3: Trade Barriers & Modes of Entry

Session # 4
 Topics Covered in Previous Session
• 2.1 Overview of International Theories

• 2.2 Trade Theories

Theory of Absolute Cost Advantage
Theory of Comparative Cost Advantage
Relative factor Endowments/Heckscher-Ohlin theory
Human Critical Approach
Natural Resources Theory
Scale Economies Theory

• 2.3 Trade Barriers

Tariff Barriers
Non Tariff barriers
 2.3 Trade Barriers

Tariff Barriers Non Tariff Barriers

Tariff Barrier is a barrier to trade

between certain countries or
geographical areas which takes the
form of abnormally high taxes levied
by a government on imports for
purposes of protection, support of
the balance of payments, or the
raising of revenue
Tariff Barriers
 Tariff Barriers
• (B) On The Basis Of Quantification of Tariff:
• 1. Specific duty: is a tariff imposed on imports, defined in terms of
specific amount per unit,

• Example: ₹ 500 on each TV set imported.

• 2. Ad valorem Duty: are levied as a fixed percentage of the value of

the commodity
• Example: costly works of art, rare manuscripts, etc.
 Tariff Barriers
• 3. Mixed or Combined or Compound Duty:
• Combined duty when 10% of value (ad valorem) and ₹ 1/- on every
meter of cloth is charged as duty.

• (C) On the basis of purpose they (Tariffs) serve:

• 1. Revenue Tariff
• Example: Luxury Goods

• 2. Protective Tariff
• Example: Recycled Paper Pulp
 Tariff Barriers
• 3. Anti-Dumping Duties

• 4. Countervailing Tariffs or Duties

 Tariff Barriers
• (D) On The Basis Of Trade Relations Between The Importing Country
And Exporting Country:
• 1. Single Column Tariff

• 2. Double Column Tariff

• 3. Triple Column Tariff

 2.3 Trade Barriers

Tariff Barriers Non Tariff Barriers

Quantitative restrictions which

can be imposed in order to
restrict imports from abroad
are called non tariff barriers.
Non tariff barrier are normally
useful for reducing the total
quantity which can be imported
from abroad
 NonTariff
Tariff Barriers
Barriers
• 1. Quota System: (Quantitative Restriction)
• Under quota system, the country fixes in advance the limit of import
quantity of a commodity that would be permitted from various
countries during a given period.
• Types of Quotas:
• (1)Tariff Quota:
• Imports of a commodity up to a specified volume are allowed duty
free or at a special low rate duty.

• Imports in excess of this limit are subject to a higher rate of duty.

 NonTariff
Tariff Barriers
Barriers
• (2)Unilateral Quota:
• Country on its own fixes a ceiling on quantity of import of a particular
commodity.

• (3)Bilateral Quota:
• Negotiations are made between the importing countries and a
particular supplier country and the quantity to be imported is decided

• (4) Multilateral Quota:

• Extension of bilateral quota. In this type, a group of countries come
together & fix quotas for exports & imports for each member country.
 NonTariff
Tariff Barriers
Barriers
• Effects of Quotas:
• (1) Reduction of Imports
• (2) Protection to Domestic Industries
• (3) Revenue to Government

• 2. Import Licensing:
• An import license is a document issued by a national government
authorizing the import of certain goods into its territory

• 3. Consular Formalities:
 NonTariff
Tariff Barriers
Barriers
• 4. Preferential Treatment through Trading Blocs:

• 5. Customs Regulations:

• 6. Prior import restrictions:

• Importers are given permission to import goods only after payment of
the deposit.
 NonTariff
Tariff Barriers
Barriers
• 7. State Trading:
• State trading refers to import-export activity by the government

• 8. Foreign Exchange Regulations:

Chapter 3 Modes of Entry
 3.2 Methods/Modes of Market Entry
• (1) EXPORTING:
(A) Direct Exporting
(B) Indirect Exporting
• (2) LICENSING
• (3) FRANCHISING
• (4) CONTRACT MANUFACTURING
• (5) MANAGEMENT CONTRACTING
• (6) JOINT VENTURE
• (7) COLLABORATION
• (8) MERGER &
TAKEOVER/ACQUISITION
• (9) TURNKEY PROJECTS
• (10) FOREIGN DIRECT INVESTMENT
(FDI)
• (11) COUNTERTRADE
 Methods/Modes of Market Entry
• 1. Exporting:
• Exporting is defined as the sale of products and services in foreign
countries that are sourced or made in the home country.
Types of Exporting

Direct Exporting Indirect Exporting

 Methods/Modes of Market Entry
• 2. Licensing:
• Licensing can be used for entry in the foreign market. Here, the
manufacturer (licensor) enters into an agreement with licensee (firm in
the importing country) and this gives him the right to use the
manufacturing process, a patent design or a trademark.

