Module in International Marketing | 1

PREFACE

Whether or not a company wants to participate directly in international business, it

cannot escape the ever-increasing competition from international firms. The
globalization of the marketplace is already a reality, but it led us to some
misunderstandings. The concept of the global market, or global marketing, thus
needs some clarification.

Generally, the concept views the world as one market and is based on identifying
and targeting cross-cultural similarities. The global marketing concept is based on
the premise of cultural differences and is guided by the belief that each foreign
market requires its own culturally adapted marketing strategies.

As global economic growth occurs, understanding marketing in all cultures is

increasingly important. This course addresses global issues and describes concepts
relevant to all international marketers, regardless of the extent of their international
involvement. Emphasis is on the strategic implications of competition in the
markets of different countries. An environmental/cultural approach to international
marketing permits a truly global orientation. The reader’s horizons are not limited
to any specific nation or to the particular ways of doing business in a single country.
Instead, in this module it provides an approach and framework for identifying and
analyzing the important cultural and environmental uniqueness of any country or
global region.

The course is designed to stimulate curiosity about management practices of

companies, large and small, seeking market opportunities outside their home
country and to raise the reader’s consciousness about the importance of viewing the
international marketing management strategies from a global perspective.

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Module in International Marketing | 2

 TABLE OF CONTENTS

PAGE
Preface 2

UNIT I
GLOBAL DIMENSIONS OF MARKETING 5
Learning Objectives 5
Setting Up 5
Lesson Proper 6
Introduction of the Course 6
The Global Marketplace 7
Developing Foreign Markets 14
References 16
Assessing Learning 17

UNIT II
ENVIRONMENT FOR INTERNATIONAL MARKETING 20
Learning Objectives 20
Setting Up 20
Lesson Proper 21
Main Components of International Marketing
21
Environment
Micro Environment 22
Macro Environment 24
Importance of International Marketing Environment 30
References 31
Assessing Learning 31

UNIT III
MARKET SEGMENTATION 34
Learning Objectives 34
Setting Up 34
Lesson Proper 35
Approaches to Global Segmentation 35
Market Segmentation 38
References 42
Assessing Learning 42

UNIT IV
THE FIRM’S OPERATING DECISIONS 45
Learning Objectives 45

Module in International Marketing | 3

 Setting Up 45
Lesson Proper 46
Product Development 46
Packaging 48
Distribution 49
Pricing 51
Promotion and Communication 53
References 54
Assessing Learning 54

UNIT V
EXPORT FINANCING 56
Learning Objectives 56
Setting Up 56
Lesson Proper 57
Pre-shipment Finance 57
Post-shipment Finance 62
References 65
Assessing Learning 65

UNIT VI
DOCUMENTATION 69
Learning Objectives 69
Setting Up 69
Lesson Proper 70
Documentary Credits 70
Documentary Collection 74
Marine Insurance 76
References 78
Assessing Learning 78

UNIT VII
LAWS AND REGULATIONS 83
Learning Objectives 83
Setting Up 83
Lesson Proper 83
International Laws, Rules and Standards 83
Tariff systems 86
Non-tariff barriers 88
References 91
Assessing Learning 92

Module in International Marketing | 4

UNIT I GLOBAL DIMENSIONS OF MARKETING

Overview

This unit introduces the facts about International Marketing. Different approaches made in
various countries for specific brand is also discussed and how to deal with each
dissimilarities. Lastly, steps on how to expand into global markets are included in the
discussion.

Learning Objectives

At the end of the unit, I am able to:

1. define International Marketing
2. know the importance, challenges and how to overcome the challenges in the
International Market
3. know and understand several ways on how a company can enter global
trade.
4. comprehend the Steps for Expanding Into Global Markets

Setting Up

Name: ________________________________________ Date:________________

Course/Year/Section: _____________________ Score: ______________

Directions: Read the instructions carefully and provide the needed answer.

Think of yourself as a marketer whose about to venture into the international

market, what would be the product you will launch? What are your considerations?
List down your plan to your first international market entry.
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________

Module in International Marketing | 5

Lesson Proper

Introduction of the Course

The modern world is organized on the theory that each nation state is sovereign and
independent from other countries. In reality, however, no country can completely
isolate its internal affairs from external forces. Even the most inward-looking
regimes have realized the limitations of their own resources as well as the benefits
of opening up their borders. This major change in the orientation of most regimes
has led to an enormous amount of activity in the international marketplace.

A global economic boom in the last decade of twentieth century has been one of the
drivers for efficiency, productivity and open, unregulated markets that swept the
world.

1 Never before in world history have businesses been so deeply involved in and
affected by international global developments. Powerful economic, technological,
industrial, political and demographic forces are converging to build the foundation
of a new global economic order on which the structure of a world economic and
market system will be built.

2 Whether or not a company wants to participate directly in international business,

it cannot escape the effect of the ever-increasing number of domestic firms
exporting, importing, and/or manufacturing abroad; the number of foreign-based
firms operating in most markets; the growth of regional trade areas; the rapid
growth of world markets; and the increasing number of competitors for global
markets.

International marketing is the application of marketing principles by industries

in one or more than one country. With the increasing change in customers'

Module in International Marketing | 6

demands, choices, preferences and tastes, the economies are expanding and giving
way to more competitive marketing.

International marketing can also open door for future business

opportunities. International marketing not only increases market share and
customer base, it also helps the business to connect to new vendors, a larger
workforce and new technologies and ways of doing business.

The Global Marketplace

A market is an institutional structure that permits people and organizations to

exchange goods, services and labor. The United States, for example, is a market. The
United States, Canada, and Mexico form a quasi-free market governed by the North
American Free Trade Agreement. The European Union is also a market.
For example, a business may be located in the United States. It may purchase
components for one of its products from Japan, South Korea, Germany, and Mexico.
The components may be shipped by a shipping company from Greece to an
outsourcing firm in China for assembly, where it is then transported across Chinese
and Russian railroads for distribution in European retail stores. The business' stock

Module in International Marketing | 7

may be traded on the New York Stock Exchange, Japanese Nikkei Exchange, and the
London Stock exchange.
The global marketplace is a term used to describe the exchange of goods, ideas,
and services uninhibited by geographic borders. In a global marketplace,
organizations can target and access relevant customer bases regardless of their
proximity.

Companies decide to “go global” for a number of reasons. Perhaps the most urgent
reason is to earn additional profits. If a firm has a unique product or technological
advantage not available to other international competitors, this advantage should
result in major business successes abroad. In other situations, management may
have exclusive market information about foreign customers, marketplaces, or
market situations. In this case, although exclusivity can provide an initial motivation
for going global, managers must realize that competitors will eventually catch up.
Finally, saturated domestic markets, excess capacity, and potential for cost savings
can also be motivators to expand into international markets.

A company can enter global trade in several ways, as this section describes.

 Exporting

When a company decides to enter the global market, usually the least complicated
and least risky alternative is exporting, or selling domestically produced products to
buyers in another country. A company, for example, can sell directly to foreign
importers or buyers. Exporting is not limited to huge corporations such as General
Motors or Apple. Indeed, small companies typically enter the global marketplace by
exporting. China is the world’s largest exporter, followed by the United States.

Many small businesses claim that they lack the money, time, or knowledge of foreign
markets that exporting requires. The U.S. Small Business Administration (SBA) now
offers the Export Working Capital Program, which helps small and medium-size
firms obtain working capital (money) to complete export sales. The SBA also
provides counseling and legal assistance for small businesses that wish to enter the
global marketplace. Companies such as American Building Restoration Products of
Franklin, Wisconsin, have benefited tremendously from becoming exporters.
American Building is now selling its chemical products to building restoration
companies in Mexico, Israel, Japan, and Korea. Exports account for more than 5
percent of the firm’s total sales.

Plenty of governmental help is available when a company decides to begin

exporting. Export Assistance Centers (EAC) provide a one-stop resource for help in
exporting. Over 700 EACs are placed strategically around the country. Often

Module in International Marketing | 8

the SBA is located in the same building as the EAC. The SBA can guarantee loans of
$50,000 to $100,000 to help an exporter grow its business. Online help is also
available at http://www.ustr.gov. The site lists international trade events, offers
international marketing research, and has practical tools to help with every step of
the exporting process.

 Licensing and Franchising

Another effective way for a firm to move into the global arena with relatively little
risk is to sell a license to manufacture its product to a firm in a foreign
country. Licensing is the legal process whereby a firm (the licensor) agrees to let
another firm (the licensee) use a manufacturing process, trademark, patent, trade
secret, or other proprietary knowledge. The licensee, in turn, agrees to pay the
licensor a royalty or fee agreed on by both parties.

International licensing is a multibillion-dollar-a-year industry. Entertainment and

character licensing, such as DVD movies and characters such as Batman, is the
largest single category. Trademarks are the second-largest source of licensing
revenue. Caterpillar licenses its brand for both shoes and clothing, which is very
popular in Europe.

U.S. companies have eagerly embraced the licensing concept. For instance, Labatt
Brewing Company has a license to produce Miller High Life in Canada. The Spalding
Company receives more than $2 million annually from license agreements on its
sporting goods. Fruit of the Loom lends its name through licensing to 45 consumer
items in Japan alone, for at least 1 percent of the licensee’s gross sales.

The licensor must make sure it can exercise sufficient control over the licensee’s
activities to ensure proper quality, pricing, distribution, and so on. Licensing may
also create a new competitor in the long run if the licensee decides to void the
license agreement. International law is often ineffective in stopping such actions.
Two common ways that a licensor can maintain effective control over its licensees
are by shipping one or more critical components from the United States and by
locally registering patents and trademarks in its own name.

Franchising is a form of licensing that has grown rapidly in recent years. Many U.S.
franchisors operate thousands of outlets in foreign countries. More than half of the
international franchises are for fast-food restaurants and business services.
McDonald’s, however, decided to sell its Chinese stores to a group of outside
investors for $1.8 billion, but retained 20 percent of the equity.

Having a big-name franchise doesn’t always guarantee success or mean that the job
will be easy. In China, Home Depot closed its stores after opening 12 to serve the
large Chinese population. Had they done market research, they would have known
that the majority of urban dwellers live in recently built apartments and that DIY

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(Do It Yourself) is viewed with disdain in Chinese society, where it is seen as a sign
of poverty.

When Subway opened its first sandwich shop in China, locals stood outside and
watched for a few days. Patrons were so confused that the franchisee had to print
signs explaining how to order. Customers didn’t believe the tuna salad was made
from a fish because they couldn’t see the head or tail. And they didn’t like the idea of
touching their food, so they would hold the sandwich vertically, peel off the paper
wrap, and eat it like a banana. Most of all, the Chinese customers didn’t want
sandwiches.

It’s not unusual for Western food chains to adapt their strategies when selling in
China. McDonald’s, aware that the Chinese consume more chicken than beef, offered
a spicy chicken burger. KFC got rid of coleslaw in favor of seasonal dishes such as
shredded carrots or bamboo shoots.

 Contract Manufacturing

In contract manufacturing, a foreign firm manufactures private-label goods under a

domestic firm’s brand. Marketing may be handled by either the domestic company
or the foreign manufacturer. Levi Strauss, for instance, entered into an agreement
with the French fashion house of Cacharel to produce a new Levi’s line, Something
New, for distribution in Germany.

The advantage of contract manufacturing is that it lets a company test the water in a
foreign country. By allowing the foreign firm to produce a certain volume of
products to specification and put the domestic firm’s brand name on the goods, the
domestic firm can broaden its global marketing base without investing in overseas
plants and equipment. After establishing a solid base, the domestic firm may switch
to a joint venture or direct investment, explained below.

 Joint Ventures

Joint ventures are somewhat similar to licensing agreements. In a joint venture, the
domestic firm buys part of a foreign company or joins with a foreign company to
create a new entity. A joint venture is a quick and relatively inexpensive way to
enter the global market. It can also be very risky. Many joint ventures fail. Others fall
victim to a takeover, in which one partner buys out the other.

Sometimes countries have required local partners in order to establish a business in

their country. China, for example, had this requirement in a number of industries
until recently. Thus, a joint venture was the only way to enter the market. Joint
ventures help reduce risks by sharing costs and technology. Often joint ventures will

Module in International Marketing | 10

bring together different strengths from each member. In the General Motors–
Suzuki joint venture in Canada, for example, both parties have contributed and
gained. The alliance, CAMI Automotive, was formed to manufacture low-end cars for
the U.S. market. The plant, which was run by Suzuki management, produces the
Chevrolet Equinox and the Pontiac Torrent, as well as the new Suzuki SUV. Through
CAMI, Suzuki has gained access to GM’s dealer network and an expanded market for
parts and components. GM avoided the cost of developing low-end cars and
obtained models it needed to revitalize the lower end of its product line and its
average fuel economy rating. After the successful joint venture, General
Motors gained full control of the operation in 2011. The CAMI factory may be one of
the most productive plants in North America. There GM has learned how Japanese
automakers use work teams, run flexible assembly lines, and manage quality
control.

 Direct Foreign Investment

Active ownership of a foreign company or of overseas manufacturing or marketing

facilities is direct foreign investment. Direct investors have either a controlling
interest or a large minority interest in the firm. Thus, they stand to receive the
greatest potential reward but also face the greatest potential risk. A firm may make
a direct foreign investment by acquiring an interest in an existing company or by
building new facilities. It might do so because it has trouble transferring some
resources to a foreign operation or obtaining that resource locally. One important
resource is personnel, especially managers. If the local labor market is tight, the firm
may buy an entire foreign firm and retain all its employees instead of paying higher
salaries than competitors.

Sometimes firms make direct investments because they can find no suitable local
partners. Also, direct investments avoid the communication problems and conflicts
of interest that can arise with joint ventures. IBM, in the past, insisted on total
ownership of its foreign investments because it did not want to share control with
local partners.

General Motors has done very well by building a $4,400 (RMB 29,800) minivan in
China that gets 43 miles per gallon in city driving. The Wuling Sunshine has a
quarter the horsepower of U.S. minivans, weak acceleration, and a top speed of 81
miles per hour. The seats are only a third of the thickness of seats in Western
models, but look plush compared to similar Chinese cars. The minivans have made
GM the largest automotive seller in China, and have made China a large profit center
for GM.

Walmart now has over 6,000 stores located outside the United States. In 2016,
international sales were over $116 billion. About one-third of all
new Walmart stores are opened in global markets.

Module in International Marketing | 11

Not all of Walmart’s global investments have been successful. In
Germany, Walmart bought the 21-store Wertkauf hypermarket chain and then 74
unprofitable and often decrepit Interspar stores. Problems in integrating and
upgrading the stores resulted in at least $200 million in losses. Like all other
German stores, Walmart stores were required by law to close at 8 p.m. on weekdays
and 4 p.m. on Saturdays, and they could not open at all on Sundays. Costs were
astronomical. As a result, Walmart left the German retail market.

Walmart has turned the corner on its international operations. It is pushing

operational authority down to country managers in order to respond better to local
cultures. Walmart enforces certain core principles such as everyday low prices, but
country managers handle their own buying, logistics, building design, and other
operational decisions.

Global firms change their strategies as local market conditions evolve. For example,
major oil companies like Shell Oil and ExxonMobil had to react to dramatic changes
in the price of oil due to technological advances such as more efficient automobiles,
fracking, and horizontal drilling.
Managing the Drop in Oil Prices

In 2014, crude oil was $90 a barrel, but increased production due to the shale oil
boom and the reluctance of OPEC countries to reduce output led to a price drop to
$45–$60 throughout the first quarter of 2015. While this is terrific news for
consumers, it does provide challenges to managers at both large and small
companies connected to the oil industry. Companies such as Chevron, Royal Dutch
Shell, and ExxonMobil saw dramatic reductions in their earnings, which were also
reflected in lower stock prices.

The action taken by senior executives at Chevron was to trim their planned capital
expenditures by $5 billion in 2016, resulting in the elimination of 1,500 jobs, while
ExxonMobil executives Jeff Woodbury and CEO Rex Tillerson (now the former U.S.
Secretary of State) were less specific; they planned several belt-tightening strategies
and forecast several years of low oil prices. Likewise, Ben van Beurden, the CEO of
Royal Dutch Shell, announced plans to eliminate 6,500 jobs and also predicted long-
range low prices for oil.

In addition to layoffs, actions that oil company managers can employ include
mergers for companies that don’t have the ability to become fully efficient
themselves. They can merge with other companies that can improve overall
efficiencies and operations. Contrary to the cost-cutting plans mentioned earlier,
some companies might consider increasing their spending plans. Going against the
reduced expenditures trend is Encana, a North American oil producer, which plans
to increase its overall spending. Some of the factors that allowed Encana to increase
spending was its low debt-to-equity ratio and its growth, which exceeded the
industry average.

Module in International Marketing | 12

Growth is an important component of a company’s strategy, and reactive short-term
strategies can often hurt long-term growth. By implementing performance-
improvement programs, companies can address problems and inefficiencies within
the company and allow them to focus on innovation. Another strategy that
companies can use is to review and alter their supply chain by focusing on costs and
efficiency. Companies can expand their supplier base, thus increasing competition
and reducing costs. This also requires companies to embrace a lean manufacturing
mindset.

