a s a l s o p r o v i d e d t e c h n i c a l a s s i s t a n c e i n

development program ming t hrough va rious survey missions wh ich

ma ke intensive stud ies of na tiona l resources of developing member

count ries and m a ke recommenda tions.

IB RD jointly w ith th e IMF ha s ta ken init iat ive in providing

relief to the hearty indebted poor countries (HIPCs) by reducing

their externa l debt burden.

World Bank and India: India is a founder member of the

ba nk. India is the biggest single borrower of the ba nk In dia r eceived

$ 5472 million fina ncial help during t he t hird plan period from t he

12-na tion Aid In dia Consortium formed t hrough t he S incere effort s

of the bank. I t played the role of a mediator in the canal water

d i sp u t e w i t h Pa k is t a n . T he ba nk s ro le in Ind ia s eco no mic

development ha s been more tha n substa ntia l an d but for the t imely

loans given to India by the bank, the success of the countryseconomic development pla ns w ould ha ve been considera bly dela yed.

Conclusion: The World B a nk ha s been la rgely instrum enta l

in accelerating the pace of economic development in different

count ries of the w orld. The purpose of th e B a nk ca n be fulfilled only

w hen the ra te of interest charged by t he ban k is low enough for a ll

co u nt r ies t o ena b le t hem t o t a ke lo a ns f ro m t he ba nk mo re

frequent ly. The B a nk is a nonpolitica l institut ion expected to trea t

a ll member equa lly and not to discriminat e among them.

It is hoped tha t in future the w orld B a nk will be in a stronger

positions to sender financial assistance to the member countries


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membership. At present , IMF ha s 184 member count ries.

E a ch members quota in the Fun d determines its subscriptions

to the fund, i ts drawing rights , vot ing power and share of anya llocat ion of specia l dra w ing right s (SD Rs)

The highest a uth ority of th e fund is th e Boa rd of G overnors,

in w hich ea ch of th e member count ries is represented by a G overnor

and an alternate Governor. The Governor normally meet once a

year but may meet or vote by mail at other t imes. The Board of

Governors has delega ted many o f i t s powers to the Board o f

executive directors. The Executive Board deals regularly with a

wide variety of administrat ive and policy matters and elects themanaging director who is the chairperson of the Executive Board

a nd C hief of the opera ting st a ff of the fund.

Functions:-The prima ry functions of IMF a re:-

(i) to promote Internat ional Monetary Cooperat ion through

a perma nent institution wh ich provides the ma chinery

for consulta t ion and collaborat ion on Internat ional

moneta ry problems.

(ii) t o f a ci li t a t e t h e ex pa n s i on a n d b a l a n ced g r ow t h o f

Int ernat iona l tra de an d t o contr ibute to th e promotion

of high levels of employm ent a nd r ea l income.

(i ii) to promote excha nge sta bil ity a nd to ma inta in orderly

excha nge ar ra ngements a mong members.

(iv ) t o give con f idence t o members by ma k ing genera l

resources of the Fund temporarily available to them

under adequa te safeguards, thus providing them w iththe opportunity to correct maladjustments in their

bala nce of paym ents.


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Use of Fund Resources and special Drawing Rights

(SDRs):Fund m embers ma y dra w on F unds financial resources to

meet their balance of payments needs. In addition, the members

have access to three permanent facilities for specific purposes-

(i) t h e fa c il it y f or com pen s a t or y f in a n ci ng of ex por t

f l u c t u a t i o n s ( a v a i l a b l e t o m e m b e r s f a c i n g B O P

difficulties due to tempora ry export short fa ll for rea sons

beyond control).

(ii) The buffer stock fina ncing fa cility (a vailable for building

I n t e r n a t i o n a l b u f f e r s t o c k i n o r d e r t o p r e v e n t

fluctua tions in members export ear nings).

(iii) The structura l Adjustment fa cility (SAF) (to provide

f i n a n c i a l s u p p o r t t o l o w i n c o m e c o u n t r i e s o n

concessiona l t erms).

