International Business and Trade Buma 20043

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Office of the Vice President for Academic Affairs

College of Business Administration
DEPARTMENT OF ENTREPRENEURSHIP
INSTRUCTIONAL MATERIALS FOR

(BUMA 20043: INTERNATIONAL BUSINESS AND TRADE)
COMPILED BY:
CRESILDA M. BRAGAS, MBA

PAUL JOHN G. RACI
PUP A. Mabini Campus, Anonas Street, Sta. Mesa, Manila 1016

Direct Line: 335-1730 | Trunk Line: 335-1787 or 335-1777 local 000
Website: www.pup.edu.ph | Email: inquire@pup.edu.ph
THE COUNTRY’S 1st POLYTECHNIC U

TABLE OF CONTENTS
Introduction ............................................................................................................................................. 3
Course Outcomes ................................................................................................................................... 3
LESSON 1: INTERNATIONAL BUSINESS AND TRADE ........................................................................ 4

I: Definition of International Business and Trade ................................................................................... 4
II: Difference between International Business and Trade ....................................................................... 5
III: Importance of Business and Trade ................................................................................................... 5
IV. Benefits and Importance of International Business ........................................................................... 6
Case Sample ............................................................................................................................................ 6
Assessments ............................................................................................................................................. 6
LESSON 2: THE INTERNATIONAL BUSINESS ENVIRONMENT ........................................................... 7

I: Advantages and Disadvantages of International Business ................................................................. 8
II: International Business Plan................................................................................................................ 9
III: Types of International Business ........................................................................................................ 9
IV: Factors Affecting International Business ......................................................................................... 10
V:Driving Force of International Business ............................................................................................ 11
VI: Barriers and Constraints of International Business ......................................................................... 13
Case Sample .......................................................................................................................................... 15
Assessments ........................................................................................................................................... 16
LESSON 3: THE INTERNATIONAL BUSINESS OPERATIONS ........................................................... 17

I: Factors to Consider in International Business .................................................................................. 17
II: The Nature and Scope of International Business ............................................................................. 19
Case Sample .......................................................................................................................................... 20
Assessments ........................................................................................................................................... 20
LESSON 4: INTERNATIONAL TRADE ................................................................................................. 21

I: Historical Overview of International Trade......................................................................................... 21
II: Types of International Trade ............................................................................................................ 24
III: Reasons for International Trade ...................................................................................................... 24
IV: Business on Exports, Import, and Outsourcing ............................................................................... 25
International Business and Trade Page 1 of 97

V: Global Production, Outsourcing, and Logistics ............................................................................... 27
VI: Advantages and Disadvantages of International Trade................................................................... 31
Case Sample. ......................................................................................................................................... 33
Assessments ........................................................................................................................................... 35
LESSON 5: GLOBAL TRADE AND INVESTMENT ENVIRONMENT .................................................... 36
I: The International Trade Theory......................................................................................................... 36

II: Political Economy and International Trade ...................................................................................... 42
III: Foreign Direct Investment .............................................................................................................. 44
IV: The Global Capital Market .............................................................................................................. 46
V: The International Monetary Fund .................................................................................................... 48
Case Sample .......................................................................................................................................... 50
Assessments ........................................................................................................................................... 51
LESSON 6: INTERNATIONAL COMMERCIAL TERMS ........................................................................ 52

I: The Concept of INTERCOM ............................................................................................................ 52
II: Transfer of Risks............................................................................................................................. 59
III: The INTERCOM 2020:The Main Changes ...................................................................................... 60
Article Review........................................................................................................................................ 65
Assessments ........................................................................................................................................... 67
LESSON 7: INTERNATIONAL MARKETING MANAGEMENT ............................................................. 68

I: The Concept of International Marketing ........................................................................................... 68
II: Challenges and Scope of International Marketing ........................................................................... 73
III: International Marketing Planning, Organizing and Controlling ......................................................... 76
IV: International Marketing Entry Decision ........................................................................................... 81
Assessments ........................................................................................................................................... 90
GRADING SYSTEM
REFERENCES
MIDTERM EXAMINATION
FINAL EXAMINATION

INTRODUCTION
Trade and international business has been the core of every economy in the world. There is no
country which level of development been achieved without committing a large section of its economy in
trade and international business; China for example did transform its economy into the second most
developed in the world by enormously engaging in the production and sale of manufactured products and
do businesses overseas. South Korea also followed the same path and so with Singapore. But why
commit more resources for international business and trade. The local economy is so restricted, there is
not much opportunity to grow and earnings are so limited. In order to overcome this problem, countries
need to export more and engage more commercially with the outside world. The arena of international
management has never offered so many opportunities and challenges to individual managers,
businesses, governments, and the academic community alike. The expansion of the global market has
created a need for managers who are familiar with the problems of international trade and finance such
as culture, political structure, foreign exchange, geographical terrain, time, food and technology.
Globalization is an accepted phenomenon of the 21st century. As goods and services

increasingly move across international borders ever greater expertise is required to make such activity as
smooth as possible. Failure of World Trade Organization talks means that barriers and challenges to that
free and smooth flow of trade remain. One sure way of overcoming obstacles is to be in possession of
the right knowledge, organizational strategies and competent team and leader to carry out various trade
activities in the global arena.
COURSE OUTCOMES
After successfully completed this module, students will be able to:
 Understand the international business environment

 Analyze the factors influencing international business and trade
 Analyze the implication of globalization to international business and trade
 Evaluate a business scenarios that provides international business and trade opportunities
 Design effective and efficient strategy appropriate for an organization to enter international
market.

LESSON ONE
INTERNATIONAL BUSINESS AND TRADE
OVERVIEW
The rationale for the first kind of trade is very clear. So long as the importing country can afford to buy the
products or services they are able to acquire things which, otherwise they would have to do without.
Examples of differing significance are the import of bananas into the UK, in response to consumer
demand, or copper to China, an essential for Chinese manufacturing industry. The second kind of trade
is of greater interest because it accounts for a majority of world trade today and the rationale is more
complex. The UK imports motor cars, coal, oil, TV sets, domestic appliances and white goods, IT
equipment, clothing and many more products which it was well able to produce domestically until it either
transferred production abroad or ceased production as local industries became uncompetitive. At first
sight, It would seem a waste of resources to import goods from all over the world in which a country could
perfectly well be self-sufficient.
Learning Outcomes:
 Define international business and trade

 Discuss the difference of International Business between International Trade
 Explain the importance and benefit International Business
COURSE MATERIALS
I. DEFINITION OF INTERNATIONAL BUSINESS
International business refers to business activities among various business entities world-wide
that involved the trading of goods, services, technology, capital and/or knowledge across international
boundaries and borders. Normally, this involves business transactions between two countries or more
involving goods and services. At the current conditions, international business is primarily guided by the
systems of globalization. International trade on the other hand is the trading of goods and services
commonly known as exports and imports across international borders or territories because of
differences in need and resources and the cost of production of a product or service. In most countries,
trade represents a sizable amount of their GDP.
II. THE DIFFERENCE BETWEEN INTERNATIONAL BUSINESS AND INTERNATIONAL

TRADE
International trade is an industrial concept or category. An international business constitutes one of

the many component parts (organizations) that make up international trade.
For example, international banking is a type of industry in the field of international trade. Deutsche Bank
exists as one component of international banking. International trade also means the aggregation of ALL
of the various industries playing in the international trade sandbox.
International business refers to international trade whereas a global business is a company

doing business across the world. For example the trading of oil by oil producers and oil consumers is an
international business involving mostly OPEC countries and countries that buy oil and facilitated by global
business entities like Shell and Chevron.
III. THE IMPORTANCE OF INTERNATIONAL BUSINESS AND TRADE
The importance of international trade for different countries is that it is an important factor in raising
living standards, providing employment and enabling consumers to enjoy a greater variety of goods.
World exports of goods and services have increased to $2.34 trillion ($23,400 billion) in 2016.
International Business on the other hand takes the job of facilitating export and import; it arranged
international loans for countries for growth and development and is an influential factor in growth and
development
IV. BENEFITS IF INTERNATIONAL BUSINESS AND TRADE
There are advantages which may be accrued from international business and trade enumerated as
follows:
 Increased revenues – the firm‘s scope of market practically will increase when there is trade
with other countries because a firm can sell its products world-wide.
 Enhances competition – since a firm now sells in other countries must expect that competition is
intense and thus is forced to make its operation highly efficient and quality.
 Improvement in product quality – since foreign markets are highly competitive firms need to
improve quality and be efficient in order to survive and be profitable.
 Low capital cost – capital cost in a highly liberalized market is cheap because of competition.
 Better risk management – risk arising from higher cost is minimized due to enormous number of
suppliers selling similar materials or merchandize.
 Benefiting from currency exchange – when a country is observing free trade, its companies
are basically into foreign enabling them to earn more dollars thus making the exchange rate of our
Peso is more stable.
 Access to export financing > because of intense export activities in the economy, normally,
because of the government desire to help export firms with their financing needs, the government
in most cases open a highly subsidized loans to these firms.
 Wider market for domestic product – a country which is in free trade can create a much bigger
size of markets for its firms.

CASELET:
An X& Y enterprise is exporting desiccated coconut to Russia. Its buyer is a Russian-owned company
that produces detergents, soap products, shampoo and some cosmetics. Its market is the whole of
Russia including the Asian part of the country and some to former soviet states in central Asia. The
company has been making sales equivalent to 50million US dollars per year. However the problem of
shipment has been perennial since the COVID-19 pandemic started and became worst at the height of
the health crisis in Russia. However when China opened up and began to schedule train trips to Russia
via the Trans Siberian Railway, goods are accommodated and therefore Russian shipment can be
transported through this route. But there is big problem for its transportation from Manila to China and a
sea transport company offered services but the freight is so expensive. Russia has been the biggest
market but the earnings from continuing business with the Russian company has been turning negative.
If you owned X&Y what will you do and why?
ASSESSMENTS:
1. Are business and trade inseparable in actual setting? Why?
2. How do you attribute international trade to the growth of the nation economy? Explain
3. Identify some of the benefits which may be deriving from engaging in international trade.
4. Identify the elements of the firm‘s business environment, political environment, and technological
environment.
5. What factors are the most to affect a firm‘s operation? Explain.

LESSON TWO
THE INTERNATIONAL BUSINESS ENVIRONMENT
OVERVIEW
Countries trade with each other due to some reasons foremost among them is the ability to produce a
given product which a country may have expertise but others do not have and vice versa involving other
products. In order to satisfy their need despite of the absence of resources and technical knowhow these
countries will have to sourced that from countries which posses the capability to produce the items
cheaply and qualitatively. Similarly, the exporting countries cannot produce some needed products
efficiently and qualitatively but such are within the expertise of importing countries to produce thus for
both parties to benefit they trade with one another. Other than these, there are other reasons why
countries engage in trade.
Learning Outcomes:
 Define Advantages and Disadvantages of International Business

 Know the steps to create International Business Plan
 Determine the types of International Business
 Analyze factors affecting International Business
 Recognize the driving force of International business
 Identify the barriers and Constraints in International Business
COURSE MATERIALS
I. ADVANTAGES AND DISADVANTAGES OF INTERNATIONAL BUSINESS
We can enumerate some of these advantages as follows:
 Wide market – the business organization‘s markets are considered the entire world.
 Minimal business risk- since the market is enormous there is no problem about buyers
 More human talent may be accessed because of your world-wide operation thus enabling
the firm to lower its managerial and labor cost
 Easier to develop your brand –a good quality product may easily be known world-wide because
your product has presence in many countries
 Attaining Economies of Scale production – your fixed cost may reduce substantially because
of your high volume production.

 Susceptibility to consumers taste and fashion – any change in consumer demand worldwide
especially on designs, style, prices, quality among others, the firm will have to follow otherwise it
will loss markets.
 Improved consumer confidence
DISADVANTAGES
 Foreign rules and regulations – since your operation is world-wide, you need to adhere to
various laws in countries where you operate.
 Handling logistics – logistical problem can be one of the serious problems a firm may encounter
due to shipping delays and loss of shipments.
 Speaking the language – communication problem can be problematic for your expats and even
the domestically hired may have some difficulty communicating with their bosses.
 Coordinating time zones – coordinating with various offices world-wide becomes problematic
due to variation in time zone.
 Foreign exchange rate – this affects the value of local branches profits due to fluctuation in
exchange caused by a rise in the value of the US dollar.
 Mitigating credit risk – credit risk is justified because of the trend with regards to payment
practices; If you don‘t adopt such you‘ll have a restricted sale.
 It poses greater risk for unpaid international sales – the risk of having unpaid receivables are
greater for foreign accts than domestic.
 Following Foreign Politics – the governments of your foreign buyers can order your importer not
to purchase your products because only of political differences with the government.
 Gathering market research – if a local firm has business outside of the country it would be
easier to gather data through its businesses for use in business and market analysis.
 The desire to expand can be done easily because of the big markets offered by foreign
countries.
II. INTERNATIONAL BUSINESS PLAN
 An International Business Plan is about the development of a business proposal on how to start
a new business venture in abroad. This may consist of a new business or a new product or
service of an existing business and this is applicable to all types of businesses.