New technology can also be used as a cost driver. New technologies such as micro
seismic sensors used to monitor fracking operations in drilling operations miles
under the earth can boost production. Adopting new technology can also lead to
changes in the workers that companies employ. New technology usually requires
higher-skilled workers, while reducing the number of lower-skilled workers.

The drop in oil prices has produced a survival-of-the-fittest competition among

energy companies. The companies that employ multiple strategies to improve
efficiency are the ones that will survive and prosper.

 Counter Trade

International trade does not always involve cash. Today, countertrade is a fast-
growing way to conduct international business. In countertrade, part or all of the
payment for goods or services is in the form of other goods or services.
Countertrade is a form of barter (swapping goods for goods), an age-old practice
whose origins have been traced back to cave dwellers. The U.S. Commerce
Department says that roughly 30 percent of all international trade involves
countertrade. Each year, about 300,000 U.S. firms engage in some form of
countertrade. U.S. companies, including General Electric, Pepsi, General Motors,
and Boeing, barter billions of goods and services every year. Recently, the Malaysian
government bought 20 diesel-powered locomotives from China and paid for them
with palm oil.

Module in International Marketing | 13

Developing a Foreign Market

10 Steps for Expanding Into Global Markets

These 10 tips may help to get started successfully in planning on growing company
through exporting,;

Develop a game plan.

Formulating a strategy for going global requires the same kind of planning and
market analysis needed for success in domestic markets. There are also some
nuances that factor into the equation, such as logistics, customs duties and
currency conversion. But the good news is that there are a number of free or
inexpensive resources available to help you get started.

Identify the product or service you have to sell.

It may seem self-evident, but you need to have a viable product or service, and
know there is a market for whatever it is you hope to export. In general, many
American exporters already have developed a domestic market for their
products or services before venturing overseas.

Develop an export plan.

Module in International Marketing | 14

A free government resource to help you prepare an export plan is the Basic
Guide to Exporting. The guide includes an outline of 11 questions that potential
exporters may want to ask as part of the export plan development process. By
answering these key questions, you may gain a better understanding of
everything from product and licensing requirements to logistics and pricing
strategies.

Conduct market analysis.

As the Basic Guide to Exporting notes, some companies rely on secondary data
sources because they are more readily available—and less expensive—than
conducting primary market research. Whether you conduct your own research
or rely on secondary data sources, conducting market analysis can help you to
determine what the top countries are for products similar to yours. Other
research should focus on your price competitiveness, potential distribution
channels, and duties, taxes or regulations that may constrain entry into a
particular market.

Segment potential export markets.

Another key component in assessing export opportunities is to estimate the
potential size of your market in the countries you have targeted. Market
segmentation can provide insight about how many potential customers you have
in a given country and, more importantly, how to reach them. One resource to
consult when developing an export marketing plan is Exporting: The Definitive
Guide to Selling Abroad Profitably by Laurel Delaney, founder of international
consulting agency GlobeTrade.

Assess your competition.

Whether you sell in the United States or in some other global market, you need
to understand who your competitors are. Every export market will have a
unique set of competitors and understanding the competitive landscape is
important before trying to sell in another country. In fact, a detailed competitive
analysis should be conducted for every potential new export market you are
considering. One tool for assessing the competition is the book Import/Export Kit
for Dummies by John Capela.

Determine if there are packaging, labeling or regulatory requirements.

Labeling, for example, may need to be customized for a particular market, and
the term "Made in the USA" may not be acceptable on the packaging. One best
practice is to plan on labeling products in the language of the country you are
selling to. It is also important to determine if there are special labeling
requirements, as is often the case with food and pharmaceuticals exports.

Module in International Marketing | 15

 Use trade shows to test markets for your product or service.
In addition to traditional market research, one way to test the potential for your
products overseas is to participate in industry trade fairs in the markets you are
considering. One starting point for identifying potential trade shows is the Trade
Show News Network website.

Test your strategy in a single market with low barriers to entry.

U.S. companies often start expanding internationally by exporting to Canada.
Geographic proximity, along with cultural and language similarities, help make
Canada a good proving ground for American companies venturing across the
border for the first time. Regardless of which market you plan to enter first, set
realistic goals and take baby steps first.

Leverage free and low-cost resources from government agencies.

The Small Business Development Center (SBDC) network is one starting point
for new-to-export companies. Many states also provide free counseling for
companies interested in exporting. A list of those resources can be found on the
State International Development Organizations website.

References

https://opentextbc.ca/businessopenstax/chapter/participating-in-the-global-
marketplace/#rfin-ch03_31

http://www.export.gov and get answers to questions such as: What’s in it for me?
Am I ready for this? What do I have to do? The site also provides a huge list of
resources for the first-time exporter.

“McDonald’s Sells Control of China Business to Citic, Carlyle,” Bloomberg News,

https://www.bloomberg.com/news/articles/2017-01-09/mcdonald-s-sells-
control-of-china-business-to-citic-carlyle, January 9, 2017.

“Famous Failures in China,” http://www.1421.consulting, February 2, 2016.

General Motors website

http://www.gmcamiassembly.ca/Facilities/public/ca/en/CAMI/about_us.html,
accessed July 17, 2017.

WulingSunshine,
http://media.gm.com/media/cn/en/wuling/vehicles/sunshine/2010.html,
accessed June 27, 2017.

“Walmart 2017 Annual Report,” http://stock.walmart.com, accessed June 27, 2017.

Module in International Marketing | 16

Stanley Reed and Clifford Krauss, “Royal Dutch Shell Profits Continue to Fall,
Prompting Layoffs,” The New York Times, http://www.nytimes.com, July 30, 2015;
John Biers, “More Belt-tightening Ahead as Exxon, Chevron Profits Dive,” Yahoo!
News, https://www.yahoo.com, July 31, 2015; Aisha Tejani, “How Oil Companies Are
Responding to the Oil Price Drop,” http://www.castagra.com, accessed June 30,
2017.

https://www.americanexpress.com/en-us/business/trends-and-insights/articles/
10-steps-expanding-global-markets/

Assessing Learning

Name: ________________________________________ Date:________________

Course/Year/Section: _____________________ Score: ______________

Activity 1

Test I. Modified True or False. Write the word True if the statement is correct, otherwise
write False. If your answer is false write your answer on the space provided after the
sentence

_________ 1. Joint venture is the practice in which a foreign firm manufactures

private-label goods under a domestic firm’s brand name. ___________________________

_________ 2. Direct foreign investment is a form of international trade in which part

or all of the payment for goods or services is in the form of other goods and services.
___________________________

_________ 3. Countertrade is an active ownership of a foreign company or of

manufacturing or marketing facilities in a foreign country. ___________________________

_________ 4.The practice of selling domestically produced goods to buyers in another

country. ___________________________

_________ 5. International marketing is an agreement in which a domestic firm buys

part of a foreign firm or joins with a foreign firm to create a new entity.
___________________________

_________ 6. Joint venture is the application of marketing principles by industries in

one or more than one country. . ___________________________

_________ 7. Market is an institutional structure that permits people and

organizations to exchange goods, services and labor. . ___________________________

Module in International Marketing | 17

_________ 8. Local market is an institutional structure that is not limited to specific
geographic locations but rather involves the exchange of good, services, and labor
anywhere in the world. .

_________ 9. Licensing is the legal process whereby a firm agrees to allow another
firm to use a manufacturing process, trademark, patent, trade secret, or other
proprietary knowledge in exchange for the payment of a royalty.
___________________________

_________ 10.The global marketplace is a term used to describe the exchange of

goods, ideas, and services uninhibited by geographic borders.
___________________________

Test II. Critical Thinking Questions. Read each questions carefully and write your
answers on the space provided.

1. Do you think that Royal Dutch Shell and ExxonMobil would have been more
successful if they had considered strategies other than cutting spending and
eliminating jobs? Why or why not?

________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
___

2. How should oil companies react if oil prices rise to the $90 to $100 per barrel
level? Explain your reasoning.

________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
___

3. Discuss several ways that a company can enter international trade.

________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
___

4. Explain the concept of countertrade.

Module in International Marketing | 18

 ________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
___

Test III. Enumeration

10 Steps for Expanding Into Global Markets

1. _______________________________________________
2. _______________________________________________

3. _______________________________________________

4. _______________________________________________

5. _______________________________________________

6. _______________________________________________

7. _______________________________________________

8. _______________________________________________

9. _______________________________________________

10. _______________________________________________

Module in International Marketing | 19

Unit II Environment for International Marketing

Overview

This unit introduces the facts about International Marketing Environment. Different
components which shape policies, programmes and strategies of an international
marketer.

Learning Objectives

At the end of the unit, I am able to:

1. define International Marketing Environment
2. know the importance of Economic, Socio Cultural, Politico-legal, Competitive
and Technological environment.

Setting Up

Name: ________________________________________ Date:________________

Course/Year/Section: _____________________ Score: ______________

Directions: Take a look at the photo. What have all this pictures in common? Write the
word/s that best describe the photos and explain your answer.

Module in International Marketing | 20

__________________________________________________________________________________________________________
__________________________________________________________________________________________________________
____________________________________________________________________________________________________

Lesson Proper

International Marketing Environment refers to the controllable and

uncontrollable forces that influence upon the marketing decision making of a firm
globally. International Marketing environment is comprised of those components
which shape policies, programs and strategies of an international marketer. An
international firm must resort to systematic study of international marketing
environment to collect the inputs of marketing decision making.

Main Components of International Marketing Environment

Internal and External Environment

The international marketing environment surrounds and impacts upon the

organization. Marketers aim to deliver value to satisfied customers, so they need to
assess and evaluate the internal environment and the external environment which
is subdivided into micro and macro.

Thus, there are mainly two components of international marketing

environment:

The ability of a firm to do international business depends on a number of internal

factors like the mission and objectives of the firm; the organizational and

Module in International Marketing | 21

management structure and nature; internal relationship between employees,
shareholders and Board of Directors, etc.; company image and brand equity;
physical assets and facilities; R&D and technological capabilities; personnel factors
like skill, quality, morale, commitment, attitude, etc.; marketing factors like the
organization for marketing, quality of the marketing men and distribution network;
and financial factors like financial policies, financial position and capital structure.

Let’s look at an example of how the internal environment would impact a company
such as Wal-Mart. In this case the immediate local influences which might include its
marketing plans, how it implements customer relationship management, the
influence of other functions such as strategy from its top management, research and
development into new logistics solutions, how it makes sure that it purchases high-
quality product at the lowest possible price, that accounting is undertaken
efficiently and effectively, and of course its local supply chain management and
logistics for which Wal-Mart is famous.

A useful tool for quickly auditing the internal environment is known as the Five Ms
which are Men, Money, Machinery, Materials and Markets. Some might include a
sixth M, which is minutes, since time is a valuable internal resource. All these factors
are company related factors which are fully controllable. All these have to be
considered while entering in the international market.

External Environment

External environment refers to the factors outside the firm. These factors are
uncontrollable or we can say that these are beyond the control of a company. The
external environmental factors such as the economic factors, socio-cultural factors,
government and legal factors, demographic factors, geographical factors etc. are
generally regarded as uncontrollable factors.

The external environment may further be divided in two parts:

a. Micro Environment and
b. Macro Environment

Micro Environment

The micro environment is made from individuals and organizations that are
close to the company and directly impact the customer experience. They can
be defined as the actors in the firm’s immediate environment which directly
influence the firm’s decisions and operations. These include, suppliers,
various market intermediaries and service organizations, competitors,
customers, and publics. The micro environment is relatively controllable since
the actions of the business may influence such stakeholders.

Module in International Marketing | 22

 Wal-Mart’s micro environment would be very much focused on immediate
local issues. It would consider how to recruit, retain and extend products and
services to customers. It would pay close attention to the actions and
reactions of direct competitors. Wal-Mart would build and nurture close
relationships with key suppliers. The business would need to communicate
and liaise with its publics such as neighbors which are close to its stores, or
other road users. There will be other intermediaries as well including
advertising agencies and trade unions amongst others.

i. Suppliers:

Marketing managers must watch supply availability and other trends dealing
with suppliers to ensure that product will be delivered to customers in the
time frame required in order to maintain a strong customer relationship.

ii. Marketing Intermediaries:

Marketing intermediaries refers to resellers, physical distribution firms,

marketing services agencies, and financial intermediaries. These are the
people that help the company promote, sell, and distribute its products to
final buyers. Resellers are those that hold and sell the company’s product.
They match the distribution to the customers and include places such as Wal-
Mart, Target, and Best Buy.

Physical distribution firms are places such as warehouses that store and
transport the company’s product from its origin to its destination. Marketing
services agencies are companies that offer services such as conducting
marketing research, advertising, and consulting. Financial intermediaries are
institutions such as banks, credit companies and insurance companies.

iii. Customers:

Another aspect of microenvironment is the customers. There are different

types of customer markets including consumer markets, business markets,
government markets, international markets, and reseller markets. The
consumer market is made up of individuals who buy goods and services for
their own personal use or use in their household. Business markets include
those that buy goods and services for use in producing their own products to
sell.

This is different from the reseller market which includes businesses that
purchase goods to resell as is for a profit. These are the same companies
mentioned as market intermediaries. The government market consists of
government agencies that buy goods to produce public services or transfer

Module in International Marketing | 23

 goods to others who need them. International markets include buyers in
other countries and includes customers from the previous categories.

iv. Competitors:

Competitors are also a factor in the micro environment and include

companies with similar offerings for goods and services. To remain
competitive a company must consider who their biggest competitors are
while considering its own size and position in the industry. The company
should develop a strategic advantage over their competitors.

v. Publics:

The final aspect of the microenvironment is publics, which is any group that
has an interest in or impact on the organization’s ability to meet its goals. For
example, financial publics can hinder a company’s ability to obtain funds
affecting the level of credit a company has. Media publics include newspapers
and magazines that can publish articles of interest regarding the company
and editorials that may influence customers’ opinions.

Government publics can affect the company by passing legislation and laws
that put restrictions on the company’s actions. Citizen- action publics include
environmental groups and minority groups and can question the actions of a
company and put them in the public spotlight. Local publics are
neighborhood and community organizations and will also question a
company’s impact on the local area and the level of responsibility of their
actions.

The general public can greatly affect the company as any change in their
attitude, whether positive or negative, can cause sales to go up or down
because the general public is often the company’s customer base and finally
those who are employed within the company and deal with the organization
and construction of the company’s product.

Macro Environment

The macro environment is less controllable. The macro environment consists of

much larger all-encompassing influences (which impact the micro environment)
from the broader global society. The macro environment includes culture, political
issues, technology, the natural environment, economic issues and demographic
factors amongst others.

Again for Wal-Mart the wider global macro environment will certainly impact its
business, and many of these factors are pretty much uncontrollable. Wal-Mart

Module in International Marketing | 24

trades mainly in the United States but also in international markets. For example in
the United Kingdom Wal-Mart trades as ASDA. Wal-Mart would need to take into
account local customs and practices in the United Kingdom such as bank holidays
and other local festivals etc.

A number of factors constitute the international environment: social, cultural,

political, legal, competitive, economic, and technology. Each should be evaluated
before a company makes a decision to go international.

i. Economic Environment

The international marketer tries to understand economic environmental variables

of the global markets for identifying the right marketing opportunities for the
enterprise.

The economic environment is comprised of the following economic variables:

(a) National Income
(b) Gross Domestic Product (GDP)
(c) Industrial Structure
(d) Currency floating (Open/fixed) issue
(e) Demand patterns
(f) Balance of Payment (BOP) status
(g) Economy base (Import/Export)
(h) Rate of Economic Growth
(i) Occupational Pattern
(j) State of Inflation
(k) Consumer Mobility.

A way of classifying the economic growth of countries is to divide them into

three groups:

(a) Industrialized;
(b) Developing and;
(c) Less-developed nations.

The industrialized nations are generally considered to be the United States, Japan,
Canada, Russia, Australia, and most of Western Europe. The economies of these
nations are characterized by private enterprise and a consumer orientation. They
have high literacy, modern technology, and higher per capita incomes. Developing
nations are those that are making the transition from economies based on
agricultural and raw materials production to industrial economies.

Many Latin American nations fit into this category and they exhibit rising levels of
education, technology, and per capita incomes. Finally, there are many less

Module in International Marketing | 25

developed nations in today’s world. These nations have low standards of living,
literacy rates are low, and technology is very limited.

ii. Social/Cultural Environment:

The social/cultural environment consists of the influence of religious, family,

educational, and social systems in the marketing system. Marketers who intend to
market their products overseas may be very sensitive to foreign cultures. While the
differences between home country and those of foreign nations may seem small,
marketers who ignore these differences risk failure in implementing marketing
programmes. Failure to consider cultural differences is one of the primary reasons
for marketing failures overseas.