Special D ra w ing Right (SD R) is an Int erna tional Reserve Asset

crea ted by the IMF in 1969 and a l loca ted to i t s members to

supplements exist ing reserve asset . The SDR is IMFs unit of

a ccount. The va lue of th e SD R is determ ined da ily on t he ba sis of

five currencies- U S d ollar , G erma n deutsche ma rk, French fra nce,J a panese Yen a nd B ritish P ound sterling. The SDR va luat ion basket

is revised every five year s.

Under the new agreement of IMF, the SDR is the unit of

account for all purposes of the Fund and members of Fund have

pegged their currencies to the SDR, When a member pegs its

currency t o the SD R, th e value of its currency is fixed in terms of

the SDR.

Technical Assistance, Liquidity & Other Activities:The

technical assistance provided by the fund which constitutes an

integral part of i ts activit ies is in the nature of regular annual


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consulta tions w ith members.

The IMF provides technical assistance and training to its

members in the follow ing a rea s-

(i) designing and implementing f iscal an moneta ry policies

(ii) in st it ut ion b uild in g

(iii) col lect ing and ref in ing s t a t i s t ica l da t a

(iv) dra f t ing and rev iewing financia l leg is la t ion

The IMF a nd t he world B a nk launched a joint init ia t ive in

providing extern a l debt r elief for t he hea vily indebted poor count ries

(HIPCs)

IMF and India: India is a founder member of the IMF an d

has played an important role in the formulation of Fund policies.

IMF h a s been very sympa thetic to India a nd t o its problems a lso.

India w as t he firs t country to draw J apanese yens from the IMS.

To meet its B OB deficit , Ind ia purcha sed from th e IMF Fund

$100 million during 1948 and 1949. In 1974, India was granted a

st a nd by credit of $200 million by t he Fun d t o tide over her foreignexcha nge crisis. Un der Oil fa cility, India purcha sed a tota l of SD R

401. 34 million f rom t he fu nd in 1974-75 a nd 1975-76.

India h a s ma de substa ntia l draw a ls from the IMF from 1990-

91 onwa rds un der different fina ncing facilities.

Conclusion: T he IMF wa s es t a b l i shed fo r p ro mo t ing

Int erna tiona l Economic sta bility by promoting the bala nced growth

of free In terna tiona l Tra de an d th e multi-convert ibility of na tiona l

currencies. The Fund is a pool of cent ra l ba nk reserves an d na tiona lcurrencies which a re ma de ava ilable to the fund members. The IMF

over th e year s ha s been performing its opera tions of surveillance,

financial assista nce and t echnica l assista nce apart from a ssist ing


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low income a nd hea vily indebted count ries to build t heir economies

a nd ga in entry in to the globa l economy.

2.2.3 Un i t ed N a t i ons Con f er en ce on T r ad e An dDevel o pm en t (UN CTAD )

Introduction: In t he present era of mutua l understa nding

a nd In terna tiona l Coopera tion the sta ggering poverty of millions of

people inhabiting worlds developing countries had aroused the

conscience of the whole world. The proof of this is the birth and

growth of many Internat ional f inancia l organisat ions and other

Int ernat iona l bodies under the Un ited Nations Orga nisat ion.

In J uly 1962, th e Ca iro conference of the developing count ries

on the problems o f economic development passed the Ca iro

Decla ra tion on D eveloping Count ries calling for th e convening of

the United Nat ions Conference on trade and Development i .e .

U NC TAD. The U nit ed Na tions E conomic a nd social council ag reed

to convene such a conference-the f irs t UNCTAD- and passed

resolution on August 3, 1962, which was endorsed by the United

Nations General Assembly. The historic decision of the United

Nations General Assembly to name 1960-69 as a developmentdeca de w a s a furt her r ecognition of th e deep w orld-w rote concern

with the urgent necessity of raising the luring standards of the

people of the developing countries. UNCTAD was established as a

perma nent organ of the U .N. General Assembly.

Function: The ma in purpose of crea ting th e U NCTAD w a s

to promote speedy development of the underdeveloped countries

(U DC s) by solving th e problems of th e sluggish expan sion of th eir

export trade deficits in the external BOB and excessive burden of

foreign d ebt.


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The prin cipa l functions of U NC TAD a re-

(i ) t o promot e In t erna t iona l t r a de especia l ly w i t h a v iew

to accelerating the economic development of UDCspart icularly tra de betw een t he countries w ith different

economic an d socia l organ isat ion.

