Chapter 1 - Introduction: International Marketing

INTERNATIONAL MARKETING
CHAPTER 1 – INTRODUCTION
International Marketing is a marketing carried on across national
boundaries. It is the marketing across the national frontiers. When a
country crosses its national frontiers to market its product, it is indulging
in international marketing. It refers to the strategy process &
implementation of the marketing activities in the international arena.
It is the performance of business activities designed to plan, price,
promote & direct the flow of company`s goods & services to consumers
or users in more than one nation for a profit.
International marketing is different from domestic marketing in as much
as the exchange takes place beyond the frontiers, thereby involving
different marketing & consumers who might have different needs, wants
& behavioral attributes.
International marketing is a business mechanism by which goods
produced in one country are marketed in other countries by following
trade practices, policies & rules of the countries by the contracting
parties.
Subash C, Jain terms international marketing as “it refers to exchanges
across nation boundaries for satisfaction of human needs & wants.”
Definition of International Marketing
International Marketing can be defined as exchange of goods and
services between different national markets involving buyers and sellers.
According to the American Marketing Association, “International
Marketing is the multi‐national process of planning and executing the
conception, prices, promotion and distribution of ideal goods and
services to create exchanges that satisfy the individual and
organizational objectives.”
VEDA TUTORIALS 1
International marketing is the performance of business activities

designed to plan, price, promote, and direct the flow of company’s
goods & services to consumers in more than one nation for profit.
Elements of International Marketing
 Across the national boundaries
International marketing is marketing across the national boundaries
irrespective of differences in culture, languages, monetary systems, trade
policies etc.
 Performance of all the marketing activities
As in domestic, international marketing also involves all such functions
like product planning & development, pricing, distribution, promotion &
related activities.
 Flow of goods & services
International marketing involves the process of flow of goods &
services, either exchanged under a barter deal or on value.
 Environmental differences
International marketing has to meet challenges in various markets due to
environmental differences in climate, physical environment, culture,
affluence, location & life style of consumers.
Objective of International Marketing
 To bring countries closer for trading purposes & to encourage
large scale free trade among the countries of the world.
 To bring integration of economies of different countries & thereby
to facilitate the process of globalization of trade.
 To establish trade relations among the nations & thereby to
maintain cordial relations among nations for maintaining world
peace
VEDA TUTORIALS 2
 To facilitate & encourage social & culture exchanges among

different countries of the world.
 To provide better life & welfare to people from different countries
of the world. In addition, to provide assistance to countries facing
natural calamities & other emergency situations.
 To provide assistance to developing countries in their economic &
industrial growth & thereby to remove / reduce gap between the
developed & developing countries.
 To ensure optimum utilization of resources at global level
 To encourage world export trade & to provide benefits of the same
to all participating countries
 To offer the benefit of comparative cost advantages to all
countries participating in international marketing
 To keep international trade free & fair / beneficial to all
participation countries by reducing / removing trade barriers.
Scope of International Marketing
 Establishing a branch in foreign market for processing, packaging
or assembling the goods according to the needs of the markets.
Sometimes complete manufacturing is carried out by branch
through direct investments.
 Joint Ventures & Collaborations
International marketing includes establishing joint ventures &
collaboration in foreign countries with some foreign firms for
manufacturing &/or marketing the product. Under these arrangements,
the company work in collaboration with foreign firm in order to exploit
the foreign markets.
 Licensing Arrangements
Under this system, the company establishes licensing arrangements with
the foreign whereby foreign enterprises are granted the right to use the
VEDA TUTORIALS 3
exporting company`s knowhow, viz. patents, processes or trademarks

according to the terms of agreements with to without financial
investments.
 Consultancy Services
The scope of international marketing also includes offering consultancy
services. The exporting company offers consultancy services by
undertaking turnkey projects in foreign countries. For this purpose, the
exporting company sends its consultants & experts in foreign countries
who guide & direct the manufacturing activities on the spot.
 Technical & Managerial Know-how
The scope of international marketing also includes the technical &
managerial know-how provided by the exporting company to the
importing company. The technicians & managerial personnel of the
exporting company guide & train the technicians & managers of the
importing company.
Features of International Marketing
 Large Scale Operations
International marketing is always conducted on a large scale. It is done
on wholesale basis, to get the advantages of large scale operations
regarding transportations, handling & warehousing.
 Dominance of MNCs & developed countries
MNCs having worldwide contacts dominate the scene of international
marketing. MNCs conduct business more efficiently & economically.
MNCs adopt global approach which is needed in international
marketing. Besides MNCs, industrially developed nations also dominate
international marketing because of their competitive & productive
capacity. Developed countries supply goods to all countries & earn huge
profits.
VEDA TUTORIALS 4
 International Restrictions
There are various trade restrictions due to protective policies followed
by different countries. Trade barriers are adopted practically by all
countries.
 Presence of Trading Blocs
Certain nations of a region have come together to form trading bloc for
their mutual benefits, economic development & to reduce or eliminate
trade barriers among member nations. International marketing is
influenced by the presence of such trading blocs.
 Foreign Exchange Regulations
 Three-faced competition
Suppliers have to face competition from three angles in international
marketing. They have to face competition from the other suppliers of the
exporter`s country, from the local producers of importing country &
from the exporters of competing nations.
 International Forums
International trade is regulated by international forums like WTO &
UNCTAD. International marketers should have a deep knowledge of the
forums rules & regulations
 International Marketing Research
In international markets, it is required to know how customers dealers &
competitors. In international marketing, marketing research is a must
due to different social, cultural, economic & political environment of far
off markets.
 Sensitive & Flexible
International marketing is very sensitive & flexible in character. Due to
political & economic reasons, a product may suddenly become
VEDA TUTORIALS 5
unpopular or market may come down quickly. The sale at the

international level may be affected by competitors or due to the
introduction of a new product by a competitor.
 Advanced Technology
International marketing is very dynamic & competitive. Thus,
organization must be able to sell goods of bets quality, at competitor’s
price. Advanced countries dominate international marketing because
they use advanced or sophisticated technology in production &
marketing of goods. Due to their ability to sell superior quality goods at
competitive prices, the advanced countries are capable of increasing
their exports & thereby capturing world market.
 Lengthy & time-consuming
It is so due to long distances, restrictions imposed by different countries,
payment difficulties because of use of different currencies & lengthy
procedural formalities
 Wide scope
International marketing has a wide scope. The important areas covered
in international marketing are product planning, product development,
pricing, packaging, advertising, branding, marking, labelling,
communication, procedural formalities, sales promotions, international
marketing research etc.
 Long term marketing planning
International marketing needs long term marketing planning, the need
for long term planning is because the marketing situations is different in
different countries.
 Advantages to all participating countries
VEDA TUTORIALS 6
It helps in having smooth & good relations between countries & thereby
ensures world peace. But the advantages are not shared in fair proportion
by all participating countries.
Need for International Marketing
 International interdependence of countries & growing world
population
 No uniform geographic & climatic conditions in all countries
 No uniform production cost in the countries
 Increasing needs of consumers for production & better standard of
living to people
 Need of developing closer economic & cultural cooperation
between different countries
 Problem of surplus production & scarce production in some
countries
 Bridging the gap between developed & developing nations in
terms of exchange of goods & services transfer of technical know-
how & skills
 Economic growth of developing countries & peace in the world
 Optimum use of resources
 Technological development
 Increase foreign exchange earnings by more & more exports
thereby improving the BOP
Advantages of International Marketing
 Better standard of living
International marketing provides a better standard of living to people in
different countries & raises their welfare. It brings income to the people
& thereby provides a higher standard of living.
 Optimum use of resources
VEDA TUTORIALS 7
International marketing helps in optimum use of resources. Surplus

resources or production can be exported to other countries.
 Quick industrial development
International marketing helps in quick industrial development of
developed & developing countries. The developed countries give aid,
capital, goods & technology to the developing countries & developing
countries supply raw materials &labour to the developed countries.
 Raises the real income & national well-being
In international marketing, every country specializes in the production of
that commodity to which it is best suited to produce, export its surplus
produce & import those commodities which it can get cheaper from
other countries.
 Lower prices
International marketing decreases the price of goods & services, all over
the world due ot specialization.
 Technological development
International marketing through specialization, decreases the prices of
goods & services, increases their demand, thereby consumption, which
helps in further specialization & technological developments.
 Availability of foreign exchange
A country earns forex due to exports & use it for paying essential
imports. International marketing helps in easy availability of forex for
import of capital goods, modern technology & other essential
requirements.
 International co-operation & world peace
Due to trade relations, international marketing brings countries close
which leads ot co-operation among the countries.
VEDA TUTORIALS 8
 Build cultural relations

International marketing alters the quality of life of people. It exchanges
goods & services among the countries & develops closer social &
cultural relations between various countries.
 Expansion of tertiary sector
International marketing increases exports, thereby industrial
development.
 Special benefits during emergency
 Removal of deficit
International marketing helps in removal of deficit in balance of trade &
payments of participating countries through exports promotion & import
substitution.
 Benefits of comparative cost differences
International marketing helps in getting the benefits of comparative cost
differences, as suggested in the theory of comparative costs. The
benefits of division of labour& specialization at the international level
are also through international marketing.
Problems in International Marketing
As is said that, “lifeis not bed of roses”, international business is not
all that lovely. It has its problems. The impor‐tant problems include:
• Political Factors:
Political instability is the major factor that discourages the spread of
international business. For example, in the Iran Iraq war, Iraq‐Kuwait
war, dismantling of erstwhile USSR, Civil War in Fiji, Malaysia. and
Sri Lanka, military coups in Pakistan, Afghanistan, frequent changes in
political parties in power and thereby changes in government policies in
India etc., created political risks for the growth of international
business. Also, latest Indo‐Pak Summit at Agra in July, 2001 ended in a
VEDA TUTORIALS 9
no compromise situation, which affects international business.

 HugeForeign Indebtedness:
The developing countries with less purchasing power are lured into a
debt trap due to the operations of MNCs in these countries. For
example, Mexico, Brazil, Poland, Romania, Kenya, Congo, and
Indonesia.
• Exchange Instability:
Currencies of countries are depreciated due to imbalances in the balance
of payments, political instability and foreign indebted‐ ness. This, in
turn, leads to instability in the exchange rates of domestic currencies in
terms of foreign currencies. For example, Zambia, India, Pakistan,
Philippines depreciated their currencies many times. This factor
discourages the growth of international business.
• Entry Requirements:
Domestic governments impose entry requirements to multina‐tionals.
For example, an NINC can enter Eritrea only through a jointventure
with a domestic company. However, with the establishment of world
Trade Organization (WTO), many entry requirements by the host
governments are dispensed with.
• Tariffs, Quotas and Trade Barriers :

Governments of various countries impose tariffs, import and export
quotas and trade barriers in order to protect domestic business. Further,
these barriers are imposed based on the political and diplomatic
relations between or among Govern‐ments. For example, China,
Pakistan and USA (before 1998) imposed tariffs, quotas and barriers on
imports from India. But the erstwhile USSR and present Russia
liberalized imports from India.
• Corruption:
Corruption has become an international phenomenon. The higher rate
bribes and kickbacks discourage the foreign investors to expand their
operations.
VEDA TUTORIALS 10
• Bureaucratic Practices of Government :

Bureaucratic attitudes and practices of Government delay sanctions,
granting permission and licenses to foreign compa‐nies. The best
example is Indian Government before 1991. These practices make the
MNCs to enter other countries.
However, the benefits of international business outweigh the problems.

Added to this, globalization is the order of the day. Most of the countries
eliminated the barriers and paved the way for the growth and expansion
of international business. In fact, international business, during the third
millennium (2001 and beyond) is just an extension to interregional
business within a country.
Distinguish between Domestic Marketing & International

Marketing
Points Domestic Marketing International
Marketing
Meaning It is concerned with It is concerned with
identifying identifying,
anticipating & anticipating &
satisfying the local satisfying the needs of
consumer`s needs. consumers in foreign
countries.
Scope It has a narrow scope It has a wider scope as
& is restricted to the it includes the entire
political boundaries of world as a market.
a country.
Risk Risk is comparatively Risk is comparatively
less. It is subject to higher. It is subject to
commercial risk. political &
commercial risks.
Trade barriers No trade barriers Trade barriers like
tariffs, quotas, etc.
Competition Sellers face Competition is severe
competition mainly & three faced i.e.
VEDA TUTORIALS 11
from domestic form the other

manufacturers / suppliers of exporters
traders country, from local
producers of
importer`s country &
from exporters of
other countries.
Trading Blocs No influence of There is influence of
trading blocs. trading blocs.
Methods of Normally by cash or Normally by Letter of
Payments cheque. Credit or by
documentary bills of
exchange.
Procedure & It involves relatively It involves lengthy &
Formalities simple procedures & complicated
formalities. procedures &
formalities.
Currency Use of single currency Use of multiple
currency
Scale of Operations Scale of operations is Scale of operations is
comparatively less as much larger as goods
goods are sold within are sold in many
the country countries.
Exchange of Goods Free exchange of There are certain
goods are allowed restrictions in
within the country exchange of goods.
Language / Culture Involves only one It involves many
country & mostly one countries & thus there
language & one are different
culture. languages & culture.
Mobility of Factors Free mobility of Lower mobility of
of Production factors of production factors of production
Monetary System One monetary & Different monetary &
economic system economic system
VEDA TUTORIALS 12
Realization of Sales No time limit for In India, international

Proceeds realization of proceeds must be
domestic sales realized within 180
proceeds days
Transport Costs Low High
Basis of International Trade

International trade involves voluntary exchange of goods, services,
assets, or money between residents of two different countries or between
different countries. The fundamental question that arises for most of us
at the thought of international trade is why should a business firms of
one country should to the another country, when the industries of that
country also produce goods and market them. What is the basis of
international business?
A number of theories have been developed to explain the basis for

international trade. The different trade theories include theory of
absolute advantage, theory of comparative advantage, and classical
trade theory. These theories discuss and analyze different nuances of
trade for the trading partners and deal with the financial dynamics of the
trading activity between two countries
 Theory of comparative advantage

Adam Smith's theory of absolute advantage is a simple explanation of
the benefits of international trade. However, if one country has an
absolute advantage in the production all goods, can there be benefits
from trade.
In 1817, David Ricardo, a classical economist developed the principal
of comparative advantage to explain this situation. The principal is
based on the relative efficiencies of production where each country has
a comparative advantage in producing the commodity in which it has
the lower opportunity cost.
Opportunity costs are what must be given up in order to consume or
produce another good. For example, going on an overseas holiday may
involve giving up the purchase of a new car. The comparative
VEDA TUTORIALS 13
advantage principle can be illustrated using Tables 3 and 4.