Steps in creating an international business plan
1. Identify the business strategy goal. What do you want to achieve in opening a business
abroad? Is it to enlarge your market or obtain a good return for your business
2. Decide on what product or service to market. You have to decide what product or service you
want to sell in the international markets. Decide on this based on your assessment about the
marketability of the product or service you have in mind
3. Conduct a feasibility study for such product. As in any business, before you start you need to
make a sort of determining its viability by conducting a project study or feasibility study. But since
you‘ll be dealing with international business environment, environmental factors are somehow
more complicated
4. Ascertain the level of competition in your target market. International markets are so
competitive before you engage business seize them up first if you can compete with them
especially in price and quality and of course the level of competence required from your
managers.
5. Identify and plan especially on various strategies to adopt especially marketing Strategy.
Formulate a strategic plan including development of tactics and strategies required for your plan
6. Determine the needed organizational structure for your international business. Decide on
your organizational structure. Be sure that this one can generate higher productivity and minimize
cost.
III. TYPES OF INTERNATIONAL BUSINESS
We can categorize international business as follows:
a. Exporting – selling finished products or unprocessed one including services abroad.
b. Licensing – is about giving permission to domestic firms abroad to process or produce

your products under your strict supervision using your own name and logo and formula.
Normally, the foreign owner has to have shares in the firm to be setup up to 40%
(Philippines) and partake in the profit and management of the company. E.g. Toyota
Motors of Japan and Toyota Motors Phils. The latter is licensed to produce Toyota
products in the Philippines like Vios, Innova, Wigo and Altis.
c. Franchising – is a form of business arrangement between the owner of the franchise

(franchisor) and the one to franchise called the franchisee. E.g. McDonald, KFC, KR Ace
Hardware etc.

d. Foreign Direct Investment – these are foreign companies that invested in the domestic
economy some may own one hundred percent while most 40% and rest to local investors
e.g. HSBC, Yokohama tires, and Chevrolet
IV. FACTORS AFFECTING INTERNATIONAL BUSINESS
 Political. This is the politics of the host government towards your business. Normally a
foreign business must not involve itself whatsoever in any politics in its host country
because it detriments its business interest.
 Economic. These are the economic factors which may impact the operation of your
business abroad like: the level of inflation, debts, unemployment, exchange rate,
commodity prices especially oil, and trading of securities.
 Legal. These are laws that may hamper business operations e.g. anti-trust law in the
US, Laws on intellectual property rights, laws on corrupt practices, etc. If you think your
business cannot deal with these laws legally then never attempt to open a branch in that
certain country.
 Social. The firm needs to investigate the social conditions in a country where you desire
to open a business. Like in Saudi Arabia where the social norms are so strict which are all
based on Islamic teaching thus quite difficult for you to open a business there.
 Environmental. This includes both physical, business and peace and order conditions if
such are conducive to business.
 Technical. This is the technology which your firm possesses if such is at grade against
other firms in the industry.
The government remains the driving force in international business because of its desire to develop
the economy and create employment through enhancing export oriented industries and deployment of
more businesses in the country from abroad. The government introduce various measures to encourage
more foreign businesses to put up branches in the country through low business tax, easiness in the
process and remove some requirements including corrupt officials that prey on foreign investors. Cheap
labor is also assured for foreign business including training of competent managers.
Factors of International Trade
1. Geographical factor. The reason for trade is geography and this is affected by the
following:

a. Proximity this normally affects the cost of transportation so that no matter how much
desire we have to buy Russian crude, we don‘t because of the transportation cost.
b. Endowment. Trade with countries in the Middle East normally consist of oil. This is the
only commodity which countries in the region sell to the world so without this they have
trade relation with other countries.
c. Trade alliances. Southeast Asian countries formed the ASEAN because of their desire
to achieve economic growth primarily through trade.
2. Social Factor. The volume of trade we have with the US and other western countries
such as EU is huge because we Filipinos by social orientation are western so we buy
more clothes, shoes, office equipment, and others from these countries but because high
prices we shifted to China hence this country also manufactures western design products
3. Legal factors. If some legal restrictions are observed in international trade such as those
in Bangladesh that employs children in its garment factories, trade with other countries are
affected. Because of that report, EU countries now anymore buy as much as garment
products as before
4. Behavioural Economic Forces. Due to higher prices of oil products, people tend to
lower their consumption thus affecting their buying behavior and can affect also our
importation of this commodity with various oil producers in the world
V. DRIVING FORCES OF INTERNATIONAL BUSINESS
1. Liberalization: One of the most important factors which have given a great forward thrust to
globalization since the 1980‘s is the formation of universal economic policy resulting in
liberalization of economy in many countries. The immediate result of liberalization in globalization
of business. Now many business firms can involve themselves is international trade as the
restrictions imposed by various countries is highly restricted under GATT/WTO.
2. Multi National Companies (MNCs): The companies which have taken a complete advantage of
trade liberalization caused under GATT/WTO are MNC‘s (Multi National Companies). Sony,
Philips, Coco Cola, Pepsi, Procter & Gamble, etc are some famous examples for MNCs. These
companies combine their resources and objectives to achieve profit in global market. According
to the world Investment Report 1997, there were about 44,500 MNC‘s in the world with nearly
2.77 lakhs foreign collaborations. Hence MNC‘s is an important factor inducing Globalization.
3. Technology: Technology in a powerful driving force of Globalization. Once a Technology is

developed, it soon becomes available everywhere in the world. (for example) A hospital in the
USA performs the required diagnostics on patients say an X – ray or MRI or C.T Scan. These
diagnostic tests represent technology in medical field. In the next three minutes, a radiologists in
Bangolore, India receives the scanned images from USA. He then sends his report to USA. This
is called as teleradiology. The entire process, from the time the patient was admitted, has taken
Just 20 minutes. The cost of this work is 30% lower in India compared to the USA. In short, long

distance on – line services made possible by the technological developments have given a
forward thrust to globalization.
4. Transportation and Communication revolutions: Technological revolution in several spheres,

like transport and Communication, has given a great impetus to globalization. The
Microprocessor in computers has created the flow of information from one part of the globe to
another not only fast but also cost effective. It has played a pivotal role in reducing space and
time. It has made world in to a global village. Microprocessors coupled with satellite, optical fiber,
wireless technologies, World Wide Web have made this ‗World in to a global village. The
consumers/ customers has become more global. By sitting in front of the computer and logging
on to World Wide Web the consumer can download any type of information from any part of the
world. Flow of information is business. It determines profit. Hence technology is a strong driving
force for globalization.
5. Product development and efforts: The immediate impact of increase of Technology is the
growth of new products due to innovation. The fast technology hastens product
obsolescence. This has made many firms to invest heavily on R&D activities with cross – border
alliances. These companies have to stay in business and survive competition. In order to
achieve this, many companies have crossed their borders and have tie – ups to update their
products through research and development with foreign companies. This causes globalization.
6. Rising aspirations and wants: Because of the increasing levels of education and exposure to
the media, aspirations of people around the world are rising. They aspire for everything that can
make life more comfortable and satisfying. If domestic firms are not able to meet the wants, they
would naturally turn to the foreign firms to satisfy their aspirations. This promotes globalization.
7. World economic trends: The world economic conditions are changing fast. There, is a great
difference in the growth rates of economies/ markets between developing nations and developed
nations. In developed nations the economies have become stagnant, due to saturation on the
other hand, the developing nations are experiencing tremendous growth rate in various business
sector. Cheap labor, high investment in research and development, improvements in technology
are some of the factors which have driven the developing nations towards achieving high growth
rate in business. Hence it is very common for the developing nations to have a strong
international trade links with developed nations. Thus difference in world economies between
nations causes globalization.
8. Regional Integration: Nowadays many countries are joining hands together to promote free and
fair international trade across the borders. They are forming separate trade blocks. European
Union and North American Free Trade Agreements are two such classical examples. This
promotes globalization.
9. Leverages: Leverage is simply some type of advantage that a company enjoys by conducting
business in more than one country. A global company can experience three important types of
leverages.

10. Experience transfers: The experience that a company gains by doing business in one country
can be effectively transferred to some other country if the particular company does business on
global scale. This is called experience transfer (For example) Coca-Cola first developed a strong
marketing strategy to tap tea and coffee market in India. In 2002 it became a success. From this
experience, it then joined hands with Mc Donald‘s for marketing hot beverages. The Georgia
Gold brand was thus born and it was first launched in Delhi and Mumbai. This brand is now
available in all Mc Donald‘s outlets throughout the country. The success of this business in hot
beverages with Mc Donald‘s promoted Coca-cola to enter into ice-tea and cold coffee Marketing
business in 2003.
VI. BARRIERS AND CONSTRAINTS IN INTERNATIONAL BUSINESS
Trade barriers are government-induced restrictions on international trade. Man-made trade barriers
come in several forms, including:
 Tariffs  Voluntary Export Restraints

 Non-tariff barriers to trade  Local content requirements
 Import licenses  Embargo
 Export licenses  Currency devaluation
 Import quotas  Trade restrictions
 Subsidies
Most trade barriers work on the same principle–the imposition of some sort of cost on trade that
raises the price of the traded products. If two or more nations repeatedly use trade barriers against each
other, then a trade war results.
Economists generally agree that trade barriers are detrimental and decrease overall economic
efficiency. This can be explained by the theory of comparative advantage. In theory, free trade involves
the removal of all such barriers, except perhaps those considered necessary for health or national
security. In practice, however, even those countries promoting free trade heavily subsidize certain
industries, such as agriculture and steel. Trade barriers are often criticized for the effect they have on the
developing world. Because rich-country players set trade policies, goods, such as agricultural products
that developing countries are best at producing, face high barriers. Trade barriers, such as taxes on food
imports or subsidies for farmers in developed economies, lead to overproduction and dumping on world
markets, thus lowering prices and hurting poor-country farmers. Tariffs also tend to be anti-poor, with low
rates for raw commodities and high rates for labor-intensive processed goods. The Commitment to
Development Index measures the effect that rich country trade policies actually have on the developing
world. Another negative aspect of trade barriers is that it would cause a limited choice of products and,
therefore, would force customers to pay higher prices and accept inferior quality.
In general, for a given level of protection, quota-like restrictions carry a greater potential for
reducing welfare than do tariffs. Tariffs, quotas, and non-tariff barriers lead too few of the economy‘s
resources being used to produce tradable goods. An export subsidy can also be used to give an
advantage to a domestic producer over a foreign producer. Export subsidies tend to have a particularly
strong negative effect because in addition to distorting resource allocation, they reduce the economy‘s

terms of trade. In contrast to tariffs, export subsidies lead to an over allocation of the economy‘s
resources to the production of tradable goods.
CASE: Trading Across Borders: Training for Trade Facilitation
In today‘s globalized and highly digitalized trading environment, the ability of trade professionals to
benefit from electronic systems largely depends on training and communication. In recent years, Doing
Business has captured reforms that highlight the fundamental role played by education, training and
communication in trade facilitation.
Customs clearance officials and customs brokers are two of the most important parties involved in a
typical international trade transaction. They have different but interconnected roles with regards to
education, training and communication since they are the providers and users of customs services,
respectively. While the customs clearance official is an employee of the customs administration who acts
as a law enforcement officer, the customs broker is a third-party, private entity who deals directly with
customs officials on behalf of the exporter or importer. Given these roles, communication and training on
new trade processes, as well as on IT developments, are critical.
Doing Business data show that education and training, together with communication with customs
clearance officials and customs brokers, play an important role in the successful implementation of trade-
related reforms. Furthermore, a well-trained and educated workforce is equipped with the knowledge to
perform their day-to-day duties as well as to increase the efficiency of the overall trade process.
Main findings:
 Of the economies that implemented trade reforms as captured in Doing Business 2019, 85%
regularly provide training to customs clearance officials.
 Training of customs clearance officials and customs brokers is positively associated with lower
border and documentary compliance times.
 Doing Business data indicate that the average time required to clear customs (for both exports
and imports) is 34% lower in economies where clearance officers receive regular training
compared to those where no regular training is provided.
 Worldwide, organizing workshops is the most commonly-used channel of communication to
convey changes in practice or regulations to customs officials and customs brokers.
 A majority of economies do not require a formal university degree to operate as a customs broker.
However, brokers are required to obtain a license in 75% of economies measured by Doing
Business.

ASSESSMENTS:
1. Discuss the various factors that affect business people in doing business globally.
2. How does the Philippine Export business the economy of the country? Justify your answer by
providing an example.
3. As a management student, what do you think is the most crucial step in creating an international
business plan? Why? Explain your answer briefly.
4. Enumerate at least three barriers that common Traders faced in doing international business
transactions. Why?

LESSON THREE
THE INTERNATIONAL BUSINESS OPERATIONS
OVERVIEW
The continued growth in international trade and the growing opportunities for boosting sales,
increasing market share and ROI, finding raw materials, and lowering costs in international markets have
greatly impacted businesses and how they operate. To compete in the global marketplace, professionals
must learn the strategies, policies, norms and technology necessary to conduct international business,
develop an overseas customer base and ultimately manage the international business operations. To be
successful, business professionals must understand and develop the knowledge and skills necessary to
manage the starting, or expansion of, international operations. There are four major categories of the
international business operations such as geographic conditions, cultural and social factors, political and
legal factors, and economic conditions.
Learning Outcomes:
 Identify and discuss the factors to consider in International Operations

 Illustrate and explain the nature and scope of International Business
COURSE MATERIALS
I. FACTORS TO CONSIDER IN INTERNATIONAL OPERATIONS
Geographical Factors:
 The climate, terrain, seaports, and natural resources of a country influence business activities.
 Very hot weather limits the types of crops that can be grown. It also restricts the types of
businesses that can operate in that climate.
 A hot, sunny climate is critical for growing tropical fruit, but not suitable for a ski resort.
 Mountainous terrain offers opportunities for mining but limits the amount of land available for
crops.
 A nation with many rivers or seaports is able to easily ship products for foreign trade.
 Countries with few natural resources must depend on imports.