(i i) to make proposa ls for put t ing the sa id pr inciples and

policies into effect.

(iii) to formulat e the principles and policies of Internat iona l

tr a de a nd relat ed problems of economic development.

(iv) To review a nd facil ita te the coordinat ion of act ivit ies of

other institutions within th e United Na tions Sy stem in

the field of Int ernat iona l tra de an d relat ed problems of

economic development.

(v ) t o be a va i la b le a s a cen t re for ha rmonis ing t he t r a de

rela ted development po l ic ies o f governments and

regiona l economic grouping.

UNCTAD I:The first U NCTAD w hich wa s held in G eneva in

1964 and was a t tended by delegates from 120 countries . Theimport a nt principles la id down a nd a ccepted by t he conference w ere-

(i) Economic development a nd socia l progress should be

t h e c o m m o n c o n c e r n o f t h e w h o l e I n t e r n a t i o n a l

Community.

(i i) Nat ional an d Internat iona l economic policies should be

directed towards the at tainment of consistency with

the needs and interest of the developing countries in

part icular a nd the w orld as a wh ole in general.

(i ii) Developed countries should extend new preferent ia l

concessions both tariff and non-tariff to developing


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count ries. They should reduce rest rictions on tr a de tha t

hinder the trade of the UDCs and should extend the

market for the products of developing countries.

(iv) Assistan ce and a id from the developing countries should

not be subject to poli t ica l considerat ion. The f irst

U NC TAD su cceeded in solving t he int erest in d eveloped

countries regarding the problems of the developing

countries but even then actual performance was not

very encoura ging.

UNCTAD II: The second meeting of UNCTAD took place in

1968 a fter t he four year s of first meeting w hich wa s held in 1964.The objectives of t his meetin g w ere-

(i ) to reeva lua te the economic condit ions and impl ica t ions

f o r i m p l e m e n t a t i o n o f t h e r e c o m m e n d a t i o n s o f

U NC TAD I.

(ii) Init iat ing negotiat ions which would ensure real progress

in In terna tiona l coopera tion for development.

In U NCTAD II developed count ries realised th a t t he reduced

export ea rn ings of developing countr ies would reduce th eir extern a l

purchasing power and importing capacity thereby reducing the

export ea rn ing of developed count ries. The fina l resolution t herefore,

str essed th e need of a n ear ly establishment of a mut ua lly accepta ble

genera lised, non-reciprocal a nd n on discrimina tory countries know n

a s genera lised syst em of preference (G SP ).

UNCTAD III: The third UNCTAD was held in Santiago in

Ch ile (S outh America ) in 1972 a nd 99 developing count ries formin g

a group of 77 attended the conference. The only achievement of

U NCTAD III w a s th e una nimous decision t o adopt special m easures

for the development of 25 least developed countries designated by


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the U.N. the hard core countries.

UNCTAD IV:The fourt h U NCTAD w a s held at Na irobi, Kenya

in 1976 and was attended by more than 170 representatives from153 countries t he ma jor results w ere-

(i ) I t was agreed tha t the in tegra ted commodity programme

should ensure stable conditions for commodity trade

a nd d evelopment.

(ii ) I t was recommended to par t icipants a t the mult i la tera l

t r a de nego t i a t io ns in Geneva t ha t ba r r ie rs t o t he

improvement of export trade from the development

count ries should be lifted or reduced.

(i ii) The world Ba nk and regional development inst i tut ions

w ere invited t o consider fa cilities wh ich w ould provide

export credit refinancing for the developing countries.

UNCTAD V: T he f i f t h UNCT AD wa s he ld in Ma ni l a ,

Philippines in 1979 attended by about 150 representatives from

members counties and Int ernat iona l Organisa tions.

The r esults of th e conference w ere-

(i) O n de bt p r ob lem s of t h e d ev el op in g cou n t i es t h e

indust r ia l countr ies opposed the proposa l fo r the

establishment of an I nterna l Debt Commission a s they

agreed that the existing machinery of creditor groups

could be improved.

(i i) The countries agreed on the desirabil ity of accelerat ing

negotia tions on in dividual commodities.