Table 3 Comparative advantages: production before
specialization
Wheat (units) Cloth (units)
Australia 20 10
China 5 5
Total
Output 25 15
In Table 3, Australia has an absolute advantage in the production of

both wheat and cloth. By using the theory of comparative advantage,
both countries can gain from specialization and trade.
Table 4 Opportunity costs
Opportunity cost
Country 1 unit of wheat 1 unit of cloth
Australia 0.5 (10/20) units of cloth 2(20/10) units of wheat
China 1 (5/5) units of cloth 1(5/5) units of wheat
From Table 4:
• Australia has a comparative advantage in the production of wheat
since it has to give up only 0.5 units of cloth to produce an extra
unit of wheat, while China must give up 1 unit of cloth to produce
an extra unit of wheat. So it is more practical for Australia to
specialize in the production of wheat.
• China has a comparative advantage in the production of cloth since
VEDA TUTORIALS 14
it has to give up only 1 unit of wheat to produce an extra unit of

cloth, while Australia must give up 2 units of wheat to produce an
extra unit of cloth. Consequently it is more practical for China to
specialize in the production of cloth.
Australia has a comparative advantage in the production of wheat
and China cloth. Trade between the two countries should be
beneficial because of the different opportunity costs for these
commodities.
Table 5 Production levels after
specialization
Wheat (units) Cloth (units)
4 0 (‐
Australia 0 (+20) 10)
1 (+
China 0 (‐5) 0 5)
Total 4 1 (‐
output 0 (+15) (net gain) 0 5) (net gain)
From Table 5 we can see that total output has increased when countries
specialize in the production of goods and services based on comparative
advantage. As both countries are using their resources more efficiently,
trade will lead to higher standard of living than would be otherwise
possible.
International Business Environment
INTERNAL AND EXTERNAL INTERNATIONAL MKTG

CONCEPT
The key difference between domestic and international marketing is the
multi‐dimensionality and complexity of foreign country markets a
country may operate in. Knowledge and awareness of these complexity
and implications for international marketing is must.
The important environmental analysis model SLEPT (Social, Legal,
VEDA TUTORIALS 15
Economical, Political and Technological)

1. Social & Cultural Influences
a. SOCIAL: Difference in social conditions, religion and
culture determines whether the customers aresimilar or
dissimilar across the globe.
McDonald’s had to understand the same in India when they
had to enter such huge market with its burger. In 1995 / 6
India’s vegetarian market was 40%. These vegetarians
preferred that the burger should be made in a clean and
separate kitchen. Also their love for spicy food was required
to be considered. Among the non‐veg. eaters, their disliking
towards pork and beef among mean eater was very well
known. McDonald’s realize that they need to serve Indians
more than just burger, a burger that satisfies Indians taste.
b. CULTURE: Culture describes the kind of behaviour
considered acceptable in society.
The prescriptive characteristic of culture simplifies a
consumer’s decision‐making process by limiting product
choices to those which are socially acceptable. The same
feature creates problems for those products, which are not in
time with culture.
• Coca Cola had to withdraw its 2 liters bottle from Spain
market as Spaniards were not having refrigerator
having larger compartments.
Johnson’s floor wax was doomed to failure in Japan as it
made the wooden floors very slippery and Johnson failed to
take into account the custom of not wearing shoes inside the
home.
• Coca Cola when introduced in china the name sounded
like “KOOKE – KOULA” meant thirsty mouth, full of
candle wax. So they had to change the name to “KEE
KOU KEELE” which meant “joyful taste and
happiness.”
• In Japan, White face is associated with death of mask.
VEDA TUTORIALS 16
• The size of refrigerators in USA is very big compared

to Indian refrigerators, as women there believe in
storing vegetables and other eatable items, which can
be consumed till longer period
of time.
Even the value and beliefs associated with color vary
significantly between different cultures. Blue considered as
feminine and worm in Holland, is seen as masculine and cold
in Sweden. Green is a favorite color in Muslims, but in
Malaysia, it is associated with illness. White is associated
with death and mourning in China, Korea and in some
traditions in India. Although, the same color expresses
happiness and is color of wedding dress of the bride in
English country.
Such differences suggest that same marketing mix can not be
used for all markets.
2. Legal Environment:
Legal systems vary both in content and interpretations. A successful
marketer will modify his marketing strategies in accordance with such
variations. Laws affect the marketing mix in terms of products, price,
distribution and promotional activities quite dramatically. For many
firms such laws are burdensome regulations.
For e.g. in Germany environmental laws mean a firm is responsible for
the retrieval and disposal of packaging waste it creates and must produce
packaging which is recyclable.
In Canada, if the information does not appear in both French and
English, the goods may be confiscated. An international Marketer should
learn about the advertising, packaging, and labeling regulations in
foreign markets.
India has been seen by many firms to be an attractive emerging market
having many legal difficulties, bureaucratic delays and lots of official
procedures. Many MNCs have found it difficult to break such hard
structure. Foreign companies are often viewed with suspicion. However,
some firms have been innovative in overcoming difficulties.
VEDA TUTORIALS 17
3. Economic Environment:
The economic situation varies from country to country. There are
variations in the levels of income and living standards, interpersonal
distribution of income, economic organization,occupational structure
and so on. These factors affect market conditions.
The level of development in a country and the nature of its economy will
indicate the type of products that may be marketed in it and the
marketing strategy that may be employed in it. In high income countries
there is a good market for a large variety of consumer goods. But in low‐
income countries where a large segment does not have sufficient income
even for their basic necessities, the situation is quite different.
4. Political Environment:
The political environment of international marketing includes any
national or international political factor that can affect the organization’s
operations or its decision‐making. The tendencies of governments to
change regulations can seriously affect an international strategy
providing both opportunities and threat. (1992’s liberalization policy by
Narsimha Rao Govt.) An unstable political climate can expose firms to
many commercial, economic and legal risks.
Political risk is defined as being: “A risk due to a sudden or gradual
change in a local political environment that is disadvantageous to
foreign firms and markets.”
5. Technological Environment:
The Technological Environment is perhaps the most dramatic force now
shaping our destiny. An international marketer should very well keep in
his mind the change taking place in technology and thereby affecting the
product.
New technologies create new markets and opportunities. However,
every new technology replaces an old technology. Xerography hurt
carbon‐paper industry, computer hurt typewriter industry, and examples
are so on. Any international marketer, when ignored or forgot new
technologies, their business has declined. Thus, the marketer should
watch the technological environment closely. Companies that do not
VEDA TUTORIALS 18
keep up with technological changes, soon find their products outdated.

The United States leads the world in research and development
spending. Scientists today are researching a wide range of promising
new products and services ranging from solar energy, electric car, and
cancer cures. All these researches give a marketer an opportunity to set
his products as per the current desired standard. The challenge in each
case is not only technical but also commercial that means manufacture a
product that can be afforded by mass crowd.
Stages of International Marketing

 No direct foreign Marketing
 No activity in cultivating customers outside domestic market
 Distributors / Dealers / Foreign Customers coming directly to
the firm
 Web Pages (Indication)
 Infrequent Foreign Marketing

 Product surplus in domestic market
 No intention of maintaining continuous market representation
 Few companies fir this model as customers always look for long
term commitment
 Regular Foreign Marketing

 Marketing goods on a continuous basis to foreign markets
 Overseas Middlemen / Own Sales force / Sales subsidiary
 Adaptation of the product to the foreign market
 International Marketing / Multinational Marketing

 Fully committed & involved in international marketing o
Markets all over the world
 Production & marketing activities outside the home market
 The company formulates a unique strategy for every country
with which it conducts business E.g. Balsara – Mint / Cinamint
VEDA TUTORIALS 19
 Global Marketing
 At this stage, companies treat the world, including their home
market as one
 Maximize returns through global standardization of its business
activities
 Efficiency of scale by developing a standardized product, of
dependable quality, to be sold at a reasonable price to a global
market
 The company standardizes its logo, image, store, processes
 Wherever necessary due to cultural differentiation adaptations
are made
International Business Approach

International business approaches are similar to the stages of
internationalization or globalization. Douglas Wind and Pelmutter
advocated four approaches of international business. They are:
1. Echnocentric Approach
 The domestic companies normally formulate their strategies.
 Their product design and their operations towards the national
markets, customers and competitors. But, the excessive production
more than the demand for the product, either due to competition or
due to changes in customer preferences push the company to
export the excessive production to foreign countries.
 The domestic company continues the exports to the foreign
countries and views the foreign markets as an extension to the
domestic markets just like a new region.
 The executives at the head office of the company make the
decisions relating to exports and, the marketing personnel of the
domestic company monitor the export operations with the help of
an export department.
 The company exports the same product designed for domestic
markets to foreign countries under this approach. Thus,
maintenance of domestic approach towards international business
is called ethnocentric approach.
VEDA TUTORIALS 20
2. Polycentric Approach
 The domestic companies, which are exporting to foreign countries
using the ethnocentric approach, find at the latter stage that the
foreign markets need an altogether different approach. .
 Then, the company establishes a foreign subsidiary company and
decentralists all the operations and delegates decision making and
policy‐making authority to its executives.
 In fact, the company appoints executives and personnel including a
chief executive who reports directly to the Managing Director of
the company.
 Company appoints the key personnel from the home country and
the people of the host country fill all other vacancies.
3. Regiocentric Approach
 The company after operating successfully in a foreign country,
thinks of exporting to the neighboring countries of the host
country.
 At this stage, the foreign subsidiary considers the regions
environment (for example, Asian environment like laws, culture,
policies etc.) for formulating policies and strategies.
 However, it markets more or less the same product designed under
polycentric approach in other countries of the region, but with
different market strategies.
4. Geocentric approach
 Under this approach, the entire world is just like a single country
for the company.
 They select the employees from the entire globe and operate with a
number of subsidiaries.
 The head‐ quarter coordinates the activities of the subsidiaries.
 Each subsidiary functions like an independent and autonomous
company in formulating policies, strategies, product design, human
resource policies, operations etc.
VEDA TUTORIALS 21
Trade Barriers
It refers to the government policies & measures which obstruct the free
flow of goods & services across national borders. Trade barriers are
imposed on exports & imports.
Objectives of Trade Barriers
 To protect domestic industries or certain other sector of economy
from foreign competition
 To guard or protect the economy against dumping by rich countries
with surplus production
 To promote indigenous R&D & to promote new industries
 To conserve the forex resources of the country
 To make the BOP position more favourable
 To curb conspicuous consumption
 To counteract trade barriers imposed by other countries
 To encourage the use of domestic production in the domestic
market & thereby to make the country strong & self-sufficient
 To mobilize revenue for the government
 To discriminate against certain countries
 To make the economy self-reliant.
Types / forms of Trade Barriers
I. Tariff Barriers
Tariff refers to the duties or taxes imposed on internationally traded
products when they cross the international borders.
Types of Tariffs:
a. On the basis of the origin & destination of goods crossing
the national boundary:
 Export duties
It is a tax imposed on a commodity originating from the duty-levying
VEDA TUTORIALS 22
destined for some other country.

 Import Duties
It is tax imposed on a commodity originating abroad & destined for the
duty-levying country.
 Transit Duties
It is a tax imposed on a commodity crossing the national frontier
originating from & destined for other countries.
b. On the basis of quantification of the tariff:

 Specific Duties
It is a flat sum per physical unit of the commodity imported or exported.
It is a fixed amount of duty levied upon each unit of the commodity
imported.
 Ad-Valorem Duties
They are levied as a fixed percentage of value of the commodity
imported / exported.
 Compounded Duties
When a commodity is subject to both specific duty & ad-valorem duty,
tariff is a compounded duty.
c. On the basis of application between different countries:

 Single column Tariff / Uni-lateral Tariff:
It provides a uniform rate of duty for all like commodities without
making any discrimination between countries.
 Double Column Tariff:
It discriminates between countries because there are two rates of duty on
some or all commodities.
 Triple-Column Tariff:
It consists of 3 autonomously determined tariff schedules the general,
the intermediate & the preferential. The general & intermediate tariffs
are similar to the maximum & minimum rates under the double column
tariff system. The preferential rate was generally applied in the case of
trade between the mother country & its colonies.
VEDA TUTORIALS 23
d. On the basis of purpose they serve

 Revenue Tariff
Sometimes the main intention of the government in imposing tariffs may
be to obtain revenue. When raising the revenue is the primary motive,
the rates of duty are generally low lest imports be highly discouraged.
 Protective Tariff:
It is intended mainly to give protection to the domestic industries from
foreign competition. Naturally the duty rates are very high inorder to
curtail imports.
 Countervailing Duties:
They may be imposed on certain imports when they have been
subsidized by foreign governments. They are generally penalty duties in
addition to the regular rates.
 Anti-Dumping Duties:
They are imposed to imports when are being dumped on the domestic
markets at a price either below the production costs or substantially
lower than their domestic prices. They are generally penalty duties in
addition to the regular rates.
Advantages / Benefits of Tariff Barriers

 Imports from abroad are discouraged or even eliminated to
considerable extent.
 Protection is given to home industries & manufacturing activities.
This facilitates increase in the domestic production.
 Consumption of foreign goods reduces to a considerable extent &
the attraction for imported goods is brought down considerably.
 Tariffs give substantially revenue to the government.
 Tariffs remove or at least reduce the deficit in the balance of trade
& balance of payments of a country.
 Tariffs encourage research & development activities within the
country. They create favourable atmosphere for industrial
development & generation of employment opportunities.
 Tariffs may be used to influence the political & economic policies
of other countries.
VEDA TUTORIALS 24
 Tariffs avoid competition fromforeign manufacturers & this may

lead to monopolistic tendencies among domestic industries.
II. Non-Tariff Barriers

Non-tariff barriers to trade (NTBs) or sometimes called "Non-Tariff
Measures (NTMs)" are trade barriers that restrict imports, but are
unlike the usual form of atariff; And Tariff Barriers restricts Exports.
Some common examples of NTB's are anti-dumping measures
and countervailing duties, which, although called non-tariff barriers,
have the effect of tariffs once they are enacted. Example of Tariff
Barrier is Export Duty.
Some of non-tariff barriers are not directly related to foreign economic
regulations but nevertheless have a significant impact on foreign-
economic activity and foreign trade between countries.
Trade between countries is referred to trade in goods, services and
factors of production. Non-tariff barriers to trade include import quotas,
special licenses, unreasonable standards for the quality of goods,
bureaucratic delays at customs, export restrictions, limiting the activities
of state trading, export subsidies, countervailing duties, technical
barriers to trade, sanitary and rules of origin, etc. Sometimes in this list
they include macroeconomic measures affecting trade.
A non-tariff barrier is any barrier other than a tariff that raises an
obstacle to free flow of goods in overseas markets. Non-tariff barriers,
do not affect the price of the imported goods, but only the quantity of
imports.
Types of Non-Tariff Barriers

a. Quota System:
Under this system, a country may fix in advance, the limit of import
quantity of a commodity that would be permitted for import from
various countries during a given period. The quota system can be
divided into the following categories:
 Tariff/Customs Quota: Certain specified quantity of imports
is allowed at duty free or at a reduced rate of import duty.
VEDA TUTORIALS 25
Additional imports beyond the specified quantity are

permitted only at increased rate of duty. A tariff quota,
therefore, combines the features of a tariff and an import
quota.
 Unilateral Quota: The total import quantity is fixed without
prior consultations with the exporting countries.
 Bilateral Quota: In this case, quotas are fixed after
negotiations between the quota fixing importing country and
the exporting country.
 Multilateral Quota: A group of countries can come together
and fix quotas for exports as well as imports for each
country.
b. Import Licensing:
It is useful for restricting the total quantity to be imported. In this
system, imports are allowed under license. Importers have to approach
the license authorities for permission to import certain commodities.
Foreign exchange for imports are provided against such license issued.
c. Consular Formalities:
A number of importing countries demand that the shipping documents
should include consular invoice certified by their consulate stationed in
the exporting country. The purpose of consular formalities is to restrict
imports to some extent & not to allow free imports commodities which
are not necessary or harmful to national economy or social welfare.
d. Preferential Arrangements through trading blocs:

Some nations form trading groups for preferential arrangements in
respect of trade amongst themselves. Imports from member countries are
given preferences, whereas, those from other countries are subject to
various tariffs and other regulations.
e. Customs Regulations:
VEDA TUTORIALS 26
Customs regulations & administrative regulations are very complicated

to many countries & are used as invisible tariffs for discouraging
imports.
f. State Trading:
In some countries like India, certain items are imported or exported only
through canalizing agencies like MMTC. Individual importers or
exporters are not allowed to import or export canalized items directly on
their own.
g. Foreign Exchange Regulations:

The importer has to ensure that adequate foreign exchange is available
for import of goods by obtaining a clearance from exchange control
authorities prior to the concluding of contract with the supplier.
h. Prior Import Deposits:

The importers are asked to deposit even 100% of import value of the
goods in advance with a specific authority. Then, the importers are given
permission to import goods.
Effects of Barriers on International Trade

I. Effects / Impact of Tariff:
a. Protective Effect:
An import duty is likely to increase the price of the imported goods. This
increase in the price of imports is likely to reduce imports & increase the
demand for domestic goods. Import duties may also enable the domestic
industries to absorb higher production costs. Thus, as a result of the
protection accorded by the tariff, the domestic industries are able to
expand the output.
b. Consumption Effect:
The increase in prices resulting from the import duty usually reduces the
consumption capacity of the people.
c. Redistribution Effect:
If the import duty causes an increase in the price of the domestically
VEDA TUTORIALS 27
produced goods, it amounts to redistribution of income between the

consumers & producers in favour of the producers.
d. Revenue Effect:
A tariff revenue increased revenue for the government.
e. Income & Employment Effect:
Tariff may cause a switch over from spending on foreign goods to
spending on domestic goods. This higher spending within the country
may cause an expansion of domestic income & employment.
f. Competitive Effect:
The competitive effect of tariff is, in fact, an anti-competitive effect in
the sense that protection of domestic industries from foreign
competition, may enable the domestic industries to obtain monopoly
power with all its associated evils.
g. Balance of Payments Effects:
Tariffs by reducing the volume of imports, may help the country to
improve its BOP position.
II. Effect / Impact of Quotas:

a. Price Effect:
As quotas limit the total supply, it may cause an increase in the domestic
prices.
b. Consumption Effect:
If quotas leads to an increase in prices, it may compel people to reduce
their consumption of the commodity subject to quotas or some other
commodities.
c. Protective Effect:
By protecting domestic industries against foreign competition to some
extent, quotas encourage the expansion of domestic industries.
d. Redistributive Effect:
Quotas will also have redistributive effect, if the fall in supply due to the
impact restrictions enables the domestic producers to raise prices. The
rise in prices will result in redistribution of income between the
producers & consumers in favour of the producers.
e. Revenue Effect:
Quotas may also have a revenue effect. As quotas are administered by
VEDA TUTORIALS 28
means of license, government may obtain some revenue by charging a

license fee.
Tariff Barriers Non-Tariff Barriers

Meaning It means duties & It means quantitative
taxes imposed on restrictions imposed
imported goods to restrict imports
Kinds Import duties, specific Quotas, import
duties, ad-valorem licensing, consular
duties, countervailing formalities, foreign
duties, protective exchange restrictions
duties etc. etc.
Effects Affects the prices of Affects the quantity of
imported goods. imported goods
Revenue Brings huge revenue Do not bring revenue
to the government to the government.
Protection Do not provide direct Provide direct
protection to home protection to home
industries industries
Formation of Is not encouraged Is encouraged
monopoly groups
Effectiveness Not very effective Very effective to
restrict imports
Flexibility Less flexible More flexible
Effects on imports Indirectly restricts Directly restricts
imports imports
Assessment of costs It is easier for It is difficult to assess
importers to assess the costs.
costs under tariff
systems
Time required Charging import Import licensing &
duties takes less time other formalities takes
more time.
VEDA TUTORIALS 29
Specific Duty Ad-Valorem Duties