Cultural and Social Factors:
 Cultural and Social - In some societies, hugging is an appropriate business greeting. In other
societies, a handshake is the custom. These differences represent different cultures.
 Culture is the accepted behaviors, customs, and values of a society. A society's culture has a
strong influence on business activities. For example, in Spain and parts of Latin America,
businesses traditionally were closed for several hours in the middle of the day for a long lunch or
a period of rest.
 The main cultural and social factors that affect international business are language, education,
religion, values, customs, and social relationships. These relationships include interactions among
families, labor unions, and other organizations.
Political and Legal Factors:
 Political and Legal Factors Each day, we encounter examples of government influence on
business.
 Regulation of fair advertising, enforcement of contracts, and safety inspections of foods and
medications are a few examples.
 In general, however, people in the United States have a great deal of freedom when it comes to
business activities.
 However, not all countries are like the United States. In many places, government restricts the
activities of consumers and business operators.
 The most common political and legal factors that affect international business activities include
the type of government, the stability of the government, and government policies toward business.
Economic Conditions:
 Economic Conditions Everyone faces the problem of limited resources to satisfy numerous needs
and wants.
 This basic economic problem is present for all of us. We continually make decisions about the use
of our time, money, and energy.
 Similarly, every country plans the use of its land, natural resources, workers, and wealth to best
serve the needs of its people
Factors that influence the economic situation of a country include the type of economic system,
the availability of natural resources, and the general education level of the country's population. Other
economic factors include the types of industries and jobs in the country and the stability of the country s
money supply. Available technology for producing and distributing goods and services also influences a
nation's economic situation.
II. THE NATURE AND SCOPE OF INTERNATIONAL BUSINESS
Business perspective (as opposed to functional view like marketing, financing, management etc)
grounded in global environment. To be realistic, it involves the broadest and most generalized study of
the field of business, adapted to a fairly unique across the border environment. Many conditions and
environmental variables that are significant in internal business (such as foreign legal System, foreign
exchange markets, inflationary trends, and cultural differences) are mostly irrelevant to domestic
business. However, global integration in trade, investment, factor, technology and communication has
been in practice for economies together. International business can well be broken down into foreign
trade, trade in services, portfolio investment and direct investments (FDIS).
The fundamental and the largest international business activity in many countries is the foreign
trade comprising exports and imports. Physical goods / commodities or merchandise leave the country in
export. Imports are those goods brought across the national borders into a country. The international
firms also trade in services banking, insurance, consulting, travel and transportation etc. earn in the form
of feel or royalties. The fees are earned through short or long term contractual agreements such as
consultancy or management contracts or turn key projects. Royalties are received from the use of one
company‘s name, trademark, patent or process by someone else.
Alternatively, a firm can earn royalties from abroad by licensing the use of its technology
information, Franchise in overseas markets. Portfolio investments are financial investments made in
foreign countries. The investor purchases debt or equity in the expectation of financial return on the
investment. Foreign direct investment or direct investment is one in which investor is given collecting
interest in foreign company. FDI maybe in the form of a joint venture or a wholly owned subsidiary – joint
venture is a shared ownership stake with equal share in a foreign business. Indian joint ventures abroad
are operated in more than 868 projects / enterprises. A wholly owned subsidiary can be established in
foreign markets either in the form of totally new operation or acquisition of an established firm and use
the firm to promote its products. The subsidiary, if it is established starting from the ground up is called a
Greenfield investment. However, there needs to be the perspective of the international business. That is,
the firm‘s senior management should clearly define the firm‘s guiding principles in terms of international
mandate rather than to allow firm‘s international activities to develop as an incidental or adjunct to its
domestic activities. This would help to focus the attention of mangers on the opportunities and threats
external to domestic economy.
i) Sell in those global markets when prices are highest.

ii) Reuse finances globally.
iii) Forge international strategic alliances.
iv) Take on the best talent from all over the world. You will have achieved the stature of a
true MNC

CASE
Madagascar‘s reform program dates back to the elaboration of Madagascar Naturally,

Madagascar‘s vision on how to achieve the Millennium Development Goals, which was formally unveiled
in November 2004. To realize that vision, the Madagascar Action Plan (MAP) was subsequently drawn
up. One of its commitments is for the economy to achieve a growth rate of between 7% and 10% by
2012. The document places a strong emphasis on the role of the private sector in spurring and sustaining
economic growth and identifies international trade competitiveness as a key challenge to be addressed.
Since the reform program was adopted, Madagascar‘s full integration into the Common Market for
Eastern and Southern Africa (COMESA)‘s free trade framework in 2005, and into that of the Southern
African Development Community (SADC) in 2007, has created a new sense of urgency. ―It simply isn‘t
possible to continue our old ways. We have to catch up with our competitors in the region,‖ says Patrick
Ravaoarisoa, Director of the Bureau of Standards. A private sector respondent offers a more somber
analysis: ―Free trade has come too early for Madagascar—prepare for large-scale disappearance of
economic operators in the country.‖ Globalization and regional integration were catching up with
Malagasy reality—it was reform or demise. From the time the reform was conceived until full
implementation, the reform took less than two years. This is a considerably shorter time than comparable
reforms in other countries. How was this result achieved? Part of the reason has to do with the fact that
SGS had acquired experience from other countries, such as Ghana and Côte d‘Ivoire in implementing
similar projects. ―SGS have been a very competent technical partner,‖ says Vola-Razafindramiandra.
―But the speed with which we implemented the reform is also thanks to the fact that we had a clear idea
of where we were going. Reforms are never just a question of introducing information technology, you
have to have a clear strategy if things are to work out,‖ he adds. Another critical factor in the success of
the reform was the incentives provided to customs employees under the new system. Gasynet user fees
amount to 0.50% of the CIF value of goods and parts of this amount is paid to Customs and distributed
among customs inspectors. ―Before the reform, there was a problem with staff assignments. Certain
customs posts were more attractive than others due to the amount of money an inspector could earn
under the table. Now, everyone earns a similar amount no matter where they are located, provided that
their performance is satisfactory.‖ If it isn‘t, supervisors retain the discretion of taking away this
performance incentive. ―We are the only country in the world to have adopted this exact arrangement,‖
says Vola-Razafindramiandra. ―It has greatly improved discipline within the customs service and
strengthened management‘s authority.
ASSESSMENTS:
1. What are the four parts of the international business environment?

2. What cultural factors affect international business activities?
3. Name four factors that influence a country‘s economic conditions.
4. What skills are important for success in an international business

LESSON FOUR
THE INTERNATIONAL TRADE
OVERVIEW
International trade, economic transactions that are made between countries; among the items
commonly traded are consumer goods, such as television sets and clothing; capital goods, such as
machinery; and raw materials and food. Other transactions involve services, such as travel services and
payments for foreign patents (see service industry). International trade transactions are facilitated by
international financial payments, in which the private banking system and the central banks of the trading
nations play important roles.
International trade and the accompanying financial transactions are generally conducted for the
purpose of providing a nation with commodities it lacks in exchange for those that it produces in
abundance; such transactions, functioning with other economic policies, tend to improve a nation‘s
standard of living. Much of the modern history of international relations concerns efforts to promote freer
trade between nations. This article provides a historical overview of the structure of international trade
and of the leading institutions that were developed to promote such trade.
Learning Outcomes:
 Identify and explain the effect of Import, Export in the economy.


 Determine the communication process, cultural-communication link and managing the
cross-cultural communication that affects the Import and Export

 analyze the elements of the International Trade as well as its advantages and
disadvantage

 Analyze the ground essential in the operation of International Business.
COURSE MATERIALS
I. HISTORICAL OVERVIEW OF INTERNATIONAL TRADE
At the time Adam Smith profound the value of the division of labor with David Ricardo
emphasizing the relevance of the comparative advantage theory in foreign trade this has greatly ignite
the idea of the benefits of economic integration. Since then countries have realized the need to expand
trade, and the need to sign various trade agreements. Although countries have always tried and
implement trade agreements destined to achieve greater openness and liberalized trade however the
road towards this goal was not smooth and easy. But the breakthrough came with the signing of the

General Agreement on Tariffs and Trade (GATT) in 1992 and eventually the establishment of the World
Trade Organization several years after.
Mercantilism and Multilateral Trade Liberalization
The mercantilist idea of foreign trade was the most heavily practiced system in foreign trading
through the 16th century till the last part of the 18th century by the European nations. The Mercantilist
theory also viewed foreign as a means by which to improve the economy of ones country so that always
their objective in trading with other countries was to have more export receipts than imports. However
there is something very important in this practice which most countries adopted it before the
implementation of GATT; that trade agreements that intend to assist local industries through the use of
tariffs and quotas on imports and exports of machineries and production tools and recruitment of skilled
labor overseas were prohibited. In order for the British to advance their trade interest, they passed the
British Navigation Act of 1651which under this law foreign ships were not allowed to go coastal trade in
England, and requiring all imports from continental Europe to be ferried by either British ships or ships
that were registered in the country where the goods were produced.
Later David Ricardo and Adam Smith vehemently criticized the whole doctrine of mercantilism
and emphasized the importance of imports and stated that exports were just the necessary cost of
acquiring them. Later their theories gained more support and helped to ignite a change in the trading
system and move towards trade liberalization. Later, we can see the British providing more support for
this theory.
In 1823, the Reciprocity of Duties Act was passed, which greatly aided the British carry trade and
made permissible the reciprocal removal of import duties under bilateral trade agreements with other
nations. In 1846, the Corn Laws, which had levied restrictions on grain imports, were repealed, and by
1850, most protectionist policies on British imports had been dropped. Further, the Cobden-Chevalier
Treaty between Britain and France enacted significant reciprocal tariff reductions. It also included a most
favored nation clause (MFN), a non-discriminatory policy that requires countries to treat all other
countries the same when it comes to trade. This treaty helped spark a number of MFN treaties
throughout the rest of Europe, initiating the growth of multilateral trade liberalization, or free trade.
The Deterioration of Multilateral Trade
The gains earn from actions of some countries lead by the British to achieve greater trade
liberalization slowed down in late of the 19th century due to severe economic depression in 1873. With
depression easing in1877, countries were more willing to institute measures aimed at providing greater
domestic protection and discourage importation.
Italy on its part have introduced sets of tariff in 1878 and a more severe one in 1887. Germany in
1879, became more protectionist with its "iron and rye" tariff, and France followed with its Méline tariff of
1892. Only Great Britain among major Western European powers, adhere to maintain free-trade policies.
The US did not take part in the trade liberalization program that sweep across Europe in the first
half of the 19th century. However this had changed in the latter part of the 19th century. It later practiced

protectionism and raised customs duties during the civil war and passed an ultra-protectionist trade policy
the McKinley Tariff Act of 1890.
Although liberalized trade has been enormously restricted especially during the era of
mercantilism nevertheless the volume of trade among countries has steadily increased. Despite various
hurdles international trade continued to expand however trade liberalization meets its bad fate when
World War I broke out in 1914.
After the war with nationalism steadily rising among European countries because of economic
failures, Europeans started to practice ultra nationalist ideologies that served to disrupt world trade and
dismantle the trading system that had been in place since the previous century. Due to the massive trade
barriers erected by many European countries the newly formed League of Nations organize the First
World Economic Conference in 1927 in order to introduce a new set of guidelines for the enactment of a
new multilateral trade agreement. However this proved to be unsuccessful because of the onset of the
Great Depression which triggered Europeans to initiate a new wave of protectionist measures. The
economic crisis that ensued after the First World War plus the extreme nationalism plaguing most part
Europe and Japan in Asia perpetuated the conditions that lead to the outbreak of World War II.
Multilateral Regionalism
After the Second World War which the U.S. and Britain appeared victorious were convinced the
need to redesign the worlds trade and financial system which were enormously needed to attain fast
economic recovery worldwide. The plan had resulted to the establishment of the International Monetary
Fund (IMF), World Bank, and International Trade Organization. These three institutions were formed out
of the meeting among victorious powers in the US known as the Bretton Woods Agreement. Under the
agreement the IMF and World Bank will have to play a significant roles as provided in their approved
charter primarily to achieve economic growth for member countries while the issue on trade was
assigned to another formed body the International Trade Organization but since it became unsuccessful,
its function to oversee the development of a non-preferential multilateral trading order eventually would
be taken up over by GATT which was established in 1947. The establishment of the GATT was for the
reduction of tariffs among member nations, to pave the way for the expansion of multilateral trade
however the periods that followed saw the increasing number of more regional trade agreements
established. Few years after GATT was signed, Western Europe formed a regional economic integration
by creating the European Coal and Steel Community in 1951, which later evolve into what is popularly
known as the European Union (EU).
Other regions have followed suit the steps taken by European countries. We have regional
agreements formed in Asia the ASEAN, NAFTA in North America and many other more in Central
America, Africa, and in South America. The move initiated by the Europeans have inspired other
countries to do the same although regionalism can be a both a boon and bane for a worldwide
multilateral trade but it still serve the objective for tariff reduction and enhance multilateral trade. When
the Soviet Union broke up, the EU signed trade agreements with most of the former satellite Soviet
states.

In the middle part of the 1990s, the EU signed some bilateral trade agreements with Middle
Eastern countries. The U.S. also pursued its own trade negotiations, forming an agreement with Israel in
1985, as well as the trilateral North American Free Trade Agreement (NAFTA) with Mexico and Canada
in the early 1990s. Many other significant regional agreements also took off in South America, Africa and
Asia.
In 1995, the World Trade Organization (WTO) was established to replace GATT. This body act as the
overseer of multilateral trade agreements as embodied in the Uruguay Round of trade negotiations. After
several negotiations, the world trade body has included policies on services, intellectual property rights
and investment. Presently, almost all countries are members of the WTO including China which came
late.
II. TYPES OF INTERNATIONAL TRADE
There are three types of international trade: Export Trade, Import Trade and Entreport Trade.
An export in international trade is a good or service produced in one country that is sold into another
country. The seller of such goods and services is called exporter; whereas the foreign buyer of such
goods is called an importer. Export of goods often requires the involvement of government authorities.
The import trade on the other hand is referred to as goods and services purchased into one nation from
another. The word ―import‖ originates from the word ―port‖ considering the fact that the products are
frequently transported via ship from foreign countries. Similarly to exports, imports are also the backbone
of international trade. While Entrepot trade refers to a trade in one country for the goods of other
countries. Merchandise can be imported and exported without paying import duties in entreport trade.
Because of favorable trade conditions, profit is possible at entreport trade
Elements of International Trade
There are four cost elements of international trade namely;
 Transaction costs. The costs related to the economic exchange behind trade.
 Tariff and non-tariff costs. Levies imposed by governments on a realized trade flow.
 Transport costs. The cost of transporting products from one country to another country.
 Time costs. The time needed to move them.
III. REASONS FOR INTERNATIONAL TRADE
The five main reasons why countries trade with one another
1. Differences in technology. This allows one country to acquire a product which it does not have
the technical knowledge to produce but other countries have and vice versa
2. Differences in resource endowments. The differences in the availability of resources compel