(iii) Th e r e s ol u t i on c a l l ed f or c on t i n u e d r e s is t a n c e t o

protectionist pressures a nd urge to indust ria l countries

to reduce or el iminate quant i ta t ive restr ic t ions on

import s a nd t o improve ma rket a ccess.


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UNCTAD VI : The sixth UNCTAD was held in Belgrade in

1983. The m a in iss ues of t he conference were-

(i ) t o lower t he wa l ls of prot ect ion ism a nd t o expa nd t heG S P on the part of th e developed countries.

(ii) Developing countries raised the issue of their worsening

terms of made an d a ccumulat ed debt.

UNCTAD VII : The sevent h U NCTAD w a s held in G eneva in

1987. It w a s a tt ended by 150 countries an d Int erna tiona l agencies.

A pa ckag e of proposa ls to solve the problem of debt of th e developing

count ries arr est of growing tr end of protectionism in Int erna tiona l

tr a de a nd improvement of economic and social conditions of LD Cs

wa s a dopted.

UNCTAD VIII: The eighth U NCTAD w a s held in Ca rt a gen

de India s, Columbia in 1992 a tt ended by 170 member count ries an d

Int ernat iona l Organ isat ions. The new structure of U NCTAD wa s

envisaged in w hich t he conference meets every four yea rs, th e tra de

a nd development boa rd (TDB ) meets tw ice a year in regular session,

a nd execu t ive co mmi t t ee o f t he bo a rd which co mp r i ses t he

p e r m a n e n t r e p r e s e n t a t i v e s i n G e n e v a t o U N C T A D t o m e e t

periodically, specia l committ ee an d gr oups on problems of developing

countries.

UNCTAD IX: The ninth UNCTAD was held in Midrand

G a uteng P rovince, Republic of South Africa in 1996. It w a s a tt ended

b y r e p r e s e n t a t i v e s o f 1 3 8 m e m b e r s t a t e s . D i s c u s s i o n s o n

G lobalisat ion, Int ernat iona l tra de as a n instrument for development

in th e post-U rugua y round w orld, enterprise development a nd fut ure

w ork of UN CTAD in a ccorda nce w ith its ma nda te.

UNCTAD X: The tenth UNCTAD was held in Bangkok

Tha iland in 2000. In w orked out th e developmenta l stra tegies in a n


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on Ta riff s a nd Tra de (G ATT) est a blish ed in 1947

As per prea mble of th e G ATT t he ma in objectives w ere to-

(i) r a ise t h e st a n da r d of livin g.

(i i) Ensure the full employment and increase the volume of

rea l income and effective dema nd.

(i ii) Ensure bet ter ut i l isa t ion of the resources of the world.

(iv) Ensure expansion o f product ion a nd Intent iona l t ra de

since the establishment of the GATT, eight rounds of

negotia t ions of reduce the ta riffs a nd t ra de barriers in

th e tra de in goods ha ve been held.

The G eneva Round held in 1947 wa s a tt ended by 23 count ries

a nd r esulted in excha nge of ta riff cuts. The Amnest y Round h eld in

1949 w a s held in F ra nce follow ed by Torguey Round held in B rita in

in 1950-56 in S w itzerla nd.

The D illon Round of 1960-61 w a s held in G eneva w a s t he fifth

round followed by t he Kennedy Round in 1964-67 w hich wa s a tt ended

by 48 countries including 35 developing countries. This round

included a n ew a nt i-dum ping a greement . The Tokyo Round h eld in

1973-79 w a s a tt ended by 102 countries w a s a continua tion of theG ATTs efforts t o progressively r educe ta riffs.

The eight h roun d i.e. Ur ugua y Roun d w a s held in 1986-93 in

w hich 123 members part icipa ted w a s t he most comprehensive round.

The fina l a ct w a s signed in 1994 a t Ma rra kesh (Morocco) a nd

t he G ATT 1994 fina lly emerged a s WTO in 1995.

Thus , WTO w a s esta blished on 1 J a nua ry 1995 as a successor

to th e G ATT. The H eadq ua rt ers of WTO a re in G eneva, S w itzerla nd.

Membership and structure:The origina l members comprise

of the members to the GATT as on the date of entry into force of

this a greement.