Meaning It is imposed on each It is duty levied on
unit of a commodity total value of
imported or exported commodity imported
or exported.
Convenience It is easy to calculate It is difficult to
& administer because calculate because it is
the number of units requires proper
imported or exported assessment of the
is multiplied by the value of goods
rate of duty imported or exported.
Popularity It is not very popular It is very popular &
though it has most of the countries
advantages over ad charge tariffs based
valorem duty on this system only.
Suitability It is levied on such It is levied on such
goods whose goods whose
quantification is quantification in terms
possible of numbers is not
possible
Method of Charges Duty charges depends Duty charge on flat
upon the value of rate basis limited to
imported goods which the physical features
is judged on the basis of the commodity
of model & make
specifications
Main Considerations Physical units of The value of goods is
commodity is considered & physical
considered & value is units of commodity is
not considered. not considered.
TRADE BLOC
Along with trade barriers, there are trade blocs among the countries of
the world. These blocs offer special concessions to members of the
group but impose restrictions on the imports from the non‐ member
VEDA TUTORIALS 30
countries. As a result, these trade blocs are harmful to the growth of free
international trade. Efforts should be made to remove such trade blocs so
as to have free trade among the nations of the world. Unfortunately,
efforts in this direction by WTO are not effective.
Trade blocs are groups of countries that have established special

preferential arrangements governing trade between members. Although
in some cases the preferences‐such as lower tariff duties or exemptions
from quantitative restrictions the general purpose of such arrangements
is to encourage exports by bloc members to one another‐sometimes
called intra‐trade.
Objectives of Trading Blocs

 To remove or at least to reduce trade barriers among the member‐
countries of the group. To impose common external tariff and non‐
tariff barriers on non‐member countries.
 To bring integration of economies of member countries through
free transfer of labour, capital and other factor of production.
 To maintain cordial economic, political, cultural and social
relations among the members of the group.
 To provide assistance to member countries of the group in all
possible ways in solving their current economic problems.
Types of Trading Blocs
1. FREE TRADE AREA: In Free Trade Area all barriers to the
trade of goods and services amongmember countries are removed.
In an ideal free trade area, no discriminatory tariffs, quotas,
subsidies o administrative impediments would be allowed to distort
trade between member countries. Each country however, is
allowed to determine its own trade policies with regard to non‐
members. For e.g. there is a free trade agreement known as
NAFTA (The North American Free Trade Agreement) between
three counties; USA, Canada and Mexico.
2. Custom Union: A Custom Union represents the next stage in
economic cooperation. Membercountries here not only remove
VEDA TUTORIALS 31
trade restrictions for members but also adopt a uniform

commercial policy (Common external tariff) against non‐members.
A customs union brings more economic integration as compared to
free trade area. Custom Union exists between France and Monaco,
Italy and San Marino, to name some examples.
3. Common Market: A Common Market is a step ahead of custom
union. It eliminates all tariffsand other restrictions on internal
trade, adopts a set of common external tariffs and removes all
restrictions on free flow of capital and labor among member
nations. Thus, a common market is a common marketplace for
goods as well as for services. Unlike a custom Union, a common
Market allows free movement of factors necessary to production.
Latin America possesses three common markets: The Central
American Common Market (CACM), the Andean Common
Market, and the Southern Cone Common Market.
Economic Union: It is a step ahead to common market. It has all
features of common market and also uniformity in respect of
monetary and fiscal policy of member countries. Member countries
are expected to pursue common fiscal and monetary policies.
Positive & Negative Effects (implications) of Trade Blocs in

International Marketing
A. Positive Effects of Trading Blocs
 Economics Integration:
Trading blocs represent various forms of economic integration in the
region. It is process that unifies different types of independent
economies into a larger entity.
 Co-operative Spirit:
Co-operative spirit & co-ordination among nations has developed
through creation of trading blocs. Trading blocs also discourage
discrimination in any form & application of trade restrictions.
 Expansion of Markets:
Formation of trading blocs broadens the scope of regional markets. Due
to reduction or elimination of trade barriers among member nations
within the countries of the trading blocs.
VEDA TUTORIALS 32
 Growth & Development of Region:

Trading blocs helps in the growth & development of the region. Due to
trading blocs, the individual companies of member nations can enter into
joint ventures & mergers to consolidate their position.
 Uniform Policies:
Member countries within a bloc have to function under common
parameters & uniform policies. This has ensured reduction in transaction
costs & time & better control on the entry & exit of goods. Even national
policies are tailored to meet the requirements of the trading blocs.
 Increase in trade:
The policies & systems of trading blocs has generated better prospects or
traders in that region, with the result that there is enhanced trade activity
within a bloc. This has contributed to the rapid increase in the export &
import activities of member nations & in their trade revenues.
Trading blocs helps to increase the exports of member nations due to
rapid industrialization. The growth in the region generates more income,
which leads to more purchasing power & hence more imports.
 Product & Market Development:
Removal of trade barriers has encouraged countries to move from
unilateral to multilateral trading. It basically implies that markets have
expanded. This has resulted in greater competition& has brought a
greater variety of enterprises & products.
 Benefits to consumers of member countries:
Consumers of member-nations can be greatly benefitted due to the
formation of trading blocs. Greater trade activity would obviously
benefit the consumers of that region. They now have access to a wider
variety of products competitive prices. Besides, the purchasing power of
the people have lastly improved because of better employment
opportunities.
 Free transfer of resources / factors:
Trading blocs may allow its member nations for an unrestricted or free
transfer of resources or factors of production like labour& capital, across
the borders of member nations, as is being done by EU.
 Creates cordial / better relations:
VEDA TUTORIALS 33
Trading blocs bring economic, political & cultural integration of

member nations. This helps to build & maintain better economic,
political & social relations between members of the bloc. This helps in
avoiding disputes, peaceful relations among member nations.
B. Negative Effects / Impacts of Trading Blocs
 Common External Barriers:
The member countries of the trading blocs may impose common
external barriers on non-members. The common external barriers in the
form of tariffs & non-tariff makes it difficult for non-members to trade
with members of a trading blocs. By keeping the world market out,
members may suffer way of not getting access to a wider & better
spread.
 Collective Bargaining by Member Nations:
Collective bargaining of the members of a trading bloc with members on
trade related issues / matters put the non-members disadvantage.
 Affects Competition:
Formation of trading blocs affects free & fair competition at global
level. Competition among member countries is reduced. But non-
members countries have to face collective competition from members of
the trading blocs.
 Affects Global / International Trade:
Trading blocs create barriers in the growth of global trade artificially.
 Problems for non-members:
The non-members nations of a trading bloc face many problems like
high tariffs, import restrictions etc.
 Loss of political sovereignty:
The political sovereignty of individual countries is lost due to trading
blocs, since the national policies of the member countries would be
forced upon them externally by dominating members of the trading
blocs.
WTO & Trade Liberalization

The World Trade Organization (WTO) is an intergovernmental
organization which regulates international trade. The WTO officially
VEDA TUTORIALS 34
commenced on 1 January 1995 under the Marrakech Agreement, signed

by 123 nations on 15 April 1994, replacing the General Agreement on
Tariffs and Trade (GATT), which commenced in 1948. The WTO deals
with regulation of trade between participating countries by providing a
framework for negotiating trade agreements and a dispute resolution
process aimed at enforcing participants' adherence to WTO agreements,
which are signed by representatives of member governmentsand ratified
by their parliaments. Most of the issues that the WTO focuses on derive
from previous trade negotiations, especially from the Uruguay
Round (1986–1994).
The WTO is attempting to complete negotiations on the Doha

Development Round, which was launched in 2001 with an explicit focus
on developing countries. As of June 2012, the future of the Doha Round
remained uncertain: the work programme lists 21 subjects in which the
original deadline of 1 January 2005 was missed, and the round is still
incomplete. The conflict between free trade on industrial goods and
services but retention of protectionism on farm subsidies to
domestic agricultural sector (requested by developed countries) and
the substantiation of fair trade on agricultural products (requested
bydeveloping countries) remain the major obstacles. This impasse has
made it impossible to launch new WTO negotiations beyond the Doha
Development Round. As a result, there have been an increasing number
of bilateral free trade agreements between governments. As of July
2012, there were various negotiation groups in the WTO system for the
current agricultural trade negotiation which is in the
condition of stalemate.
The WTO's current Director-General is Roberto Azevêdo, who leads a

staff of over 600 people in Geneva, Switzerland. A trade facilitation
agreement known as the Bali Package was reached by all members on 7
December 2013, the first comprehensive agreement in the organization's
history
VEDA TUTORIALS 35
Objectives of WTO
 Trade without discrimination:
It is through the application of Most Favoured Nation (MFN) principle.
According to MFN clause, a member nation of WTO must give the same
preferential treatment to other member nations which it gives to any
other member nations.
 Settlement of disputes:
Settlement of disputes between the member countries through
consultation, conciliation & through dispute settlement procedure, as a
last resort.
 Raising Standard of Living:
Raising standard of living of the people of member countries & creation
of full employment of the citizens of member countries.
 Optimum utilization of the world`s productive resources:
Ensuring optimum use of world`s resources & thereby expanding world
production & trade of goods & services.
 Growth of underdeveloped countries or Less Developed
Countries (LDCs)
Recognizes the need for positive efforts designed to ensure that
developing countries, especially the LDCs get a better share of growth in
international trade.
Functions of WTO
 Administration & implementation of various agreements signed at
the Uruguay Conference & thereafter by WTO
 Supervising the implementation of tariff cuts averaging 37%as
agreed by the member nations
 Examination of the foreign trade policies of the member nations &
to bring these policies in line with the WTO guidelines.
 Collection of information about export-import trade, statistics
related to imports & exports & policies & measures taken by the
member countries.
 Settlement of trade disputes through WTO Dispute Settlement
Body
VEDA TUTORIALS 36
 Consultancy services to member countries

 Provision of common platform for free & fruitful communication,
dialogue, exchange & negotiations
 Technical assistance & training programmes co-operating with
other international negotiations.
GATT WTO
Birth 1947 1995.
Revised version of
GATT 1947
rd
Origin 3 pillar of Bretton Successor to GATT
Woods Institutions (A Replacement)
Institution Only set of rules with Permanent body with
no institutional Secretariat
foundation
Membership 23 (original) 135 (21st May 1999)
Objective World Trade Same with well-
Liberalization defined rules
Coverage Trade in Goods Addl. Areas like
Investment Services,
Agriculture, Textiles
Cross Retaliation Not Allowed Allowed
Structure Provisional Permanent
Agreement Commitment
Dispute Settlements Slow & ineffective Quick & Automatic
Working Ad-hoc Rule-based
Details of Important Trading Blocs

1. Association of South East Asian Nations (ASEAN)
The Association of Southeast Asian Nations or ASEAN was established
on 8 August 1967 in Bangkok by the five original Member Countries,
namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand.
Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July 1995,
Laos and Myanmar on 23 July 1997, and Cambodia on 30 April 1999.
VEDA TUTORIALS 37
OBJECTIVES
The ASEAN Declaration states that the aims and purposes of the
Association are:
(i) To accelerate the economic growth, social progress and cultural
development in the region through joint endeavors.
(ii) To promote regional peace and stability through abiding respect
for justice and the rule of law in the relationship among
countries in the region and adherence to the principles of the
United Nations Charter.
(iii) To maintain close cooperation with the existing international
and regional organizations
with similar aims.
WORKING OF ASEAN
The member countries of ASEAN have Preferential Trading
Arrangements (PTA), which reduces tariffs on products traded among
member countries. In 1992, ASEAN developed a Common Effective
Preferential Tariffs (CEPT) plan to reduce tariffs systematically for
manufactured and processed products.
The members have also established a series of co‐operative efforts to
encourage joint participation in industrial, agricultural and technical
development projects and to increase foreign investments in their
economies. These efforts include an ASEAN finance corporation, the
ASEAN Industrial Joint Ventures Programme (AJIV) etc. ASEAN
nations have introduced some programmes for greater diversification in
their economies.
India and ASEAN

India is interested in maintaining close economic relations with the
members of ASEAN, as these countries are closer to India. The ASEAN
countries are offering co‐operation to India in the field of trade,
investment, science and technology and training of personnel. Also,
India’s trade with ASEAN countries is satisfactory in recent years.
VEDA TUTORIALS 38
2. LAFTA (LATIN AMERICAN FREE TRADE

ASSOCIATION)
LAFTA was established in February 1960 under the Treaty of
Montevideo. The member countries of the association are Argentina,
Brazil, Columbia, Chile, Ecuador, Mexico, Paraguay, Peru, Uruguay,
Venezuela and Bolivia.
The main objective of the association is to build up a common market
for South American countries and thereby to bring about a gradual
reduction in trade barriers among member countries. LAFTA as a trade
bloc wants to stimulate intra‐Latin American trade and also to increase
Latin American’s declining share in world trade. However, LAFTA
could not emerge as a powerful economic union due to non‐ cooperation
among the member countries. The member countries have been
competing among themselves for promoting their exports. Political
instability among the member countries is another cause responsible for
making this union weak and ineffective. Due to lack of understanding
and mutual trust, the integration among the member countries is not
effective.
In recent years, the Latin American debt crisis has eroded some of the
industrial progress that the countries had made and has forced them to
rely on primary product exports to patch up their debt. In 1989, Andean
countries made a renewed effort to revive regional co‐operation with
new measures. LAFTA was replaced (renamed) by the Latin American
Integration Association (LAIA) with the signing of the Montevideo
Treaty of 1980. The achievements of LAIA are also moderate.
An 'advising bank' is a correspondent of a bank which issues a letter of
credit, and, on behalf of the issuing bank, the advising bank notifies the
beneficiary of the terms of the credit, without engagement on its part to
pay or guarantee the credit.
3. EUROPEAN UNION:
As a major center of power in the global economy, the European Union
(EU) is second only to the United States. In 2002, GDP of EU was US$
8531 bn. This constituted 26.6 % of the global GDP as compared to 32.5
% for the US and 12.2 % for Japan. Today after a number of Eastern
VEDA TUTORIALS 39
European Countries joined the EU, it is a bloc of 25 counties with a

population of over 450 mn. The EU also includes Germany, UK, France,
Italy and Spain, which are respectively 3rd, 4th, 5th, 7th, and 9th largest
economies in the world. Thus EU presents an enormous export and
investorarket that is both mature and sophisticated.
In 2004, EU accounted for 35.1 % of global merchandise exports as
compared to 11.1 % by the US, valued at US$ 3,300 bn.
About the EU: The EU is an organization of European Countries

dedicated to increasing economicintegration and strengthening
cooperation among its members. The EU has its headquarters in
Brussels, Belgium. The union consists of 25 members namely, Belgium,
Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg,
Netherlands, Portugal, UK, Spain, Austria, Finland, Sweden, Czech
Republic, Hungary, Latvia, Malta, Poland, Slovakia, Cyprus, Estonia,
Lithuania and Slovenia.
Objectives of the EU: Its principal goal is to promote and expand

cooperation among members states ineconomics, trade, social issues,
foreign policies, security, defence, and judicial matters. Another major
goal of the EU is to implement the Economic and Monetary Union,
which introduced a single currency, the Euro for the EU members.
The Single Market and Common Commercial Policy: The single

market refers to the creation of a fullyintegrated market within the EU,
which allows for free movement of goods, services and factors of
production. The EU, in conjunction with Member States, has a number
of policies designed to assist the functioning of the market. Some of the
policies are given below:
Competition Policy: The main competition lied in energy and transport
sector. The union designed thisstrategy to prevent price fixing, collusion
(secret agreement), and abuse of monopoly.
Free movement of goods: A custom union covering all trade in goods
was established and a commoncustoms tariff was adopted with respect
to countries outside the union.
VEDA TUTORIALS 40
Services: Any member nation has a right to provide services in other