A number of cultural differences can cause marketers problems in attempting to

market their products overseas.

These include:
(a) Language,
(b) Colour,
(c) Customs and taboos,
(d) Values,
(e) Aesthetics,
(f) Time,
(g) Business norms,
(h) Religion, and
(i) Social structures.

Each is discussed in the following sections:

Language
The importance of language differences cannot be over emphasized, as there are
almost 3,000 languages in the world. Language differences cause many problems for
marketers in designing advertising campaigns and product labels. Language
problems become even more serious once the people of a country speak several
languages. For example, in Canada, labels must be in both English and French. In
India, there are over 200 different dialects, and a similar situation exists in China.

Colours
Colours also have different meanings in different cultures. For example, in Egypt, the
country’s national colour of green is considered unacceptable for packaging,
because religious leaders once wore it. In Japan, black and white are colours of
mourning and should not be used on a product’s package. Similarly, purple is
unacceptable in Hispanic nations because it is associated with death.

Module in International Marketing | 26

Values
An individual’s values arise from his/her moral or religious beliefs and are learned
through experiences. For example, in America people place a very high value on
material well-being, and are much more likely to purchase status symbols than
people in India.

Similarly, in India, the Hindu religion forbids the consumption of beef, and fast-food
restaurants such as McDonald’s and Burger King would encounter tremendous
difficulties without product modification. Americans spend large amounts of money
on soap, deodorant, and mouthwash because of the value placed on personal
cleanliness. In Italy, salespeople call on women only if their husbands are at home.

Aesthetics

The term aesthetics is used to refer to the concepts of beauty and good taste. The
phrase, “Beauty is in the eye of the beholder” is a very appropriate description for
the differences in aesthetics that exist between cultures. For example, Americans
believe that suntans are attractive, youthful, and healthy. However, the Japanese do
not.

Time

Americans seem to be fanatical about time when compared to other cultures.

Punctuality and deadlines are routine business practices in the US. However,
salespeople who set definite appointments for sales calls in the Middle East and
Latin America will have a lot of time on their hands, as business people from both of
these cultures are far less bound by time constraints. To many of these cultures,
setting a deadline such as “I have to know next week” is considered pushy and rude.

Business Norms

The norms of conducting business also vary from one country to the next.

Religious Beliefs

A person’s religious beliefs can affect shopping patterns and products purchased in
addition to his/her values. In the United States and other Christian nations,
Christmas time is a major sales period. But for other religions, religious holidays do
not serve as popular times for purchasing products. Women do not participate in
household buying decisions in countries in which religion serves as opposition to
women’s rights movements.

Module in International Marketing | 27

Every culture has a social structure, but some seem less widely defined than others.
That is, it is more difficult to move upward in a social structure that is rigid. For
example, in the US, the two-wage earner family has led to the development of a
more affluent set of consumers. But in other cultures, it is considered unacceptable
for women to work outside the home.

iii. Political Environment

The political environment abroad is quite different from that of India. Most nations
desire to become self-reliant and to raise their status in the eyes of the rest of the
world. This is the essence of nationalism. The nationalistic spirit that exists in many
nations has led them to engage in practices that have been very damaging to other
countries’ marketing organizations.

For example, foreign governments can intervene in marketing programs in

the following ways:
(1) Contracts for the supply and delivery of goods and services
(2) The registration and enforcement of trademarks, brand names, and labeling
(3) Patents
(4) Marketing communications
(5) Pricing
(6) Product safety, acceptability, and environmental issues

Political Stability

Business activity tends to grow and thrive when a nation is politically stable. When a
nation is politically unstable, multinational firms can still conduct business
profitably.

Monetary Circumstances

The exchange rate of a particular nation’s currency represents the value of that
currency in relation to that of another country. Governments set some exchange
rates independently of the forces of supply and demand. If a country’s exchange rate
is low compared to other countries, that country’s consumers must pay higher
prices on imported goods.

Trading Blocs and Agreements

A trade bloc is a type of intergovernmental agreement, often part of a regional

intergovernmental organization, where regional barriers to trade, (tariffs and non-
tariff barriers) are reduced or eliminated among the participating states.

Tariff and Non-Tariff Barriers

Module in International Marketing | 28

Most nations encourage free trade by inviting firms to invest and to conduct
business there, while encouraging domestic firms to engage in overseas business.
These nations do not usually try to strictly regulate imports or discriminate against
foreign-based firms. There are, however, some governments that openly oppose free
trade. For example, many Communist nations desire self-sufficiency. Therefore, they
restrict trade with non-Communist nations. But these restrictions vary with East-
West relations.

The most common form of restriction of trade is the tariff, a tax placed on imported
goods. Protective tariffs are established in order to protect domestic manufacturers
against competitors by raising the prices of imported goods. The other form of
restriction is non-tariff. Countries impose non-tariff barriers to restrict the import of
goods indirectly from certain countries. Non-tariff barriers include quota system,
restriction on foreign exchange, state trading, etc.

Expropriation

All multinational firms face the risk of expropriation. That is, the foreign
government takes ownership of plants, sometimes without compensating the
owners. However, in many expropriations there has been payment, and it is often
equitable. Many of these facilities end up as private rather than government
organizations. Because of the risk of expropriation, multinational firms are at the
mercy of foreign governments, which are sometimes unstable, and which can
change the laws they enforce at any point in time to meet their needs.

iv. Legal Environment:

Businesses are affected by legal environments of countries in many ways. Legal

environments are not just based on different laws and regulations concerning
businesses, these are also defined by the factors like rule of law, access to legal
systems by foreigners, litigations systems etc. Variations in legal environments, rule
of law, laws, and legal systems affect foreign business firms in a number or areas.

v. Competitive Environment

To plan effectively international marketing strategies, the international marketer

should be well-informed about the competitive situation in the international
markets.

By competitive environment we mean the following variables:

(a) Nature of competition
(b) Players in the competition
(c) Strategical weapons used by the participants
(d) Competition regulations

Module in International Marketing | 29

Following are the ways an international marketer can handle competition:
(i) Proper knowledge about the competitors
(ii) Knowledge of competitors’ objectives
(iii) Knowledge of competitors’ strategies
(iv) Knowledge of competitors’ reaction patterns
(v) Knowledge of competitors’ strengths and weakness.

vi. Technological Environment

Technological know-how impacts all spheres of an international marketer’s

operations including production, information system, marketing etc. The
international marketers must understand technological development and its impact
on its total operations. The marketing intelligence system may help the
international firm to know technological orientations of other enterprises and to
update its own technologies to remain competitive. Research and Development
(R&D) has a vital role to play in increasing technological ability of a firm.

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 keep up with technological changes, soon find their pro0ducts 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.

The level of technological development of a nation affects the attractiveness of doing

business there, as well as the type of operations that are possible. Marketers in
developed nations cannot take many technological advances for granted. They may
not be available in lesser developed nations.

Consider some of the following technologically related problems that firms

may encounter in doing business overseas:
(a) Foreign workers must be trained to operate unfamiliar equipment.
(b) Poor transportation systems increase production and physical distribution costs.
(c) Maintenance standards vary from one nation to the next.
(d) Poor communication facilities hinder advertising through the mass media.
(e) Lack of data processing facilities makes the tasks of planning, implementing, and
controlling marketing strategy more difficult.

Module in International Marketing | 30

Importance of International Marketing Environment

The various components of the international marketing environment are the major
determinants of marketing opportunities. As such, it is the responsibility of an
international firm to have clear grasp of international marketing environment to
formulate effective marketing decisions regarding Marketing Mix variables.

Summary

1. International Marketing environment opportunities vary among the nations.

Some economies have enormous potentials of growth while other has not. The
knowledge of economic environment helps an international marketer to understand
which market to select for reaping lasting benefits.

2. Culture is a basic determinant of human behaviour. The cultural norms and values
may vary among the countries. That’s why knowledge of cultural environment is
utmost important to the international marketer.

3. Political environment has a major influence on creating sound investment climate.

The law and order situations influence business operations. International marketing
operations can be smoothly conducted in a country having political stability and
healthy political situation.

4. International marketing is affected by legal environment of a foreign country in

which a firm intends to operate. International marketing transactions need
compliance with legal provisions. So international marketer should be familiar with
the legal environment of foreign countries where marketing efforts will be made.

5. The state of competition prevailing in an international market has great

importance upon the strategic plan of the international marketer.

6. Technological changes have also great importance because of its direct impact on
product obsolescence issue. Up-to-date knowledge about the state of technological
environment is essential for the firms associated with international marketing.

References

https://www.businessmanagementideas.com/marketing/international-marketing-
environment/20682

Assessing Learning

Name: ________________________________________ Date:________________

Module in International Marketing | 31

Course/Year/Section: _____________________ Score: ______________

Activity 2
Test I. Identification. Write your answer on the space provided before the number.

____________________1. It is comprised of those components which shape policies,

programs and strategies of an international marketer.

____________________2. It can be defined as a set of traditional benefits and values that

are passed and shared among different societies.

____________________3. It refers to the controllable and uncontrollable forces that

influence upon the marketing decision making of a firm globally.

____________________4. It is used to refer to the concepts of beauty and good taste. The
phrase, “Beauty is in the eye of the beholder” is a very appropriate description for
the differences in aesthetics that exist between cultures.

____________________5. It arises from his/her moral or religious beliefs and are learned
through experiences.

____________________6. They are also a factor in the micro environment and include
companies with similar offerings for goods and services.

____________________7. It refers to resellers, physical distribution firms, marketing

services agencies, and financial intermediaries.

____________________8. It is made from individuals and organizations that are close to

the company and directly impact the customer experience. It can be defined as the
actors in the firm’s immediate environment which directly influence the firm’s
decisions and operations.

____________________9. This consists of the influence of religious, family, educational,

and social systems in the marketing system.

____________________10. These are those that are making the transition from economies
based on agricultural and raw materials production to industrial economies.

____________________11. These nations have low standards of living, literacy rates are
low, and technology is very limited.

____________________12. These are generally considered to have economies of these

nations are characterized by private enterprise and a consumer orientation. They
have high literacy, modern technology, and higher per capita incomes.

Module in International Marketing | 32

____________________13. This refers to the factors outside the firm. These factors are
uncontrollable or we can say that these are beyond the control of a company.

____________________14. This consists of much larger all-encompassing influences from

the broader global society. It includes culture, political issues, technology, the
natural environment, economic issues and demographic factors amongst others.

__________________15. The foreign government takes ownership of plants, sometimes

without compensating the owners

Test II. Enumeration

Six Ms which are useful tool for quickly auditing the internal environment

16.___________________________

17.___________________________

18.___________________________

19.___________________________

20.___________________________

Test III. Essay

1. How to Minimize Political Risks?

_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________

2. Importance of International Marketing Environment

_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Module in International Marketing | 33

UNIT III. MARKET SEGMENTATION

Overview:

This unit gives an insights to the global market segmentation, STP Process and
market segments that are defined by income levels, usage patterns, or other factors that
frequently span countries and regions. Moreover, it will allow you to understand the
importance of segmentation to the brand.

Learning Objectives:

At the end of the unit, I am able to:

1. discuss the global market segmentation
2. identify the steps in STP Process
3. distinguish the criteria in market segmentation
4. understand the importance of segmentation in the international market

Setting Up

Name: ________________________________________ Date:________________

Course/Year/Section: _____________________ Score: ______________

Module in International Marketing | 34

Directions: Listed below is a table that provides top-level information for eight different
market segments. Based upon the information provided, which target market would you
select as the best one to pursue? Why?

Questions:

1. Which segment/s are the most attractive? Why?

_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
2. Which segment/s would you NOT target? Why not?
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________

3. Which particular factors did you rely upon the most to help guide your decision?
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________

4. In real business life, what other information would you need to help you select the
best target market for a firm?
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________

Lesson Proper
/

Module in International Marketing | 35

Approaches to Global Segmentation

The strategic marketing planning process flows from a mission and vision statement
to the selection of target markets, and the formulation of specific marketing mix and
positioning objective for each product or service the organization will offer. Leading
authors like Kotler present the organization as a value creation and delivery sequence. In its
first phase, choosing the value, the strategist "proceeds to segment the market, select the
appropriate market target, and develop the offer's value positioning. The formula -
segmentation, targeting, positioning (STP) - is the essence of strategic marketing."

The Full STP Process

The market segmentation, targeting and positioning (STP) process is a fundamental

concept in understanding marketing and the strategies of firms. In most marketing
textbooks, the STP approach is presented as a simple three step process. While that
approach provides a good introduction to this marketing concept, it fails to adequately
highlight the smaller steps of the STP process that should also be understood.

The STP model is a central concept in marketing that is absolute key to serving a
market successfully. STP refers to three activities: segmentation, targeting, and positioning.
Marketers segment markets and identify attractive segments to target, before developing
suitable positioning strategies and allocating resources to prioritize marketing activities.
The use of the STP model has become more and more popular because of the increasing
prevalence of mature markets, greater diversity in customer needs, and the ability to reach
niche segments.

Module in International Marketing | 36

 //

The following is a quick discussion of the full market segmentation, targeting and
positioning (STP) process, as shown above.

Step One – Define the market

In the first step in this more detailed model is to clearly define the market that the
firm is interested in. This may sound relatively straightforward but it is an important
consideration. For example, when Coca-Cola looks at market segmentation they would be
unlikely to look at the beverage market overall. Instead they would look at what is known as
a sub-market (a more product-market definition). A possible market definition that Coca-
Cola could use might be diet cola soft drinks in South America. It is this more precise market
definition that is segmented, not the overall beverage market, as it is far too generic and has
too many diverse market segments.

Step Two – Create market segments

Once the market has been defined, the next step is to segment the market, using a
variety of different segmentation bases/variables in order to construct groups of consumer.
In other words, allocate the consumers in the defined market to similar groups (based on
market needs, behaviour or other characteristics).

Step Three – Evaluate the segments for viability

After market segments have been developed they are then evaluated using a set
criteria to ensure that they are useable and logical. This requires the segments to be
assessed against a checklist of factors, such as: are the segments reachable, do they have
different groups of needs, are they large enough, and so on.

Step Four – Construct segment profiles

Module in International Marketing | 37

 Once viable market segments have been determined, segment profiles are then
developed. Segment profiles are detailed descriptions of the consumers in the segments –
describing their needs, behaviours, preferences, demographics, shopping styles, and so on.
Often a segment is given a descriptive nickname by the organization. This is much in the
same way that the age cohorts of Baby Boomers, Generation X and Generation Y have a
name.

Step Five – Evaluate the attractiveness of each segment

Available market data and consumer research findings are then are added to the
description of the segments (the profiles), such as segment size, growth rates, price
sensitivity, brand loyalty, and so on. Using this combined information, the firm will then
evaluate each market segment on its overall attractiveness. Some form of scoring model will
probably be used for this task, resulting in numerical and qualitative scores for each market
segment.

Step Six – Select target market/s

With detailed information on each of the segments now available, the firm then
decides which ones are the most appropriate ones to be selected as target markets. There
are many factors to consider when choosing a target market. These factors include: firms
strategy, the attractiveness of the segment, the competitive rivalry of the segment, the firm’s
ability to successfully compete and so on.

Step Seven – Develop positioning strategy

The next step is to work out how to best compete in the selected target market.
Firms need to identify how to position their products/brands in the target market. As it is
likely that there are already competitive offerings in the market, the firm needs to work out
how they can win market share from established players. Typically this is achieved by being
perceived by consumers as being different, unique, superior, or as providing greater value.

Step Eight – Develop and implement the marketing mix

Once a positioning strategy has been developed, the firm moves to implementation.
This is the development of a marketing mix that will support the positioning in the
marketplace. This requires suitable products need to be designed and developed, at a
suitable price, with suitable distribution channels, and an effective promotional program.

Step Nine – Review performance

After a period of time, and on a regular basis, the firm needs to revisit the
performance of various products and may review their segmentation process in order to
reassess their view of the market and to look for new opportunities.

Market Segmentation

Segmentation is an important strategic tool in international marketing because the

main difference between calling a firm international and global is based on the scope and
bases of segmentation. An international firm has different marketing strategies for different

Module in International Marketing | 38

segments of countries, while a global firm views the whole world as a market, and then
segments this whole world based on viable segmentation bases. Generally, there are three
approaches to segmentation in international marketing: macro-segmentation, micro-
segmentation and the hybrid approach.

Macro-segmentation

Macro-segmentation or country-based segmentation identifies clusters of countries

that demand similar products.  Macro-segmentation uses geographic, demographic and
socioeconomic variables such as location, GNP per capita, population size or family size to
group countries intro market segments, and then selects one or more segments to create
marketing strategies for each of the selected segments. This strategy enables a company to
centralize its operations and save on production, sales, logistics and support functions.
However, macro-segmentation doesn’t take into consideration consumer differences within
each country and among the country markets that are clustered together, and fails to
acknowledge the existence of segments that go beyond the borders of a particular
geographic region. Therefore, the company may be leaving money on the table, because the
firm may be losing opportunities to solve the need of consumer segments across these
country segments. Macro-segmentation leads to misleading national stereotyping, which
results in neglect of within-country heterogeneity. Ignoring similarity in needs across
country boundaries results in countries losing economies of scale benefits that can be
achieved by serving the needs of a wider population across country (macro-segment)
boundaries.