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B esides these, other st a tes ma y a ccede to the a greement a nd

th e multila tera l tra de agreements a nnexed thereto to become oth er

members. At present th e membersh ip of t he WTO is 14. It is hea ded

by a director general (WHO at present is supachai Panitchpakdi)

w ho is assist ed by four deputies from different member st a tes. The

director General is appointed by the General Council for a four

year term a fter consulta t ion a mong member countr ies.

The structure of WTO consists of the following bodies-

(i) The Ministerial Conference: T h e m i n i s t e r i a l

conference (MC) is t he P rima ry body composed of th e represent a tions

of all the members. It is the executive of the WTO and carries outth e functions of the WTO. It m eets a t lea st once every t w o years. I t

ha s the a uthority to ta ke decisions on all ma tt ers under a ny of the

multilatera l tra de agreements on t he request of the members.

(ii) The General Council: The G enera l Council ha ndles

th e day to da y w ork of the WTO a nd r eports t o the MC. It comprises

of representa tives of a ll the members. I t can meet a s ma ny t imes a s

is appropria te a nd necessa ry. It ha s thr ee functiona l council w orking

under its supervision and guidance- council for Trade in goods,council for t ra de in services a nd council for tr a de relat ed a spects of

Int ellectua l P roperty R ights.

(iii) The Dispute Settlement Body:It usually meets t ruce

a month on which all members can sit to hear the complaints of

violat ions of WTO rules a nd a greements. It sets up expert pa nels to

study disputes.

(iv) The Trade Policy Review Body: It is the forum for

the entire membership to review the trade policies of all WTOmember count ries. Major t ra ding pow ers tr a de policies are reviewed

every two years while the trade policies of the other individual

members a re review ed every four yea rs.


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(v) The committee on Trade and Development, the

committee on BOP and the committee on budget finance and

administration: The committee on trade and development is

concerned with issues related to developing and least developed

countries. The committee on BOP is responsible for consultations

be t ween t he W T O members a nd co u nt r ies which t a ke t r a de

restr ictive measur es in order t o cope wit h t heir B OP difficulties.

The committee on budged, fina nce a nd a dminist ra tion deals

w ith issues relat ing t o the WTOs fina ncing a nd bud get

Functions: The m a in fu nct ions of WTO a re-

(a ) To f a ci li t a t e a n d i m pl em e n t a ct i on , op er a t i on ,

administrat ion and the promotion of the agreement,

the multila tera l and plurilatera l tra de a greements wh ich

togeth er ma ke up th e WTO

(b) To provide the forum of negotiat ions among its members

in respect of multila tera l tr a de relat ions.

(c) To adminis ter the ru les and procedures governing the

settlement of tr a de disputes among members.

(d) To oversee na t iona l t ra de pol icies by adminis ter ing

Tra de P olicy Review Mecha nism (TRP M).

(e) To coopera t e w i t h t he IMF , Wor ld B a nk a nd ot her

Internat ional inst i tut ions involved in global policy

making.

WTO in Action

(1) The Fi rst Ministerial Conference, 1996

(Singapore)-The conference ended wit h a declar a tion dealing w ith

six major areas viz . labour standard, investment , compet i t ion

policies government procurement, textiles a nd a gricultur e.


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(2) The second Ministerial Conference, 1998 (Geneva)-

The th ree ma in fea t ures of this conferen ce w ere celebra tions of 50th

a nniversa ry of multilatera l tra ding yea r, a ministerial declara tion

laying t he founda tion for next year for a new set of global t a lks in

certa in a reas such a s Tra de Rela ted Int ellectua l P roperty Right s

(TRIPS), Trade Related Investment Measures (TRIMS), Dispute

S ettlement, Technical B a rriers t o Tra de etc. an d t he conclusion on

a n a greement on dut y free tr a de in electronic commerce.

(3) The third Ministerial Conference, 1999 (Seattle)-

In th is conference, wh ile the U S preferred on t he a genda of WTO

core labour standards, environment protection. Industrial tariffs,

e-commerce, t ransparency in govt . procurement pract ices; the

Eur opea n U nion, J a pan a nd few other industria l ised countr ies

wanted comprehensive d iscuss ions on a l l new issues such as

investm ent r ules, competit ion policy, govt. procurement , labour a nd

environment a l sta nda rds, industria l ta riffs; th e developing count ries

including India wanted the future work programme of the WTO

confined to the built-in agenda of the existing agreements. The

s e s s i o n w a s u l t i m a t e l y s u s p e n d e d d u e t o p r o t e s t s a n d

demonstrations.