Member States.
Free movement of persons: Any citizen of EU member state can live
work in any other EU member state Capital: There are no restrictions
on the movement of capital and on payments with the EU andbetween
member states and third countries.
Trade between the European Union and India
India was one of the first Asian nations to accord recognition to the
European Community in 1962. The EU is India’s largest partner and
biggest source community in 1962. The EU is India’s largest trading
partner and biggest source of FDI. It is a major contributor of
developmental aid and an important source of technology. Over the
years, EU – India trade has grown from 4.4 bn to 28.4 bn US$.
Top items of trade between India and EU

India’s exports to EU % India’s Imports from EU %
Textile and clothing 35 Gemstones and jewellery 31
Leather and leather products 25 Power generating equipment 28
Gemstones and jewellery 12 Chemical products 15
Agriculture products 10 Office machinery 10
Chemical products 9 Transport equipment 6
 India is EU’s 17th largest supplier and 20th largest destination for
exports.
 India’s strength lies in its traditional exports like textiles,
agriculture and marine products, gems and jewellery, leather and
electronics products.
 Tariff and non‐tariffs have been reduced, but compared to
International standards they are still high.
 Under the Bilateral trade between India and EU, it accounts for
26% of India’s exports and 25% of its imports.
 Under the same trade there is an agreement on sugarcane. The EU
has undertaken to buy and import a specific quantity of sugarcane,
raw or white, from India at guaranteed price, the prices are fixed
annually.
VEDA TUTORIALS 41
MULTINATIONAL CORPORATIONS (MNCs)

A Multinational Corporation is a business unit which operates
simultaneously in different part of world either by manufacturing or
marketing or both by keeping its headquarter elsewhere as a strategic
nerve centre.
Although MNC took birth in the early 1860s, it was after the Second
World War that the Multinationals have grown rapidly.
Generally, an MNC meets five criteria.
1. It operates in many countries at different levels of economic
development.
2. Its local subsidiaries are managed by nationals.
3. It maintains complete industrial organizations including R & D and
manufacturing facilities, in several countries.
4. It has direct investment base in different countries.
5. It derives from 20 % to 50 % or more of its net profits from foreign
operations.
Jacques Maisonrouge, president of IBM world trade corporations
defines an MNC as a company thatmeets five criteria:
1) It operates in many countries at different levels of economic
developments.
2) Nationals manage its local subsidiaries.
It maintains complete industrial organizations, including R and d and
manufacturing facilities in several countries.
4) It has a multinational central management.
5) It has multinational stock ownership.
James C. Baker also defines MNC’s as a company:
1) Which has direct investment base in several countries.
2) Which generally derives from 20% to 50% or more its net profits
from foreign operations.
3) Whose management makes policy decisions based on the
alternatives available anywhere in the world.
VEDA TUTORIALS 42
A significant share of the world’s industrial investment, production,

employment and trade are accounted for by these more than 65000
MNC’s with over 8,00,000 affiliates.
Characteristics of MNC`s
 Large Size:
MNC`s are very huge in size. The worth of their assets, sales, profits in
multi-crores which is sometimes more than the GDP of many nations.
 Worldwide activities:
The head office of the parent company is located in one of the country
but the activities are spread all over the world. The parent company
holds 51% to 100% of the subsidiary.
 Multinational Management:
Activities of MNC`s are managed at international level. The managing
committees of these corporations have experts from various countries of
the world.
 Multinational ownership:
Share in capital of these corporations are held by the citizens of many
countries. Buying & selling of these shares take place at international
level.
 Huge financial resources:
Resources of MNC`s are huge. Their stock of capital in millions &
billions. So they have large capital base.
 Varied activities:
The scope of MNC`s are not confined to one activity.
 Oligopoly form of market:
Oligopoly form of market is one in which the number of seller are
limited, M+NC`s generally involve themselves in the production of
those goods which have small number of producers.
 Advanced technology:
MNC`s use new & updated production techniques. They spend a lot of
money on R&D.
 Brand reputation:
MNC`s enjoy marketing superiority due to well reputed brands,
international image & control over the prices of the product.
 Transfer of resources:
The resources, techniques, managerial & technical know-how, raw
VEDA TUTORIALS 43
materials etc. are transferred from the parent corporation to its subsidiary
companies in other countries.
Merits of MNC`s
Multinationals offer advantages to host countries as well as to the
countries of their origin as explained below: ‐
Advantages of the MNC’s to the host countries: ‐

1. Raise the rate of investment:
MNC’s raise the rate of investment in the host countries andthereby
bring rapid industrial growth accompanied by massive employment
opportunities in different sectors of the economy.
2. Facilitate transfer of technology:
Multinationals act as agents for the transfer of technology todeveloping
countries and thereby help such countries to modernize there industries.
They remove technological gaps in developing countries by providing
techno‐managerial skills.
3. Accelerate industrial growth:
Multinationals accelerate industrial growth in host countriesthrough
collaborations, joint ventures and establishment of subsidiaries and
branches. They facilitate economic growth through financial, marketing
and technological services. MNC’s are rightly called “messengers of
progress”.
4. Promote export and reduce imports:
MNC’s help the host countries to reduce the imports andpromote the
exports by raising domestic production. Marketing facilities at global
level are provided by MNC’s due to their global business contacts.
5. Provide services to professionals:
MNC’s provide the services of the skilled professionalmanagers for
managing the activities of the enterprises in which they are
involved/interested. This raises overall managerial efficiency or
enterprises connected with multinationals. MNC’s bring managerial
revolution in host countries.
6. Facilitate efficient utilization of resources:
Multinationals facilitate efficient utilization ofresources available in host
VEDA TUTORIALS 44
countries. This leads to economic development.

7. Provide benefits of R and D activities:
Multinationals has enormous resources at their disposal.Some are
utilized for R and D activities. The benefits of R and D activities are
passed on to the enterprises operating in the host countries.
8. Support enterprises in host countries:
MNC’s support to enterprises in the host countries inorder to support
their own operations indirectly. This is how MNC’s support enterprises
in the host countries to grow. Even consumers get new goods and
services due to the operations of MNC’s.
9. Break domestic monopolies:
MNC’s raise competition in the host countries and thereby
breakdomestic monopolies.
Advantages of MNC`s to Countries of their Origin
1) Facilitate inflow of foreign exchange:
MNC’s collect funds from the enterprises of other countries in the form
of fees, royalty, and service charges. This money is taken to the country
of their origin. MNC’s make their home countries rich by facilitating
inflow of foreign exchange from other countries.
2) Promote global co‐operation:
MNC’s provide co‐operation to poor or developing countries to develop
their industries. The countries of their origin participate in such
international co‐ operation, which is beneficial to all countries‐ rich and
poor.
3) Ensure optimum utilization of resources:
MNC’s ensure optimum utilization of natural and other resources
available in their home countries. This is possible due to their worldwide
business contacts.
4) Promote bilateral trade relations:
MNC’s facilitate bilateral trade relations between their home countries
and the other countries with which they have business relations.
Demerits of MNC`s
1) Provide outdated technologies:
MNC’s design the technologies, which can be used in differentcountries.
VEDA TUTORIALS 45
They don’t supply technology to poor countries for industrial

development but for profit maximization. The technologies designed for
profit maximization and not purely for meeting the needs of developing
countries. The technologies supplied may be costly and may be outdated
and obsolete or may not be suitable for the needs of developing
countries.
2) Harm the national interests:
The activities of MNC’s in the host countries may be harmful tothe
national interests as MNC’s are solely guided by the profit
maximization. They ignore the interests of host countries. MNC’s even
make profits at the cost of developing countries.
3) Charge heavy fees:
MNC’s charge heavy fees and service charges from the enterprises in
thehost countries. They repatriate profits of their subsidiaries to their
home countries. This leads the outflow of countries.
4) Develop monopolies:
MNC’s restrict competition and acquire monopoly power in certain
areasin the host countries.
5) Use resources recklessly:
MNC’s use the resources in the host countries in a very recklessmanner,
which leads to fast reduction of non‐renewable natural resources.
6) Dominate domestic policies:
MNC’s use their money power for political purposes. They takeundue
interest in political matters in the host countries. MNC’s are being
openly termed as an extension of the imperialistic forces.
7) Adverse effects on life style/culture in the host countries:
MNC’s create demand for goodsand services in developing countries
through advertising and sales promotion techniques. As a result, people
purchase costly/ luxury goods which are not really useful nor within
their capacity to purchase. MNC’s create adverse effects on the cultural
background of many developing countries.
8) Interfere in economic and political systems:
They put indirectly pressures for the formulationof policies that are
favorable to them. They even topple the government in the host
countries if its policies are against the MNC’s and their operations.
VEDA TUTORIALS 46
9) Avoid tax liabilities:

Transfer pricing enables multinational corporations to avoid taxes
bymanipulating prices in the case of intra company transactions.
10) Lead to brain drain in developing countries:
Multinationals are now entering in countries likeIndia in a bigger way.
They hire qualified technocrats and managerial experts. These people
work for a few years in India, acquire experience and relocated as
experts in Singapore, Korea or the United States for managing the
activities of MNC’s. This leads to brain drain in developing countries.
CLASSIFICATIONS OF MNCS
Pyramid Model Umbrella Model Inter/

Conglomerate
MNC MNC MNC
a.Pyramid Model MNC:

These organizations have strong Headquarters and weak subsidiaries.
HeadQuarter is rude, arrogant and gives no powers to its subsidiaries.
The decision making capacity is also not centralized. For E.g. Siemens,
Johnson & Johnson, IBM, McDonalds, Marks & Spencer etc. This
model of MNC is very power conscious.
b. Umbrella Model MNC:
This model is very good among others. There is a relationship of mutual
helpbetween the Head quarter and the subsidiary. Ideas and money flow
freely.
Making money and using power is not the primary motto of the
organizations. Head quarters give full freedom to the subsidiaries. Both
HQ and subsidiaries are very strong. E.g. P & G, Price water house,
KPMG etc.
Problems: These organizations are very image conscious. If anything
damages their image, strong actions are taken for that.
c. Inter conglomerate Model MNC:
 For such organizations, money is main aim.
VEDA TUTORIALS 47
 Investment and Rate of Investments are very high.

 No loyalty towards any subsidiary countries. E.g. HLL, Unilever
etc.
 Companies enter any segment and adapt the approach of Multi
segments, Multi markets, Multi products and Multi countries.
 Such companies try to acquire monopoly and take over its
competitors there by reducing competition. E.g. Brooke Bond and
Lipton are taken over by HLL.
How MNCs expand their business:
i. International Licensing:
MNC permits the domestic company to use its trademark, brand name
ortechnical know‐how for manufacturing and marketing purpose. The
license is given against payment of fee which acts as source of income to
the MNCs. E.g. Brand 555 is the licensed user of British American
Tobacco company. In India it is manufactured by ITC (the licensee). It
has the market of 600 cr. And company pays 5% of the total sales to
BAT (licensor) as license fees. The BAT does not provide any raw
material but just the brand name is given. This company took 45 years to
establish. The licensor generally keeps supervisor in the plant of
licensee.
ii. International Franchising:
The licensor not only provides the brand name but also the raw
material.E.g. McDonalds. (Syrup – pharmaceutical companies, printed
circuit boards to electronic items, essence – cold drink companies (Pepsi
gives its essence to Punjab Agro).
iii. Turnkey projects:
MNCs undertake to complete the whole project and handover the same
whenready to the host country. Such project may be supplied on tender
basis. Such projects provide new opportunity to expand the business
activities.
iv. Joint Ventures:
“Like marriage, binding between home country representative and host
countryrepresentative, to set up a project either in home country or host
or 3rd country with a commitment of joint risk taking and joint profit
sharing.”
VEDA TUTORIALS 48
E.g. ModiLuft – Modi and Lufthansa

Successful JVs: Indo Gulf fertilizer – Birla group, Taj group of hotels
with Russian government.
v. Collaborations:
It deals with any one part of management function, either finance or
technology collaboration. (it is not possible to have collaboration in
consumer products and FMCG. It happens generally with medicines,
technological products.)
E.g. Bajaj – Kawasaki, Hero
Honda ,Kinetic Honda
Collaborations are time bound and
not permanent.
FOREIGN DIRECT INVESTMENT (FDI)

A foreign direct investment (FDI) is a controlling ownership in a
business enterprise in one country by an entity based in another country.
Foreign direct investment is distinguished from portfolio foreign
investment, a passive investment in the securities of another country
such as public stocks and bonds, by the element of "control". According
to the Financial Times, "Standard definitions of control use the
internationally agreed 10 percent threshold of voting shares, but this is a
grey area as often a smaller block of shares will give control in widely
held companies. Moreover, control of technology, management, even
crucial inputs can confer de facto control."
The origin of the investment does not impact the definition as an FDI,
i.e., the investment may be made either "inorganically" by buying a
company in the target country or "organically" by expanding operations
of an existing business in that country.
Broadly, foreign direct investment includes "mergers and acquisitions,
building new facilities, reinvesting profits earned from overseas
operations and intra company loans". In a narrow sense, foreign direct
investment refers just too building new facilities.
VEDA TUTORIALS 49
The numerical FDI figures based on varied definitions are not easily
comparable. As a part of the national accounts of a country, and in
regard to the GDP equation
Y=C+I+G+(X-M)
[Consumption + gross Investment + Government spending + (exports -

imports)], where, I is domestic investment plus foreign investment, FDI
is defined as the net inflows of investment (inflow minus outflow) to
acquire a lasting management interest (10 percent or more of voting
stock) in an enterprise operating in an economy other than that of the
investor. FDI is the sum of equity capital, other long-term capital, and
short-term capital as shown the balance of payments. FDI usually
involves participation in management, joint-venture, transfer of
technology and expertise.
Stock of FDI is the net (i.e., inward FDI minus outward FDI) cumulative

FDI for any given period. Direct investment excludes investment
through purchase of shares. FDI is one example of international factor
movements A foreign direct investment (FDI) is a controlling ownership
in a business enterprise in one country by an entity based in another
country. Foreign direct investment is distinguished from portfolio
foreign investment, a passive investment in the securities of another
country such as public stocks and bonds, by the element of "control".
According to the Financial Times, "Standard definitions of control use
the internationally agreed 10 percent threshold of voting shares, but this
is a grey area as often a smaller block of shares will give control in
widely held companies. Moreover, control of technology, management,
even crucial inputs can confer de facto control." yes that is fact.
Factors influencing the FDI

a. Supply Factor:
Firms invest capital in foreign countries due to lower costs of business in
foreign countries. These includes the following:
VEDA TUTORIALS 50
 Production costs: companies invest in foreign countries in order to

get the benefits of lower production costs like low labour costs,
land prices, commercial real estate’s rents, tax rates etc.
 Logistics: if the transportation cost form the domestic country to
foreign market is high & / or the time of transportation of the
products to foreign markets is long, then the firms undertake FDI
 Availability of natural resources: companies locate their
production facilities close to the source of critical inputs.
 Availability of quality human resources at low cost: high quality
human resources contribute to high value addition to the product of
service. High quality human resources at low cost attracts FDI
 Access to key technology: in order to have access to existing key
technology rather than developing technologies firms go for FDI
b. Demand Factors:
FDI is selected by companies in order to increase the total demand for
their products. These factors include the following:
 Customer Access: certain business firms particularly fast food
service oriented & retail outlets should locate their operations close
to customers.
 Marketing Advantages: companies can enjoy a number of
marketing advantaged by locating their operations in host country
like lower marketing costs, accessibility to hands-on experience
regarding customer & market handling, improving customer
services etc.
 Exploitation of competitive advantage: companies which enjoy
competitive advantages through trade mark, brand name,
technology etc. go for FDI in order to exploit its competitive
advantages in various foreign markets.
 Customer Mobility: companies which have one or few customer
select the FDI strategy along with their customers.
c. Political Factors:
Companies enter foreign markets through FDI in order to overcome the
trade barriers imposed by the host country &/or to avail the incentives
offered by the host governments.
VEDA TUTORIALS 51
 Avoidance of trade Barriers: Companies establish production

facilities in foreign markets to avoid trade barriers like high export
tariffs, quotas etc.
 Economic development incentives: government at local level, state
level & national level offer incentives to attract domestic & foreign
investments like low tax rate, employee training programmes,
development of infrastructural facilities etc.
Reasons for FDI