countries to trade with one another
3. Differences in demand. There are countries which supply of a given product is enormous and
thus surpasses demand. Because demand in such countries becomes lower vis-à-vis demand
these countries will have to sell their extra products to other countries.
4. The presence of economies of scale. If you can sell your products more in a big market your
cost of production becomes cheaper because of fixed cost.
5. The presence of government policies. The current government has a friendlier relations with
China thus we are buying now more goods from China like trucks, cars and Machineries similarly
for China also buys more our export products
IV. BUSINESS OPERATIONS ON EXPORT, IMPORT AND OUTSOURCING
The history of importing and exporting dates back to the Roman Empire, when European and
Asian traders imported and exported goods across the vast lands of Eurasia. Trading along the Silk
Road flourished during the thirteenth and fourteenth centuries. Caravans laden with imports from
China and India came over the desert to Constantinople and Alexandria. From there, Italian ships
transported the goods to European ports.
For centuries, importing and exporting has often involved intermediaries, due in part to the
long distances traveled and different native languages spoken. The spice trade of the 1400s was no
exception. Spices were very much in demand because Europeans had no refrigeration, which meant
they had to preserve meat using large amounts of salt or risk eating half-rotten flesh. Spices
disguised the otherwise poor flavor of the meat. Europeans also used spices as medicines. The
European demand for spices gave rise to the spice trade. The trouble was that spices were difficult to
obtain because they grew in jungles half a world away from Europe. The overland journey to the
spice-rich lands was arduous and involved many middlemen along the way. Each middleman
charged a fee and thus raised the price of the spice at each point. By the end of the journey, the price
of the spice was inflated 1,000 percent.
Exporting is defined as the sale of products and services in foreign countries that are sourced
or made in the home country. Importing is the flipside of exporting. Importing refers to buying goods
and services from foreign sources and bringing them back into the home country. Importing is also
known as global sourcing
Companies can sell into a foreign country either through a local distributor or through their
own salespeople. Many government export-trade offices can help a company find a local distributor.
Increasingly, the Internet has provided a more efficient way for foreign companies to find local
distributors and enter into commercial transactions.
Distributors are export intermediaries who represent the company in the foreign market.
Often, distributors represent many companies, acting as the ―face‖ of the company in that country,
selling products, providing customer service, and receiving payments. In many cases, the distributors

take title to the goods and then resell them. Companies use distributors because distributors know the
local market and are a cost-effective way to enter that market.
However, using distributors to help with export can have its own challenges. For example,
some companies find that if they have a dedicated salesperson who travels frequently to the country,
they‘re likely to get more sales than by relying solely on the distributor. Often, that‘s because
distributors sell multiple products and sometimes even competing ones. Making sure that the
distributor favors one firm‘s product over another product can be hard to monitor. In countries like
China, some companies find that—culturally—Chinese consumers may be more likely to buy a
product from a foreign company than from a local distributor, particularly in the case of a complicated,
high-tech product. Simply put, the Chinese are more likely to trust that the overseas salesperson
knows their product better.
Specialized Entry Modes: Contractual
Exporting is a easy way to enter an international market. In addition to exporting, companies can
choose to pursue more specialized modes of entry—namely, contractual modes or investment modes.
Contractual modes involve the use of contracts rather than investment. Let‘s look at the two main
contractual entry modes, licensing and franchising.
LICENSING. It is defined as the granting of permission by the licenser to the licensee to use intellectual
property rights, such as trademarks, patents, brand names, or technology, under defined conditions. The
possibility of licensing makes for a flatter world, because it creates a legal vehicle for taking a product or
service delivered in one country and providing a nearly identical version of that product or service in
another country. Under a licensing agreement, the multinational firm grants rights on its intangible
property to a foreign company for a specified period of time. The licenser is normally paid a royalty on
each unit produced and sold. Although the multinational firm usually has no ownership interests, it often
provides ongoing support and advice. Most companies consider this market-entry option of licensing to
be a low-risk option because there‘s typically no up-front investment.
For a multinational firm, the advantage of licensing is that the company‘s products will be manufactured
and made available for sale in the foreign country (or countries) where the product or service is licensed.
The multinational firm doesn‘t have to expend its own resources to manufacture, market, or distribute the
goods. This low cost, of course, is coupled with lower potential returns, because the revenues are shared
between the parties.
FRANCHISING. Similar to a licensing agreement, under a franchising agreement, the multinational firm
grants rights on its intangible property, like technology or a brand name, to a foreign company for a
specified period of time and receives a royalty in return. The difference is that the franchiser provides a
bundle of services and products to the franchisee. For example, McDonald‘s expands overseas through
franchises. Each franchise pays McDonald‘s a franchisee fee and a percentage of its sales and is
required to purchase certain products from the franchiser. In return, the franchisee gets access to all of
McDonald‘s products, systems, services, and management expertise.
Specialized Entry Modes:

 Investment. Beyond contractual relationships, firms can also enter a foreign market through one
of two investment strategies: a joint venture or a wholly owned subsidiary.
 Joint Venture. An equity joint venture is a contractual, strategic partnership between two or more
separate business entities to pursue a business opportunity together. The partners in an equity
joint venture each contribute capital and resources in exchange for an equity stake and share in
any resulting profits. (In a nonentity joint venture, there is no contribution of capital to form a new
entity.) Equity joint venture may be done between a foreign firm and a local firm. In the Philippines
the capitalization of a foreign partner is only 40% of the total capitalization of the business as
allowed in our constitution. The foreign put up factories here and produce its products in the
Philippines and sell more of it in our market and the rest is exported.
Risks of Joint Ventures
Equity joint ventures pose both opportunities and challenges for the companies involved. First and
foremost is the challenge of finding the right partner—not just in terms of business focus but also in terms
of compatible cultural perspectives and management practices. Second, the local partner may gain the
know-how to produce its own competitive product or service to rival the multinational firm. This is what‘s
currently happening in China. To manufacture cars in China, non-Chinese companies must set up joint
ventures with Chinese automakers and share technology with them. Once the contract ends, however,
the local company may take the knowledge it gained from the joint venture to compete with its former
partner. For example, Shanghai Automotive Industry (Group) Corporation, which worked with General
Motors (GM) to build Chevrolets, has pursued plans to increase sales of its own vehicles tenfold to
300,000 in five years and to compete directly with its former partner. Source: Ian Rowley, “Chinese
Carmakers Are Gaining at Home,” BusinessWeek, June 8, 2009, 30–31.
 Wholly Owned Subsidiaries. Firms may want to have a direct operating presence in the foreign
country, completely under their control. To achieve this, the company can establish a new, wholly
owned subsidiary (i.e., a greenfield venture) from scratch, or it can purchase an existing company
in that country. Some companies purchase their resellers or early partners (as VitracEgypt did
when it bought out the shares that its partner, Vitrac, owned in the equity joint venture). Other
companies may purchase a local supplier for direct control of the supply. This is known as vertical
integration.
Establishing or purchasing a wholly owned subsidiary requires the highest commitment on the
part of the international firm, because the firm must assume all of the risk—financial, currency, economic,
and political.
V. GLOBAL PRODUCTION, OUTSOURCING AND LOGISTICS
There are five basic questions that need to be addressed when dealing with global production
Outsourcing and Logistics:

1. Where should production activities be located?
2. What should be the long-term strategic role of foreign production sites?
3. Should the firm own foreign production activities, or is it better to outsource those activities to
independent vendors?
4. How should a globally dispersed supply chain be managed?
5. Should the firm manage global logistics itself, or should it outsource the management to
enterprises that specialize in this activity?
The firm need to devise a strategy that would allow the company to accomplish its objectives and
overall strategy on lowering costs, Add value by better serving customer needs, and its production
activities. It has to have quality Logistics and physical transmission of material through the supply chain,
from suppliers to customer.
It can disperse production to those locations where activities can be performed most efficiently,
manage the global supply chain efficiently to better match supply and demand. The firm can improve
quality by eliminating defective products from the supply chain and the manufacturing process; the use of
the Six Sigma program which aims to reduce defects and can boost productivity and eliminate waste.
The Six Sigma is a direct descendant of total quality management (TQM), has a goal of improving
product quality. In the European Union, firms must meet the standards set forth by ISO 9000 before the
firm is allowed access to the European marketplace.
International companies have two other important production and logistics objectives: Production and
logistics functions must be able to accommodate demands for local responsiveness and must be able to
respond quickly to shifts in customer demand. In order to achieve this three factors are important when
making location decisions:
1. Country factors
2. Technological factors
3. Product factors
Under Country factors, firms should locate manufacturing activities in those locations where economic,
political, and cultural conditions, including relative factor costs, are most conducive to the performance of
the business. Country factors that can affect location decisions include:
 Availability of skilled labor and supporting industries

 Formal and informal trade barriers
 Future exchange rate changes
 Transportation cost
 Regulations affecting the business
 Technological Factors. The type of technology a firm uses in its manufacturing can affect location
decisions
Three characteristics of a manufacturing technology which are of interest:

1. Level of fixed costs. If the fixed costs of setting up a manufacturing plant are high, it might make
sense to serve the world market from a single location or from a few locations When fixed costs
are relatively low, multiple production plants may be possible Producing in multiple locations
allows firms to respond to local markets and reduces dependency on a single location
2. Minimum efficient scale. The larger the minimum efficient scale (the level of output at which most
plant-level scale economies are exhausted) of a plant, the more likely centralized production in a
single location or a limited number of locations makes sense A low minimum efficient scale allows
the firm to respond to local market demands and hedge against currency risk by operating in
multiple locations.
3. Flexibility of the technology. Flexible manufacturing technology or lean production covers a range
of manufacturing technologies that are designed to:
 Reduce set up times for complex equipment

 .Increase the utilization of individual machines through better scheduling
 Improve quality control at all stages of the manufacturing process
Flexible manufacturing technologies can produce a wide variety of products at a unit cost that at
one time could only be achieved through the mass production of a standardized output. Mass
customization implies that a firm may be able to customize its product range to meet the demands of
local markets yet still control costs. Technological factors concentrating production at a few choice
locations makes sense when:
a. Fixed costs are substantial. The minimum efficient scale of production is high and Flexible
manufacturing technologies are available; and
b. Production in multiple locations makes sense when: Both fixed costs and the minimum efficient
scale of production are relatively low and appropriate flexible manufacturing technologies are not
available.
Two product factors impact location decisions when the value-to-weight ratio is high, it is
practical then to produce the product in a single location and export it to other parts of the world. If
the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple
locations across the world. When products serve the international market, the need for local
responsiveness falls, and it becomes appropriate to concentrate manufacturing in a central location.
Locating Production Facilities
There are two basic strategies for locating manufacturing facilities:
1. Concentrating them in the optimal location that can serve the world market. From there
decentralization can be done in various regional or national locations that are close to major
markets. With respect to the case of Starbucks on locating production facilities we can be guided
by the following questions. Where is Starbucks production located? What is important to
Starbucks regarding production? What are the key challenges? How do they insure these are
provided? Where is their production located? What is important to Starbucks regarding
production? How do they insure these are provided? With regards to its farmer-suppliers, we can
be guided by the following: the contract must be long term and there should be transparency of
payments to farmers, including Quality assurance, Fair Trade Labelling and the Org provide loans
to growers. What are the key challenges? Price is another concern to the growers which may be
less than the costs to produce. In order to keep producers in business should Starbucks own the
plants?
The Strategic Role of Foreign Factories
The strategic role of foreign factories and the strategic advantage of a particular location can change over
time Factories initially established to take advantage of low cost labor can evolve into facilities with
advanced design capabilities Improvement in a facility comes from two sources:
a. Pressure to lower costs or respond to local markets. An increase in the availability of advanced
factors of production.
b. The Strategic Role of Foreign Factories. Many companies now see foreign factories as globally
dispersed centers of excellence This philosophy supports the development of a transnational
strategy A major aspect of a transnational strategy is a belief in global learning, or the idea that
valuable knowledge does not reside just in a firms domestic operations, it may also be found in its
foreign subsidiaries This implies that firms are less likely to switch production to new locations
simply because of some underlying variables like wage rates and outsourcing of production
2. The essence of Make-or-Buy Decisions in international business is whether to make or buy the
component parts that go into their final product? Make-or-buy decisions are important factors in
many firms' manufacturing strategies. Service firms also face make-or-buy decisions as they
choose which activities to outsource and which to keep in-house. Make-or-buy decisions involving
international markets are more complex than those involving domestic markets.
The Advantage of Make Decision are the following:
 It lower cost; if a firm is more efficient at that production activity than any other enterprise, it may
decide to continue manufacturing a product or component part in-house and facilitate investments
in highly specialized assets - internal production makes sense when substantial investments in
specialized assets are required to manufacture a component.
 Make Protect proprietary technology - a firm might prefer to make component parts that contain
proprietary technology in-house in order to maintain control over the technology. The advantage
of buying component parts from independent suppliers: Gives that firm greater flexibility By
buying component parts from independent suppliers, the firm can maintain its flexibility, switching

orders between suppliers as circumstances dictate This is particularly important when changes in
exchange rates and trade barriers alter the attractiveness of various supply sources over time.
On the other hand, The advantages of Buy helps drive down the firm's cost structure. Firms that
buy components from independent suppliers avoid he challenges involved with coordinating and
controlling the additional subunits that are associated with vertical integration. The lack of incentive
associated with internal suppliers and the difficulties with setting appropriate transfer prices helps the firm
capture orders from international customers. Outsourcing can help firms capture more orders from
suppliers-countries through Trade-Offs. The benefits of manufacturing components in-house are greatest
when: Highly specialized assets are involved and vertical integration is necessary to protect proprietary
technology. The firm is more efficient than external suppliers at performing a particular activity.
Strategic Alliances With suppliers sometimes, firms can capture the benefits of vertical integration
without the associated organizational problems by forming long-term strategic alliances with key
suppliers However, these commitments may actually limit strategic flexibility. Managing A Global Supply
Chain Logistics encompasses the activities necessary to get materials to a manufacturing facility, through
the manufacturing process, and out through a distribution system to the end user. The objectives of
logistics are: To manage a global supply chain at the lowest possible cost and in a way that best serves
customer needs and to help the firm establish a competitive advantage through superior customer
service.
The Role Of Just-in-Time Inventory the basic philosophy behind just-in-time (JIT) systems is to
economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to
enter the production process, and not before JIT systems generate major cost savings from reduced
warehousing and inventory holding costs JIT systems can help the firm spot defective parts and take
them out of the manufacturing process early to boost product quality However, a JIT system leaves the
firm with no buffer stock of inventory to meet unexpected demand or supply changes.
VI. ADVANTAGES AND DISADVANTAGES OF INTERNATIONAL TRADE
Advantages of International Trade can be enumerated as follows:
 Optimal use of natural resources: International trade helps each country to make optimum
use of its natural resources. Each country can concentrate on production of those goods
for which its resources are best suited. Wastage of resources is avoided.
 Availability of all types of goods: It enables a country to obtain goods which it cannot
produce or which it is not producing due to higher costs, by importing from other countries
at lower costs.
 Specialization: Foreign trade leads to specialisation and encourages production of