Module in International Marketing | 39

 /

Micro-segmentation

Micro-segmentation or consumer-based segmentation involves grouping consumers based

on common characteristics using psychographic and/or behavioral segmentation variables
such as cultural preferences, values and attitudes, lifestyle choices. “Common Ways of
Segmenting Buyers” show some of the different types of buyer characteristics used for
micro-segmentation. Notice that the characteristics fall into one of four segmentation
categories: behavioral, demographic, geographic, or psychographic.

Module in International Marketing | 40

 Criteria to Identify Market Segments

Marketing professionals might answer the following questions:

•Behavioral segmentation: What benefits do customers want, and how do they use our
product?
•Demographic segmentation: How do the ages, races, and ethnic backgrounds of our
customers affect what they buy?
•Geographic segmentation: Where are our customers located, and how can we reach
them? What products do they buy based on their locations?
• Psychographic segmentation: What do our customers think about and value? How do
they live their lives?

Common Ways of Segmenting Buyers/

Segmenting by Behavior

Behavioral segmentation divides people and organization into groups according to

how they behave with or act toward products. Benefits segmentation—segmenting buyers
by the benefits they want from products—is very common. Take toothpaste, for example.
Which benefit is most important to you when you buy a toothpaste: The toothpaste’s price,
ability to whiten your teeth, fight tooth decay, freshen your breath, or something else?
Perhaps it’s a combination of two or more benefits. If marketing professionals know what
those benefits are, they can then tailor different toothpaste offerings to you (and other
people like you).

Another way in which businesses segment buyers is by their usage rates—that is,
how often, if ever, they use certain products. Companies are interested in frequent users
because they want to reach other people like them. They are also keenly interested in
nonusers and how they can be persuaded to use products. The way in which people use
products can also be a basis for segmentation.

Segmenting by Demographics

Segmenting buyers by personal characteristics such as age, income, ethnicity and

nationality, education, occupation, religion, social class, and family size is called
demographic segmentation. Demographics are commonly utilized to segment markets
because demographic information is publicly available in databases around the world.

Segmenting by Geography

Suppose your great new product or service idea involves opening a local store.
Before you open the store, you will probably want to do some research to determine which
geographical areas have the best potential. For instance, if your business is a high-end
restaurant, should it be located near the local college or country club? If you sell ski
equipment, you probably will want to locate your shop somewhere in the vicinity of a
mountain range where there is skiing. You might see a snowboard shop in the same area

Module in International Marketing | 41

but probably not a surfboard shop. By contrast, a surfboard shop is likely to be located
along the coast, but you probably would not find a snowboard shop on the beach.

Segmenting by Psychographics

If your offering fulfils the needs of a specific demographic group, then the
demographic can be an important basis for identifying groups of consumers interested in
your product. What if your product crosses several market segments? Psychographic
information is frequently gathered via extensive surveys that ask people about their
activities, interests, opinion, attitudes, values, and lifestyles. 

Hybrid Segmentation

Hybrid or Universal segmentation looks for similarities across world markets. This
strategy solves the disadvantages of using macro- and micro-segmentation bases to
segment international markets, as they tend to ignore similarities and highlight only the
differences. Certain segments identified in a micro-segmentation strategy may have the
same characteristics present on a global scale. 

Why segment your audience?

Why is segmentation important for customers?

Traditional mass marketing enables you to find a compromise, satisfying the

greatest number of people with the same offers. In comparison, segmentation enables you
to zero in on the expectations of each customer. There is real demand for this, since 91% of
consumers are more likely to buy from brands that offer them personalized experiences.

Why is segmentation important for the brand?

 Better knowledge of your customers and your market

Segmenting your market essentially analyzes who is part of that audience in detail and
what characteristics you observe among your customers. It also enables you to understand
which groups are the most loyal to the brand (or spend the most, are the least loyal, etc.)
and, armed with that knowledge, better align your future marketing actions. This will
ultimately enable you to offer your visitors an improved experience and to therefore retain
your customers.

 Better price optimization

It seems difficult, even impossible, to increase your prices market-wide overnight.

However, by using a segmented approach you can identify the groups of people who are
prepared to pay a little more for a specific uplift to your products or services. We’ll come
back to this point in more detail when we discuss the applications of segmentation.

 Greater value creation

With a segmented view of your market, you’ll be able to see a more significant ROI on
your marketing actions than you would with a general approach. With a untargeted
campaign that goes out to your whole market, the average success rate will be lower than if

Module in International Marketing | 42

you successfully aim a suitable and differentiated campaign at several sub-groups.
Essentially it is more effective to optimize segment by segment than it is to optimize for the
entire market.

References
/
Philip R. Cateora, Mary C. Gilly, John L. Graham. (2011) International Marketing 15th Edition

Sak Onkvisit and John J. Shaw (2004) International Marketing: Analysis and Strategy 4 th
Edition

Global Market Segmentation retrieved from https://opentext.wsu.edu/cpim/chapter/6-5-

bases-for-segmentation/

Marketing segmentation: criteria, methods, applications, and examples retrieved from

https://www.kameleoon.com/en/blog/segmentation-audience

Jorge A. Restrepo (2003) Segmentation-Targeting-Positioning retrieved from

https://www.eurekafacts.com/wp-content/uploads/2018/10/Eureka-Facts-Segmentation-
Targeting-Positioning-White-paper.pdf

Assessing Learning
/
Name: ________________________________________ Date:________________
Course/Year/Section: _____________________ Score: ______________

Activity 3

Test I. Identification. Identify the word/s being described in each number.

______________________________1. The market segmentation, targeting and positioning (STP)

process is a fundamental concept in understanding marketing and the strategies of firms.
______________________________2. This strategy solves the disadvantages of using macro- and
micro-segmentation bases to segment international markets, as they tend to ignore
similarities and highlight only the differences.
______________________________3. Divides people and organization into groups according to how
they behave with or act toward products.
______________________________4. A type of segmentation that ask questions like what do our
customers think about and value? How do they live their lives?
______________________________5. This involves grouping consumers based on common
characteristics using psychographic and/or behavioristic segmentation variables such as
cultural preferences, values and attitudes, lifestyle choices. 
_____________________________6. This is an important strategic tool in international marketing
because the main difference between calling a firm international and global is based on the
scope and bases of segmentation.
_____________________________7. Segmenting buyers by personal characteristics such as age,
income, ethnicity and nationality, education, occupation, religion, social class, and family
size.

Module in International Marketing | 43

_____________________________8. The ninth stage of STP Process.
_____________________________9. Flows from a mission and vision statement to the selection of
target markets, and the formulation of specific marketing mix and positioning objective for
each product or service the organization will offer.
_____________________________10. This is frequently gathered via extensive surveys that ask
people about their activities, interests, opinion, attitudes, values, and lifestyles. 

Test II. Enumeration. List down all the items required in each number.

Steps in STP Process

1. _______________________________________________________
2. _______________________________________________________
3. _______________________________________________________
4. _______________________________________________________
5. _______________________________________________________
6. _______________________________________________________
7. _______________________________________________________
8. _______________________________________________________
9. _______________________________________________________

Why is segmentation important for the brand?

10. _______________________________________________________
11. _______________________________________________________
12. _______________________________________________________

Criteria to Identify Market Segments

13. _______________________________________________________
14. _______________________________________________________
15. _______________________________________________________

Test III. Critical Thinking. Read the questions carefully and write your answer on the
space provided.

1. Offer your arguments for product adaptation.

_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________

2. Can standard marketing techniques (e.g., market segmentation) be used to market

services locally and internationally?
_________________________________________________________________________________________________
_________________________________________________________________________________________________

Module in International Marketing | 44

 _________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________

3. Describe briefly the STP Process and its marketing implications.

_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________

UNIT IV. THE FIRM’S OPERATING DECISIONS

Overview

Module in International Marketing | 45

 This unit gives an idea about the application of marketing mix in the international
market. New product development and know-hows on packaging will be tackled. The
different distribution channels that is direct and indirect channel will be covered under
this unit. Pricing as a relevant consideration in introducing new products is added on the
discussion. Lastly, promotional activities to communicate the product to the market is on
the discourse of this unit.

Learning Objectives

At the end of the unit, I am able to:

1. describe the various marketing mix used in the international market
2. identify the considerations of new product development
3. distinguish the different distribution channels
4. discuss the relevance and factors affecting the price of a product
5. enumerate the different promotional activities

Setting Up

Name: ________________________________________ Date:________________

Course/Year/Section: ______________________ Score: _______________

Direction: Refer to the picture and provide answer to the given question.

Why do you think the taste of coke in various countries differ? Comment on the product
adaptation of the brand.
__________________________________________________________________________________________________________
__________________________________________________________________________________________________________
__________________________________________________________________________________________________________

Module in International Marketing | 46

__________________________________________________________________________________________________________
_____________________________________________________________________________________________________

Lesson Proper

Product Development

What is a Product?

A product is often considered in a narrow sense as something tangible that can be

described in terms of physical attributes, such as shape, dimension, components, form,
color, and so on. This is a misconception that has been extended to international marketing
as well, because many people believe that only tangible products can be exported. A student
of marketing, however, should realize that this definition of product is misleading since
many products are intangible (e.g., services).

In many situations, both tangible and intangible products must be combined to

create a single, total product. Perhaps the best way to define a product is to describe it as a
bundle of utilities or satisfaction. Warranty terms, for example, are a part of this bundle, and
they may be adjusted as appropriate (i.e., superior versus inferior warranty terms).

Since a product can be bundled, it can also be unbundled. One problem with a
bundled product is the increased cost associated with the extra benefits. With the increased
cost, a higher price is inevitable. Thus a proper marketing strategy, in some cases, is to
unbundle a product instead so as to get rid of the frills and attract price-sensitive
consumers.

New Product Development

There are six distinct steps in new product development:

The first step is the generation of new product ideas. Such ideas can come from any
number of sources (e.g., salesperson, employees, competitors, governments, marketing
research firms, customers). The second step involves the screening of ideas. Ideas must be
acknowledged and reviewed to determine their feasibility. To determine suitability, a new
product concept may simply be presented to potential users, or an advertisement based on
the product may be drawn and shown to focus groups to elicit candid reactions. As a rule,
corporations usually have predetermined goals that a new product must meet. The third
step is business analysis, which is necessary to estimate product features, cost, demand, and
profit. Several competing teams of designers produce a prototype, and the winning model
that meets preset goals then goes to the “product development” team.

The fourth step is product development, which involves lab and technical tests as
well as manufacturing pilot models in small quantities. At this stage, the product is likely to
be handmade or produced by existing machinery rather than by any new specialized
equipment. Ideally, engineers should receive direct feedback from customers and dealers.
The fifth step involves test marketing to determine potential marketing problems and the
optimal marketing mix. The last step, assuming that things go well, the company is ready for
full-scale commercialization by actually going through with full-scale production and

Module in International Marketing | 47

marketing. It should be pointed out that not all of these six steps in new product
development will be applicable to all products and countries. Test marketing, for example,
may be irrelevant in countries where most major media are more national than local. If the
television medium has a nationwide coverage, it is not practical to limit a marketing
campaign to one city or province for test marketing purposes.

Innovative Product and Adaptation

An important first step in adapting a product to a foreign market is to determine the

degree of newness as perceived by the intended market. How people react to newness and
how new a product is to a market must be understood. In evaluating the newness of a
product, the international marketer must be aware that many products successful in the
United States, having reached the maturity or even decline stage in their life cycles, may be
perceived as new in another country or culture and thus must be treated as innovations.
From a sociological viewpoint, any idea perceived as new by a group of people is an
innovation. Whether or not a group accepts an innovation, and the time it takes to do so,
depends on the product’s characteristics. Products new to a social system are innovations,
and knowledge about the diffusion (i.e., the process by which innovation spreads) of
innovation is helpful in developing a successful product strategy. Marketing strategies can
guide and control, to a considerable degree, the rate and extent of new product diffusion
because successful new product diffusion is dependent on the ability to communicate
relevant product information and new product attributes.

In breaking into a foreign market, marketers should consider factors that influence
product adoption. As explained by diffusion theory, at least six factors have a bearing on the
adoption process: relative advantage, compatibility, trialability/divisibility, observability,
complexity, and price. These factors are all perceptual and thus subjective in nature. For a
product to gain acceptance, it must demonstrate its relative advantage over existing
alternatives. A product must also be compatible with local customs and habits. A new
product should also be compatible with consumers’ other belongings. If a new product
requires a replacement of those other items that are still usable, product adoption becomes
a costly proposition.

A new product has an advantage if it is capable of being divided and tested in small
trial quantities to determine its suitability and benefits. This is a product’s
trialability/divisibility factor. Observation of a product in public tends to encourage social
acceptance and reinforcement, resulting in the product’s being adopted more rapidly and
with less resistance. If a product is used privately, other consumers cannot see it, and there
is no prestige generated by its possession. Complexity of a product or difficulty in
understanding a product’s qualities tends to slow down its market acceptance.

The first four variables are related positively to the adoption process. Like
complexity, price is related negatively to product adoption.

Physical or Mandatory Requirements and Adaptation

A product may have to change in a number of ways to meet the physical or

mandatory requirements of a new market, ranging from simple package changes to total
redesign of the physical core product. In many countries, the term product homologation

Module in International Marketing | 48

is used to describe the changes mandated by local product and service standards. A recent
study reaffirmed the often-reported finding that mandatory adaptations were more
frequently the reason for product adaptation than adapting for cultural reasons. Some
needed changes are obvious with relatively little analysis; a cursory examination of a
country will uncover the need to rewire electrical goods for a different voltage system,
simplify a product when the local level of technology is not high, or print multilingual labels
where required by law. Other necessary changes may surface only after careful study of an
intended market. Legal, economic, political, technological, and climatic requirements of the
local marketplace often dictate product adaptation. The less economically developed a
market is, the greater degree of change a product may need for acceptance. One study found
that only one in ten products could be marketed in developing countries without
modification of some sort. To make a purchase more affordable in low-income countries,
the number of units per package may have to be reduced from the typical quantities offered
in high-income countries.

Changes may also have to be made to accommodate climatic differences.

Supplementary air filters and different clutches had to be added to adjust for the problem.
Similarly, crackers have to be packaged in tins rather than cardboard boxes for humid areas.

Now they’re the top-selling biscuit in the country, after consumer research
suggested reducing the sugar content and reducing package sizes and prices. Because most
products sold abroad by international companies originate in home markets and require
some form of modification, companies need a systematic process to identify products that
need adaptation.

Packaging

Packaging Functions and Criteria

Much like the brand name, packaging is another integral part of a product.
Packaging serves two primary purposes: functional and promotional. First and foremost,
a package must be functional in the sense that it is capable of protecting the product at
minimum cost. If a product is not manufactured locally and has to be exported to another
country, extra protection is needed to compensate for the time and distance involved. A
country’s adverse environment should also be taken into account. When moisture is a
problem, a company may have to wrap pills in foil or put food in tin boxes or vacuum-sealed
cans. However, the type of package chosen must be economical.

For most packaging applications, marketers should keep in mind that foreign
consumers are more concerned with the functional aspect of a package than they are with
convenience. A tin box or a glass bottle can be used after the product content is gone to
store something else. Empty glass containers can be sold by consumers to recoup a part of
the purchase price. From the marketing standpoint, the promotional function of packaging
is just as crucial as the functional aspect. In any case, packaging does not have to be dull.
Novel shapes and designs may be used to stimulate interest and create excitement.

Mandatory Package Modification

A package change may be either mandatory or at the discretion of the marketer. A

mandatory change is usually necessitated by government regulations. Sometimes, it is for

Module in International Marketing | 49

safety and other reasons. Sometimes, packaging regulations are designed more for
protection against imports than for consumer protection.

Several countries require bilingualism (e.g., French and English in Canada, and
French and Flemish in Belgium). This requirement may force the manufacturer to increase
package size or shorten messages and product name, since a bilingual package must have
twice the space for copy communications. In some cases, modification is dictated by
mechanical or technical difficulties, such as the unavailability of certain typographic fonts or
good advertising typographers. In many cases, packaging and labeling are closely related.
Packages may be required to describe contents, quantity, and manufacturer’s name.

In many cases, packaging and labeling are closely related. Packages may be required
to describe contents, quantity, manufacturer’s name and address, and so on in letters of
designated sizes. Any pictorial illustration that is used should not be misleading.