 To increase sales & profits:
Companies invest capital directly in various foreign countries in order to
increase sales & profits because foreign markets offer more attractive
business opportunities than domestic markets.
 To enter fast growing markets:
The fast growing markets provide better opportunities to MNC for their
business growth.
 To protect foreign markets:
Some MNC`s invest in foreign countries to protect foreign markets.
 To protect domestic markets:
Some MNC`s invest & operate in foreign markets in order to avoid the
competition with the weak domestic firms. They leave the domestic
markets to the less competitive domestic firms.
 To consolidate trade blocs:
MNC`s prefer to do business with other member countries of the trade
bloc because MNC`s get preferential treatment in doing business.
 To acquire technological & managerial knowhow:
Sometime, the technological & managerial knowhow in various foreign
countries might be superior to those of domestic country. In cases,
MNC`s invest in foreign countries in order to acquire the superior
technological & managerial knowhow.
 To reduce costs:
MNC`s invest in foreign countries in order to reduce production costs &
various other operations due to availability of various inputs of raw
materials, human resources etc. at lower price in foreign countries.
VEDA TUTORIALS 52
Domestic companies invest in foreign markets due to lower

transportations costs & energy costs.
Benefits & Costs of FDI

Benefits for Host Countries:
 Access to superior technology
 Increased competition
 Increase in domestic investment
 Access to export markets
 Export promotion strategies
 Generating employment
 Bridging host countries foreign exchange gaps
Costs for the Host Country:

 There is an import of substantial inputs from the investor`s
country.
 Companies will hire expatriate managers for management position
 Investing country has controlling technologies, for which it
charges a huge technology fee.
 FDI can even wipe out local firms. Infant industries & other home
industries may suffer, if they cannot compete.
Benefits for Home Country:

 Inward flow of earnings on a long term basis.
 High salaries for employees
 Exposure to foreign markets.
Costs for Home Country:

 Initial capital outflow is very large
 Exports may decrease
 Imports may increase, if FDI is intended to serve the home country
 Employment will be lost to the home country population
 Profits are repatriated abroad. They may not stay in the country re-
investment.
VEDA TUTORIALS 53
 Major tax havens will enjoy the money at the cost of the home
country.
VEDA TUTORIALS 54
CHAPTER 2 – PRODUCT PACKAGING & DISTRIBUTION
Packaging
Packaging is a logistical management function which is performed at
factory or the warehouse & it begins immediately post production.
It is done for –
 Product Protection
 Easy Handling & Movement
 Customer Service
Objective of Packaging
 It leads at attracting customer attention & is convenient for
customer to handle the product.
 Packaging should be light weight to reduce transportation cost
especially for long distance & thus reduces cost of storage
 Facilitates easy handling
 To identify the product
 To give new look to the product
 To assemble & arrange the product in the desired form
 To facilitate the functions of wholesalers & retailers
 To check adulteration
Functions of Packaging
 Physical Packaging: It involves protection from damage, physical
efforts, contamination & protection from environmental
conditions. It is generally not economical to provide absolute
protection to the products from all possibility of damage from
environmental conditions. Higher the value of product, more
protection it deserves & so on & more expensive is the packaging.
During logistical process packaged products can be damaged in
transportation, handling & storage.
VEDA TUTORIALS 55
 Environmental Protection: package perishability is a critical factor

in design. Keeping the contents clean, fresh & safe for expected
shelf life is a primary function.
 Cube Minimization: The truck is cubed out, that means the truck is
full space wise, but not fully utilized weight wise. Cube
minimization is reducing the space occupied by the product to cut
freight charge. Square shaped bottles & oral shaped containers.
 Weight Minimization: The truck is full weight wise but not fully
utilized space wise. Weight minimization is reducing the weight of
the consignment to fully utilize the capacity of the truck
 Facilitating Handling & Using: Fruit juices in tetra packs handling
& consumption by users.
 Facilitating Storage & Use: Ink cartridges for printers, floppies,
CDs, reusable corrugated boxes bottles & refill packs.
 Grouping Goods into Convenient Unit for Distribution: Small
objects are typically grouped together in one package for reasons
of efficiency.
 Reducing Pilfering Opportunities: Package constructions are more
resistant to pilferage & some have pilfer indicating seals.
 Communications: Packages & labels communicate how to use,
transport, recycle or dispose of packages or products. Content
identification – what does this contain? Product, manufacturer,
universal code etc. with high visibility – bar codes & scanners.
Essentials of Good Packaging
 Packaging enhances customer service levels.
 Lighter packaging saves transportation costs & insurance costs.
 Careful package planning helps better utilization of warehousing
space
 Reduces damages & losses of the products
 Reduces requirement of special handling
VEDA TUTORIALS 56
 Environment friendly packs saves disposal costs & improves

company image
 Reusability of packs saves costs.
Factors for Package Design in International Marketing
a. Physical Characteristics –
The physical characteristics of the product like physical state, weight
stability, fragility, rigidity, surface finish etc. affect the packaging
decisions.
b. Physio-chemical characteristics –
Certain physio-chemical characteristics like the effect of moisture
oxygen, light, flame, bacteria, fungi, chemical action etc. on the product
are very important factors to be considered while making packaging
decisions.
c. Language –
For the product package to perform the promotional function, the label
must be printed in local language. The purpose of the package label is
achieved when a consumer can read what is written.
d. Colour –
Consumer preferences for color differs from one country to another. In
Islamic countries, green is supposed to be favouredcolour, Greeks like
both white & blue, but there are considered to be colours of mourning &
sorrow in the Far East.
e. Size –
Package size should be determined only on finding out the buying
characteristics of the consumers. If the buyers shop regularly at close
intervals the size of the package will have to be smaller. If the target
VEDA TUTORIALS 57
consumer so not have freezers the preferred unit size is likely to be

smaller.
f. Economy –
While packing is very important in marketing, it is costly also. There are
number of cases where the packaging cost is more than the content cost.
The increasing packaging cost is a matter of serious concern. Thus,
every effort should be made to reduce the packaging costs as much as
possible without impairing the packaging requirements.
g. Containers –
The developed markets especially generally prefer disposable
containers. The regulatory agencies sometimes insist that containers
should be made of material which will not have undesirable
environmental effects due to environmental pollution.
h. Length of the Distribution Channel –
A long distribution channel means a longer time between production &
find consumptions. Higher is this time difference, greater is the necessity
of providing better & strong packaging.
i. Convenience –
From consumer`s viewpoint, packaging should have the convenience
quality. Thus besides, functional needs a good package should have
certain characteristics like easy to open & close, easy to dispense, easy
to dispose off, easy to recycle, easy to identify easy to handle,
convenient to pack, etc.
j. Climate –
A country with humid climate will require different packaging especially
for perishable items, then what is required in a country with a cold
climate.
VEDA TUTORIALS 58
Special Factors in Package Designs

a. Regulations in the foreign countries –
Packaging & labelling may be subject to government regulations in the
foreign countries. Some countries have specified packaging standards
for certain commodities. The trend towards requiring labelling in a
country`s native language is growing.
b. Buyers Specifications –
In some cases, buyers like the importers may give the packaging
specifications. Which incorporating specifications, it should also be
ensured that packaging satisfies other statutory requirements.
c. Socio-cultural factors –
While designing the packaging for a product, socio-cultural factors
relating to the importing country like customs, traditions beliefs etc.
should also be considered.
d. Retailing Characteristics –
The nature of retail outlet is very important factor in packaging design.
In some of the foreign markets, as a result of the spread of super markets
& discount houses, a large number of products are sold on a self-service
basis. Therefore, the package has to perform many of the sales tasks &
hence, it must attract attention, describe the product features give the
consumer confidence & make a favourable overall impressions.
e. Environmental factors-
The impact of climatic factors in the place where the product originates,
while the product is in transit & while it is in the market etc. should be
considered. The package should be capable of withstanding the stresses
& hazards of handling & transporting, stacking, storing etc. under
diverse conditions.
f. Disposability –
One of the qualities required of a good package is that it should be easily
disposed of or recycled.
Essentials of Good Packaging

a. Colour –
Colors have aesthetical value. People in different countries & places
attach different meanings to colour.
VEDA TUTORIALS 59
b. Language –
The matter printed on the packages must be in English & prominent
local language.
c. Size –
If the purchases are made frequently the size of the package must be
smaller & vice versa. The size should be such that it does not create
problem to the dealers to stack or store the products on their shelves.
d. Climate –
A country with humid climate will require different packaging especially
for perishable items, then what is required in a country with a cold
climate.
e. Nature of the Product –
The sophisticated product like computers may require a special type of
packaging. Fragile items require special cushioning material.
f. Length of Distribution Channel –
The longer the chain of distribution, the stronger packaging is required.
The time gap between the date of the production & final consumption
also determines the type of packaging.
g. Nature of Container –
Some buyers prefer disposal containers while others prefer reusable
containers especially in less developed countries.
h. Trends in Packaging –
New packaging system & material which have become fashionable
should be used. Packaging should reflect improvement in packaging
technology, consumer`s life styles & preferences.
i. Mode of Transport –
Packaging requirements depend upon the mode of transport goods by air
transport require light packaging, while ship transport needs packaging
in standard size as per the containers size.
j. Cost of Package –
Packaging should not be very expensive. The cost to be incurred on
packaging should justify benefits.
k. Accepted Norms –
Standard norms must be studies before designing a package for overseas
markets.
VEDA TUTORIALS 60
l. Regulations in the Importing Country –

There are certain regulations imposed by importing country. Such
regulations must be observed in designing packages.
Labelling
Labelling is the process of fixing labels on the export product. A label is
that part of the product that carries information about the product & the
seller. It provides written information about the product such as features
of the product, its composition, price, date of manufacture & expiry,
name of the producer etc. Its main purpose is to inform the consumer
essential details in respect of the product as regards its quantity, quality,
how to use & maintain it.
Types of Labels
 Brand Label –
It is a simple label which carries only the brand name.
 Descriptive Label –
It gives details of the product such as features, uses, contents, warnings,
directions for use etc.
 Grade Label –
It identifies the quality of the product with a letter, number or word.
Forms of Labels
Labels on the product may assume any of the following forms –
a. Strip of the cloth
b. Card label
c. Adhesive sticker
d. User`s manual
Contents of Label
Every label should contain the following information’s –
 Information to satisfy the legal requirements of a particular country
 Instructions for taking care of the product
 Dimensions of the product
VEDA TUTORIALS 61
 Instructions for the use of the product

 Country of origin
 Name & address of the manufacturer
 Lot number of the consignment
 Date of manufacture & expiry
Features of a Good Quality Label

 It includes all the relevant information
 It is printed in the language of the importer`s country
 It is appropriate to the product
 It has to be take into account the colour& shape preferences of the
prospective buyers.
Purpose of Export Marking

 The exporters should properly mark the export boxes in order to
ensure their proper identification, correct handling & delivery.
 Making on the export boxes is very important part of the logistics
for transportation of the goods to the buyers.
 Making on the export boxes not only ensures their safe
transportation & delivery but it also helps in proper handling of
cargo by the people.
 Main purpose of marking on export boxes is identification of
cargo. Marking facilitates identification of packages by the buyer
to the time of delivery at the destination port.
 It avoids mix of goods with similar consignments at the time of
loading & unloading by the illiterate porters at different ports in
route to destinations.
 There are some legal provisions of the customs authorities
regarding marking & importing countries which are to be fulfilled
in order to avoid heavy penalties.
 The content of the package may be known without removing the
outer packaging case & unpacking the goods. Thus, marking on
packages meant for shipment aids the exporters, importers,
shipping companies & the customs authorities.
VEDA TUTORIALS 62
Global Distribution Channels

• Distribution‐activities that make products available to customers
when and where they need them.
• A channel of distribution or marketing channel is a group of
individuals and organizations that directs the flow of products from
producers and customers.
• Marketing Intermediaries link producers to other intermediaries or
to the ultimate users of the product. Operate between the producer
and the final buyer.
Types of utility distribution offers:
1. TIME...when the customers want to purchase the product.
2. PLACE...where the customers want to purchase the product.
3. POSSESSION...facilitates customer ownership of the product.
4. FORM...sometimes, if changes have been made to the product in
the distribution channel, i.e. Pepsi/Coke, concentrate to bottlers.
• Each channel member has different responsibilities within the
overall structure of the distribution of the system; mutual
profit/success is obtained through cooperation.
• Distribution (or "Place") is the fourth traditional element of the
marketing mix. The other three are Product, Price and Promotion.
The Nature of Distribution Channels
• Most businesses use third parties or intermediaries to bring their
products to market. They try to forge a "distribution channel"
which can be defined as
• "all the organizations through which a product must pass between
its point of production and consumption"
• Why does a business give the job of selling its products to
intermediaries? After all, using intermediaries’ means giving up
some control over how products are sold and who they are sold to.
• The answer lies in efficiency of distribution costs. Intermediaries
are specialists in selling. They have the contacts, experience and
VEDA TUTORIALS 63
scale of operation which means that greater sales can be achieved

than if the producing business tried run a sales operation itself.
Functions of a Distribution Channel

The main function of a distribution channel is to provide a link between
production and consumption.
Organizations that form any particular distribution channel perform
many key functions:
 Information Gathering and distributing market research and
intelligence‐important for marketing planning
 Promotion Developing and spreading communications about
offers
 Contact Finding and communicating with prospective buyers
 Matching Adjusting the offer to fit a buyer's needs, including
grading,assembling and packaging
 Negotiation Reaching agreement on price and other terms of the
offer
 Physical Distribution – transporting & storing goods
 Financing – acquiring & using funds to cover the costs of the
distribution channel.
 Risk Taking – assuming some commercial risks by operating the
channel
All of the above functions need to be undertaken in any market. The
question is ‐ who performs them and how many levels there need to be
in the distribution channel in order to make it cost effective.
Numbers of Distribution Channel Levels

Each layer of marketing intermediaries that performs some work in
bringing the product to its final buyer is a "channel level". The figure
below shows some examples of channel levels for consumer marketing
channels:
VEDA TUTORIALS 64
In the figure above, Channel 1 is called a "direct‐marketing" channel,

since it has no intermediary levels. In this case the manufacturer sells
directly to customers. An example of a direct marketing channel would
be a factory outlet store. Many holiday companies also market direct to
consumers, bypassing a traditional retail intermediary ‐ the travel agent.
The remaining
channels are
"indirect‐marketing channels".
Channel 2 contains
one
intermediary. In consumer markets,

this is typically
a retailer. The
consumer electrical
goods market in the UK is typical of this
arrangement whereby producers such as
Sony, Panasonic, Canon etc. sell their goods directly to large retailers
such as Comet, Dixons and Currys which then sell the goods to the final
consumers.
VEDA TUTORIALS 65
Channel 3 contains two intermediary levels ‐ a wholesaler and a retailer.