different goods in different countries. Goods can be produced at a comparatively low cost
due to advantages of division of labour.
 Advantages of large-scale production: Due to international trade, goods are produced not
only for home consumption but for export to other countries also. Nations of the world can
dispose of goods which they have in surplus in the international markets. This leads to
production at large scale and the advantages of large scale production can be obtained by
all the countries of the world.
 Stability in prices: International trade irons out wild fluctuations in prices. It equalizes the
prices of goods throughout the world (ignoring cost of transportation, etc.)
 Exchange of technical know-how and establishment of new industries: Underdeveloped

countries can establish and develop new industries with the machinery, equipment and
technical know-how imported from developed countries. This helps in the development of
these countries and the economy of the world at large.
 Increase in efficiency: Due to international competition, the producers in a country attempt

to produce better quality goods and at the minimum possible cost. This increases the
efficiency and benefits to the consumers all over the world.
 Development of the means of transport and communication: International trade requires

the best means of transport and communication. For the advantages of international trade,
development in the means of transport and communication is also made possible.
 International co-operation and understanding: The people of different countries come in

contact with each other. Commercial intercourse amongst nations of the world encourages
exchange of ideas and culture. It creates co-operation, understanding, cordial relations
amongst various nations.
 Ability to face natural calamities: Natural calamities such as drought, floods, famine,
earthquake etc., affect the production of a country adversely. Deficiency in the supply of
goods at the time of such natural calamities can be met by imports from other countries.
Disadvantages of International Trade
Though foreign trade has many advantages, its dangers or disadvantages should not be ignored.
 Impediment in the Development of Home Industries: International trade has an adverse effect on
the development of home industries. It poses a threat to the survival of infant industries at home.
Due to foreign competition and unrestricted imports, the upcoming industries in the country may
collapse.
 Economic Dependence: The underdeveloped countries have to depend upon the developed ones
for their economic development. Such reliance often leads to economic exploitation. For instance,
most of the underdeveloped countries in Africa and Asia have been exploited by European
countries.
 Political Dependence: International trade often encourages subjugation and slavery. It impairs
economic independence which endangers political dependence. For example, the Britishers came
to India as traders and ultimately ruled over India for a very long time.
 Mis-utilization of Natural Resources: Excessive exports may exhaust the natural resources of a
country in a shorter span of time than it would have been otherwise. This will cause economic
downfall of the country in the long run.
 Import of Harmful Goods: Import of spurious drugs, luxury articles, etc. adversely affects the
economy and well-being of the people.
 Storage of Goods: Sometimes the essential commodities required in a country and in short supply
are also exported to earn foreign exchange. This results in shortage of these goods at home and
causes inflation. For example, India has been exporting sugar to earn foreign trade exchange;
hence the exalting prices of sugar in the country.
 Danger to International Peace: International trade gives an opportunity to foreign agents to settle
down in the country which ultimately endangers its internal peace.
 World Wars: International trade breeds rivalries amongst nations due to competition in the foreign
markets. This may eventually lead to wars and disturb world peace. International trade promotes
lopsided development of a country as only those goods which have comparative cost advantage
are produced in a country. During wars or when good relations do not prevail between nations,
many hardships may follow.
CASE: Business Collaborations in China
Some foreign companies believe that owning their own operations in China is an easier option than
having to deal with a Chinese partner. For example, many foreign companies still fear that their Chinese
partners will learn too much from them and become competitors. However, in most cases, the Chinese
partner knows the local culture—both that of the customers and workers—and is better equipped to deal
with Chinese bureaucracy and regulations. In addition, even wholly owned subsidiaries can‘t be totally
independent of Chinese firms, on whom they might have to rely for raw materials and shipping as well as
maintenance of government contracts and distribution channels.
Collaborations offer different kinds of opportunities and challenges than self-handling Chinese
operations. For most companies, the local nuances of the Chinese market make some form of
collaboration desirable. The companies that opt to self-handle their Chinese operations tend to be very
large and/or have a proprietary technology base, such as high-tech or aerospace companies—for
example, Boeing or Microsoft. Even then, these companies tend to hire senior Chinese managers and

consultants to facilitate their market entry and then help manage their expansion. Nevertheless,
navigating the local Chinese bureaucracy is tough, even for the most-experienced companies.
Let‘s take a deeper look at one company‘s entry path and its wholly owned subsidiary in China. Embraer
is the largest aircraft maker in Brazil and one of the largest in the world. Embraer chose to enter China as
its first foreign market, using the joint-venture entry mode. In 2003, Embraer and the Aviation Industry
Corporation of China jointly started the Harbin Embraer Aircraft Industry. A year later, Harbin Embraer
began manufacturing aircraft.
In 2010, Embraer announced the opening of its first subsidiary in China. The subsidiary, called Embraer
China Aircraft Technical Services Co. Ltd., will provide logistics and spare-parts sales, as well as
consulting services regarding technical issues and flight operations, for Embraer aircraft in China (both
for existing aircraft and those on order). Embraer will invest $18 million into the subsidiary with a goal of
strengthening its local customer support, given the steady growth of its business in China.
Guan Dongyuan, president of Embraer China and CEO of the subsidiary, said the establishment of
Embraer China Aircraft Technical Services demonstrates the company‘s ―long-term commitment and
confidence in the growing Chinese aviation market
Building Long-Term Relationships
Developing a good relationship with regulators in target countries helps with the long-term entry strategy.
Building these relationships may include keeping people in the countries long enough to form good ties,
since a deal negotiated with one person may fall apart if that person returns too quickly to headquarters.
The case of Guanxi
One of the most important cultural factors in China is guanxi (pronounced guan shi), which is loosely
defined as a connection based on reciprocity. Even when just meeting a new company or potential
partner, it‘s best to have an introduction from a common business partner, vendor, or supplier—someone
the Chinese will respect. China is a relationship-based society. Relationships extend well beyond the
personal side and can drive business as well. With guanxi, a person invests with relationships much like
one would invest with capital. In a sense, it‘s akin to the Western phrase ―You owe me one.‖
Guanxi can potentially be beneficial or harmful. At its best, it can help foster strong, harmonious
relationships with corporate and government contacts. At its worst, it can encourage bribery and
corruption. Whatever the case, companies without guanxi won‘t accomplish much in the Chinese market.
Many companies address this need by entering into the Chinese market in a collaborative arrangement
with a local Chinese company. This entry option has also been a useful way to circumvent regulations
governing bribery and corruption, but it can raise ethical questions, particularly for American and Western
companies that have a different cultural perspective on gift giving and bribery.

ASSESSMENTS:
1. How the export and import of a country affects its economy? explain
2. What are the elements of international trade and how each may create advantages and
disadvantages to the economy? Explain
3. What do you mean by investment environment? Cite an Example
4. Highlights the history of International Trade in the world.
5. Discuss the primary role of foreign factories in the International Trade

LESSON FIVE
THE GLOBALTRADE AND INVESTMENT ENVIRONMENT
OVERVIEW
Prior to the establishment of the World Trade Organization (WTO) and before that the signing of
the General Agreement on Tariff and Trade(GATT) the world economy was under the regime of
regulation and closed economies except for some countries which signed with one another bilateral
agreements that would minimize the inflow of goods from other states. We can enumerate some the
formation of economic blocs like the ASEAN and the European Economic Community. However these
involved only few countries and thus according to some international leaders with pragmatic views about
trade this will not make economic sense in world development and thus need that the benefits from free
trade and foreign investments must accrue to the whole world. This liberal views from notable world
leaders like Bill Clinton, John Major, Tony Blair, and Fidel Ramos from the Philippines led to the signing
of the GATT agreement and its ratification by the Philippine senate in 1992 and the establishment of the
WTO made the world much more able to attain economic development and improved the standard of
living.
Learning Outcomes:
 Discuss the Global Trade and Investment Environment

 Understand International trade Theory
 Discuss the political economy of International Trade
 Determine the Foreign Direct Investment (FDI) and Foreign exchange market
 Explain the International Monetary Fund
COURSE MATERIALS
I. THE INTERNATIONAL TRADE THEORY
International trade theories are simply different theories to explain international trade. Trade is the
concept of exchanging goods and services between two people or entities. International trade is then the
concept of this exchange between people or entities in two different countries. People or entities trade
because they believe that they benefit from the exchange. They may need or want the goods or services.
While at the surface, this many sound very simple, there is a great deal of theory, policy, and business
strategy that constitutes international trade.
The Different International Trade Theories
―Around 5,200 years ago, Uruk, in southern Mesopotamia, was probably the first city the world
had ever seen, housing more than 50,000 people within its six miles of wall. Uruk, its agriculture made
prosperous by sophisticated irrigation canals, was home to the first class of middlemen, trade
intermediaries…A cooperative trade network…set the pattern that would endure for the next 6,000 years.
In more recent centuries, economists have focused on trying to understand and explain these trade
patterns. .
To better understand how modern global trade has evolved, it‘s important to understand how
countries traded with one another historically. Over time, economists have developed theories to explain
the mechanisms of global trade. The main historical theories are called classical and are from the
perspective of a country, or country-based. By the mid-twentieth century, the theories began to shift to
explain trade from a firm, rather than a country, perspective. These theories are referred to
as modern and are firm-based or company-based. Both of these categories, classical and modern,
consist of several international theories.
Classical or Country-Based Trade Theories
Mercantilism
Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an
economic theory. This theory stated that a country‘s wealth was determined by the amount of its gold and
silver holdings. In it‘s simplest sense, mercantilists believed that a country should increase its holdings of
gold and silver by promoting exports and discouraging imports. In other words, if people in other
countries buy more from you (exports) than they sell to you (imports), then they have to pay you the
difference in gold and silver. The objective of each country was to have a trade surplus, or a situation
where the value of exports are greater than the value of imports, and to avoid a trade deficit, or a
situation where the value of imports is greater than the value of exports.
A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism
flourished. The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen their
nations by building larger armies and national institutions. By increasing exports and trade, these rulers
were able to amass more gold and wealth for their countries. One way that many of these new nations
promoted exports was to impose restrictions on imports. This strategy is called protectionism and is still
used today.
Nations expanded their wealth by using their colonies around the world in an effort to control more
trade and amass more riches. The British colonial empire was one of the more successful examples; it
sought to increase its wealth by using raw materials from places ranging from what are now the Americas

and India. France, the Netherlands, Portugal, and Spain were also successful in building large colonial
empires that generated extensive wealth for their governing nations.
Although mercantilism is one of the oldest trade theories, it remains part of modern thinking.
Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and
discourage imports through a form of neo-mercantilism in which the countries promote a combination of
protectionist policies and restrictions and domestic-industry subsidies. Nearly every country, at one point
or another, has implemented some form of protectionist policy to guard key industries in its economy.
While export-oriented companies usually support protectionist policies that favor their industries or firms,
other companies and consumers are hurt by protectionism. Taxpayers pay for government subsidies of
select exports in the form of higher taxes. Import restrictions lead to higher prices for consumers, who
pay more for foreign-made goods or services. Free-trade advocates highlight how free trade benefits all
members of the global community, while mercantilism‘s protectionist policies only benefit select
industries, at the expense of both consumers and other companies, within and outside of the industry.
Absolute Advantage
In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of
Nations.Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: W.
Strahan and T. Cadell, 1776). Recent versions have been edited by scholars and economists. Smith
offered a new trade theory called absolute advantage, which focused on the ability of a country to
produce a good more efficiently than another nation. Smith reasoned that trade between countries
shouldn‘t be regulated or restricted by government policy or intervention. He stated that trade should flow
naturally according to market forces. In a hypothetical two-country world, if Country A could produce a
good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on
specializing on producing that good. Similarly, if Country B was better at producing another good, it could
focus on specialization as well. By specialization, countries would generate efficiencies, because their
labor force would become more skilled by doing the same tasks. Production would also become more
efficient, because there would be an incentive to create faster and better production methods to increase
the specialization.
Smith‘s theory reasoned that with increased efficiencies, people in both countries would benefit and trade
should be encouraged. His theory stated that a nation‘s wealth shouldn‘t be judged by how much gold
and silver it had but rather by the living standards of its people.
Comparative Advantage
The challenge to the absolute advantage theory was that some countries may be better at producing both
goods and, therefore, have an advantage in many areas. In contrast, another country may not
have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist,
introduced the theory of comparative advantage in 1817. Ricardo reasoned that even if Country A had
the absolute advantage in the production of both products, specialization and trade could still occur
between two countries.