Distribution

Channels of Distribution

In every country and in every market, urban or rural, rich or poor, all consumer and
industrial products eventually go through a distribution process. The distribution process
includes the physical handling and distribution of goods, the passage of ownership (title),
and—most important from the standpoint of marketing strategy—the buying and selling
negotiations between producers and middlemen and between middlemen and customers. A
host of policy and strategic channel selection issues confronts the international marketing
manager. These issues are not in themselves very different from those encountered in
domestic distribution, but the resolution of the issues differs because of different channel
alternatives and market patterns. Each country market has a distribution structure through
which goods pass from producer to user. Within this structure are a variety of middlemen
whose customary functions, activities, and services reflect existing competition, market
characteristics, tradition, and economic development.

In short, the behavior of channel members is the result of the interactions between
the cultural environment and the marketing process. Channel structures range from those
with little developed marketing infrastructure, such as those found in many emerging
markets, to the highly complex, multilayered system.

Direct and Indirect Selling Channels

A manufacturer can sell directly to end users abroad, but this type of channel is
generally not suitable or desirable for most consumer goods. In foreign markets, it is far
more common for a product to go through several parties before reaching the final
consumer. Companies use two principal channels of distribution when marketing abroad:
(1) indirect selling, and (2) direct selling.

Indirect selling, also known as the local or domestic channel, is employed when a
manufacturer in the United Kingdom, for example, markets its product through another
British firm that acts as the manufacturer’s sales intermediary (or middleman). As such, the
sales intermediary is just another local or domestic channel for the manufacturer because
there are no dealings abroad with a foreign firm. By exporting through an independent local
middleman, the manufacturer has no need to set up an international department. The

Module in International Marketing | 50

middleman, acting as the manufacturer’s external export organization, usually assumes
responsibility for moving the product overseas. The intermediary may be a domestic agent
if it does not take title to the goods, or it may be a domestic merchant if it does take title to
the goods.

Advantage:

- The channel is simple and inexpensive. The manufacturer incurs no start-up cost
for the channel and is relieved of the responsibility of physically moving the goods
overseas. Because the intermediary very likely represents several clients who can
help share distribution costs, the costs for moving the goods are further reduced

Limitations:

- No/less control over the marketing of its product to another firm. This
situation may adversely affect the product’s success in the future. If the chosen
intermediary is not aggressive the manufacturer may become vulnerable, especially
in cases where competitors are careful about their distribution practices.
- The indirect channel may not necessarily be permanent. Being in the business
of handling products for profit, the intermediary can easily discontinue handling a
manufacturer’s product if there is no profit or if a competitive product offers a
better profit potential.

Direct selling is employed when a manufacturer develops an overseas channel. This

channel requires that the manufacturer deal directly with a foreign party without going
through an intermediary in the home country. The manufacturer must set up the overseas
channel to take care of the business activities between the countries. Being responsible for
shipping the product to foreign markets itself, the manufacturer exports through its own
internal export department or organization.

Advantages:

- The manufacturer is more directly committed to its foreign markets.

- Greater control. The channel improves communication because approval does not
have to be given to a middleman before a transaction is completed. Therefore, the
channel allows the company’s policy to be followed more uniformly.

Disadvantages:

- Difficult channel to manage if the manufacturer is unfamiliar with the foreign

market.
- The channel is time consuming and expensive. Without a large volume of business,
the manufacturer may find it too costly to maintain the channel.

Channel Decisions

As in any domestic market, the international market requires a marketer to make at

least three channel decisions: length, width, and number of channels of distribution.

Channel length is concerned with the number of times a product changes hands among
intermediaries before it reaches the final consumer. The channel is considered long when a
manufacturer is required to move its product through several middlemen. The channel is

Module in International Marketing | 51

considered short when the product has to change hands only one or twice. If the
manufacturer elects to sell directly to final consumers, the channel is direct.

Channel width is related to the number of middlemen at a particular point or step in

the distribution channel. Channel width is a function of the number of wholesalers and the
different kinds that are used, as well as a function of the number and kind of retailers used.
As more intermediaries or more types are used at a certain point in the channel, the channel
becomes wider and more intensive. If only a few qualified intermediaries are needed to
provide proper product support at a particular level or at a specific location, the channel is
selective. The product, though perhaps not available everywhere, is still carried by at least a
few qualified middlemen within the same area. Finally, the distribution becomes exclusive if
only one intermediary of one type is used in that particular area.

Another decision that concerns the manufacturer is the number of distribution

channels to be used. In some circumstances, the manufacturer may employ many channels
to move its product to consumers. For example, it may use a long channel and a direct
channel simultaneously. The use of dual distribution is common if the manufacturer has
different brands intended for different kinds of consumers. Another reason for using
multiple channels may involve the manufacturer setting up its own direct sales force in a
foreign market where the manufacturer cannot remove the original channel (e.g., agents)
for strategic or legal reasons.

Pricing

The Role of Price

Price is an integral part of a product – a product cannot exist without a price. It is

difficult to think or talk about a product without considering its price. Price is important
because it affects demand, and an inverse relationship between the two usually prevails.
Price also affects the larger economy because inflation is caused by rapid price increases.
Yet among the marketing decision variables, price has received the least attention. “The
export-pricing literature is characterized by a distinct lack of sound theoretical and
empirical works.”

Price, however, is no more important than the other three Ps. One should not forget
that price should never be isolated from the other parts of the marketing mix. Price should
never be treated as an isolated factor.

Price Standardization

` One area of pricing that has received some attention is the issue of pricing
standardization. Businesses found that the degree of standardization varied across
individual elements, with branding and product being least adapted. Perhaps because of
government regulations, price and advertising elements were most adapted.

Pricing Decisions

Module in International Marketing | 52

 Of the four Ps of marketing, pricing is probably the one that receives the least
attention, especially in an international context. One problem with an investigation of
pricing decisions is that theories are few and vague. Most of the theories that do exist
reduce the large number of pricing variables to a discussion of demand and supply. Because
the few theories are inadequate, many pricing decisions are based on intuition, trial and
error, or routine procedures (e.g., cost-plus or imitative pricing). When pricing a product, a
company must consider a number of factors.

The factors of cost and supply are always relevant – domestically and
internationally. Other factors such as exchange rate, tariffs, and culture are more applicable
in the case of international marketing.

Supply and demand

The law of supply and demand is a sound starting point in explaining companies’
price behavior. A common practice is to reduce the large number of pricing factors
to two basic variables: demand and supply. In an efficient, market-oriented
economy, demand is affected by competitive activity, and consumers are able to
make informed decisions. Price, as a measure of product benefit, acts as the
equilibrator of supply and demand.

Cost

In pricing a product, it is inevitable that cost must be taken into account. The typical
costs associated with international marketing include: market research; 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; product modification; and
special packaging.

Exchange rate

One pricing problem involves the currency to be used for billing purposes. As a rule,
a seller should negotiate to bill in a strong currency, and a buyer should try to gain
acceptance in a weak currency. The exchange rate is one factor that generally has no
impact in domestic marketing but is quite crucial in international marketing.

Market Share

A high market share provides pricing flexibility because the company has the
advantage of being above the market if it so chooses. The company can also choose
to lower its price because of the better economies of scale derived from lower
production and marketing costs. Market share is even more crucial for late entrants
because market share acts as an entry barrier. That is, without market share, a
company cannot achieve the high volume necessary to improve its efficiency.

Tariffs and distribution costs

As a rule, when dumping and subsidies are not involved, a product sold in a host
country should cost more than an identical item sold in a manufacturer’s home

Module in International Marketing | 53

 market. This is the case because the overseas price must be increased to cover
tariffs and extra distribution costs.

Culture

In most other countries, a flexible or negotiated price is common practice, and

buyers and sellers often spend hours haggling about price. Thus, price haggling is an
art, and the buyer with the superior negotiating skills is expected to do better on
price than those unfamiliar with the practice.

Promotion and Communication

The purpose of promotion is both to communicate with buyers and to influence

them. Effective promotion requires an understanding of the process of persuasion and how
this process is affected by environmental factors. The potential buyer must not only receive
the desired information but should also be able to comprehend that information.

To communicate effectively with someone means that certain facts and information
are shared in common with that person. Communication is basically a five-stage process
consisting of source, encoding, information, decoding, and destination.

Promotion Mix

To communicate with and influence customers, several promotional tools are available.
Advertising is usually the most visible component of promotion, but it is not the only
component. The promotion mix also consists of three other distinct but interrelated
activities: personal selling, publicity, and sales promotion.

- Personal selling is an “oral presentation in a conversation with one or more

prospective purchasers for the purpose of making sales.” Personal selling, also
commonly known as salesmanship, is used at every distribution level.
- Telemarketing. Personal selling does not always require a face-to-face
conversation. For instance, personal selling may be done over the telephone.
- Publicity is the non-personal stimulation of demand that is not paid for by a
sponsor which has released news to the media. There are several methods that may
be used to gain publicity. Such methods include the following: contribution of
prizes; sponsorship of civic activities; release of news about the company’s product,
plant, and personnel; and announcements of the company’s promotional campaign,
especially with regard to such sales promotion techniques as games and contests.
- Overseas Product Exhibition. One type of sales promotion that can be highly
effective is the exhibition of a product overseas. This type of promotion may be very
important because regular advertising and sales letters and brochures may not be
adequate

The Role of Advertising

Developing and socialist/communist countries, emphasizing production and

distribution efficiency, usually attack advertising as a wasteful practice whose
primary purpose is to create unnecessary wants. Yet advertising serves a very
useful purpose – consumers everywhere, irrespective of their countries’ political
systems and level of economic development, need useful product information.

Module in International Marketing | 54

 International advertising is the practice of advertising in foreign or international
media when the advertising campaign is planned, directly or indirectly, by an
advertiser from another country. To advertise overseas, a company must determine
the availability (or unavailability) of advertising media. Media may not be readily
available in all countries or in certain areas within the countries.

References

Philip R. Cateora, Mary C. Gilly, John L. Graham. (2011) International Marketing 15th Edition

Sak Onkvisit and John J. Shaw (2004) International Marketing: Analysis and Strategy 4 th
Edition

Assessing Learning

Name: ________________________________________ Date:________________

Course/Year/Section: _____________________ Score: ______________

Activity 4

Test I. True or False. Write the word True if the statement is correct, otherwise write
False.

____________1. A high market share provides pricing flexibility because the company has the
advantage of being above the market if it so chooses.
____________2. The law of supply and demand is a sound starting point in explaining
companies’ price behavior.
____________3. One advantage of direct selling is that the channel is simple and inexpensive.
____________4. Publicity is the non-personal stimulation of demand that is not paid for by a
sponsor which has released news to the media.
____________5. Personal selling, also commonly known as advertising.
____________6. An important first step in adapting a product to a foreign market is to
determine the degree of newness as perceived by the intended market.
____________7. As a rule, when dumping and subsidies are not involved, a product sold in a
host country should cost more than an identical item sold in a manufacturer’s home market.
____________8. Channel width is a function of the number of wholesalers and the different
kinds that are used, as well as a function of the number and kind of retailers used.
____________9. Packaging serves two primary purposes: functional and promotional.
____________10. Price haggling is an art, and the buyer with the superior negotiating skills is
expected to do better on price than those unfamiliar with the practice.

Test II. Fill in the blank/s

Module in International Marketing | 55

 1. The typical __________________ associated with international marketing include: market
research; 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; product modification;
and special packaging.
2. Personal selling does not always require a face-to-face conversation. For instance,
personal selling may be done over the ________________ and this is called
telemarketing.
3. The purpose of promotion is both to ______________________ with buyers and to
influence them.
4. _______________________ is related to the number of middlemen at a particular point or
step in the distribution channel.
5. The ________________________ includes the physical handling and distribution of goods,
the passage of ownership (title), and—most important from the standpoint of
marketing strategy—the buying and selling negotiations between producers and
middlemen and between middlemen and customers.
6. One limitation of indirect selling is that the indirect channel may not necessarily
be ___________________.
7. The ________________________ also consists of three other distinct but interrelated
activities: personal selling, publicity, and sales promotion.
8. A high ___________________ provides pricing flexibility because the company has the
advantage of being above the market if it so chooses.
9. A ____________________ change may be either mandatory or at the discretion of the
marketer.
10. For a product to gain acceptance, it must demonstrate its ______________________________
over existing alternatives.

Test III. Research Work

1. Explain (in the international context) how these product attributes affect product
adoption: relative advantage, compatibility, trialability/divisibility, observability,
complexity, and price.
2. As an advertising manager, do you plan to use a standardized advertisement?
3. Distinguish between direct and indirect selling channels.What are the advantages
and disadvantages of these channels?
4. Cite some foreign regulations that restrict the use of either advertising in general or
certain advertising practices in particular, and offer the rationale for these
regulations.
5. Go to the soft drink section of a supermarket. How many different types of soft-
drink packages are there (in terms of size, form, and so on)? Should any of them be
modified for overseas markets?

Module in International Marketing | 56

UNIT V. EXPORT FINANCING

Overview

This unit gives an idea on export financing. Further, insights about pre-
shipment finance and post-shipment finance.

Learning Objectives

At the end of the unit, I am able to:

1. define export financing.

2. discuss the pre-shipment finance.
3. state the objectives of pre-shipment finance.
4. enumerate the types of pre-shipment finance and the stages of pre-
shipment finance.
5. discuss the post-shipment finance.
6. discuss the type of finances under post-shipment finance.
7. enumerate the types of post-shipment finance.

Setting Up

Name: _________________________________ Score: ____________________________

Course/Year/Section: _____________________ Date: ____________________________

Activity 5

Direction: Look at the picture below. Answer the following questions below.

1. What do you think about the pictures?

2. Is there a relationship among them?
3. Explain briefly their relationship.

Module in International Marketing | 57

Answer:

_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________

Lesson Proper

Introduction

Export Financing is the term used to describe the

broad variety of financing based on the export
market. The goal of export financing is to enable
companies to enter a foreign market.

After the shipment has passed domestic customs,

there could be a substantial amount of time when
the goods are in transit and are then received by
the importer. In particular, when it comes to
developing markets, the opportunity to apply favorable payment terms to the
importer is also a big part of securing an order. The objective of export finance is to
maintain a positive cash flow cycle during the gap.

Pre-shipment Finance

Pre-shipment finance is credit granted to the exporters by a financial

institution. Pre-shipment credit is a part of working capital finance. Pre-shipment
finance includes any finance that an exporter needs before they send goods to a
buyer. 

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The main objectives behind pre-shipment finance are:

 Procure raw materials.

 Carry out manufacturing process.

 Provide a secure warehouse for goods and raw material.

 Process and pack the goods.

 Ship the goods to the buyers.

 Meet other financial costs of the business.

Types of Pre-shipment Finance

Following special schemes are available lo in respect of pre-shipment finance

1. Extended Packing Credit Loan- This type of packing credit is advanced by

the bankers to their customers who are considered as first class customers
for them. This facility is extended for a short period in order to enable the
customers acquire or procure goods. Once goods are acquired in the custody
of the exporter, the bank converts this clean advance into hypothecation or
pledge loan.

a. Packing Credit Loan (Hypothecation) - This facility may be an

extended one over what we had studied above after procuring the raw
materially by the customer. Or this credit may be made available for
obtaining raw materials, work-in-progress and finished goods. Such
goods are made available as security for loan granted. The production
of such raw materials and work-in-progress or work-in-process into
finished goods can be undertaken even by sub-contractors.
b. Packing Credit Loan (Pledge) - This facility is available for material
which are seasonal or obtained in odd bunched lots. The documents
relating to acquisition of raw materials are pledged to the bank, while
possession remains with the exporter. Such raw material is pledged
with the bank to obtain advances.

2. Secured Shipping Loan - Secured shipping loan may be obtained once the
goods are delivered to the transport operator or to the shipping clearing and
forwarding agent. It shall be issued against receipt of the lorry or railway
receipt. It is prolonged for a very short period of time, taking into account the
time taken to transport goods to port and the completion of the shipping and
customs formalities.

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 3. Advances against Red Clause Letter of Credit - If the exporter wishes to
obtain packing credit then the importer should request that the letter of
credit be opened by the red clause. Red clause letter of credit authorizes local
banks to grant advances to exporters for the processing of export orders to
meet their working capital requirement. The issuing Bank guarantees these
advances.

4. Advance against Check or Draft - If exporters have earned direct payments

from abroad through checks or drafts, then the bank may grant expo credit at
a concessional rate to exporters with good track records until the time of
check or draft proceeds are realized. The banks, however, have to be assured
that the proceeds are under an export order.

5. Pre-Shipment Credit in Foreign Currency (PCFC) -  Under the PCFC

scheme, exporters are allowed to avail pre-shipment credit in a convertible
currency at interest rates not exceeding 0.75 per cent over 6 months LIBOR,
i.e., on the basis on London Inter-Bank Offered Rate. The credit will be self-
liquidating in nature and will be adjusted by discounting the relative export
bill designated in foreign currency.  The credit under this scheme is available
for a maximum period of 180 days. If extended beyond this period, 2 percent
penal interest is charged. If the PCFC is not adjusted within 360 days, it will
be adjusted at the TT selling rate for the currency concerned and will be
treated as a rupee advance.