A wholesaler typically buys and stores large quantities of several
producers goods and then breaks into the bulk deliveries to supply
retailers with smaller quantities. For small retailers with limited order
quantities, the use of wholesalers makes economic sense. This
arrangement tends to work best where the retail channel is fragmented ‐
i.e. not dominated by a small number of large, powerful retailers who
have an incentive to cut out the wholesaler. A good example of this
channel arrangement in the UK is the distribution of drugs.
Distribution Channels Available for Exporting

I. Direct Channels
a. Foreign Distributor – it is foreign company having exclusive
rights to distribute the company`s product in a foreign country.
b. Foreign Retailers – it is a retailing company firm in a foreign
country engaged by the distributors of the foreign country
concerned to deal in & sell the products.
c. State-controlled Trading Company –it is a government company
authorized to deal in & sell the product services of foreign
companies.
d. End User – sometimes a manufacturer is able to sell directly to
foreign end user with no intermediaries involved in the process. It
is used for expensive industrial products.
II. Indirect Channels

a. Export Broker – it is a domestic company engaged in arranging
for export of goods of domestic companies by charging a fee.
b. Manufacturer`s Export Agent / Sales Representative – it is a
firm exclusively engaged to take up all export activities of a
domestic manufacturer. This agent works for a commission.
c. Export Management Company – the company manages the
entire export activities of a domestic company on contract.
d. Purchasing / Buying Agent – it is an agency firm of a foreign
buyer/ importer. Foreign buying / importing country appoints
VEDA TUTORIALS 66
agents to arrange for buying products from other countries.

e. Export Merchant – it is a firm engaged in buying the products in
domestic country in order to export to foreign countries on its own.
f. Export Distributors – it is granted exclusive right to represent the
manufacturer in selling the product in foreign countries. He
operates either in his own name or manufacturer1s name.
g. Trading Company – trading companies act as a link between
exporting companies & importing companies.
Factors Influencing Selection of Distribution Channels

 Product Characteristics
 Market & Customer Characteristics
 Middlemen Characteristics
 Company Characteristics & Objectives
 Competitors Characteristics
 Environmental Characteristics
VEDA TUTORIALS 67
CHAPTER 3 – PRICING POLICY IN INTERNATIONAL

MARKETS
INTERNATIONAL PRICING
Three basic factors determine the boundaries of the pricing decision ‐
the price floor, or minimum price, bounded by product cost, the price
ceiling or maximum price, bounded by competition and the market and
the optimum price, a function of demand and the cost of supplying the
product. In addition, in price setting cognisance must be, taken of
government tax policies, resale prices, dumping problems, transportation
costs, middlemen and so on. Whilst many agricultural products are at the
mercy of the market (price takers) others are not. These include high
value added products like ostrich, crocodile products and hardwoods,
where demand outstrips supply at present.
Pricing Considerations
The price considerations listed below will help an exporter determine
the best price for the product overseas.
• At what price should the firm sell its product in the foreign
market?
• What type of market positioning (customer perception) does the
company want to convey from its pricing structure?
• Does the export price reflect the product’s quality?
• Is the price competitive?
• Should the firm pursue market penetration or market‐ skimming
pricing objectives abroad?
• What type of discount (trade, cash, quantity) and allowance
(advertising, trade‐off) should the firm offer its foreign customers?
• Should prices differ by market segment?
Pricing?
• What pricing options are available if the firm’s costs increase or
decrease? Is the demand in the foreign market elastic or inelastic?
• Are the prices going to be viewed by the foreign government as
VEDA TUTORIALS 68
reasonable or exploitative?
• Do the foreign country’s antidumping laws pose a problem?
As in the domestic market, the price at which a product or service is sold
directly determines a firm’s revenues. It is essential that a firm’s market
research include an evaluation of all of the variables that may affect the
price range for the product or service. If a firm’s price is too high, the
product or service will not sell. If the price is too low, export activities
may not be sufficiently profitable or may actually create a net loss.
The traditional components of determining proper pricing are costs,
market demand, and competition. Each of these must be compared with
the firm’s objective in entering the foreign market. An analysis of each
component from an export perspective may result in export prices that
are different from domestic prices.
It is also very important that the exporter take into account additional
costs that are typically borne by the importer. They include tariffs,
customs fees, currency fluctuation transaction costs and value‐ added
taxes (VATs). These additional costs can add substantially to the final
price paid by the importer, sometimes resulting in a total of more than
double the U.S. domestic price.
Factors Determining Price
There are three factors determining the prices –
a. Foreign Market Objectives / Competition

An important aspect of a company’s pricing analysis is deter‐ mining
market objectives. For example, is the company attempting to penetrate
a new market, looking for long‐term market growth, or looking for an
outlet for surplus production or outmoded products? Many firms view
the foreign market as a secondary market and consequently have lower
expectations regarding market share and sales volume. This naturally
affects pricing decisions.
Marketing and pricing objectives may be general or tailored to
particular foreign markets. For example, marketing objectivesfor sales
to a developing nation where per capita income may be one tenth of
that in the United States are necessarily different from the objectives
VEDA TUTORIALS 69
for Europe or Japan.
b. Costs
The computation of the actual cost of producing a product and bringing
it to market is the core element in determining if exporting is financially
viable. Many new exporters calculate their export price by the cost ‐plus
method. In the cost‐plus method of calculation, the exporter starts with
the domestic manufacturing cost and adds administration, research and
development, overhead, freight forwarding, distributor margins, customs
charges, and profit.
The effect of this pricing approach may be that the export price escalates
into an uncompetitive range. Marginal cost pricing is a more competitive
method of pricing a product for market entry. This method considers the
direct, out‐of‐pocket expenses of producing and selling products for
export as a floor beneath which prices cannot be set without incurring a
loss. For example, additional costs may occur due to product modifica‐
tion for the export market that accommodates different sizes, electrical
systems, or labels. On the other hand, costs may decrease if the export
products are stripped‐down versions or made without increasing the
fixed costs of domestic produc‐tion.
Other costs should be assessed for domestic and export products
according to how much benefit each product receives from such
expenditures. Additional costs often associated with export sales
include:
• Market research and credit checks;

• Business travel;
• International postage, cable, and telephone rates;
• Translation costs;
• Commissions, training charges, and other costs involving foreign
representatives;
• Consultants and freight forwarders; and
• Product modification and special packaging.
After the actual cost of the export product has been calculated, the
exporter should formulate an approximate consumer price for the foreign
VEDA TUTORIALS 70
market.
c. Market Demand
For most consumer goods, per capita income is a good gauge of a
market’s ability to pay. Some products may create such a strong demand
such as popular goods like Levis, that even low per capita income will
not affect their selling price. Simplifying the product to reduce its selling
price may be an answer for the exporter to most lower per capita income
markets. The firm must also keep in mind that currency fluctuations may
alter the affordability of its goods. Thus, pricing should try to accom‐
modate wild changes in the U.S. and/or foreign currency. The firm
should anticipate the type of potential customers. If the firm’s primary
customers in a developing country are expatriates or belong to the upper
class, a higher price might be feasible even if the average per capita
income is low.
Competition In the domestic market, few companies are free to set
prices without carefully evaluating their competitors’ pricing policies.
This situation is true in exporting, and is further complicated by the need
to evaluate the competition’s prices in each potential export market.
If there are many competitors within the foreign market, the exporter
may have little choice but to match the market price or even underprice
the product or service in order to establish a market share. On the other
hand, if the product or service is new to a particular foreign market, it
may actually be possible to set a higher price than in the domestic
market.
Export Pricing
Objectives of Export Pricing
a. Survival –
An exporter faces competition not only form his fellow exporters but
also from other countries exporters. In such competition markets, one of
the marketing tools which can make exporters survive in the competition
pricing. Making price competitive, thereby earning less profit in order to
survive could be one of the pricing objectives. Keeping prices
competitive & maintaining low prices is a short-term objective, as every
VEDA TUTORIALS 71
exporter aims as increasing the profits at the later stage.

b. Maximum Sales Growth –
Depending upon the competition & sensitivity of market to price, the
final pricing decision needs to be taken. There are two alternatives
available for this purpose:
 Setting lower price to overseas buyers leads to higher sales
volume, thereby earning more profits. For this purpose, the market
should be highly price sensitive. Such low prices discourages
competition thereby further increasing sales.
 Setting higher prices to indicate superior quality of the product.
Such indication leads consumers to rate products higher compared
to that of competitors. Due to this perception, sales volume of the
product increases.
c. Maximum Current Profits –
An exporter may determine his objective of securing maximum profits.
A price which would generate. Such a profit is to be established. For this
purpose, it is necessary to have complete information of cost & demand.
A price which can generate maximum cash flows or a higher rate of
returns is determined. But this objective is more of a short-term nature &
bases its performance on profits which may turnout to be dangerous in
export markets.
d. To Establish Leadership –
To establish not only superior quality image but also emphasize on
leadership or number one position in the export markets. By charging a
higher price & making a noticeable difference in the price as compared
to that of competitors this objective can be fulfilled.
Importance of Export Pricing

 Customers are extremely sensitive about quality & price. If price is
not set properly, success of the firm comes in danger.
 Volume of sales & market demand depends on pricing policy
 Competitive capacity in foreign market depends on pricing fixed
 It decides the success & failure of export efforts
 It builds goodwill in the market
 It is one of the important components in marketing mix
VEDA TUTORIALS 72
 It helps in capturing foreign markets

 It enables to achieve objectives of the firm
 It develops brand image & product differentiation
 It increases / affects profitability of the firm
 Helps in market penetration by keeping them low initially &
gradually raising them
 Becomes a promotional tool
 Not only helps in increasing profits & raising revenue but also in
increasing market share of the product
 Helps by having good profitability to undertake diversification,
R&D etc.
Export Costing Methods

a. Cost-based Pricing / Cost-plus Pricing –
In this methods, the price includes a certain percentage of profit margin
on the sum total of the full cost production, marketing costs & on
allocation of overheads. That is,
Price = [Fixed Cost + Variable Cost + Overheads + Marketing
Costs] + Specified Percentage of Total Costs
Advantages –
 It covers all the costs
 It is simple method & easy to understand
 It is designed to provide the target rate of margin
 Generally, it is rational & widely accepted method.
Disadvantages –
 It ignores the price elasticity of demand
 It imparts inbuilt inflexibility to pricing decisions
 Sometimes opportunity to charge a high price is foregone
 It would not be helpful for some of the objectives or task like
market penetration, fighting competition etc.
 Cost calculations are based on pre-determined level of activity.
 If the costs of the firm are higher than its competitors, this method
would render the firm incompetitive in relation to price.
VEDA TUTORIALS 73
b. Market Oriented Pricing Method –

It allows the prices to be changed as per the changes in market
conditions. The product may be priced high, when demand conditions
are very good & price may be lowered, when the market is sluggish, it
helps in increasing sales.
Advantages –
 It is very flexible policy
 Price is based on market conditions
Disadvantages –
 It is difficult to estimate what the traffic will bear
 There is a possibility of ignoring the elasticity of demand factor
c. Following competitors –
Many firms follow the dominant competitors particularly the price
leader is setting the price. The price leader is the firm which initiates the
price trends.
The important alternatives while following the competitors are –
 Setting the price of the same level as that of the competitor
 Setting the price below that of the competitor.
d. Pricing higher than that of the competitors –

The choice of the alternatives has to be based on such factors as the
comparative quality of the product, the image & reputation of the firm,
the uniqueness or similarity of the product etc.
Advantages –
 It is a very simple method
 It follows the main market trend
 It has relevance to the competitive standing of the firm
Disadvantages –
 Pricing objectives of the firm could be different from that of the
competitors
 Cost factors of the followers may not be similar to that of the
competitors
VEDA TUTORIALS 74
 Sometimes the competitors may initiate price change for wrong

reasons
 If the competitor`s price decisions are unrealistic, the follower will
also be going wrong on the price.
e. Negotiated Prices –
Deciding the price by negotiation between the seller & the buyers is
common. This is popular in government & institutional purchases.
Advantages –
 It has great flexibility
 It has the opportunity to put across & understand the points of both
the buyer & the seller.
Disadvantages –
 If the bargaining power of the seller is weak, he may not be able to
get a good price.
f. Customer Determined Price –

In number of cases, the foreign buyer specifies the price at which he is
prepared to buy the product. Whether a price quotation given by the
buyer will be acceptable to seller or not, will depend on the factors like
the structure, conditions of business, objectives etc.
g. Break-even Price (BEP)

Number of units that must be sold in order to produce a profit of zero
(but willrecover all associated costs). In other words, the break ‐even
point is the point at which your product stops costing you money to
produce
• and sell, and starts to generate a profit for your company.
The graphic method of analysis (below) helps you in understanding the
concept of the break‐even point. However, the break‐even point is found
faster and more accurately with the following formula:
Q = FC / (UP ‐ VC) where:
Q = Break‐even Point, i.e., Units of production (Q),
FC = Fixed Costs,
VC = Variable Costs per Unit
VEDA TUTORIALS 75
UP = Unit Price
Therefore,
Break‐Even Point Q = Fixed Cost / (Unit Price ‐ Variable Unit Cost)
h. Marginal Cost Pricing –

It is common in evaluating the profitability of new orders In case of
firms with excess (idle) capacity. In this method the relevant cost
considered for pricing is the variable cost, fixed cost is excluded from
the calculation of the cost of the product. An order which may appear to
be unprofitable may appear to be profitable, if marginal cost approach is
adopted.
The key to marginal costing is to view home sales & export sales as two
separate components & to consider export sales as extra sales. If
exporter recovers his fixed costs from his home sales, he can consider
extra cost of the additional production to be only the variable cost
involved. This means the break-even price can be for lower than if the
price were calculated on the basis of both fixed & variable costs.
Advantages –
 It may help the firm in market penetration
VEDA TUTORIALS 76
 It will make the firm price competitive

 It may help the firm to increase its total sales turnover
 It is a realistic approach to evaluate an export order, when there is
idle capacity
Disadvantages –
 It is normally advisable only when idle capacity with no
opportunity cost exists
 Once the products are sold at a low price, it will be difficult to
increase it substantially later
 It has limitations in applying to export-oriented units
i. Transfer Pricing –
Transfer pricing is more appropriate to those organisations with
decentralized profit centres. Transfer pricing is used to motivate profit
center managers, provide divisional flexibility and also further corporate
profit goals. Across national boundaries the system gets complicated by
taxes, joint ventures, attitudes of governments and so on. There are four
basic approaches to transfer pricing.
• Transfer at cost: few practice this, which recognizes foreign
affiliates contribute to profitability by operating domestic scale
economies. Prices may be unrealistic so this method is seldom
used. Otherwise it is basically used for increasing corporate
profitability.
• Transfer at direct cost plus overheads and margin. Similar to
that in transfer at cost. Profits are show at every stage.
• Transfer at a price derived from end market prices: very useful
strategy in which market based transfer prices and foreign sourcing
are used as devices to enter markets too small for supporting local
manufacturers. This gives a valuable foothold. Prices are required
to be competitive in the international market.
• Transfer at an "arm's length": this is the price that would have
been reached by unrelatedparties in a similar transaction. The
problem is identifying a point "arm's length" price for all products
other than commodities. Pricing at "arm's length" for differentiated
VEDA TUTORIALS 77
products results not in a specific price but prices, which fall in a

pre-determinable range.
j. Dumping –
It is the sale of an imported good or product at a price lower than
normally charged indomestic market or country of origin than the
country of sale. It is usually done by organizations to capture the market
share. There are anti-dumping legislations used by the government to
protect local industries since it affects development of local economy, as
it cannot be predicted. To be convicted, both price discrimination and
injury must be proved.
Elements of Costs
I. Export Price Based on Marginal Costs –
a. Direct Costs –
Variable costs
o Direct material
o Direct Labour
o Variable Production Overheads
o Variable Administrative Overheads
b. Other Costs Directly Related to Exports –
Selling costs – advertising support to importers abroad
Special packing, labelling etc.
Commission to Overseas Agent
Export Credit Insurance
Bank Charges
Inland Freight
Forwarding Charges
Inland Insurance
Port Charges
Export Duties, if any,
Warehousing at Port, if required
Documentation & Incidentals
Interest on funds involved / cost of deferred credit
Cost of after-sales service including free parts supply
VEDA TUTORIALS 78
Consular fees
Pre-shipment inspection & loss on rejects
 Total Direct Costs -
Less: Duty Drawback & benefits from sale of import
licenses, if any,
Direct Cost = F.O.B. price at marginal cost
Freight (Volume or weight whichever is higher)
Insurance (C.I.F. price based on marginal costs)
II. Export Price Based on Full Costs –

 Direct costs
 Fixed Costs / Common Costs
Production Overheads
Administrative Overheads
Publicity & Advertising (general)
F.O.B. Price (based on full costs)
 Freight (Volume or weight whichever is higher)
 Insurance C.I.F. Price (Based on full cost)
Factors Influencing Pricing Policy

 Costs –
The fixed & variable cost of production & transportation & marketing
costs influence the pricing policy. Although, in the short-run in certain
situations the export price may be lower than the full costs, in the long-
run a firm which exports a substantial share of its production is normally
expected to cover full costs.
 Competition –
A monopolistic normally has high degree of freedom in pricing. That is
why patented products could be sold at high prices. The more severe the
competition, the lower the pricing freedom.
 Product Differentiation –
If the company`s product is highly differentiated, or, if the product has
some strong unique features the company will have more freedom to
manipulate the price.
VEDA TUTORIALS 79
 Exchange rate –
The exchange rate of the currency may also influence pricing. For
example, if the rupee is depreciating, the Indian exporters would be
constrained to quote high dollar prices because an appreciation of the
rupee means a fall in the rupee realization for every dollar earned by
exporters.
 Image –
The price may also depend upon the image of the company & the
country. It may be easier for a well- reputed firm to change a higher
price than others. Pricing freedom also depends on the image abroad of
the country.
 Government Factors –
Export pricing is sometimes influenced by government policies &
regulations. The government influence on export pricing may take any
one or more of the following forms –
a. Regulations of Margins –
Sometimes the government may dictate the margins or mark ups by the
producers or distributors. The marketers, thus, lose, by & large, the
freedom in pricing.
b. Price floors & ceiling –
There are number of cases in different countries involving price floor &
ceilings. When there are such regulations, the prices shall not fall below
the floor price or shall not exceed the price ceiling, as the case may be.
c. Subsidies –
With a view to make exports price competitive, government sometimes
grant subsidies. A subsidy enables the seller to reduce his price to extent
of the subsidy without incurring any loss.
d. Tax Concessions & Exemptions –
In countries like India, the export sector enjoys certain tax benefits
which help to quote a lower price for exports.
e. Other incentives –
A number of other incentives & assistances like cheap credit, supply of
raw materials etc. at regulated prices, marketing assistances etc. may
also influence export prices.
f. Government Competition –
VEDA TUTORIALS 80
Government may compete directly in the market to control prices.