(4) Doha (Qatar) Ministerial Conference (Nov.2001)-

A compromise was reached in this conference on Intel lectual

P roperty R ights (IP R) wh ich w a s regar ded as one on t he contention

a nd difficult implementa tion issues perta ining t o a ccess to medicine

a nd public health concerns in a nd developing count ries, th e a ccords

is known as TP IP S.

(5) Cancun Ministerial Conference (Sep. 2003)- Thefifth conference was held in Mexico. The main task was to take

stock of progress in negotiations and other work under the Doha

Development Agent s. No consensus w a s rea ched on a ny issue.


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WTO and India: Ind ia is a signa tory t o th e WTO declar a tion

and has to pay heed to i t s obl iga t ions in shopping i t s fu ture

macroeconomic policies. India has constantly been phasing out

Quantitat ive Restrict ions on imports and with the withdrawal of

tariffs on imports, India has provided access to cheaper inputs of

productions but the producers of domestically produced identical

goods are facing tough competition In 19947, the developed and

developing countries entered into historic accord to remove

Int ernat iona l barriers to the expansion of ba nking, insura nce a nd

securit ies. In 1998, Ind ia took a proactive sta nd a t t he WTO meeting

dema nding a mendment s to th e TRIP S, improved ma rket a ccess in

service and better deal in agriculture. India has also expressed

concern on the General Agreement on Trade in service (GATS),

environment issues, tra de an d In vestment, t ra de an d competit ion,

trade facilitat ion and transparency, Intellectual Property Rights

a nd other agreements over th e yea rs.

2.3 SUMMARY

The esta blishment of the WTO a s th e first ma jor interna tiona ltr a de institu tion in th e post-cold w a r era is a n epoch-ma king event .

The biggest ga in is the existence a nd expa nsion of a t ra ding syst em

ba sed on int erna tionally a greed and enforcea ble rules an d disciplines

t o b o t h o v e r s e a s a n d g u a r a n t e e p r o g r e s s i n t h e s p h e r e o f

international trade. The credibility and effectiveness of the new

multilat eral system based on open, just a nd undistorted competition

rests on the WTO member government full compliance with the

rules, disciplines and commitments result ing from the historic

Mar ra kesh a greement.


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2.4 KEYWORDS

United Nations Conference on Trade and Development

(UNCTAD): A U N body tha t h a s been especially a ctive in dealing

w ith r ela tionships betw een developing an d indust ria lized count ries

w ith respect t o tra de.

World Trade Organisation: A voluntary organisa t ion

th rough wh ich group of countries negotiat e tra ding a greement s an d

w hich has a uth ority to oversee tr a de disputes among count ries.

Special Drawing Right (SDR):A unit of a ccount iss ued to

countries by the Int erna tional Moneta ry F und t o expa nd t heir officialreserve bases.

Third-World Countries: D eveloping count ries or t hose not

considered socialist or non socia list indus tr ial countries.

International Monetary Fund (IMF):A mult i-government a l

association organized in 1945 to promote exchange rate stability

a nd to facilita te the intern a tiona l flow of currencies.

2.5 SELF-ASSESSMENT QUESTIONS

1. S t a t e t h e fu nct ion s of t h e I n ter n a t ion a l B a n k for

Reconstruction a nd D evelopment E labora te t he role of

w orld B a nk wit h reference to th ese functions.

2. E xpla i n th e r ole w h ich t h e Wor ld B a n k h a s pla y ed in

th e economic development of less developed countr ies.

How far ha s India benefit t ed from her m embership of

the Bank?

3. D iscu ss t he role of t he In t erna t iona l Monet a ry F und in

solving th e problem of interna tiona l liquidity.


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4. E x pla i n th e pu rpos es of t he I n t er n a t ion a l Mon et a r y

F u nd . D iscu ss ho w f a r i t ha s been su ccess fu l in

achieving these purposes.