6. Advances against Duty Drawback - The import duty paid on raw materials
or components for export production or the excise duty paid on items
indigenously produced for export are repaid to the exporter on completion of
the export. The several items on which duty drawbacks are determined by
the policies of the Government. The need for advance against duty drawback
arises because of the delay involved in verifying the claims of the exporter on
completion of the export. The items on which duty drawbacks are eligible
will have the funds locked up till the government releases them after due
verification the claim. During this interval, the exporter seeks financial
assistance from the bank as the amounts due to him are locked up.

Different Stages of Pre-Shipment Finance

Appraisal and sanction of limits

 Pre-shipment finance or packing credit is essentially a working capital advance

made available for the specific purpose for
procuring/processing/manufacturing of goods meant for export. Both expenses
will be able to be funded under the packaging credit before shipment. Packing
advance credit should only be liquidated from export proceeds. While
considering credit facilities for export activities, banks examine the aspects of

Module in International Marketing | 60

 product profile, country profile and commodity profile in particular. The bank
also look into the status report of the prospective buyer, with whom the
exporter proposes to do business.

Disbursement of Packing Credit Advance

 Once the proper sanctioning of the documents is done, bank ensures whether
exporter has executed the list of documents mentioned earlier or not.
Disbursement is normally allowed when all the documents are properly
executed. Sometimes an exporter is not able to produce the export order at
time of availing packing credit. So, in these cases, the bank provide a special
packing credit facility and is known as Running Account Packing.

Follow up of Packing Credit Advance

 Exporters must submit inventory statement containing all the relevant stock
details. The banks then use it as a guarantee to secure the packing credit
ahead of time. The Bank also decides on the presentation rate for these
stocks. In addition, registered dealers (banks) often inspect the stock at
regular intervals, physically.

Liquidation of Packing Credit Advance

 Packing Credit Advance needs to be liquidated from as the preceding

shipment's export proceeds, thus turning reshipment credit into post
shipment credit. This liquidation can also be accomplished through the
payment receivable from the Government and includes duty drawback,
payment from the Central Government's Market Development Fund (MDF),
or from any other relevant source.

Overdue Packing

 Bank considers a packing credit to be late, unless the creditor liquidates the
packing credit on the due date. And if the situation continues then the bank
must take the required action to recover its dues according to the usual
recovery protocol.

Special Cases

Packing Credit to Sub Supplier

Packing credit can only be shared between the Export Order Holder (EOH) and the
producer of the products on the basis of disclaimer. This disclaimer is normally
issued by the EOH to indicate that it does not use any credit facility against the
portion of the order being transferred on the manufacturer's behalf.

This disclaimer is also signed by the bankers of EOH after which they have an option
to open an inland letter of credit specifying the goods to be supplied to the EOH as a

Module in International Marketing | 61

part of the export transaction. On basis of such letter of credit, the sub supplier bank
may grant a packing credit to the sub supplier to manufacture the components
required for exports. On supply of goods, the letter of credit opening bank will pay
to the sub supplier's bank against the inland documents received on the basis of the
inland letter of credit opened by them.

The final responsibility of EOH is to export the goods as per guidelines. Any delay in
export order can bring EOH to penal provisions that can be issued anytime. The
main objective of this method is to cover only the first stage of production cycles,
and is not to be extended to cover supplies of raw material etc. Running account
facility is not granted to sub suppliers. In case the EOH is a trading house, the facility
is available commencing from the manufacturer to whom the order has been passed
by the trading house.

Banks however, ensure that there is no double financing and the total period of
packing credit does not exceed the actual cycle of production of the commodity.

Running Account facility

It is a special facility under which a bank has the right to grant the exporter of any
origin a pre shipment advance for export. Sometimes banks also scale out these
facilities depending on the exporter's good track record. In return the exporter will
deliver the letter of credit / company export order within a given timeframe.

Pre-shipment Credit in Foreign Currency (PCFC)

Authorized dealers are permitted to extend Pre-shipment Credit in Foreign

Currency (PCFC) with an objective of making the credit available to the exporters at
internationally competitive price. This is considered as an added advantage under
which credit is provided in foreign currency in order to facilitate the purchase of
raw material after fulfilling the basic export orders.

The rate of interest on PCFC is linked to London Interbank Offered Rate (LIBOR).
According to guidelines, the final cost of exporter must not exceed 0.75% over 6
month LIBOR, excluding the tax. The exporter has freedom to avail PCFC in
convertible currencies like USD, Pound, Sterling, Euro, Yen etc. However, the risk
associated with the cross currency truncation is that of the exporter.
The sources of funds for the banks for extending PCFC facility include the Foreign
Currency balances available with the Bank in Exchange, Earner Foreign Currency
Account (EEFC), Resident Foreign Currency Accounts RFC(D) and Foreign
Currency(Nonresident) Accounts.

Packing Credit Facilities to Deemed Exports

Deemed exports made to multilateral funds aided projects and programs, under
orders secured through global tenders for which payments will be made in free
foreign exchange, are eligible for concessional rate of interest facility both at pre and
post supply stages.

Module in International Marketing | 62

Advance against Checks/Drafts received as advance payment

Where exporters receive direct payments from abroad by means of checks/drafts

etc. the bank may grant export credit at concessional rate to the exporters of goods
track record, till the time of realization of the proceeds of the checks or draft etc.
The Banks however, must satisfy themselves that the proceeds are against an export
order.

Post Shipment Finance

Post Shipment Finance is a kind of loan provided by a financial institution to an

exporter or seller against a shipment that has already been made. This type of
export finance is granted from the date of extending the credit after shipment of the
goods to the realization date of the exporter proceeds. Exporters don’t wait for the
importer to deposit the funds.

Basic Features

The features of post shipment finance are:

Purpose of Finance
Post shipment finance is meant to finance export sales receivable after the date of
shipment of goods to the date of realization of exports proceeds. In cases of deemed
exports, it is extended to finance receivable against supplies made to designated
agencies.

Basis of Finance
Post shipment finances is provided against evidence of shipment of goods or
supplies made to the importer or seller or any other designated agency.

Types of Finance

Post shipment finance can be secured or unsecured. Since the finance is extended
against evidence of export shipment and bank obtains the documents of title of
goods, the finance is normally self-liquidating. In that case it involves advance
against undrawn balance, and is usually unsecured in nature.
Further, the finance is mostly a funded advance. In few cases, such as financing of
project exports, the issue of guarantee (retention money guarantees) is involved and
the financing is not funded in nature.

Module in International Marketing | 63

Quantum of Finance

As a quantum of finance, post shipment finance can be extended up to 100% of the

invoice value of goods. In special cases, where the domestic value of the goods
increases the value of the exporter order, finance for a price difference can also be
extended and the price difference is covered by the government. This type of finance
is not extended in case of pre shipment stage. Banks can also finance undrawn
balance. In such cases banks are free to stipulate margin requirements as per their
usual lending norm.

Period of Finance

Post shipment finance can be off short terms or long term, depending on the
payment terms offered by the exporter to the overseas importer. In case of cash
exports, the maximum period allowed for realization of exports proceeds is six
months from the date of shipment. Concessive rate of interest is available for a
highest period of 180 days, opening from the date of surrender of documents.
Usually, the documents need to be submitted within 21days from the date of
shipment.

Financing For Various Types of Export Buyer's Credit

Post shipment finance can be provided for three types of export:

 Physical exports: Finance is provided to the actual exporter.

 Deemed export: Finance is provided to the supplier of the goods which are
supplied to the designated agencies.
 Capital goods and project exports: Finance is sometimes extended in the
name of overseas buyer. The disbursal of money is directly made to the
domestic exporter.

Supplier's Credit

Buyer's Credit is a special type of loan that a bank offers to the buyers for
large scale purchasing under a contract. Once the bank approved loans to the buyer,
the seller shoulders all or part of the interests incurred.

Types of Post Shipment Finance

The post shipment finance can be classified as:

1) Export Bills purchased/discounted.

2) Export Bills negotiated
3) Advance against export bills sent on collection basis.
4) Advance against export on consignment basis
5) Advance against undrawn balance on exports
6) Advance against claims of Duty Drawback.

Module in International Marketing | 64

1. Export Bills Purchased/ Discounted. (Documents against Payment &
Documents against Acceptance Bills)

Export bills (Non L/C Bills) is used in terms of sale contract/ order may be
discounted or purchased by the banks. It is used in indisputable international trade
transactions and the proper limit has to be sanctioned to the exporter for purchase
of export bill facility.

2. Export Bills Negotiated (Bill under L/C)

The risk of payment is less under the LC, as the issuing bank makes sure the
payment. The risk is further reduced, if a bank guarantees the payments by
confirming the LC. Because of the inborn security available in this method, banks
often become ready to extend the finance against bills under LC. However, this
arises two major risk factors for the banks:

1) The risk of nonperformance by the exporter, when he is unable to meet his

terms and conditions. In this case, the issuing banks do not honor the letter
of credit.
2) The bank also faces the documentary risk where the issuing bank refuses to
honor its commitment. So, it is important for the negotiating bank, and the
lending bank to properly check all the necessary documents before
submission.

3. Advance against Export Bills Sent on Collection Basis

Bills can only be sent on collection basis, if the bills drawn under LC have
some discrepancies. Sometimes exporter requests the bill to be sent on the
collection basis, anticipating the strengthening of foreign currency. Banks may allow
advance against these collection bills to an exporter with a concessional rates of
interest depending upon the transit period in case of DP Bills and transit period plus
usance period in case of usance bill. The transit period is from the date of
acceptance of the export documents at the bank’s branch for collection and not from
the date of advance.

4. Advance against Export on Consignments Basis

Bank may choose to finance when the goods are exported on consignment
basis at the risk of the exporter for sale and eventual payment of sale proceeds to
him by the consignee. However, in this case bank instructs the overseas bank to
deliver the document only against trust receipt /undertaking to deliver the sale
proceeds by specified date, which should be within the prescribed date even if
according to the practice in certain trades a bill for part of the estimated value is
drawn in advance against the exports.

Module in International Marketing | 65

5. Advance against Undrawn Balance

Bank advances against the undrawn balance to facilitate the exporter. The
undrawn balance cannot be more than 5% of the total invoice value. The exporter
has to give undertaking to realize and surrender the balance amount too within the
prescribed period of 180 days from the date of shipment of goods.

6. Advance against Claims of Duty Drawback

Duty Drawback is a type of discount given to the exporter in his own country.
This discount is given only, if the in-house cost of production is higher in relation to
international price. This type of financial support helps the exporter to fight
successfully in the international markets. In such a situation, banks grants advances
to exporters at lower rate of interest for a maximum period of 90 days. These are
granted only if other types of export finance are also extended to the exporter by the
same bank. After the shipment, the exporters lodge their claims, supported by the
relevant documents to the relevant government authorities. These claims are
processed and eligible amount is disbursed after making sure that the bank is
authorized to receive the claim amount directly from the concerned government
authorities.

References

Types of forms of Pre-shipment Finance retrieved from

https://howtoexportimport.com/Types-of-forms-of-Pre-shipment-Finance-
4605.aspx

Export Post-shipment Finance retrieved from

http://www.eximguru.com/exim/guides/export-finance/ch_6_post_shipment_finan
ce.aspx

Assessing Learning

Name: _________________________________ Score: ____________________________

Course/Year/Section: _____________________ Date: ____________________________

Activity 5

Test I. Identification Identify the word or group of word that best described the
statement below. Write the answer on the space provided before the number.

___________________ 1) This is a type of discount given to the exporter by his own

country.

Module in International Marketing | 66

___________________ 2) Finance is provided to the supplier of the goods which are
supplied to the designated agencies.

___________________ 3) This can be of short term or long term, depending on the

payment term that is offered by the exporter to the overseas importer.

___________________ 4) Post shipment finances is provided against evidence of shipment

of goods or supplies made to the importer or seller or any other designated agency.

___________________5) This facility may be an extended one over what we had studied
above after procuring the raw materially by the customer

___________________ 6) Term used to describe the broad variety of financing based on

the export market.

___________________ 7) This is the credit granted to the exporters by a financial

institution.

___________________ 8) This may be obtained once the goods are delivered to the
transport operator or to the shipping clearing and forwarding agent.

___________________ 9) Exporters must submit the inventory statement containing all

the relevant stock details.

___________________ 10) It is a special facility under which a bank has the right to grant
the exporter of any origin a pre shipment advance for export.

Test II. Classification. Classify the word or group of word that best described the
statement below. Write the answer on the space provided before the number.
________________________1) This type of financial support helps the exporter to fight
successfully in the international markets.

________________________ 2) It is used in indisputable international trade transactions

and the proper limit has to be sanctioned to the exporter for purchase of export bill
facility

________________________3) This is a special type of loan that a bank offers to the buyers
for large scale purchasing under a contract.

________________________4) Finance is provided to the supplier of the goods which are

supplied to the designated agencies.

________________________5) This is the maximum allowed period for realization of export

proceeds.

Module in International Marketing | 67

________________________6) This type of export finance is granted from the date of
extending the credit after shipment of the goods to the realization date of the
exporter proceeds

________________________7) If the exporter wishes to obtain packing credit then the

importer should request that the letter of credit be opened by the red clause.

________________________8) Pre-shipment finance or packing credit is essentially a

working capital advance made available for the specific purpose for processing of
goods meant for export.

________________________9) Packing credit can only be shared between the Export Order
Holder (EOH) and the producer of the products on the basis of disclaimer

________________________10) It is a special facility under which a bank has the right to

grant the exporter of any origin a pre shipment advance for export.

Test III. True or False State whether the statement are True or False. Write True if
the statement is correct and write F is the statement is incorrect.

_______ 1) According to guidelines, the final cost of exporter must not exceed 0.75%
over 7 month LIBOR.

_______ 2) Post Shipment Finance is credit granted to the exporters by a financial

institution. Pre-shipment credit is a part of working capital finance.

_______ 3) If exporters have earned direct payments from abroad through checks or
drafts, then the bank may grant expo credit at a concessional rate to exporters with
good track records until the time of check or draft proceeds are realized.

_______ 4) The credit under this scheme is available for a maximum period of 180
days.

_______ 5) The final responsibility of EOH is to export the goods as per guidelines

_______ 6) Post shipment finances is provided against evidence of shipment of goods

or supplies made to the importer or seller or any other designated agency.

_______ 7) Under disbursement of packing credit advance exporters must submit

inventory statement containing all the relevant stock details.

_______ 8) Under physical exports post shipment finance can be extended up to the
100% of invoice value of goods.

_______ 9) Finance is sometimes extended in the name of overseas buyer. The

disbursal of money is directly made to the domestic exporter

_______ 10) Buyer's Credit is a special type of loan that a bank offers to the buyers for
large scale purchasing under a contract.

Module in International Marketing | 68

Test IV. Essay

1. What is the difference between pre-shipment finance and post-shipment

finance?

2. Which among the pre-shipment finance you think is the hardest to handle?
Explain your answer.

3. What are the main objectives of pre-shipment finance?

4. Considering the current condition of our economy, do you still think that
export financing is feasible?

5. What are the classification of post-shipment finance?

Module in International Marketing | 69

UNIT VI. DOCUMENTATION

Overview

This unit gives an idea about the function of documentary credits, documentary
collections and the marine insurance.

Learning Objectives

At the end of the unit, I am able to:

1. define documentary credits, documentary collections and marine insurance.
2. discuss the functions and utility of documentary credits, documentary
collections and marine insurance,
3. distinguish the different documents needed for exporting and importing,
4. identify different type of documentary credits, documentary collections and
marine insurance.

Setting Up

Name: _________________________________ Score: ____________________________

Course/Year/Section: _____________________ Date: ____________________________

Direction: Look at the picture below. Answer the following questions:

1. Kindly describe the picture below

2. What do you think is the relationship of each to one another?

Module in International Marketing | 70

Lesson Proper

Documentary Credit

According to International Chamber of Commerce- “Documentary Credit, as any

arrangement however named or described whereby a bank (the issuing bank)
acting at the request and in accordance with the instruction of a customer (the
applicant to the credit) is to make payment to or to the order of the third party (the
beneficiary) or is to pay, accept or negotiate bills of exchange drawn by the
beneficiary, authorize such payments to be made or such drafts to be paid, accepted
or negotiated by another bank against stipulated documents and compliance with
stipulated terms and conditions.” According to International Chamber of Commerce.

“Under a banker’s letter of credit, the issuing bank gives a written undertaking on
behalf of the buyer that the bank will honour the obligation of payment of
acceptance, as the case may be on presentation of stipulated documents.” -
According to S.K. Verghese

That is nowadays the most common form of payment. Under this scheme, the
importer's banker undertakes the duty of paying the exporter within a specified
time, on the importer’s orders, if the exporter submits such shipping and payment
documents covering the goods. In turn, the issuing bank's credit is replaced with
that of the buyer.

Such written undertaking of the importer’s banker to the exporter is known as

Letter of Credit (L/C). In other words documentary credit means arrangement made
with the bank in which bank accepts the responsibility to make payment or accept
the bills on behalf of importer.