g. Taxes –
Taxes like custom duties, also influence export pricing. Government
often impose countervailing import duties to combat dumping, export
subsidy etc.
h. International Agreements –
International prices of certain commodities are sought to be controlled
by means of international commodity agreements like quotas
agreements, buffer stock agreements & bilateral/multilateral contracts.
Export Pricing Strategies

 Skimming Price strategy –
Skimming price strategy is strategy in which the manufacturer charges a
veryhigh price in the initial stage of the PLC from the consumers. The
exporter has also to incur very high promotional expenses since the
product the newly introduced in the market. In this strategy, the exporter
keeps his profit margin very high. This type of strategy is used in case of
fashionable and novelty items, perishable items and consumer durables
which are introduced for the first time in the market. This type of
strategy is particularly useful if the exporter enters in the international
market for a short term and his main motive is profit maximization. It is
not possible for any exporter to follow this export pricing strategy for a
long time. It is used to match the demand and supply of early adopters
and reinforce customer’s perception of high value products.
Types of Skimming Price Strategy –
a. Rapid Skimming Price – where high prices are charged & the
product is promoted with heavy promotional expenditure
b. Slow Skimming Price –where high prices are charged & there is
limited promotional effort to promote the product.
•
• Penetration Price strategy –
In this type of pricing strategy, the exporter charges a lower price in
theinitial stages since the main objective of the exporter is to capture a
large market share and create brand loyalty among the consumers. In the
later stages, the exporter raises the prices of the product and recovers the
VEDA TUTORIALS 81
losses suffered in the initial period. This pricing strategy can be followed
in case of products where the exporter is assured of large market and
continuous sale. It is used by organizations who have non differentiated
products or have large marketing systems in place.
Types of Penetration Price Strategy –
a. Rapid Penetration Price Strategy – where low prices are charged
& the product is promoted with heavy promotional expenditure
b. Slow Penetration Price Strategy – where low price is charged &
there is limited promotional expenditure to promote the product.
•
• Flexible Pricing Strategy –
In this strategy, different prices are charged for the same product to
different consumers.
• Trail Pricing –
This strategy is followed at the launch of a new product, under this
strategy, low prices are fixed for a limited period, in order to get
consumer acceptance. This strategy is alternate to giving away samples.
 Differential Pricing Strategy –
This strategy refers to charging different prices for different markets
depending upon the various factors prevailing in these markets. The
exporters may charge different prices for domestic market & for
overseas market due to various factors like documentations, tariffs,
competition, buying behavior, etc.
• Transfer Pricing Strategy –
It refers to pricing of goods transferred by one subsidiary to another
within the corporation. Due to this, profits of the subsidiary are
transferred to another or to parent company.
• Standard Export Pricing Strategy –
In this the exporter may charge the same price for all export markets.
• Follow the Leader Pricing Strategy –
This policy refers to fixing the price very close to the price charged by
the leader.
• Probe the Reaction Pricing Strategy –
This refers to charging higher price in the exporters market to the probe
reactions of the consumers. The price is adjusted based on the consumer
VEDA TUTORIALS 82
reactions.
• Differential Trade Margins Pricing Strategy –
In this the exporters gives different types of discounts or trade margins,
• Escalation Pricing Strategy –
Export prices are generally much higher than the prices prevailing in the
domestic
• market for the dame product.
Break-even Price (BEP)

A firm's break‐even point occurs when at a point where total revenue
equals total costs.
Break‐even analysis depends on the following variables:
 Selling Price per Unit: The amount of money charged to the
customer for each unit of a product or service.
 Total Fixed Costs: The sum of all costs required to produce the
first unit of a product. This amount does not vary as production
increases or decreases, until new capital expenditures are needed.
 Variable Unit Cost: Costs that vary directly with the production
of one additional unit.
 Total Variable Cost The product of expected unit sales and
variable unit cost, i.e., expected unit sales times the variable unit
cost.
 Forecasted Net Profit: Total revenue minus total cost. Enter Zero
(0) if you wish to find out the number of units that must be sold in
order to produce a profit of zero (but will recover all associated
costs). Each of these variables is interdependent on the break‐even
point analysis. If any of the variables changes, the results may
change.
 Total Cost: The sum of the fixed cost and total variable cost for
any given level of production, i.e., fixed cost plus total variable
cost.
 Total Revenue: The product of forecasted unit sales and unit
price, i.e., forecasted unit sales time’s unit price.
Number of units that must be sold in order to produce a profit of zero
VEDA TUTORIALS 83
(but willrecover all associated costs). In other words, the break ‐even
point is the point at which your product stops costing you money to
produce
• and sell, and starts to generate a profit for your company.
The graphic method of analysis (below) helps you in understanding the
concept of the break‐even point. However, the break‐even point is found
faster and more accurately with the following formula:
Q = FC / (UP ‐ VC) where:
Q = Break‐even Point, i.e., Units of production (Q),
FC = Fixed Costs,
VC = Variable Costs per Unit
UP = Unit Price
Therefore,
Break‐Even Point Q = Fixed Cost / (Unit Price ‐ Variable Unit Cost)
 Break-even price is the price for a given level of output at which

there is neither any loss nor profit. In other words, if the total costs
of productions & selling a particular quantity of the product are
divided by the quantity, we get the break-even price.
VEDA TUTORIALS 84
 It helps us to understand the minimum sales required to avoid any

loss & also profit or loss or loss of various sales level.
 The difference between the BEP & expected capacity utilization is
the margin of safety.
 Lower the BEP higher is the chance of the project making profits
& lower is the risk of incurring loss.
 If the BEP is very high, the risk will also be very high.
Calculation of BEP
a. In terms of physical units –
The number of units required to be sold to achieve the BEP can be
calculated using the following formula –
BEP = FC / (SP - VC) = FC / C
Where,
FC = Fixed Costs
VC = Variable Costs
SP = Selling Price
C = Contribution per unit.
b. In terms of Sales Volume –

BEP in terms of sales volume can be calculated using the following
formula –
BEP = SP * [FC / (SP – VC)]
c. BEP for Pre-determined Profit

If the firm wants to fix the SP in such a way as to get a certain fixed
amount of total profit for a given volume, for estimating price which will
yield this level of profit, what it has to be is to add this profit figure to
the fixed cost & then calculate the BEP.
BEP = (FC + P + VC / Q)
Value Added Tax (VAT)

VAT is a tax on consumption, it is a multi-point tax. It is levied &
collected at the time of production, at each stage of exchange. Every
seller has to charge VAT at a certain rate, at the time of sale transaction
VEDA TUTORIALS 85
& also account for it to the government. Whenever, transactions take

place, the seller deducts VAT which he had paid at the time of purchase.
Therefore, a seller pays the tax only to the extent of the added value.
VAT is applicable to all goods & services. VAT helps the exporter to
improve its competitive ability. Under VAT goods are exported tax free
because the exporter gets full rebate on VAT paid.
Advantages –
 VAT Applies to all goods & services equally
 VAT affects the price structure to the minimum extent as its rates
are low.
 There is a lesser scope for evasion since a check can be affected at
the point of sale which is invariably the point of purchase of
another dealer.
 VAN can encourage exports. The tax is identifiable & an exporter
can get full rebate on VAT paid. Goods are exported tax free under
VAT.
 VAT levy provides a lot of relevant information on business inputs
& outputs. It imposes an accounting discipline on trade & gives
reliable statistical information.
Modified Value Added Tax (MODVAT)

The MODVAT scheme primarily aims at avoiding the “cascading
effect” of duty-on-duty & at ensuring that duty is paid only on the value
added at each stage of production, instead of on the gross value
including the duty paid in the earlier stages.
Purpose – it was introduced in order to avoid a double taxation on the
inputs & the finished goods.
Preconditions to be fulfilled –
 Final product must be dutiable
 Both final & capital goods must be specified for eligibility under
the Table of Rule 57Q
 Capital goods should be duty paid with an evidence of payment.
Salient Features –
 No prior permission is required, but 57G declaration is must
VEDA TUTORIALS 86
 No need of filling form D-3 for an intimation of receipt of input

 It is available for both basic excise duty & special excise duty
 Removal of inputs for home consumption or export under Rule
57F(3)
 Adjustment of the credit is allowed.
MODVAT has been replaced by CENVAT (Central Value Added
Taxes)
VEDA TUTORIALS 87
CHAPTER 4 – OVERSEAS MARKET SELECTION
Methods of Market Entry

A. Exporting
Exporting is the most traditional and well established form of operating
in foreign markets. Exporting can be defined as the marketing of goods
produced in one country into another.
The advantages of exporting are:
• manufacturing is home based thus, it is less risky than overseas
based
• gives an opportunity to "learn" overseas markets before investing
in bricks and mortar
• reduces the potential risks of operating overseas.
The disadvantage is mainly that one can be at the "mercy" of overseas

agents and so the lack of control has to be weighed against the
advantages. For example, in the exporting of African horticultural
products, the agents and Dutch flower auctions are in a position to
dictate to producers.
Besides exporting, other market entry strategies include licensing, joint
ventures, contract manufacture, ownership and participation in export
processing zones or free trade zones.
The two methods of entry in to foreign markets are Direct & Indirect.
I. Direct Exporting
In direct exporting, manufacturer takes upon himself the task of
managing the export sales. Thus there is more involvement of the
manufacturer in the export business.
In this the manufacturer`s own staff works with more dedication since
their own prosperity depends upon the success of the export effort. The
employees are more knowledgeable about the company specific sales
methods. They can be compensated as per the long-term overall interests
of the whole enterprise.
VEDA TUTORIALS 88
Forms of Direct Exporting

a. Built-in Export Department –
This is the least expensive methods & the simplest. There is an export
manager helped by a few clerks. The export managers is mainly
responsible for getting orders. After the orders is received, the remaining
work involved in fulfilling it, is handled by other regular departments.
b. Self-contained Export Departments –
It has its own staff. It can function independently & there is no friction
with other departments of the company.
c. Separate Export Company –
If the business grown satisfactorily the firm may decide to have a
separate company to handle export business. This will make it possible
to have a unified control over export business. It is also possible to
calculate the costs & profits of the export operations more precisely. The
export company can a so avail itself easily of the concessional export
financing facilities. They can purchase products from outside & can
handle more complete line of products.
d. Joint Marketing Groups –
A group of companies manufacturing similar or closely related products
may pool their resources & cultivate foreign markets jointly. They may
co-operate first by participating together in overseas trade fair & shoring
the expenses or by publishing jointly a catalogue of products
&distributing it abroad. Or they may share an agent in one or in several
areas. This co-operation can be completely informal &adhoc. Later, a
joint enterprise formally organized can be set up. The group can assist in
solving production problems, in quality control & in product adaptation.
It can mount an intensive advertising & sales promotion campaign in
chosen market abroad. It can employ first class agents.
Merits of Direct Exporting

 The manufacturer is in a position to get better knowledge of the
buyer requirements & can adapt his product accordingly.
 He has complete control over the prices charged for his product.
 He can take care of the after-sales service requirements in a much
VEDA TUTORIALS 89
better way
 Intensive cultivation of the market is made possible
 The chain of distribution is shortened leading to lower price for
ultimate consumers
 If his product is successful in foreign market, he builds up name,
reputation & goodwill
 By exporting directly, manufacturer gets greater expertise in
international marketing
 Information on marketing opportunities & trends is made
available, competitors observed, product acceptance, evaluated &
other invaluable intelligence collected.
Demerits of Direct Exporting

 As manufacturer has to invest in manufacturing activities &
marketing activities he requires more investments.
 Direct or manufacturer exporter is exposed to more risks. He has to
bear all manufacturing & marketing risks.
 Direct exporter has to look after manufacturing & marketing
activities. Thus, direct exporter, finds it difficult to concentrate on
either of the areas, leading to lack of specialization in those
activities.
 At times, direct exporting is expensive, as manufacturer has to bear
the production overheads & marketing or distribution overheads.
The direct exporters may not be in a position to enjoy the
economies of distribution.
 Small manufacturers may find it difficult to undertake direct
exporting due to limited exporting.
 In direct exporting, manufacturer has to directly contact the
overseas buyers & negotiate all aspects of the deal. This task is
difficult, especially when the exporter does not have sufficient
background information about the buyers.
 In direct exporting, manufacturer has to master aspects such as
technical aspects of documents, foreign shipping, financing,
language etc. In case of direct exporting, all such technical details
VEDA TUTORIALS 90
are looked after by the middlemen.
II. Indirect Exporting

Indirect way of exporting is almost equivalent to domestic sales. The
company will sell its product in its own country to another party which
will take the responsibility of actual transportation. This can be done in
three ways –
a. Selling to a Merchant Exporter or Export House in India –
Merchant exporter is free to decide what he will buy, where he will buy
& at what price. Merchant exporters are usually well financed &
maintain their branches at port towns & in important centres abroad.
They usually have a system of gathering market information & keep
close watch on market trends. The nature of their business makes it
possible for them to assess marketability of products & prospects of their
success. They often specialize in certain commodities or in certain areas.
This method of exportation is useful, when the company is small &
therefore, not in position to start export department to look after export
sales.
b. Selling to Visiting / Resident Buyers –
Many big foreign companies have their resident buying representatives
in India & other countries who are entrusted with the job of
procurement. Some other companies regularly send buying terms for the
same purpose. The amount of business that is conducted by such buying
operations is substantial. The manufacturer is to burdened with the
problem of actual exportation. Buyers often co-operate with producers in
developing countries to adapt products.
c. Selling through Overseas Import Houses –
The existence of large import houses in some countries allows an
alternative form of entering such markets. Selling through trading
houses automatically ensures that the goods will reach the important
distributors & through them down the distribution system. Due to
complicated distribution system, smaller companies & bigger companies
have started export marketing through trading houses.
VEDA TUTORIALS 91
Merits of Indirect Exporting

 The merchant exporter takes care of all the botheration involved &
assumes all sales & credit risks
 Export merchants usually pay manufacturers against purchase of
their goods, hence their capital is not tied up.
 Firm does not have to spend money on market research or on
setting up branches abroad.
 As they are frequently approached by buyers from abroad, demand
is concentrated upon them. Thus, merchant exporter may provide
sales opportunities in otherwise out of the way markets
 Manufacturer is free to concentrate on production.
Demerits of Indirect Exporting

 There is not publicity about brand name & the seller does not enjoy
any goodwill.
 This method is inappropriate in case of products which are either
highly specialized or custom built.
 Merchant exporter`s profit or commission paid to export brokers
increases the cost to ultimate user & reduces the return to
manufacturers.
 Export merchant may not be available for all markets
 Export merchants may concentrate on products which offer them
the greatest profit. Small manufacturer’s products may be ignored.
Direct Exporting Indirect Exporting

Meaning Exporting firm Exporting firm
exports goods through exports its products
its agents or by through
opening branches in intermediaries.
the target markets.
Risks More risks as the Less risks as
exporter has to bear manufacturer has to
production & bear only the
marketing risks production risks
VEDA TUTORIALS 92
Investments Requires more Less investment is

investment for required by the
manufacturing & manufacturer only for
distribution manufacturing
Reputations Generate goodwill in May not generate
foreign markets goodwill in foreign
markets. Reputation is
earned by
intermediaries.
Incentives Can claim different May not be able to
incentives offered by claim export
the government incentives unless
export documents are
in his name.
Control Exporter has direct Manufacturer has no
control over direct control over
packaging, pricing, packaging, pricing,
promotion etc. promotion etc.
Overheads Exporter has to bear Manufacturer has to
production & bear only production
distribution overheads overheads
First Hand Manufacturer exporter Manufacturer exporter
Information gets firsthand may not get firsthand
information, on the information since he
importers has to depend on
requirements. intermediaries.
Specialization It lacks specialization Manufacturer can
since t requires specialize only on
concentration on both manufacturing.
production &
distribution
Suitable It is more suitable & It is more suitable &
feasible for large- feasible for small-
scale exporters scale exporters
VEDA TUTORIALS 93
Prices Exports can fetch high Exports can fetch low

prices if sold directly prices due to
by manufacturers intermediaries
margins.
B. Licensing
Licensing is defined as "the method of foreign operation whereby a firm
in one country agreesto permit a company in another country to use the
manufacturing, processing, trademark, know‐how or some other skill
provided by the licensor".
It is quite similar to the "franchise" operation. Coca Cola is an excellent
example of licensing. In Zimbabwe, United Bottlers have the license to
make Coke.
Licensing involves little expense and involvement. The only cost is
signing the agreement and policing its implementation.
Advantages –
 Good way to start in foreign operations and open the door to low
risk manufacturing relationships
 Linkage of parent and receiving partner interests means both get
most out of marketing effort not tied up in foreign operation and
 Options to buy into partner exist or provision to take royalties in
stock.
 Licensing mode carriers’ low financial risk of the licensor.
 Licensor can investigate the foreign market without much efforts
on his part
 Licensee gets the benefits with less investment on R&D
 Licensee escapes himself from the risk of product failure.
Disadvantages –
 Limited form of participation ‐ to length of agreement, specific
product, process or trademark
 Potential returns from marketing and manufacturing may be lost
 Partner develops know‐how and so license is short
VEDA TUTORIALS 94
 Licensees become competitors ‐ overcome by having cross

technology transfer deals and
 Requires considerable fact finding, planning, investigation and
interpretation.
 Both parties have the responsibility to maintain the product quality
& promoting the product.
 Costly & tedious litigation may crop up & may hurt both the
parties & the market
 There is scope for misunderstanding between parties despite the
effectiveness of the agreement
 The problem of leakage in the trade secrets of the licensor
 Licensee may sell the product outside the agreed territory & after
the expiry of the contract.
 Those who decide to license ought to keep the options open for
extending market participation. This can be done through joint
ventures with the licensee.
C. Franchising
It is a form in which a parent company (the franchiser) grants another
independent entity (the franchisee) the right to do business in a
prescribed manner. The right can take form of selling the franchisor`s
products “using its name, production, marketing techniques or general
business approach.”
Advantages –
 Franchisor can enter global market with low investment & low
risks
 Franchisor can get the information regarding the markets, culture,
customs & environment of the host country
 Franchisor learns more lessons from the experiences of the
franchisees which he could not experience from the home
country`s market.
 Franchisee can also start a business with low risk as he selects an
established & proven product & operating system
 Franchisee gets the benefits of R&D with low cost
 Franchisee escapes from the risk of product failure.
Disadvantages –
 International franchising may be more complicated than domestic
franchising
 It is difficult to control the international franchisee
 Franchising agents reduce the market opportunities for both the
VEDA TUTORIALS 95
franchisor & franchisee