5. D iscu ss t he ma in pu rposes of t he UNCTAD a nd it s role

in promoting in ter na tiona l economic co-opera tion.

6. Expla in t he essen t ia l fu nct ions of t he UNCTAD wi t h

specia l reference to protection of economic int erest s of

less d eveloped count ries.

7. D iscu ss t he role a nd ma in fu nct ions of Wor ld Tra de

Orga nisa t ion (WTO).

8. D iscu ss t he pu rposes , membership a nd orga n isa t ion of

th e World Tra de Orga nisa tion.

2.6 REFERENCES/SUGGESTED READINGS

(1) B o S o der s t en , I N TE R N ATI O N AL E C O N O MI C S

S econd E dit ion, 1980.

(2) M.C . Va i sh a nd Su da ma S ingh , INTERNATIO NAL

E CONOMICS Seventh Edit ion

(3) S.K. Kapoor, INTERNATIONAL LAW AND H UMAN

RIGHTS

(4) Websi te of World B ank:- ww w.worldbank.org

(5) Websit e of IMF :- www .imf.org.

(6) Websi te of UNCTAD:- ww w.unctad .org

(7) Websi te of WTO:- ww w.wto .ogr .


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Cour se code: IB-417/MM-410 Author: Dr. Tejinder Sharma

Subject: International Marketing Vetter: Prof. M.S. Turan

L esson N o.: 3

BUSINESS ENVIRONMENT FORGLOBAL COMPANIES

STRUCTURE

3.0 Objective

3.1 Introduction3.2 Presentation of contents

3.2.1 Internal (Controllable) environment

3.2.2 External (Uncontrollable) environment

3.3 Summary

3.4 Keywords

3.5 Self Assessment Questions

3.6 References/Suggested readings

3.0 OBJ ECTIVE

After st udying th is lesson y ou should be able to-

u n der s t a n d t h e en v ir on m en t a l f a ct or s f a ced b y g lob a l

companies.

know a bout the recent economic changes

d iscuss the role of cu lture in business .

understa nd the technologica l innovat ions in recent t imes.


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3.1 INTRODUCTION

In t odays multi-polar w orld, th e conditions un der w hich the

business functions ar e much more complex a nd un certa in th a n t heyw ere before. Wheth er by choice or by compulsion, th e business fir ms

ha ve to go interna tiona l. Stra tegy formulat ion enta ils establishing

a proper firm environment that highlights the critical importance

of a na lysing t he interna tiona l business environment. The essence

of a ny successful business str a tegy is its environment a l orienta tion.

S ince, there ar e some funda ment a l differences betw een th e business

operations in the domestic and the international markets, for a

successful stra tegy, t here is a n eed to underst a nd t he complexities

of the interna tiona l markets. I t is more tha n unlikely th a t a firm

can extend its domestic strategies into the foreign markets. Mere

understanding of the customer requirements is not enough. A

company has to go beyond its internal strategies, understanding

customer requirements.

What makes a business strategy successful in one market

and a failure in another is because of the difference in the firms

ca pabilities to understa nd a nd respond t o the internat iona l business

environment.

Component s of i nt er nat i onal busin ess envi r onm ent: As a firm

sta rts its business a cross its n a tiona l bounda ries, it encounters t hree

different set s of externa l environments:

Domest ic environment

Foreign environment

G loba l environment

These environment a l component s can be represent ed in t heform of the follow ing dia gra m:


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Figure 1: Components of international business

environment

(Source: Cherunilam)


3.2.1 I n t er n a l (Con t r ol l a b l e) en v i r onm en t

The int erna l environment of a firm decides its competen ce to

do business in foreign count ries. It is a lso called as th e controllable

component of internat ional business environment because the

compa ny ca n cont rol it t o a gr eat extent. S ome of th e component s

of interna l environment a re:

Mission: The firm s miss ion decides th e course of action t ha t

a firm w ill follow in order to survive an d grow. In th e present t imes,

the firms develop a few core competences and develop their entireglobal business plan on its ba sis. They do not dissipat e their resources

by venturing into too many businesses, but concentrate on their

core strengt hs a nd do not mind outsourcing th e rest.

Internal

Environment

Domestic

Environment

Foreign

Environment

Global

Environment

INTERNATIONAL

BUSINESS


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Strategy: The mission transla tes into more operat ional

para digm in th e form of stra tegy, w hich operat es at various levels.