• 3. Franchising:
• Franchising is a form of marketing and distribution in which the owner of
a business system (the franchisor) grants to an individual or group of
individuals (the franchisee) the right to run a business selling a product or
providing a service using the franchisor's business system.
 Methods/Modes of Market Entry
• 4. Contract Manufacturing:
• Contract manufacturing is the organization that is creating or
manufacturing the product for the other company.
• One firm asks another company located in a different country to
manufacture its products.
• It also mentions strict guidelines for testing and inspection of the goods,
modifications to orders, compensation, and guarantees in case of breach
of contract.
• Example: Nike use contract manufacturers in South East Asia to produce
their sporting goods.
 Methods/Modes of Market Entry
• 5. Management Contract:
• A management contract is an arrangement under which operational
control of an enterprise is vested by contract in a separate enterprise that
performs the necessary managerial functions in return for a fee. ...

• Management contracts are often formed where there is a lack of local

skills to run a project.
 Methods/Modes of Market Entry
• Functions:
• Technical operations such as production of products
• Management of human resources, including training of personnel
• Financial management of the organization such as accounting
• Marketing services, including promotions
 Methods/Modes of Market Entry
• 6. Joint Ventures:
• A joint venture involves two or more businesses pooling their resources
and expertise to achieve a particular goal. The risks and rewards of the
enterprise are also shared.

• Bayer Zydus Pharma JV with Cadila Healthcare Ltd.

• Example: Vedanta-Foxconn
• https://timesofindia.indiatimes.com/business/india-business/vedanta-fox
conn-to-jointly-invest-rs-1-5-lakh-crore-in-gujarat/articleshow/94176327.
cms#:~:text=GANDHINAGAR%3A%20Oil%20%26%20Gas%20and%20Met
als,1.5%20lakh%20crore)%20in%20Gujarat
.
 Methods/Modes of Market Entry
• 7. Collaboration:
• Collaboration is an agreement between two companies from two
different countries for mutual help, cooperation and sharing the profits
• Nike and Apple have entered into a Collaboration, with the intent to have
a Nike+ footwear in which the iPod can be connected with these shoes
that will play music along with the display of information about time,
distance covered, calories burned and heart pace on the screen.
• Johnson & Johnson, a health care company, have joined hands with
Google, with an objective of having a robotic-assisted surgical platform.
That will help in the integration of advanced technologies, thereby
improving the healthcare services.
 Methods/Modes of Market Entry
• 8. Mergers & Acquisitions:
• In merger, two companies come together but only one company survives
and the other goes out of existence.

• This means the merging company goes out of existence but the merged
company operates with its original name.

• In takeover/acquisition, one company (acquirer) gets control over the

other company (acquired).
 Methods/Modes of Market Entry
• 9. Turnkey Projects:
• A Turnkey project is a contract under which a firm agrees to fully design,
construct & equip a manufacturing/business/service facility & turn the
project over to the purchaser when it is ready for operation for
remuneration. It includes project like nuclear power points, airports,
national highway, etc.

• A recent approach to turnkey projects is Build, Operate & Transfer (B-O-

T). the company builds the manufacturing facility, operates it for some
time & then transfers it to the host country’s government.
 Methods/Modes of Market Entry
• 10. Foreign Direct Investment:
• A foreign direct investment (FDI) is an investment made by a firm or
individual in one country into business interests located in another country.

• For instance, An Entrepreneur from the US has $1 million and wants to start
a new company in Germany.
• He invests this, creating a new clothing manufacturing firm in the country.
This would classify as a FDI.
 Methods/Modes of Market Entry
• 11. Countertrade is a system of international trading that helps governments
reduce imbalances in trade between them and other countries. It involves
the direct or indirect exchange of goods for other goods instead of currency.

• This system can be typified as simple bartering, switch trading, counter

purchase, buyback, or offset.
 1 2
If Country B Country C
does not will pay USD
have money 2 million to
to pay Country A
 Methods/Modes of Market Entry
• Counter purchase:
• Where companies trade goods and services for other goods and services

• A supplier sells a facility or product at a set price and orders unrelated or

non-resultant products to offset the cost to the initial buyer.
 Joint effort to import palm oil worth
$1 billion from Malaysia.

Largest power generation equipment

manufacturer in India.

BHEL wanted to secure additional

overseas orders

In return for setting up a hydropower

Malaysia project in that nation.
 Methods/Modes of Market Entry
• Buyback:
• A buyback occurs when a firm builds a manufacturing facility in a country—
or supplies technology, equipment, training, or other services to the country
and agrees to take a certain percentage of the plant's output as partial
payment for the contract.

• Company A builds a salt processing plant in Country B, providing capital

to this developing nation.

• In return, Country B pays Company A with salt from the plant.

 Methods/Modes of Market Entry
• Offset agreement:
• An offset is a countertrade agreement in which a company offsets a hard
currency purchase of an unspecified product from that nation in the
future.

• Company A and Country B enter a contract where Company A agrees to

buy sugar from Country B to manufacture candy. Country B then buys
that candy.