Comparative advantage occurs when a country cannot produce a product more efficiently than
the other country; however, it can produce that product better and more efficiently than it does other
goods. The difference between these two theories is subtle. Comparative advantage focuses on the
relative productivity differences, whereas absolute advantage looks at the absolute productivity.
Let‘s look at a simplified hypothetical example to illustrate the subtle difference between these
principles. Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It turns out
that Miranda can also type faster than the administrative assistants in her office, who are paid $40 per
hour. Even though Miranda clearly has the absolute advantage in both skill sets, should she do both
jobs? No. For every hour Miranda decides to type instead of do legal work, she would be giving up $460
in income. Her productivity and income will be highest if she specializes in the higher-paid legal services
and hires the most qualified administrative assistant, who can type fast, although a little slower than
Miranda. By having both Miranda and her assistant concentrate on their respective tasks, their overall
productivity as a team is higher. This is comparative advantage. A person or a country will specialize in
doing what they do relatively better. In reality, the world economy is more complex and consists of more
than two countries and products. Barriers to trade may exist, and goods must be transported, stored, and
distributed. However, this simplistic example demonstrates the basis of the comparative advantage
theory.
Heckscher-Ohlin Theory (Factor Proportions Theory)
The theories of Smith and Ricardo didn‘t help countries determine which products would give a
country an advantage. Both theories assumed that free and open markets would lead countries and
producers to determine which goods they could produce more efficiently. In the early 1900s, two Swedish
economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain
comparative advantage by producing products that utilized factors that were in abundance in the country.
Their theory is based on a country‘s production factors—land, labor, and capital, which provide the funds
for investment in plants and equipment. They determined that the cost of any factor or resource was a
function of supply and demand. Factors that were in great supply relative to demand would be cheaper;
factors in great demand relative to supply would be more expensive. Their theory, also called the factor
proportions theory, stated that countries would produce and export goods that required resources or
factors that were in great supply and, therefore, cheaper production factors. In contrast, countries would
import goods that required resources that were in short supply, but higher demand. For example, China
and India are home to cheap, large pools of labor. Hence these countries have become the optimal
locations for labor-intensive industries like textiles and garments.
Leontief Paradox
In the early 1950s, Russian-born American economist Wassily W. Leontief studied the US
economy closely and noted that the United States was abundant in capital and, therefore, should export
more capital-intensive goods. However, his research using actual data showed the opposite: the United
States was importing more capital-intensive goods. According to the factor proportions theory, the United
States should have been importing labor-intensive goods, but instead it was actually exporting them. His
analysis became known as the Leontief Paradox because it was the reverse of what was expected by the
factor proportions theory. In subsequent years, economists have noted historically at that point in time,

labor in the United States was both available in steady supply and more productive than in many other
countries; hence it made sense to export labor-intensive goods. Over the decades, many economists
have used theories and data to explain and minimize the impact of the paradox. However, what remains
clear is that international trade is complex and is impacted by numerous and often-changing factors.
Trade cannot be explained neatly by one single theory, and more importantly, our understanding of
international trade theories continues to evolve.
Modern or Firm-Based Trade Theories
In contrast to classical, country-based trade theories, the category of modern, firm-based theories
emerged after World War II and was developed in large part by business school professors, not
economists. The firm-based theories evolved with the growth of the multinational company (MNC). The
country-based theories couldn‘t adequately address the expansion of either MNCs or intraindustry trade,
which refers to trade between two countries of goods produced in the same industry. For example, Japan
exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from Germany.
Unlike the country-based theories, firm-based theories incorporate other product and service factors,
including brand and customer loyalty, technology, and quality, into the understanding of trade flows.
Country Similarity Theory
Swedish economist Steffan Linder developed the country similarity theory in 1961, as he tried to
explain the concept of intraindustry trade. Linder‘s theory proposed that consumers in countries that are
in the same or similar stage of development would have similar preferences. In this firm-based theory,
Linder suggested that companies first produce for domestic consumption. When they explore exporting,
the companies often find that markets that look similar to their domestic one, in terms of customer
preferences, offer the most potential for success. Linder‘s country similarity theory then states that most
trade in manufactured goods will be between countries with similar per capita incomes, and intraindustry
trade will be common. This theory is often most useful in understanding trade in goods where brand
names and product reputations are important factors in the buyers‘ decision-making and purchasing
processes.
Product Life Cycle Theory
Raymond Vernon, a Harvard Business School professor, developed the product life cycle
theory in the 1960s. The theory, originating in the field of marketing, stated that a product life cycle has
three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. The theory
assumed that production of the new product will occur completely in the home country of its innovation. In
the 1960s this was a useful theory to explain the manufacturing success of the United States. US
manufacturing was the globally dominant producer in many industries after World War II.
It has also been used to describe how the personal computer (PC) went through its product cycle. The
PC was a new product in the 1970s and developed into a mature product during the 1980s and 1990s.
Today, the PC is in the standardized product stage, and the majority of manufacturing and production
process is done in low-cost countries in Asia and Mexico.

The product life cycle theory has been less able to explain current trade patterns where
innovation and manufacturing occur around the world. For example, global companies even conduct
research and development in developing markets where highly skilled labor and facilities are usually
cheaper. Even though research and development is typically associated with the first or new product
stage and therefore completed in the home country, these developing or emerging-market countries,
such as India and China, offer both highly skilled labor and new research facilities at a substantial cost
advantage for global firms.
Global Strategic Rivalry Theory
Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul
Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive
advantage against other global firms in their industry. Firms will encounter global competition in their
industries and in order to prosper, they must develop competitive advantages. The critical ways that firms
can obtain a sustainable competitive advantage are called the barriers to entry for that industry.
The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or
new market. The barriers to entry that corporations may seek to optimize include:
 research and development,

 the ownership of intellectual property rights,
 economies of scale,
 unique business processes or methods as well as extensive experience in the industry, and
 the control of resources or favorable access to raw materials.
Porter’s National Competitive Advantage Theory
In the continuing evolution of international trade theories, Michael Porter of Harvard Business School
developed a new model to explain national competitive advantage in 1990. Porter‘s theory stated that a
nation‘s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.
His theory focused on explaining why some nations are more competitive in certain industries. To explain
his theory, Porter identified four determinants that he linked together. The four determinants are (1) local
market resources and capabilities, (2) local market demand conditions, (3) local suppliers and
complementary industries, and (4) local firm characteristics.
1. Local market resources and capabilities (factor conditions). Porter recognized the value of
the factor proportions theory, which considers a nation‘s resources (e.g., natural resources and
available labor) as key factors in determining what products a country will import or export. Porter
added to these basic factors a new list of advanced factors, which he defined as skilled labor,
investments in education, technology, and infrastructure. He perceived these advanced factors as
providing a country with a sustainable competitive advantage.
2. Local market demand conditions. Porter believed that a sophisticated home market is critical to
ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies
whose domestic markets are sophisticated, trendsetting, and demanding forces continuous
innovation and the development of new products and technologies. Many sources credit the
demanding US consumer with forcing US software companies to continuously innovate, thus
creating a sustainable competitive advantage in software products and services.
3. Local suppliers and complementary industries. To remain competitive, large global firms
benefit from having strong, efficient supporting and related industries to provide the inputs
required by the industry. Certain industries cluster geographically, which provides efficiencies and
productivity.
4. Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and
industry rivalry. Local strategy affects a firm‘s competitiveness. A healthy level of rivalry between
local firms will spur innovation and competitiveness.
In addition to the four determinants of the diamond, Porter also noted that government and
chance play a part in the national competitiveness of industries. Governments can, by their actions and
policies, increase the competitiveness of firms and occasionally entire industries. Porter‘s theory, along
with the other modern, firm-based theories, offers an interesting interpretation of international trade
trends. Nevertheless, they remain relatively new and minimally tested theories.
II. THE POLITICAL ECONOMY OF INTERNATIONAL TRADE
Some countries despite the presence of WTO policies on malpractices about trade continues to
implement some customs policies either designed to limit trade or restrict trade. There are countries that
continue to provide subsidy to some of their export products inorder to reduce the cost of production and
make such items competitive in the world market because of low price. Some practices involve some
items designed to protect animals, plant, people from being harm by those imports from other states.
Banana exports to Australia cannot be pursued despite this is very much allowed under the WTO rules
but Australia said they cannot buy our bananas because it carries a disease thus would threatened their
own banana industry. This is the agony of those poor countries which want
Insights on Trade, Investments and Balance of Payments Issues
This is an issue that has long concerned policymakers in the large industrial nations, who have
worried about possible negative effects of outward foreign direct investment(FDI)upon the nation's
balance of payments and employment of its work force. Thus, a number of empirical studies have been
published regarding this issue for these countries, but not for developing or newly industrializing
countries.
In recent years, however, relative costs of labor in Taiwan and Korea have risen and, in response,
Taiwanese and Korean firms have attempted to move up the "production ladder" into more capital
intensive (including human-capital intensive) operations and have moved certain of their production
activities overseas. Thus, the effect of FDI on trade has also become a concern of policymakers in
Taiwan and Korea. For this reason, in this paper we investigate this relationship empirically for Taiwan
and South Korea. We begin with a general discussion of this relationship and a review of previously
published studies of the relationship for industrialized nations.
In principle, either relationship between FDI and exports-complementarity or substitutability-could

hold. FDI takes place when investors, usually multinational firms, based in one nation (the "home" nation)
establish operations under their managerial control in some other nation (the "host" nation). Often, the
motivation is to produce locally in the host nation products that had previously been exported from the
home nation, and to the extent that this happens, FDI and home nation exports are substitutes. But the
home nation operations of a multinational firm can be vertically linked with host nation operations, such
that an increase in the activity in the latter generates increased demand for intermediate products
(including capital goods) from the former. Also, marketing and distribution capabilities created by FDI
might enable the home nation operations to export final goods and services to customers that would not
be reached in the absence of FDI. To the extent that either of these happens, home country FDI and
exports will be complements.
Because the value of intermediate products is a component of the value added to the final goods,
it could be argued that FDI and exports must be net substitutes in some long run sense. If exports of final
goods from home nation are displaced by local production, there will be a net loss of export value even if
the gross loss is offset in part by export of capital and intermediate goods. This is true in a trivial sense
because the value of final goods must be greater than or equal to the value of all inputs used to produce
those goods. However, this line of argument supposes that host nation demand for a particular good will
always be fulfilled by exports from the home country, which might not be the case. Changes in the
relative cost of production might imply that, with the passage of time, home nation exports will be
displaced by local production irrespective of whether the displacement is done by multinational firms
shifting production from the home to the host nation or by local firms operating entirely within the host
nation. Indeed, with the passage of time, the relationship between FDI and exports could very well
change. Suppose, for example, that the host nation were to become over time relatively more efficient in
the production of a particular class of final goods and the home nation were to become relatively more
efficient in the production of intermediate goods used to produce these final goods. If multinational firms
were to hold specialized skills enabling the realization of internal economies associated with vertically
linking the production of the two sets of goods, the relationship between additional FDI and exports by
these firms could become increasingly complementary even if at some earlier point in history an initial
FDI served to displace home country exports.
More complex relationships between FDI and international trade have been noted. Urata (1995)
has examined the growth of the electronics industry in East Asia, and finds that direct investment and
trade in electronics goods have grown hand-in-hand in the region. The electronics industry worldwide has
been marked by rapid overall growth and by rapid rates of new product development and cost reduction.
Urata thus finds that outward FDI by Japanese firms in the East Asian region has been driven both by
growth of host nation demand and by complex patterns of shifting relative costs. These cause firms to
seek new production sites and to create complex patterns of cross hauling of both final goods and
intermediate products. He notes that, as these Japanese MNEs have over time placed new direct
investments in countries where they were previously absent (for example China), these firms have not
stopped nor even curtailed production in countries with older-vintage FDI.

III. FOREIGN DIRECT INVESTMENTS
Under the new trade dispensation, investments may be in the form of investments in hard assets
or in securities. Both of these investments can be beneficial to the economy, however the one that is
directed in the capital is somehow triggers a bad impact on the economy especially when more dollar
investments are withdrawn from the capital market; it can ruined the exchange rate of the US dollar
against the local currency and this happened to the country during the financial crisis in 1996. The case
of investments in hard assets like factories and building do not have that kind of characteristics. This kind
of investments helps the country in many ways like transfer of technology, employment and in our
industrialization program and can also make the country improve the quality of its exports.
If we are to define foreign direct investment (FDI), it is an investment made by a firm or

individual in one country into business interests located in another country. Generally, FDI takes place
when an investor establishes foreign business operations or acquires foreign business assets in a foreign
company.Strategically, FDI comes in three types − Horizontal FDI, means the company does all the
same activities abroad as at home. For example, Toyota assembles motor cars in Japan and in the
Philippines. Vertical investments means the firm will engage in different types of activities abroad
FDI plays an important role in the economic development of a country. The capital inflow of
foreign investors allows the strengthening of infrastructure, increasing productivity and creating
employment opportunities in the Philippines.
OBJECTIVES OF FOREIGN DIRECT INVESTMENT is to sustain a high level of investment in the

manufacturing sector in order to achieve the country‘s program of industrialization within a short period of
time.
In foreign direct investment some advantages and disadvantages maybe accrued like access to
the market, access to resources, and reduction in the cost of production. While the Disadvantages may
include unstable and unpredictable foreign economy, unstable political systems, and underdeveloped
legal systems
FDI Scenarios in the Philippines
According to the UNCTAD's World Investment Report 2020, foreign direct investment flows (FDI)
to the Philippines fell to USD 5 billion in 2019, down from USD 6,6 billion in 2018 and remaining below
the full-year target of USD 8 billion set by the Central Bank of Philippines. FDI stock was about USD 88
billion in 2019, an increase of more than USD 60 billion when compared to 2010 level. Japan, the United
States and Singapore are traditionally the main investors, while inflows are concentrated in the
manufacturing and the real estate. Nevertheless, China took over Japan and Singapore as the largest
investor in the Philippines in 2018. This was mainly due to the construction of an iron and steel plant by
the Chinese Hesteel Group (HBIS) in southern Philippines. Last year, the country eased the obligation of
local employment for foreign investor workers. Despite growing FDI inflow levels, the Philippines continue
to lag behind regional peers, in part because the Philippines' constitution limits foreign investment, and
also due to the threat of terrorism in some parts of the country. This can be partially explained by the fact
that the country is evolving into a service society with low capital strength, which means that it needs only
minimal equipment. In addition, the government favours subcontracting agreements between foreign

companies and local enterprises rather than FDI in the strict sense of the term. Lastly, factors such as
corruption, instability, and inadequate infrastructure, high power costs, lack of juridical security, tax
regulations and foreign ownership restrictions discourage investment. Nonetheless, the country offers
many comparative advantages, including an English-speaking and well-skilled workforce, a strong
cultural proximity to the U.S. and a geographical location in a dynamic region. Philippines substantially
improved its business climate in 2019 : starting a business is now easier due to the abolishment of the
minimum capital requirement for domestic companies ; dealing with construction permits has been
improved (improvement of coordination, standardization of the process for obtaining an occupancy
certificate) ; and minority investor protection has also been strengthened. As such, the country is ranked
95th out of 190 economies in the latest Doing Business 2020 Report, gaining as many as 29 ranking
points compared to the previous year.
Foreign Direct Investment 2017 2018 2019
FDI Inward Flow (million USD) 8,704 6,602 4,996
FDI Stock (million USD) 79,016 82,997 87,993
Number of Greenfield Investments*** 123 178 147
Value of Greenfield Investments (million USD) 4,569 22,788 12,357
Source: UNCTAD, Latest available data.