Firms often develop core competences, but only a few are able to

convert it int o successful business. The cla ssical ca se of Ca nn on vs

Xerox is an example. Both the companies started by developing

core competence in optica l scan ning, but over a period of t ime, Xerox

outsmarted the former by its superior strategy. Cannon, at one

time, ha d pra ctically d riven Xerox even out of its h ome count ry i.e.

USA. But, Xerox developed a very comprehensive marketing and

customer serv ice s t ra tegy and rega ined i t s leadership in the

photocopier industry.

Operations: T h e o p e r a t i o n s r e f e r t o t h e o p e r a t i n g

competence of a compa ny i.e., how w ell it is a ble to underta ke the

w ork at the ground level. I t is tha t pa ra digm of the stra tegy, which

can be implemented. A firms cost lea dership, its ma rketing st ra tegy,

its production efficiency a nd t he na tur e of its hum a n r esources ha ve

a significa nt impact on th e success of a compa ny.

Alth ough, the a bove components a re ca lled as t he contr olla ble

components of business environment, but in a strict sense, they

m i g h t n o t r e m a i n c o n t r o l l a b l e a t a l l t i m e s . T h e e x t e r n a l

uncontrollable components can become too powerful and can even

influence the stra tegy of a compa ny. For example, w hen Coke a nd

Pepsi faced a problem because of the presence of pesticides, their

str a tegies ha d to be redraft ed beca use of a sudden development in

the externa l environment.

3.2.2 E x t er n a l (Un con t r ol l a b l e) en v i r onm en t

The externa l environment , a lso ca lled a s uncontrolla ble, ha s

been divided int o tw o component s, na mely foreign a nd int erna tiona l.

The foreign environment comprises of th e environment a l condit ions

prevailing in the host count ry, w hile th e int erna tiona l environment


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refers to the overall international circumstances, which influence

t he conduct of business. In pra ctice, such a division is not follow ed

str ictly a nd t he externa l environment is studied a s one component .

S ome of the sub-component s of the externa l environment a re:

A. E con om ic en vir on men t

B . P olit ica l environment

C . L eg a l a n d r egu la t or y en vir on men t

D. C ult ura l environment

E . D emogr a ph ic en vir on men t

A . Econ om i c en vi r on m en t

The economic environment is a ma jor d etermina nt of mar ketpotentia l a nd opportun ity. S ince the single most importa nt indica tor

of market potential is income, the first step in determining the

potent ial of a count ry or a region is to ident ify the tota l, and even

more significantly, the per capita income. In general, as peoples

income rises, they spend less on the necessities and more on the

discretionary purchases. One of the ways of determining market

potent ial for a product is t o evalua te product sa tur a tion levels. In

genera l , i t i s appropria te to compare the sa tura t ion levels o fcountries or of consumer segments with similar income levels.

Co u nt r ies a nd ma rke t s go t hro u gh t yp ica l s t a ges o f ma rke t

development . Alth ough, development is on a continuum, it is possible

to identify dist inct st a ges and formulat e general estima tes a bout

the ty pe of the ma rket tha t w ill be found in a country or a ma rket

at a particular stage of development. In advanced countries, for

example, more tha n ha lf the G NP is accounted for by t he services

a s opposed to goods. In und er-developed count ries, t he proport ion

of services is very low .

Some of the t ypica l chara cteristics of economic environment a re:

Changes in world economy:Over t he year s, several cha nges


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have taken place in the world economy, which have changed the

very ma nner of doing business. Keega n ha s identified th e five most

significa nt cha nges in th e world economy, w hich ha ve occurred in

th e past deca des, a nd w ill influence th e conduct of business. These

cha nges are:

a) Cap i ta l movement ra ther than t rade have become the

dr i vi ng forces of wor l d economy

The capital movement represents the at tractiveness of a

count ry for investm ent . For exa mple, by its fa voura ble pro-business

policies, China ha s a t t ra cted th e maximum investment. I n no t ime,

China is l ikely to emerge as the ma nufacturing ba se for t he wh ole

w orld. Although, many countr y a re ahea d of China in terms o

unit 14 export promotion

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