 Both the parties have the responsibilities to main product quality &
product promotion
 There is a problem of leakage of trade secrets
 There is a scope for misunderstanding between parties.
D. Joint ventures
Joint ventures can be defined as "an enterprise in which two or more
investors share ownership and control over property rights and
operation".
Joint ventures are a more extensive form of participation than either
exporting or licensing. In Zimbabwe, Olivine industries has a joint
venture agreement with HJ Heinz in food processing.
Advantages –
 Sharing of risk and ability to combine the local in‐depth
knowledge with a foreign partner with know‐how in technology or
process
 Joint financial strength
 May be only means of entry and
 May be the source of supply for a third country.
 They spread the risk between or among partners
 They provide synergy due to combined efforts of varied parties
Disadvantages –
 Partners do not have full control of management.
 May be impossible to recover capital if need be.
 Disagreement on third party markets to serve and partners may
have different views on expected benefits.
 If the partners carefully map out in advance what they expect to
achieve and how, then many problems can be overcome.
E. Mergers & Acquisitions (M&A)

It provides instant access to markets & distribution network. As
distribution is one of the most difficult areas in international marketing
VEDA TUTORIALS 96
this is often a very important consideration for M&A.

Advantages –
 Companies immediately get the ownership & control over the
acquired form`s assets, brand name & goodwill.
 The company can formulate international strategy & generate more
revenues
 If the industry already reached the stage of optimum capacity level
or over capacity level in the host country, then their strategy helps
the economy of the host country.
Disadvantages –
 This strategy adds no capacity to the industry
 Acquiring a firm in foreign country is a complex task
 Sometime, host country imposed restrictions on acquisition of
local companies by foreign companies
 Labour problems of the host country`s company are also
transferred to the acquired company.
F. Greenfield Strategy
It refers to starting with a plain green site & building on it i.e. starting
the operations of a company from scratch in a foreign markets. The
company conduct survey, selects the location, buys & / or leases land,
creates the new facilities, erects the machinery, remits or transfers the
human resources & starts the operations & marketing activities.
Advantages –
 Company selects the best location from all viewpoints
 The company can avail the incentives, rebates & concessions
offered by the host government including local governments.
 The company can have latest models of building, machinery &
equipment technology
 The company can also have its own policies & styles of HRM
Disadvantages –
 This strategy result, in a longer gestation period as the successful
VEDA TUTORIALS 97
implementation takes time & patience

 Some companies may not get the land in the location of its choice
 The company has to follow the rules 7 regulations imposed by the
host country`s Government in case of construction of the factory`s
buildings
 Host country`s Government may impose conditions that the
company should recruit local people & train them, if necessary, to
meet the company`s requirements.
G. Foreign Direct Investment (FDI)

Advantages –
 Growth in economy due to new infrastructure & developing
banking sector
 Creation of new jobs opportunities
 Concept of contract farming will take place causing benefits to
farmers
 Consumers will get good quality of products at low prices
 FDI will assure operations in production cycle & distribution
leading to cheaper production facilities
 FDI will allow transfer of skills & technology from abroad leading
to increased efficiencies
 FDI will render necessary capital for establishing organized retail
chain stores leading to long-term cash liquidity
 FDI will create better SCM in Indian market
 Providing better value to the end consumers
 Investments & improvements in the supply chain & warehousing
 Franchising options to the local entrepreneurs
 Improvement in the IT in retail
Disadvantages –
 Entry of FDI will create a major impact on organized &
unorganized domestic players
VEDA TUTORIALS 98
 FDI will drain out country`s share of revenue to foreign countries

 Unorganized sector will also have to lower the prices of products
& services leading to a negative effect on their productivity.
 Limited employment generation
 Fears that domestic organized sector might not be competitive
enough to tackle international players might not only result in loss
of market share for them in closure of their units.
 Supermarkets will establish their monopoly in the Indian market
 Increase in real estate prices
Selecting Potential Markets

Factors affecting selection of markets (determinants of market selection)
 Firm Related Factors
o Export Objectives – A firm where export objective is to sell
out a marginal surplus will select a foreign market suited to
serve this purpose. Another firm with the same product,
which wants to export a very quantity, forming a very
significant share of its total output, may have different
considerations than the first firm in market selection. In case
of second firm, as total quantity involved is large & as it
forms a significant share of its total output market
diversification would be important to minimize the risk, if we
think of a third firm which also wants to export the same
product, but which wants to export several other products
also, market(s) which it selects may perhaps be different
from what the first two firms have chosen; it would give
more importance to total exports of all the products than
those of any single product.
o Planned Business Strategy – it may also influence market
selection. A company has plans for large expansion of
foreign business may chose a market, to start with, which can
serve as a hub of international business.
o International Orientation - it may also influence market
VEDA TUTORIALS 99
selection.
o Company Resources –it comprises of financial, human,
technological & managerial factor is very important
determinant.
o Dynamism & philosophy of top management & internal
power relations may also influence the market selection
decisions.
 Market Related Factors
o General Factors
 Economic Factors –it includes factors like economic
stability, GDP growth trends, income distribution, PCI,
sectoral distribution of GDP & trends, nature of &
trends in foreign trade & BOP, etc.
 Economic Policy –it includes industrial policy, foreign
investment policy, commercial policy, fiscal policy,
monetary policy & other economic policies.
 Business Regulations –it includes industrial licensing,
restrictions on growth, takeovers, mergers etc.
restrictions on foreign remittances, repatriations etc. tax
laws, import restrictions & local content stipulations,
etc.
 Currency Stability –stability of national currency is
another important consideration in market selection.
 Political Factors –character of political system,
government system etc. political stability are import
determinants of market selections.
 Ethnic Factors –
 Infrastructure –
 Bureaucracy & Procedures –
 Market Hub –
o Specific Factors
 Trends in domestic production & consumption &
estimates for the future of the product(s) concerned.
10
VEDA TUTORIALS
0
 Trends in imports & exports & estimates for the future

 Nature of competition
 Government policy / regulations
 Infrastructure relevant to the industry
 Supply conditions of raw materials & other inputs
 Trade practices & customs
 Cultural factors & consumer characteristics
Constraints in Entering in some Global Territories / Global Markets

 Embargo on export –there may be embargo imposed by the
Government of India on export to some countries.
 Prohibited or restricted for exports – there are restrictions &
prohibitions on exports of some commodities to some countries.
 Incompatibility of Technical Standards – it may eliminate some
markets.
 High Product Adaption – in some cases, the cost of product
adaption may be so high that an exporter may not be able to afford
it
 Embargo on Import –in some cases, importing countries impose
embargoes or quotas on imports of certain specific products.
 Tariff Barriers –there may be formidable tariff barriers which may
make the product very costly to consumers in the countries
concerned.
 Non-tariff Barriers –there may be many non-tariff barriers which
may make the export of some commodities to some countries
almost impossible.
 Strong Competition –where the competition is severe it may not be
easy to enter the market or it may not be profitable to sell the
product is such markets without much costs.
 Too much promotional expenditure –in case of technical
sophisticated products, too much money may have to be spent on
preparing sales literature & catalogues in many languages.
10
VEDA TUTORIALS
1
 Foreign exchange shortage –acute shortage of foreign exchange in

importing countries may lead to uncertainity of payment. In fact,
evaluation of the ability of the importing country to pay for the
product should be important consideration in the selection of
markets.
Globalization of Indian Business

Globalization, liberalization and privatization were the three
cornerstones of India’s New Economic Policy of 1991. The year 1991
marks the beginning of a new era in the Indian economy. The new
objective to be pursued by the policy makers, strategists and executives
was to make India the largest free market economy of the 21 st century. In
pursuit of this objective, the Indian economy was to be integrated with
the world economy through a programme of structural adjustment and
stabilization. While the stabilization programme included inflation
control, fiscal adjustment and BOP adjustment, the structural reforms
included trade and capital flows reforms, industrial deregulation,
disinvestment and public enterprise reforms and financial sector reforms.
The programme of economic reforms has not been entirely successful
and as a result, the globalization process of the Indian economy has not
gathered momentum. Indian business continues to face a number of
difficulties and obstacles in their effort to globalize their business. These
obstacles are as follows:
• Government policy and procedures:

Government policy and procedures in India are extremely complex and
confusing. Swift and efficient action is a pre‐requisite for globalization ‐
which sadly missing. The procedures and practice continue to be
bureaucratic and hence a speed breaker in the globalization effort.
• High cost of inputs and infrasructural facilities:
The cost of raw materials, intermediate goods, power, finance,
infrastructural facilities etc. in India is high which reduces the global
competitiveness of Indian business. The quality and adequacy of
infrastructural facilities in India is far from satisfactory. Further the
technology employed by Indian industries and the style of operation is
10
VEDA TUTORIALS
2
generally out dated.

• Resistance to change:
The pre‐reform era (1951‐ 1991) breeded lethargy, created rigid
structures, systems, practices and procedures and generally instilled a
laid back attitude. These factors are a hindrance to the processes of
modernization, rationalization and efficiency improvement.
Technological change is generally perceived to be employment reducing
and hence resisted to the extent possible. For instance, information
technology was introduced in India in the early eighties. However,
computerization process of nationalized banks began only in the mid
nineties. Excess labour is particularly employed in the public sectors in
areas such as banking, insurance, and the railways and Indian industry in
general. As a result, labour productivity is low and cheap labour in many
a cases turns out to be dear.
• Small size and poor image:
Grant Indian firms are known to be global pygmies. A look at the
fortune 500 list would reveal all to you. On a global scale, Indian firms
are found to be small in size with low availability of resources. Indian
firms there for cannot compete successfully in the international market.
Indian products suffer from a poor image in the international market for
both reasons valid and otherwise. Indian firms continue to miss
consumer focus both domestically and internationally. The value‐money
equilibrium is missing in Indian products. Further, Indian firms are do
not have the where‐ withal to keep up to the delivery schedule, accepts
large orders and match up to international specifications.
• Growing competition and poor r & d spend:
Indian firms are not only up and against competition from developed
countries but also emerging Asian powerhouses such as South Korea
and China. Continuous improvement in quality and usefulness and
competitive costs with competitive pricing can only keep you afloat and
in order to remain afloat, one has to spend quite a lot on R & D. both
public and private sector outlays on research in India is deliberately low
when compared to the developed countries.
10
VEDA TUTORIALS
3
ADVANTAGES OF GLOBALISATION:
• For successful globalization, countries need to chalk out strategies
and policies to open up the doors for the inflows of foreign direct
investment (FDI). The FDI by the MNCs brings with it flow of
foreign exchange/ foreign capital, inflow of technology, real
capital goods, managerial and technical skills and know‐ how.
Globalization can easily promote exports of the country by
exploiting its export potentials in a right way. Globalization can be
the engine of growth by facilitating export‐ led growth strategy of
developing country. ASEAN countries such as Indonesia, Malaysia
and Thailand have demonstrated their success of export‐ led
growth strategy supported by the FDI under globalization
approach.
• Globalization can provide sophisticated job opportunities to the
qualified people and check ‘brain drain’ in a country. Globalization
would provide varieties of products to consumers at a cheaper rate
when they are domestically produced rather than imported. This
would help in improving the economic welfare of the consumer
class.
• Under globalization, the rising inflow of capital would bring
foreign exchange into the country. Consequently, the exchange
reserve and balance of payments position of the country can
improve. This also helps in stabilizing the external value of the
country’s currency.
• Under global finance, companies can meet their financial
requirements easily. Global banking sector would facilitate e
banking and e‐business. This would integrate countries economy
globally and its prosperity would be enhanced.
DISADVANTAGES OF GLOBALIZATION
• Globalization is never accepted as unmixed blending. Critics have
pessimistic views about its ill‐ consequences.
• When a country is opened up and its market economy and financial
sectors are well liberalized, its domestic economy may suffer
owing to foreign economic invasion.
10
VEDA TUTORIALS
4
• A developing economy hen lacks sufficient maturity; globalization

may have adverse effect on its growth.
• Globalization may kill domestic industries when they fail to
improve and compete with foreign well‐ managed, well‐established
firms.
• Globalization may result into economic imperialism.
• Unguarded openness may become a playground for speculators.
Currency speculation and speculators attacks, as happened in case
of Indonesia, Malaysia, Philippines, Thailand, etc. recently, may
lead to economic crisis. It may lead to unemployment, poverty and
growing economic inequalities.
10
VEDA TUTORIALS
5

Chapter 1 - Introduction: International Marketing

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 1 - Introduction: International Marketing

Uploaded by

Copyright:

Available Formats

INTERNATIONAL MARKETING

International marketing is the performance of business activities

 To facilitate & encourage social & culture exchanges among

exporting company`s knowhow, viz. patents, processes or trademarks

unpopular or market may come down quickly. The sale at the

International marketing helps in optimum use of resources. Surplus

 Build cultural relations

no compromise situation, which affects international business.

• Tariffs, Quotas and Trade Barriers :

• Bureaucratic Practices of Government :

However, the benefits of international business outweigh the problems.

Distinguish between Domestic Marketing & International

from domestic form the other

Realization of Sales No time limit for In India, international

Basis of International Trade

A number of theories have been developed to explain the basis for

 Theory of comparative advantage

advantage principle can be illustrated using Tables 3 and 4.

Wheat (units) Cloth (units)

In Table 3, Australia has an absolute advantage in the production of

Country 1 unit of wheat 1 unit of cloth

Australia 0.5 (10/20) units of cloth 2(20/10) units of wheat

China 1 (5/5) units of cloth 1(5/5) units of wheat

it has to give up only 1 unit of wheat to produce an extra unit of

International Business Environment

INTERNAL AND EXTERNAL INTERNATIONAL MKTG

Economical, Political and Technological)

• The size of refrigerators in USA is very big compared

keep up with technological changes, soon find their products outdated.

Stages of International Marketing

 Infrequent Foreign Marketing

 Regular Foreign Marketing

 International Marketing / Multinational Marketing

International Business Approach

destined for some other country.

b. On the basis of quantification of the tariff:

c. On the basis of application between different countries:

d. On the basis of purpose they serve

Advantages / Benefits of Tariff Barriers

 Tariffs avoid competition fromforeign manufacturers & this may

II. Non-Tariff Barriers

Types of Non-Tariff Barriers

Additional imports beyond the specified quantity are

d. Preferential Arrangements through trading blocs:

Customs regulations & administrative regulations are very complicated

g. Foreign Exchange Regulations:

h. Prior Import Deposits:

Effects of Barriers on International Trade

produced goods, it amounts to redistribution of income between the

II. Effect / Impact of Quotas:

means of license, government may obtain some revenue by charging a

Tariff Barriers Non-Tariff Barriers

Specific Duty Ad-Valorem Duties

Trade blocs are groups of countries that have established special

Objectives of Trading Blocs

trade restrictions for members but also adopt a uniform

Positive & Negative Effects (implications) of Trade Blocs in

 Growth & Development of Region:

Trading blocs bring economic, political & cultural integration of

WTO & Trade Liberalization

commenced on 1 January 1995 under the Marrakech Agreement, signed

The WTO is attempting to complete negotiations on the Doha