Note: * The UNCTAD Inward FDI Performance Index is Based on a Ratio of the Country's Share in Global FDI Inflows and its Share in Global GDP. ** The UNCTAD
Inward FDI Potential Index is Based on 12 Economic and Structural Variables Such as GDP, Foreign Trade, FDI, Infrastructures, Energy Use, R&D, Education,
Country Risk. *** Green Field Investments Are a Form of Foreign Direct Investment Where a Parent Company Starts a New Venture in a Foreign Country By
Constructing New Operational Facilities From the Ground Up. **** Gross Fixed Capital Formation (GFCF) Measures the Value of Additions to Fixed Assets
Purchased By Business, Government and Households Less Disposals of Fixed Assets Sold Off or Scrapped.
FDI INFLOWS BY COUNTRY AND INDUSTRY
Main Investing Countries 2018, in %
China 28.3
Singapore 11.8
Japan 11.0
British Virgin Islands 9.0
Malaysia 8.2
United States 7.2

Main Invested Sectors 2018, in %
Manufacturing 47.6
Electricity, Gas, Steam and Air 16.7

Conditioning Supply
Administrative and Support Service 11.2

Activities
Real Estate 11.2
Construction 4.9
Wholesale and retail trade 3.1
Source: Philippine Statistics Authority - Latest available data.
IV. THE GLOBAL CAPITAL MARKET
Long the establishment of the world trade organization, the problem faced by the world with
economic growth is funding availability. However funds scarcity is a problem that mostly affected only
poor and underdeveloped states but in more developed economies have been washed with capital.
Investors from this region cannot move their capital and investment in soft assets like securities in the
developing world due to restrictions imposed by their respective governments. this problem has not only
hindered economic growth but also businesses have been restricted of their growth and expansion. This
problem has been fully acknowledged when world leaders came to a meeting in Dubai to discuss free
trade and investments. This meeting have paved the way for the signing of the general agreement and
trade and eventually the establishment of the world trade organization and the full liberalization of the
capital markets all over the world and the establishment of more capital markets and the free trading of
various types of securities. this phenomenon have made the country to receive more investments in soft
assets like bonds and stocks increasing dollar inflows and increasing money supply and reducing interest
rates. this becomes now the condition of the various capital markets all over the world; fre trading of
securities which enable businesses to secure the capital requirements of their businesses at lower cost.
A global capital market is the interlinking of various investment exchanges around the world that
enable individuals and entities to buy and sell financial securities on an international level. The
interlinking of these various exchanges results in the emergence of an informal, but never-the-less
structured global capital market. Spurred by the decoupling of exchange controls and foregoing of
adjustable peg exchange rates from individual capital markets, in addition to technological advances that
have facilitated the movement of capital around the world, investors have increasingly sought
investments in multiple currencies. While equities still lag behind, other investments, such as bonds,
currencies and foreign exchanges, are all interlinked and highly visible in international trading. Yet to
reach full maturity, the market is growing and integrating at a steady pace as investors continually shift
investments to the most stable, well-regulated or high-growth economies around the globe. The
interlinking of various exchanges results in the emergence of an informal, but never-the-less structured
global capital market.
As the complexity and interlinking of the global economy grows, so follows the capital markets.
Currently, financial institutions around the world transfer billions of dollars worth of assets and
investments on a daily basis in cross border exchanges. Assessing the worth of the global capital market,
many researchers and economists have concluded the total represents more than $200,000,000,000,000
US Dollars (USD) and will continue to grow well into the future.
Potential benefits of the global capital market can have a profound impact both on economies at
large and individual businesses. Corporations and governments that solicit the public for capital can
solicit investors all over the globe, not just in a defined geographical market. Investors can respond by
investing assets that best meet their investment objectives, whether in developing economies with the
aim of achieving high growth or in stable economies that is mature to better shield investments.
Regulatory consequences, however, are inherent to the process and are usually pulled along by
demands of investors.
Information has always been crucial in investment decisions, but in the global capital market
access to this information in a transparent and rapid manner is essential for investors to make qualified
decisions. With the technology available to deliver that transparency rapidly, regulatory requirements are
left with little options other than to keep up with investor demands. Thus, many researchers have
predicted that by the time the market matures, economies will tend to be more stable, reliable and
predictable due to the unique investors requirements that demand solid and enforceable regulation that
allows investment growth while mitigating associated risks.
In the Philippines, the local operates which is part of the global market operates through the
capital markets, the Philippine Stock Exchange. Here securities such as bonds and stocks are traded
bought and sold. These securities particularly stocks represents the market value of the firm that issued
such stock. When there are more buyers for the stock demand for it is high and its price rises and will
increase the value of the firm that owned the stock when there is no demand its value falls similar to the
one being experienced by many local companies like Jollibee Foods Corporation which declared that a
portion of its market value equivalent to more than 12 billion have been wipe out because of a fall in its
share price. For government-issued securities such as the Treasury Bills this is normally sold through the
banks and is used to finance government projects and for the budgetary need of the government.
V. THE INTERNATIONAL MONETARY FUND
Money has been very important in the conduct of economic activities. This serves as the measure
of value involving products or services which people transacted. Money may make the economy grow or
it may fall thus control of its quantity is essential. However in the international sense the management of
money involving countries is more complicated and mandatory. The system which country adopts on the
valuation of every currency is that all currencies will have to determine its specific value based on the US
dollar; the demand and supply of US dollar in their market. But why the US dollar, it is because of the
economic capability of the country that owns the US dollar. The US dollar is used in all forms of
international transactions and all payments are guaranteed by the United States.
If we are to define a global monetary system, this pertains to the system and rules that govern
the use and exchange of money around the world and between countries. Each country has its own
currency as money and the international monetary system governs the rules for valuing and exchanging
these currencies. The global monetary system is governed by the International Monetary Fund (IMF)
which was established in 1946 to:
1. Promote international monetary cooperation

2. Foreign exchange stability and orderly exchange arrangements;
3. To foster economic growth and high levels of employment; and
4. To provide temporary financial assistance to countries to help ease balance of payments ...
All of us require money for our transactions, whenever we buy goods we need money, it is the
medium of exchange which means one good can be exchange with another good by means of money.
Why do economies need money? This module defines money as a unit of account that is used as a
medium of exchange in transactions. Without money, individuals and businesses would have a harder
time obtaining (purchasing) or exchanging (selling) what they need, want, or make. Money provides us
with a universally accepted medium of exchange. Before the current monetary system can be fully
appreciated, it‘s helpful to look back at history and see how money and systems governing the use of
money have evolved. Thousands of years ago, people had to barter if they wanted to get something.
That worked well if the two people each wanted what the other had. Even today, bartering exists.
History shows that ancient Egypt and Mesopotamia—which encompasses the land between the
Euphrates and Tigris Rivers and is modern-day Iraq, parts of eastern Syria, southwest Iran, and
southeast Turkey—began to use a system based on the highly coveted coins of gold and silver, also
known as bullion, which is the purest form of the precious metal. However, bartering remained the most
common form of exchange and trade. Gold and silver coins gradually emerged in the use of trading,
although the level of pure gold and silver content impacted the coins value. Only coins that consist of the
pure precious metal are bullions; all other coins are referred to simply as coins. It is interesting to note
that gold and silver lasted many centuries as the basis of economic measure and even into relatively
recent history of the gold standard, which we‘ll cover in the next section. Fast-forward two thousand
years and bartering has long been replaced by a currency-based system. Even so, there have been
evolutions in the past century alone on how—globally—the monetary system has evolved from using gold
and silver to represent national wealth and economic exchange to the current system.
The World’s Various Currencies: Old and Present
Throughout history, some types of money have gained widespread circulation outside of the nations that
issued them. Whenever a country or empire has regional or global control of trade, its currency becomes

the dominant currency for trade and governs the monetary system of that time. In the middle of a period
that relies on one major currency, it‘s easy to forget that, throughout history, there have been other
primary currencies—a historical cycle. Generally, the best currency to use is the most liquid one, the one
issued by the nation with the biggest economy as well as usually the largest import-export markets.
Rarely has a single currency been the exclusive medium of world trade, but a few have come close.
Here‘s a quick look at some of some of the most powerful currencies in history:
 Persian daric: The daric was a gold coin used in Persia between 522 BC and 330 BC.
 Roman currency: Currencies such as the aureus (gold), the denarius (silver), the sestertius
(bronze), the dupondius (bronze), and the as (copper) were used during the Roman Empire from
around 250 BC to AD 250.
 Thaler: From about 1486 to 1908, the thaler and its variations were used in Europe as the
standard against which the various states‘ currencies could be valued.
 Spanish American pesos: Around 1500 to the early nineteenth century, this contemporary of the
thaler was widely used in Europe, the Americas, and the Far East; it became the first world
currency by the late eighteenth century.
 British pound: The pound‘s origins date as early as around AD 800, but its influence grew in the
1600s as the unofficial gold standard; from 1816 to around 1939 the pound was the global
reserve currency until the collapse of the gold standard.
 US dollar: The Coinage Act of 1792 established the dollar as the basis for a monetary account,
and it went into circulation two years later as a silver coin. Its strength as a global reserve
currency expanded in the 1800s and continues today.
 Euro: Officially in circulation on January 1, 1999, the euro continues to serve as currency in many
European countries today. Fixed Exchange Rates
CASE: STARBUCKS FOREIGN DIRECT INVESTMENT
Licensing can be defined as a transaction in the external market, which is based on the sale of
intellectual property and technology rights for a fee (Holmes, 2001). It is a non-equity method of
international expansion, which is often chosen by the companies due to its relatively low cost and risk for
the licensor. However, the main problem of licensing is a lack of control over the operation of licensees. It
is especially important for Starbucks, as the right implementation of its ―Starbucks Formula‖, which is
based on delivering premium products, motivating employees and creating a superior customer
experience, is the key to internationalization success (Starbucks Corporation, 2011). International
expansion of the company into the geographical areas, which were different from the U.S. both in terms
of market development and culture, led to Starbuck‘s disenchantment with licensing and its limited
control. Therefore, the company started to implement other internationalization strategies, such as Joint

Ventures (Japan), or even expanded through own subsidiaries (Thailand, UK).The main benefit of joint
ventures over pure licensing is the tight control that Starbucks can have over its new operations. Close
cooperation with the partner abroad in pursuing common goals helps Starbucks to retain management
authority over its overseas operations, while at the same time minimizing risks and gaining quick access
to the market. Moreover, joint ventures are helpful in the regions, where there are no players in the
market that are able to meet the requirements of developing a Starbucks license. By creating joint
ventures Starbucks can help local partners both by providing its expertise and sharing resources.
There are several advantages of Joint Ventures over entering through wholly owned subsidiaries that
Starbucks considered in selecting their entry mode. Firstly, joint ventures help to minimize financial risks
and internationalization expenditures by sharing them with the joint venture partner. Secondly, joint
ventures offer access to the unique market knowledge of the partner and its position in the market. Thus,
cooperation with Sazaby Inc. gave Starbucks the access to the distribution network of the Japanese
retailer. However, there are also several risks that are associated with joint ventures. Thus, it may lead to
lower managerial control from the parent company, opportunistic behavior of the local partner or even
conflict situations. Joint ventures are also inappropriate in the poorly developed markets, where it is hard
to find the right partner. In these cases Starbucks preferred to enter countries through own subsidiaries.
This entry mode allowed to achieve maximum control over operations, as well as to eliminate competition
and to allow the fastest market entry, if the strategy is based on the acquisition of the local competitor.
Moreover, wholly owned subsidiaries help to mitigate the risk of dissemination of company know-how and
expertise, thus preventing Starbuck‘s diffusion of Starbuck‘s unique expertise (Peng, 2010).
The international expansion strategy adopted by Starbucks can be based explained through the
internationalization theory. This framework offers three drivers for selecting the most appropriate entry
mode: need for control, access to know-how and local market knowledge, and the importance of implicit
capabilities (Hill, 2011). The first argument explains why Starbucks decided to enter some countries,
such as Britain and Thailand, by acquiring local players and establishing own subsidiaries. The second
and the third reasons explain why Starbucks used joint ventures for its internationalization strategies. The
importance of implicit capabilities, such as employee motivation and the ability to create unique customer
experience, made joint ventures more appropriate than other modes that required less commitment in
terms of resources and risk. The choice of joint ventures could be also explained by the need to access
local market knowledge, which can be acquired and assimilated better through joint ventures than
through pure licensing.
ASSESSMENTS:
1. Summarize the classical, country-based international trade theories. What are the differences
between these theories, and how did the theories evolve?
2. Highlights the main concept of each theory of international trade.
3. Describe how a business may use the trade theories to develop its business strategies. Use
Porter‘s four determinants in your explanation.
4. What the country‘s problems so that it cannot attract substantial FDI?

5. What makes the political policies and systems of a nation affect international trade? Cite an
example.
6. What are the primary objectives of the IMF in as far as world economy is concern? Explain briefly
your answer.