As bank prepares a letter regarding this agreement, that document is called the
'credit letter' or sometimes it is also called the 'credit' paper. When bill is submitted
before the bank or bank accepts the bill by sign, it means commitment is made to
pay the bill’s money on maturity date. Thus accepted bills are treated as 'Bank
Accepts'.

Export of one country becomes the import of other country and in this circumstance
documentary credit is the chain between both the parties.

Normally, importer makes arrangement to open credit account and its benefits go to
exporter. But both the parties should accept its condition. Importer gives the
instruction to bank to open credit account in the favor of exporter. Importer gives all
the information to bank, such as description of goods, quality, quantity, price
documents to be received, date of dispatch of the goods on steamer, type of
insurance, credit approval date, whether credit is revocable or irrevocable etc.

Module in International Marketing | 71

Functions and Utility of Documentary Credit:

Credit has a significant role in this new commercial age. In the capitalist
economic system it has got more value. That is why, it is called as heart of modern
industrial system and life blood of business. Credit instruments are important in
both domestic trade as well as in foreign trade.

Documentary Credit in International Marketing:

Under this international payment system, the importer’s bank assumes the
responsibility of paying the exporter within a specified time, if the exporter submits
documents relating to the shipment of goods, as instructed by the importer. In
reality, the issuing bank's credit is substituted for buyer's credit. In other terms the
importer's bank's written undertaking to the export. In other words the written
undertaking of the importer’s bank to the exporter is known as the letter of credit.

Parties to Letter of Credit:

There are four parties to the letter of credit:

1. Importer: In letter of credit there must be an importer and the letter of

credit is opened at the initiative and request of the importer.
2. Issuing Bank of Opening Credit: It is the bank in the importer’s country
issuing the letter of credit at the request of the importer.
3. Agent Bank: Agent bank is a bank in the exporter’s country which
guarantees the credit at the request of the issuing bank.
4. Beneficiary: Beneficiary is the party in whose favor the letter of credit is
issued i.e. the exporter.

Different Types of Documentary Credit:

In accordance with the terms attached to them, documentary credit or letters

of credit may be classified as:

Revocable and Irrevocable Letters of Credit:

The issuing bank clearly states in the revocable letter of credit that the credit
can be revoked at any time without the exporter’s consent or notice. The exporter
has no other way out to recover his dues once the credit is revoked. Under this type
of credit, the interest of the exporter is not protected, and thus is not very common
in international trade. Revocable credits are never confirmed.

The irrevocable letter of credit, on the other hand, cannot be revoked by the
issuing bank. Under irrevocable credit, the issuing bank is under an obligation to
make the payment if the terms of credit are satisfied. The exporter, under this type
of letter of credit feels secure that the credit cannot be cancelled or revoked without
the consent of or notice to all the parties concerned.

Module in International Marketing | 72

Confirmed and Unconfirmed Letters of Credit:

Because the importer and the exporter live in separate countries, the
exporter is unaware of the soundness of the bank of the importer, issuing the letter
of credit. Therefore, he needs a local bank in his country to commit itself to having
him pay as soon as the documents are delivered soon after the shipment to reduce
the risk of his payment. The commitment for the payment by a local bank on behalf
of the issuing bank is called confirmation of letter of credit.

Assignable and Non-Assignable Letters of Credit:

Credit letters may be assignable or non-assignable. An assignable letter of

credit is one that can be allocated to any other party by the receiver (or on whose
behalf it is opened). This form of letter of credit is given in favor of an importer /
buyer's representative particularly if he does not know who will eventually be the
merchandise's exporter.

Once the representative finds a suitable person or firm (exporter) which is

able and willing to ship the goods on the terms specified by the importer, he assigns
the letter of credit to the party (exporter) concerned.

A non-assignable letter of credit is one which cannot be transferred to any

other person by the beneficiary, i.e. in whose favor, which it is issued. Generally, it is
opened in the name of the actual exporter after the order is confirmed by the
exporter.

Ancillary Letters of Credit (Back to Back Letter of Credit):

These are assisting letters of credit based on the original letters of credit. If
the exporter in whose favor the letter of credit is opened, has no funds and no line of
credit with a bank, and consequently is unable to buy the merchandise ordered, he
may request the negotiating bank to open its own letter of credit to third party (the
seller of goods) under the identical terms contained in the original letter of credit.

If the original letter of credit is irrevocable, the bank may issue its own letter
of credit known as ancillary letter of credit, honor the drafts of the seller on receipt
of the shipping documents and cancel the ancillary letter of credit. The exporter
presents his draft for the amount of the original letter of credit, but receives only the
difference between the amount of the draft and the amount paid by the bank on the
draft drawn under the ancillary letter of credit.

Process of Documentary Credit:

All the four parties perform their duties and responsibilities in the process of
documentary credit. In this process the importer applies to his bank to open
documentary credit in favor of exporter, after a written agreement between
importer and exporter. After that application is analyzed by the bank which is
expected to provide credit.

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After getting information from the agent’s bank, the exporter arranges the shipment
of goods, writes bill and hands over all instruments to agent’s bank. After that, the
agent bank sends the concerned instruments to the issuing bank after fulfilling
acceptance and payment related functions. Ultimately credit provider bank informs
the importer that all the instruments concerning goods have been received by it.
The importer on getting such information, makes all necessary payments and takes
delivery of goods with the help of instruments.  

Thus, documentary credit system is very important from commercial point of view.
This system of payment is less expensive. The exporter gets assurance from the
bank regarding the payment amount. Moreover, the importer remains confident
that exporter will get dues only when all the conditions mentioned in credit letter
are fulfilled completely by him.

Such credit is useful for both parties to the agreement and encourages international
trade to a great extent.

Documents Used in a Documentary Credit:

In general the following documents are attached with the letter of credit:

1. Bill of Lading - A bill of lading (BL or BoL) is a legal document issued by a

carrier to a shipper that details the type, quantity, and destination of the
goods being carried. A bill of lading also serves as a shipment receipt when
the carrier delivers the goods at a predetermined destination. This document
must accompany the shipped products, no matter the form of transportation,
and must be signed by an authorized representative from the carrier,
shipper, and receiver.

2. Commercial Invoice - The commercial invoice is a legal document between

the supplier and the customer that clearly describes' the sold goods, and the
amount due on the customer. The commercial invoice is one of the main
documents used by customs in determining customs duties

3. Insurance Policy -  is a service which may reimburse senders whose parcels
are lost, stolen, and/or damaged in transit

4. Certificate of Origin - A Certificate of Origin (CO) is a document attesting

that goods in a particular export shipment are wholly obtained or produced
or manufactured or processed in a particular country (country of origin)

5. Letter of Hypothecation - A letter of hypothecation is a document signed by

the customer conveying to a barker the full ownership of goods at the port of
destination in respect of which he has made advance either by loan or by
acceptance or negotiation of bills of exchange.

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 6. Certificate of Weight - The exporter should verify whether a CO is required
with the buyer and/or an experienced shipper/freight forwarder.
A certificate of weight is a document issued by customs, certifying
gross weight of the exported goods.

Documentary Collection

A documentary collection is a process by which an exporter's bank collects

funds from the importer's bank in exchange for documents detailing shipped
merchandise. A documentary collection is a trade transaction in which exporters
allow their bank to act as a collection agent for payment of shipped goods to the
buyer.

Understanding a Documentary Collection

A documentary collection is so-called because the exporter receives payment

from the importer in exchange for the shipping documents, with the funds and
documents channeled through their respective banks.

Shipping documents are documents required for the buyer to clear customs
and take delivery of the goods. Shipping documents include a commercial
invoice, certificate of origin, insurance certificate, and packing list. A key document
in documentary collections is the bill of exchange or draft, which is a formal demand
for payment from the exporter to importer.

Types of Documentary Collections

D/Cs can be classified into two types, depending on when the payment is made to
the exporter:

1. Documents against payment (D/P) requires the importer to pay the face
amount of the draft at sight. In other words, the payment must be made to
the bank before the buyer's bank or collecting bank releases the documents.
A D/P is also called a Sight Draft or Cash against Documents.
2. Documents against acceptance (D/A) requires the importer to pay on a
specified future date. A D/A/ involves the buyer or importer to make a
promise to pay, which is called a time draft. Once the buyer accepts the time
draft and the promise to pay, the bank releases the documents to the buyer.

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Special Considerations: The Documentary Collection Process

The D/C process involves the exporter (or the seller), the importer (or the
buyer), the remitting bank (or the seller's bank), and the collecting bank (or the
buyer's bank).

Below is the step-by-step process:

1. The sale is made when the buyer and seller agree on the amount to be paid,
the shipping details, and that the transaction will be a documentary
collection. Then, the exporter delivers the goods to the port or location
where the merchandise will be exported from, which is usually through a
freight forwarder.
2. The documents are prepared and sent to the exporter's bank, which is also
known as the remitting bank. The exporter's bank then forwards the
documents to the importer’s bank, which is known as the collecting bank.
3. The importer's or buyer's bank receives the documents and notifies the
buyer that documents have been received. The buyer's bank requests
payment from the buyer in exchange for the documents.

The buyer might pay the collecting bank on sight or called cash against
documents, or the buyer might agree to accept a time draft whereby the buyer will
pay at a future date. If the importer signs the time draft, it becomes a binding
obligation to pay by the due date shown on the draft.

Once the buyer's bank has been paid, or the buyer has accepted the time
draft, the bank releases the documents to the buyer. The buyer takes the documents
to the point of entry or shipment such as a port and uses the documents to collect
the merchandise.

The buyer's bank wire transfers the funds to the exporter's bank or notifies
the exporter's bank that the time draft has been accepted. The exporter's bank then
pays the exporter once funds have been collected from the buyer's bank.

Other Considerations: The Risks of Documentary Collections

The exporter's risk is higher with a time draft versus a sight draft. The
exporter might not get paid in the case of a time draft. Also, the buyer's bank would
have released the documents with the buyer's acceptance of the time draft meaning
the buyer would have the merchandise.

If the transaction is a sight draft, the seller's risk is limited if the buyer didn't
pay. With a sight draft, the buyer would not have access to the goods because the
buyer's bank would not release the documents without payment. The seller would
have to find another buyer or pay to have the goods shipped back home.

Unfortunately, D/Cs can be exploited by fraudsters posing as either the

exporter or importer. As a result, D/Cs are not recommended for exports to nations

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that are politically or economically unstable. D/Cs are best suited for established
trade relationships in sound export markets, and for transactions involving ocean
shipments rather than air or land shipments, which are more difficult to control.

Marine Insurance

The concept of marine insurance refers to the protection of products shipped

from the country of origin to the destination country. The term originates from the
fact that the goods were usually shipped by sea for international trade.
Notwithstanding what the name means, maritime insurance extends to all modes of
freight transport. When the goods are sent by air, their insurance is also known as
marine cargo insurance.

For certain export-trade arrangements insurance is also compulsory. This

could be the exporter's or the importer's duty to pay the shipping insurance
expenses, depending on the contract terms. The need for insurance goes beyond
contractual commitments, however, and there are some compelling reasons for
buying it before the export cargo is dispatched.

Marine insurance transfers the liability of the goods from the parties and
intermediaries involved to the insurance company. The legal liability of the
intermediaries handling the goods is limited to begin with. The exporter, instead of
bearing the sole responsibility of the goods, can buy an insurance policy and get
coverage for the exported goods against any possible loss or damage.

The carrier of the goods, be it the airline or the shipping company, may bear
the cost of damages and losses to the goods while on board. However, the
compensation agreed upon is mostly on a ‘per package’ or ‘per consignment’ basis.
The coverage so provided may not be sufficient to cover the cost of the goods
shipped. Therefore, exporters prefer to ship their products after getting it insured
the same with an insurance company.

Marine insurance is necessary to meet the contractual obligations of

exports. To align with agreements such as cost insurance and freight (CIF) or
carriage and insurance paid (CIP), the exporter needs to take marine insurance to
protect the buyer’s or their bank’s interest and honor the contractual obligation.
Similarly, in the case of Delivered Duty Unpaid (DDU) and Delivered Duty Paid
(DDP) terms, the seller may not be obligated to insure the goods, although in
practice they generally do.

To avoid insurance claims, ensure the following:

1. Packing of goods should be done keeping in mind their safety during loading
and unloading
2. Packing should be good enough to withstand natural hazards to the best
extent possible
3. Keep in mind the possibility of clumsy handling or theft when packing goods.

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Types of Marine Insurance

1. Freight Insurance - Under freight insurance, if the goods are damaged under
transit, the carrier will lose freight receivables and hence insurance is given on
liability for freight loss.
2. Liability Insurance - Marine Liability insurance is where compensation is
purchased to provide any liability that occurs because a ship crashes or
collides.
3. Hull Insurance- Hull Insurance covers the hull & torso of the transportation
vehicle. It covers the transportation against damages and accidents.
4. Marine Cargo Insurance - Marine cargo policy applies to compensation of
goods shipped to the country of destination from the country of origin

Types of Marine Insurance policies:

1. Floating policy - Instead of taking insurance separately for each shipment,

large exporters may opt for an open policy, also known as a blanket policy.
An open policy is a one-time plan that offers protection to all shipments
made, sometimes a year, during the agreed duration. The exporter may need
to declare periodically (say, once a month) the detail of all shipments made
during the period, type of goods, modes of transport, destinations, etc.

2. Voyage policy - With a single lot or consignment only a common policy can
be implemented. Each time a shipment is shipped overseas, the exporter
must buy insurance cover. The downside is that every time an exporter sends
a consignment there is extra effort and time involved. Conversely, with open
policies, shipments are fully insured.

3. Time policy - Time policy is implemented usually for a period of one year.
One can issue for more than a year, or they may extend to complete a
particular trip. But usually this is for a fixed time.

4. Mixed policy - is a mixture of two policies i.e Voyage policy and Time policy.

5. Named policy - is one of the most popular policies in marine insurance

policy. The name of the ship is mentioned in the insurance document, stating
the policy issued is in the name of the ship.

6. Port Risk policy -It is a policy taken to ensure the safety of the ship when it
is stationed in a port.

7. Fleet policy - Several ships belonging to the company/owner are covered

under one policy. Where it has the advantage of covering even the old ships.
Also the policy is a time based policy.

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 8. Single Vessel policy - In single vessel policy only one vessel is covered
under marine insurance policy.

9. Blanket policy - In this policy, the owner has to pay the maximum
protection amount at the time of buying the policy.

References:

Documentary Credit: Functions, Types and Process | International Marketing

retrieved from
https://www.artofmarketing.org/international-payments/documentary-credit-
functions-types-and-process-international-marketing/13577

Different Types of Marine Insurance & Marine Insurance Policies retrieved from
https://www.marineinsight.com/maritime-law/different-types-of-marine-
insurance-marine-insurance-policies/

Assessing Learning

Name: _________________________________ Score: ____________________________

Course/Year/Section: _____________________ Date: ____________________________

Activity 6

Test I. Critical Thinking Questions

1. What is documentary credit? Explain your answer.

_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
2. What are the document that are being used in a documentary credit?
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________

3. What are the types of documentary collection?

_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________

4. Is marine insurance only applicable for sea transportation?

Module in International Marketing | 79

 _____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________

5. Which type of marine insurance policy is the best for you? Explain your
answer.
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Test II. Identification. Write the word or group of words that best describe the
statement below. Write the answer on the space provided before the number.

___________________________1. If the goods are damaged under transit, the carrier will lose
freight receivables and hence insurance is given on liability for freight loss.

___________________________2. This is also known also known as a blanket policy

___________________________3. In letter of credit there must be an importer and the letter

of credit is opened at the initiative and request of the importer

___________________________4. The exporter has no other way out to recover his dues
once the credit is revoked.

___________________________5. This is a legal document issued by a carrier to a shipper

that details the type, quantity, and destination of the goods being carried

___________________________6. This is a service which may reimburse senders whose

parcels are lost, stolen, and/or damaged in transit

___________________________7. This collection is a trade transaction in which exporters

allow their bank to act as a collection agent for payment of shipped goods to the
buyer.

___________________________8. This is the key document in documentary collection

because it is a formal demand for a payment from the exporter to importer.

___________________________9. This requires the importer to pay on a specified future

date

___________________________10. The term originates from the fact that the goods were
usually shipped by sea for international trade.

___________________________11. This insurance transfers the liability of the goods from

the parties and intermediaries involved to the insurance company.

___________________________12. This insurance is where compensation is purchased to

provide any liability that occurs because a ship crashes or collides

Module in International Marketing | 80

___________________________13. It requires the importer to pay the face amount of the
draft at sight.

___________________________14. The exporter should verify whether a CO is required with

the buyer and/or an experienced shipper/freight forwarder.

___________________________15. One of the main documents used by customs in

determining customs duties.

___________________________16. It serves as a shipment receipt when the carrier delivers

the goods at a predetermined destination.

___________________________17. Bank in the exporter’s country which guarantees the

credit at the request of the issuing bank.

___________________________18. This policy is implemented usually for a period of one

year. One can issue for more than a year, or they may extend to complete a
particular trip. But usually this is for a fixed time.

___________________________19. It is the bank in the importer’s country issuing the letter

of credit at the request of the importer.

___________________________20. This applies to compensation of goods shipped to the

country of destination from the country of origin

___________________________21. Only one vessel is covered under marine insurance

policy.

___________________________22. Several ships belonging to the company/owner are

covered under one policy.

___________________________23. A mixture of two policies.

___________________________24. A single lot or consignment only a common policy can be

implemented.

___________________________25. In this policy, the owner has to pay the maximum

protection amount at the time of buying the policy.

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Test III. Enumeration. Enumerate what is asked in the following:

Type of marine insurance policy

1._______________________________________
2. _______________________________________
3. _______________________________________
4. _______________________________________
5. _______________________________________

Types of marine insurance

6. _______________________________________
7. _______________________________________
8. _______________________________________
9. _______________________________________
10. _______________________________________

What are the documents used in a documentary credit?

11. _______________________________________
12. _______________________________________
13. _______________________________________
14. _______________________________________
15. _______________________________________

Module in International Marketing | 82

UNIT VII. LAWS AND REGULATIONS

Overview:

This unit tackles the laws and regulations of the international market. Tariff
systems and non-tariff barriers will also be covered under this unit.

Learning Objectives:

At the end of the unit, I am able to:

1. discuss the International Laws, rules, and standards
2. identify the tariff systems
3. distinguish the non-tariff barriers

Setting Up

Name: __________________________________________ Date:__________________

Course/Year/Section: ________________________ Score: ________________

Direction: Explain this phrase. And write your answer on the space provided.

You can't sell to a new market until you understand their politics
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________

Lesson Proper

International Laws, Rules, and Standards

All products operate within an institutional environment, which is made up of a set

of political, social and legal ground rules. These ground rules form the laws of all
production, exchange and distribution and give rise to certain expectations and
assurances about the actions of others, and give order and stability to the means of
doing business. The most important rules in any system are those defining,
allocating and enforcing property rights, and rules and conventions defining
allowable and non-allowable forms of cooperation and competition (standards,

Module in International Marketing | 83

rules of contract, fair trading etc). Well defined and enforced systems regarding
property rights are essential. Articulated ownership and rights to use, trade and
alter assets is vital to market development, since this assigns to individuals the right
to benefits and losses in production and marketing activities.

Rules and conventions specifying entry conditions and boundaries on cooperative

and competitive policies also facilitate exchange and coordination. The
establishment and enforcement of standards can reduce transaction costs by
increasing the available information to buyers and consumers. Standards may
include basic weights, measures, quality grades and contract forms. Quality
standards may be mandatory or voluntary and minimum or multiple grades. These
standards help where trade is at a distance. The EU has a strict set of standards
regarding horticultural products for example, including hygiene, quality and
certificates of origin.

Licensing also facilitates marketing agencies and producers by reducing transaction

costs. This occurs when the criteria for licensing revolves around asset holdings,
financial solvency and so on. Performance standards are built in to maintain the
licensing agreement.

Increasingly, consumer and trading bodies like the EU are enforcing the disclosure
of more and more information. Particularly, these efforts revolve around packaging,
labelling and information, for example, pesticides used on horticultural produce. As
this trend to disclosure of information grows, along with the phenomenon of
product liability, regulations regarding certain tests or inspection of products,
handling and processing procedures may be enforced. So may ingredient and
nutrition information. This is becoming an increasingly important issue as food
products become more complex and varied. One of the problems with this noble
effort to inform the consumer is that producers may lose their competitive
differentiation advantage through divulging information to competitors.

The EU has gone to extraordinary lengths to inform the consumer, issuing directives
on product descriptions and pricing. For example the EU directive on the pricing of
cabbages runs to hundreds of pages and, what constitutes "chocolate" and a
"sausage" to name but two products, is quite revealing. (see chapter on Product
Decisions). The following case proves the point2.

The EU is also very strict, as is the USA, on food additives or flavour substitutes. It is
particularly so for any substance which may have long term harmful effects. The EU
produces "E numbers" standards for product additives and artificial colorants or
flavourings.

As indicated in the introduction to this section, the international legal framework is

somewhat confused. Most controls or regulations revolve around export and import
controls, transfer pricing, taxes, regulation of corrupt practices, embargoed nations,

Module in International Marketing | 84

antitrust, expropriation and distribution of equity, patents and trademarks. The
following touches on a number of these issues and in particular the import/export
regulations (terms of access).

International law

To many, the supreme body is the International Court of Justice, situated in The
Hague, Holland. Here a number of international disputes may be taken for ultimate
adjudication. However, a series of other bodies and legislation exists.

a) FCN (Friendship, Commerce and Navigation) and Tax Treaties primarily US based
and concerned with giving protection of trading rights and avoiding double taxation.

b) IMF and GATT already discussed in the previous section and concerned with
member nations international trade restrictions and dumping.

c) UNCITRAL (UN) international trade law commission set up with the intent to
provide a uniform commercial code for the whole world, particularly international
sales and payments, commercial arbitration and shipping legislation. Works with
international chambers of commerce and Governments.

d) ISO (International Standards Organisation) often works with ILO, WHO etc. and
contains technical committees working on uniform standards.

e) Patents and trademarks there is no such thing as international patent. The most
important patent agreement is the International Convention for the Protection of
Industrial Property, first signed in 1983 and now honoured by 45 countries. The
treaty provides that if a filee files in a signatory country within one year of the first
filing, the filee will be afforded the date of the first filing for priority purposes.

A patent cooperation treaty (PCT) and a European Patent Convention are also in
effect. The PCT has 39 countries including the USA, Japan and Brazil. The EU
convention covers 15 countries and gives patent protection in all 15 if signified in
one.

f) Air transport is covered mainly by IATA (International Air Transport Authority),

ICAA (International Civil Aviation Authority) and ITU (International
Telecommunication Company).

g) Codes of conduct, like those in the OECP, are not technical law but important.
Member countries produce guidelines for multinational enterprises covering
aspects of general policy, disclosure of information, competition, financing, taxation,
employment and industrial relations.

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h) Recourse arbitration is an attempt to reduce disputes by consultation. Some of
the most widely used are the International Chamber of Commerce, the American
Arbitration Association, the London Court of Arbitration and the Liverpool Cotton
Exchange.

Terms of access

One particular area where legal/political effects are felt by international marketers
is in the terms of access, so the rest of this section will be given over to a discussion
of these. The phrase "terms of access" refers to all the conditions that apply to the
importation of goods from a foreign country. The major instruments covered by this
phrase include import duties, import restrictions or quotas, foreign exchange
regulations and preference arrangements.

Tariff systems

Tariff systems provide either a single rate of duty for each item applicable to all
countries, or two or more rates, applicable to different countries or groups of
countries. Tariffs are usually grouped into two classifications:

Single-column tariff: The single-column tariff is the simplest type of tariff and

consists of a schedule of duties in which the rate applies to imports from all
countries on the same basis.

Two-column tariff: Under the two-column tariff, the initial single column of duties
is supplemented by a second column of "conventional" duties which show reduced
rates agreed through tariff negotiations with other countries. The conventional
rates, for example those agreed upon by "convention", are supplied to all countries
enjoying MFN (most favoured nation) treatment within the framework of GATT.
Under GATT, nations agree to apply their most favourable tariff or lowest tariff rate
to all nations who are signatories to GATT, with some substantial exceptions.

Preferential tariff

A preferential tariff is a reduced tariff rate applied to imports from certain countries.
GATT prohibits the use of preferential tariffs with the major exceptions of historical
preference schemes, such as the British Commonwealth preferences and similar
arrangements that existed before the GATT convention; preference schemes that are
part of a formal economic integration treaty, such as free-trade areas or common
markets; and the granting of preferential access to industrial country markets to
companies based in less-developed countries.

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Types of duty

Customs duties are of two different types. They are calculated either as a specific
amount per unit or specific duty, or as a percentage of the value of the goods or ad
valorem, or as a combination of both of these methods.

Ad valorem duties: This duty is expressed as a percentage of the value of goods.

The definition of customs value varies from country to country. Therefore an
exporter is well advised to secure information about the valuation practices applied
to his product in the country of destination. A uniform basis for the valuation of
goods for customs purposes was elaborated by the Customs Cooperation Council in
Brussels and was adopted in 1953. In countries adhering to the Brussels convention
on customs valuation, the customs value is landed CIF cost at the port of entry. This
cost should reflect the arm's-length price of the goods at the time the duty becomes
payable. Major trading nations that are not members of the Brussels convention on
customs valuation are the USA and Canada, which use FOB costs as the basis of
valuation, and Japan, which uses CIF value.

Specific duties: These duties are expressed as a specific amount of currency per

unit of weight, volume, length or number of other units of measurements; for
example, fifty US cents per pound, one dollar per pair, twenty-five cents per square
yard. Specific duties are usually expressed in the currency of the importing country,
but there are exceptions, particularly in countries that have experienced sustained
inflation. In the Chilean tariff, rates are given in gold pesos and, therefore, must be
multiplied by an established conversion factor to obtain the corresponding amount
of escudos.

Alternative duties: In this case both ad valorem and specific duties are set out in
the custom tariff for a given product. Normally, the applicable rate is the one that
yields the higher amount of duty, although there are cases where the lower is
specified.

Compound or mixed duties: These duties provide for specific plus ad valorem

rates to be levied on the same articles.

Anti-dumping dunes: The term dumping refers to the sale of a product at a price

lower than that normally charged in a domestic market or country of origin. To
offset the impact of dumping, most countries have introduced legislation providing
for the imposition of antidumping duties if injury is caused to domestic producers.
Such duties take the form of special additional import charges designed to cover the
difference between the export price and the "normal" price, which usually refers to
the price paid by consumers in the exporting countries. Anti-dumping duties are
almost invariably applied to articles that are produced in the importing country.

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Other import charges

Variable import levies: Several countries, including Sweden and the European

Union, apply a system of variable import levies to their imports of various
agricultural products. The objective of these levies is to raise the price of imported
products to the domestic price level.

Temporary import surcharges: Temporary surcharges have been introduced from

time to time by certain countries, such as the UK and the USA, to provide additional
protection for local industry and, in particular, in response to balance of payments
deficits.

Compensatory import taxes: In theory these taxes correspond with various

international taxes, such as value-added taxes and sales taxes. Such "border tax
adjustments" must not, according to GATT, amount to additional protection for
domestic producers or to a subsidy for exports. In practice, one of the major tax
inequities today is the fact that manufacturers in value-added tax (VAT) countries
do not pay a value added tax on sales to non-VAT countries such as the USA while
USA manufacturers who pay income taxes in the USA must also pay VAT taxes on
sales in VAT countries. For example, EU imposition of a tax on imported
horticultural products.

Adaptation to meet local requirements: The impact of adaptation to conform to

local safety and other requirements can be crippling. For example, a Jaguar car made
in the UK and sold in Japan would be three times its UK value. An alternative
approach to the Japanese market would be to begin with the Japanese customer to
identify the customer's wants and needs and to design a product for that market or
to adapt the design to a world design that would fit the needs and wants in both the
domestic and the Japanese markets. The implementation of such a program would
involve major marketing investments by the Jaguar Motor Company in establishing
distribution, advertising and promotion, training and developing organisations to
market the car in Japan. It would also involve significant expenditures in designing
the car to appeal to the needs of the Japanese customer.

What are Non-Tariff Barriers?

Non-tariff barriers are trade barriers that restrict the import or export of goods
through means other than tariffs. The World Trade Organization (WTO) identifies
various non-tariff barriers to trade, including import licensing, pre-shipment
inspections, rules of origin, custom delayers, and other mechanisms that prevent or
restrict trade.

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Developed countries use non-tariff barriers as an economic strategy to control the
level of trade they conduct with other countries. When making decisions on the non-
tariff barriers to implement in international trade, countries base the barriers on the
availability of goods and services for import and export, as well as the existing
political alliances with other trade partners.

Developed countries may elect to release other countries from being subjected to
additional taxes on imported or exported goods, and instead create other non-tariff
barriers with a different monetary effect.

Origin of Non-Tariff Barriers

During the formation of nation-states, countries had to devise ways of raising

money to finance local projects and pay recurrent expenditures. One of these ways
was the introduction of tariffs, which placed restrictions on imported and exported
goods and services.

However, industrialized countries transitioned from tariff barriers to non-tariff

barriers since they had built other sources of funding. Most developing nations still
rely on tariff barriers as a way of raising revenues to finance national projects while
regulating international trade with other countries.

Afterward, the industrialized countries switched from tariff to non-tariff barriers for
several reasons. One reason is to regulate international trade, even in the absence of
tariff barriers. It exempts certain countries from paying additional taxes on goods,
and instead, create other meaningful non-traffic barriers.

The second reason for introducing non-tariff barriers is to support weak industries
that have been affected by the reduction or withdrawal of tariff barriers. The final
reason is that non-tariff barriers are an avenue for interest groups to influence trade
regulation in the absence of trade tariffs.

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Types of Non-Tariff Barriers

Non-tariff barriers may take the following forms:

1. Protectionist barriers

Protectionist barriers are designed to protect certain sectors of domestic industries

at the expense of other countries. The restrictions make it difficult for other
countries to compete favorably with locally produced goods and services. The
barriers may take the form of licensing requirements, allocation of quotas,
antidumping duties, import deposits, etc.

2. Assistive policies

Although assistive policies are designed to protect domestic companies and

enterprises, they do not directly restrict trade with other countries, but they
implement actions that can restrict free trade with other countries. Examples of
assistive barriers include custom procedures, packaging and labeling requirements,
technical standards and norms, sanitary standards, etc.

International companies must meet the requirements before they can be allowed to
export or import certain goods into the market. The governments also help
domestic companies by providing subsidies and bailouts so that they can be
competitive in the domestic and international markets.

3. Non-protectionist policies

Non-protectionist policies are not designed to directly restrict the import or export
of goods and services, but the overall outcomes lead to free trade restrictions. The
policies are primarily designed to protect the health and safety of people and
animals while maintaining the integrity of the environment.

Examples of non-protectionist policies include licensing, packaging and labeling

requirements, plant and animal inspections, import bans for specific fishing or
harvesting methods, sanitary rules, etc.

Examples of Non-Tariff Barriers

1. Licenses
Licenses are one of the most common instruments that most countries use to
regulate the importation of goods. The license system allows authorized companies
to import specific commodities that are included in the list of licensed goods.

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Product licenses can either be a general license or a one-time license. The general
license allows importation and exportation of permitted goods for a specified
period. The one-time license allows a specific product importer to import a specified
quantity of the product, and it specifies the cost, country of origin, and the customs
point through which the importation will be carried out.

2. Quotas
Quotas are quantitative restrictions that are imposed on imports and exports of a
specific product for a specified period. Countries use quotas as directive forms of
administrative regulation of foreign trade, and it narrows down the range of
countries where firms can trade certain commodities. It caps the number of goods
that can be imported or exported at any given time.

3. Embargoes
Embargoes are total bans of trade on specific commodities and may be imposed on
imports or exports of specific goods that are supplied to or from specific countries.
They are considered legal barriers to trade, and governments may implement such
measures to achieve specific economic and political goals.

4. Import deposit
Import deposit is a form of foreign trade regulation that requires importers to pay
the central bank of the country a specified sum of money for a definite period. The
amount paid should be equal to the cost of imported goods.

References:

The Legal, Political/Trade Environment retrieved from

http://www.fao.org/3/w5973e/w5973e08.htm#TopOfPage
Non- Tariff Barriers retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/economics/non-tariff-
barriers/

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Assessing Learning

Name: _______________________________________ Date:________________

Course/Year/Section: _____________________ Score: ______________

Activity 7

Test I. Identification Identify the word/s being described in each number.

______________________________1. A form of foreign trade regulation that requires

importers to pay the central bank of the country a specified sum of money for a
definite period.
______________________________2. One of the most common instruments that most
countries use to regulate the importation of goods.
______________________________3. The policies are primarily designed to protect the
health and safety of people and animals while maintaining the integrity of the
environment.
______________________________4. Designed to protect certain sectors of domestic
industries at the expense of other countries.
______________________________5. Designed to protect domestic companies and
enterprises, they do not directly restrict trade with other countries, but they
implement actions that can restrict free trade with other countries.

Test II. Enumeration. List down all the items required in each number.

Types of Non-Tariff Barriers

1. _______________________________________________________
2. _______________________________________________________
3. _______________________________________________________

Other Import Charges

4. _______________________________________________________
5. _______________________________________________________
6. _______________________________________________________
7. _______________________________________________________

Test III. Essay

Taking any piece of legislation or example of your choice show how this has been used
in either furthering or hindering international marketing.
.________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________

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 ________________________________________________________________________________________
____________________________________________

4. Describe the major non- tariff barriers which can be used in international trade as
barriers to entry. Give examples.
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
____________________________________________

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