LESSON SIX
INTERNATIONAL COMMERCIAL TERMS
OVERVIEW
In any business transaction commercial terms are very important because these clarify the extent
of rights and responsibilities which should be assigned to every party in the agreement. Thus each of the
party involve becomes aware of their rights and duties which they can exercise and enjoy as stipulated in
the contract; enabling to generate an orderly and smooth implementation of the business agreement.
The introduction of internationally accepted commercial terms would make business agreements much
easier to conclude because the parties involved in such agreement would have common understanding
of the commercial terms used. Any disputes to arise in the business agreement may be easier to solve
because technical and legal terms are well understood by all parties.
The approval of the internationally accepted commercial terms (INCOTERMS) came during the
International Chamber of Commerce meeting in Paris in 1936. This later became the used terms in
foreign trade. The Paris meeting had defined INCOTERMS with respect to the roles and obligations of
the buyer and seller in the agreement of transportation and other responsibilities and clarify when the
ownership of the merchandise takes place, who incurs the costs and risk, and who files the documents
necessary to make the transaction. These terms are incorporated into export-import sales agreements
and contracts worldwide and are a necessary part in foreign trade.
Learning Outcomes:
 Identify and explain the Incoterms and uses of the terminologies being used in the industry such
as EXW, FCA and the like.
 Understand the rules of modes of transport between the buyer and sellers.
COURSE MATERIALS
I. THE INCOTERM (International Commercial Terms)
The application of the INCOTERM (International Commercial Terms) may be seen in the following
conditions which primarily comprise of business transactions with the outside world. It is used primarily in;
 the distribution of goods
 Issues involving regulation of transport charges

 Identifying and defining the place where transfer of merchandise will take place and the transport
risks involved in order to justify to owners for support and the chance for damage to goods when
shipped to its destination.
 Determining the obligations of both seller and the buyer.
 Identifying the cost relative to the transaction and the one who will shoulder it.
 Identifying the risk involved in the delivery of goods.
 Making international commercial transactions more to adapt to the most contemporary

commercial practices.
In international trade, people involved are far apart so that if there‘s any problem to resolve
pertaining to the transactions, this would be very difficult to initiate hence people involved are basically far
from each other ; thus the chance for misunderstanding would be greater. Moreover, because of the high
value of the transaction involved and the far distance of the source to the products‘ destination,
notwithstanding the absence of personal contact between the exporter and the importer; with these
conditions, the chances for a problematic outcome in the transaction would be greater. All of these
shortcomings may be properly addressed with the introduction of the INCOTERMS in international
transactions. The coverage of the INCOTERMS includes the following areas:
Group E or E Terms – Departure
 Ex Works (EXW) – this term is used for goods which are departing from the premises of the
exporter. The title and risk are passed to the buyer which includes transportation and insurance
costs from the time the goods depart from seller's premises. This is applicable to all kinds of
transportation. The seller (Exporter) in EXW shipment terms prepares the goods which the buyer(
Importer) collects from the former‘s premises. The responsibility of the seller is to properly pack
the goods with a package which is compliant and can be easily disposed of. The buyer arranges
the insurance for the goods while on transit however the cost and risks which entails the
transporting of the merchandise maybe shouldered either by the buyer or the seller. Whoever
bear these two basically are indicated in the contract of sell.
 Buyer: Under normal condition, the buyer or the importer is responsible for the insurance of the
imported goods while in transit and has to bear all costs and risks involved in the shipment of the
product however if the contract of sell says otherwise then the seller or the exporter must arrange
and pay for the products‘ insurance cost and bear all risks which entails it. In order to explain this
arrangement fully, we can take the following example wherein the merchandise is to be bought
from Australia and sold elsewhere in the world. This example determines which, who is
responsible for the charges in relation to the product being sought from Australia.
 Obligations under the E Group or E term (B – Buyer/Importer, S – Seller/Exporter)

Inland freight in Australia; delivery to the carrier or frontier B
Export customs clearance B
Payment of customs charges and taxes in Australia B
Loading to the main carrier and port charges B
Main carriage/freight B
Cargo (marine) insurance B
Unloading from the main carrier and port charges B
Customs clearance in Buyer's country B
Payment of customs duties and taxes in Buyer's country B
Inland freight in Buyer's country B
Other costs and risks in Buyer's country B
Group F or F Terms
Under this term the Free Carrier (FCA) clause states that the title and risk is passed to the buyer
including expenses for transportation and insurance at a time the seller delivers the goods cleared for
export to the carrier. The seller‘s obligation extends up to the point where the product has already been
loaded in the collecting vehicle of the buyer. In specific terms, seller‘s main obligation is to bring the
goods into the custody of the carrier primarily at its terminal. Moreover, under this term, the buyer can
suggest the mode of transport to be used and pays shipping charges. Other than the carrier, the buyer
can also appoint an individual to receive the merchandise in his behalf and the seller‘s responsibility
deemed fulfilled once the product concern has been delivered to that person.
The Free Alongside Ship (FAS) clause requires that the title and risk should be passed only to the
buyer including payment of all transportation and insurance cost once the merchandise been delivered
alongside ship by the seller. This mode is basically applied to sea or inland waterway transportation. The
seller is obliged to secure export clearance. In FAS the determination of price for the merchandise
includes all the costs incurred including delivery of the goods alongside the vessel at the port or the
indicated place of the buyer, however no applicable charges are to be borne by the seller for loading the
goods on board a vessel including ocean freight charges and marine insurance. The seller is cleared of

all of responsibility in relation to the shipment once the goods are place cleared alongside ship.
while the buyer or the importer shall bear all risks of loss or damage while the goods are in transit
alongside ship.
The Free on Board (FOB) arrangement is price inclusive of Ex-Works, packaging charges,
transportation cost up to the place of shipment. The seller is responsible for securing customs clearance,
pay customs dues, quality inspection charges, weight measurement charges and other export related
dues. It is important that the Bill of Lading indicates the shipment term and portray the wording "Shipped
on Board‖ and bear the signature of the shipper or his authorized representative with the date on which
the goods were boarded. The buyer‘s responsibility on one hand is to indicate the name of the ship, pays
freight, and transfer expenses. The following is an illustration on who and what in terms of obligations to
be fulfilled by either the seller or the buyer. Obligations under the under the F Group or F Terms(B –
Buyer/Importer, S – Seller/Exporter)
FCA FAS FOB
Inland freight in Australia; delivery to the carrier or frontier S S S
Export customs clearance S S S
Payment of customs charges and taxes in Australia S S S
Loading to the main carrier and port charges S B S
Main carriage/freight B B B
Cargo (marine) insurance B B B
Unloading from the main carrier and port charges B B B
Customs clearance in Buyer's country B B B
Payment of customs duties and taxes in Buyer's country B B B
Inland freight in Buyer's country B B B
Other costs and risks in Buyer's country B B B
Under Group C or C Terms the main carriage shall be borne by the Seller or Exporter. There are various
types under this arrangement, namely:
1. Cost and Freight (CFR) – the term under this condition oblige the exporter to bear the cost of
carriage for the transport of the product to selected destination port however this term makes the
risk transferable only to buyers at the port of shipment. Moreover the seller has the option to
choose the carrier, pay the expenses for the freight to the agreed port of destination but unloading
is excluded. It is also his responsibility to load the merchandise unto the ship and the required

processing of documents for forwarding purposes. The agreement on transfer of risks is similar to
FOB.
2. Cost, Insurance and Freight (CIF) –this arrangement requires that the title and risk should be
transferred only to the buyer once the shipment reaches destination port from the seller who pays
transportation and insurance cost against loss or damage. This is mostly applied for sea or inland
waterway transportation.
3. Carriage Paid to (CPT) – this term requires that the title, risk and insurance cost should be in the
name of the buyer when the merchandise is brought to the carrier by the seller who pays
transportation cost to destination. It is basically suited to all forms of transportation like: land
transport by rail, road and inland waterways. The obligation of the seller in as far as transportation
cost is concern is limited only to the first carrier however it is also his obligation to pay customs
clearance for export and the selection of carrier. Once the goods arrive at the destination port, the
risks from damages or loss is transferred to the buyer along with costs for customs importation
clearance and unloading.
4. Carriage and Insurance Paid To (CIP) – this term requires that the title and risk are transferred
to the buyer during the time the goods are delivered to the carrier by the seller who in turn pays
transportation and insurance cost to destination. This is basically applied to all forms of
transportation.
This term is basically similar to Carriage Paid To except that under this condition the seller is
obliged to pay for insurance premium against risk or loss or damage while the goods are in
transit. The buyer‘s obligation under this term is similar to Carriage Paid To. To provide a clearer
understanding of whose and what obligations under this term, the following example provides
illustration. If products are sourced in Australia and exported elsewhere outside the country , the
following obligations are to be paid by the party indicated therein such as when such products are
transported to a destination port inside Australia and later loaded to a container ship for
distribution to other countries, the expenses to be borne by each of the parties involved are
indicated below subject to the term used .
Obligations under the Group C or C Terms (B – Buyer/Importer, S – Seller/Exporter)

CFR CIF CPT CIP
Inland freight in Australia; delivery to the carrier or

S S S S
frontier
Export customs clearance S S S S
Payment of customs charges and taxes in Australia S S S S
Loading to the main carrier and port charges S S S S

Main carriage/freight S S S S
Cargo (marine) insurance B S B S
Unloading from the main carrier and port charges S S S S

Customs clearance in Buyer's country B B B B
Payment of customs duties and taxes in Buyer's

B B B B
country
Inland freight in Buyer's country B B S S
Other costs and risks in Buyer's country B B B B
Group D or D Terms – Arrival

When goods arrive in the premises of the importer, various questions on who‘s is to shoulder
transportation costs , insurance, processing fees paid in the Bureau of Customs and may be for some
other fees that need to be paid in relation to the importation, and lastly the burden on who‘s going to bear
the risks? In order to fully answer these questions, we need to look at various commercial terms which
may be applied:
1. (Delivered at Frontier DAF) – under this term , the merchandise being shipped has to be
titled under buyer’s name including the risk and the responsibility for securing import
clearance when such merchandise is delivered to agreed place by the seller. This term can be
used for any mode of transport primarily by rail or by any form of land transport.
2. Delivered Ex-Ship (DES) – this term makes the transfer of title over the goods, the risk and
responsibility over vessel discharge, secure of import clearance, and cost for unloading , cargo
insurance, unloading from the main carrier and port charges, customs clearance, including
duties and taxes, inland freight,; to the buyer at times when the goods reach the destination port.
This term is basically used for sea or inland waterway transportation.
3. Delivered Ex-Quay (DEQ) – this term makes the transfer of title and risk pass to buyer at the
destination point by the seller who delivers the goods on dock at destination point and is cleared

for import. This is basically used for sea or inland waterway transportation. The seller has to pay
for all costs except cargo insurance, inland freight in buyer‘s country and other costs and he/she
also assume the risks.
4. Delivered Duty Unpaid (DDU) – this term requires the seller to deliver the goods at the agreed
place in the country of importation and pays all the transportation costs excluding customs duty
and taxes as specified in the customs procedures. On the part of the buyer, he/she has to
process customs clearance for importation.
5. Delivered Duty Paid (DDP) – the title and risk are passed to the buyer only when the
goods reached its agreed destination point and already cleared for import. All taxes in
both source and destinations have to borne by the seller including all other costs.
When it comes to the kind of transportation used, the INCOTERMS are also applicable and each mode of
transportation has its corresponding terms. The table below provides the buyer a guide on the suitability
of INCOTERMS to use in relation to probable transport mode
.
Air Freight Road Rail Freight Sea Freight
Freight
EXW    
FCA    
FAS 
FOB 
CFR 
CIF 
CPT    
CIP    
DAF  
DES 
DEQ 
DDU    
DDP    
To summarize this term based on who among the exporter and the importer has to bear the costs, the
table below provides clearer information.

Obligations under the D Group or D Terms (B – Buyer/Importer, S – Seller/Exporter)
DES DEQ DDU DDP
Inland freight in Australia; delivery to the carrier

S S S S
or frontier
Export customs clearance S S S S
Payment of customs charges and taxes in
S S S S
Australia
Loading to the main carrier and port charges S S S S

Main carriage/freight S S S S
Cargo (marine) insurance B B S S
Unloading from the main carrier and port charges B S S S

Customs clearance in Buyer's country B S B S
Payment of customs duties and taxes in Buyer's
B S B S
country
Inland freight in Buyer's country B B S S
Other costs and risks in Buyer's country B B S S
Applicable Incoterms in Different Modes of Transportation
The choice of the appropriate incoterms must be done in consideration to the mode of transport
which the parties see beneficial effects on their interest. Thus when we decide for our incoterms, we
should at the same time look at the suited mode of transport because there are terms which are
restricted only to sea or land carriage. The table below provides the buyer a guide on the suitability of
incoterms to use in relation to probable transport mode.
II. Transfer of Risks
Another item in the incoterms of great importance to all parties concern, is the issue on the transfer of
risks. Incoterms does not only provide information on who among the parties should pay for
transportation costs but identifies as well the party which must assumes risks at a time the goods are in
transit. This is one of the most important issues that need to be considered when negotiating
Incoterms. The following conditions are used to determine the responsibility over risks pertaining to the
goods being transported.

EXW When the goods are at the disposal of the buyer.
FCA When the goods have been delivered to the carrier at the named place
FAS When the goods have been placed alongside the ship
FOB When the goods pass the ship‘s rail
CFR When the goods pass the ship‘s rail
CIF When the goods pass the ship‘s rail
CPT When the goods have been delivered to the carrier
CIP When the goods have been delivered to the carrier
DAF When the goods have been delivered to the carrier
DES When the goods are placed at the disposal of the buyer on board the ship
DEQ When the goods are placed at the disposal of the buyer on the quay
DDU When the goods are placed at the disposal of the buyer
DDP When the goods are placed at the disposal of the buyer
III. INTERCOMS 2020: MAIN CHANGES
The new Incoterms 2020 are being drafted in the International Chamber of Commerce (ICC) as the body
that publishes them since 1930. In the last decades, there has always been a revision of Incoterms Rules
coinciding with the first year of each decade 1990, 2000, 2010, which is the latest version and currently in
force.
Incoterms 2020 are being drafted by a Committee of Experts (Drafting Group) that for the first time
include representatives from China and Australia, although most of the members are European. This
Committee meets periodically to discuss the different issues that come from the 150 members (mainly
Chambers of Commerce) of the International Chamber of Commerce. The new Incoterms are expected
to appear in the last quarter of 2019, simultaneously with the centenary of the International Chamber of
Commerce, and will enter into force on January 1, 2020.
Some of the new issues and changes that are being evaluated to be included in the new edition of the
Incoterms 2020 are:

a. Removal of EXW and DDP Incoterms. It would be a very important change since EXW is an
Incoterm used in many companies with little export experience, and DDP is also commonly used
especially for goods (e.g., samples or spare parts) that are sent by couriers and via express
shipping companies that deal with all the logistics and customs procedures until delivery at the
buyer‘s address. The justification to eliminate these two terms is that they are really domestic
operations: in the case of EXW by the seller-exporter and in DDP by the buyer-importer. In
addition, these two Incoterms contradict, in some way, the new Customs Code of the European
Union since the responsibility of the exporters and importers takes place once the clearance of
export and import have been carried out.
b. Removal of Incoterm FAS. FAS (Free Alongside Ship) is an Incoterm very little used and, in
fact, does not contribute almost anything to FCA (Free Carrier Alongside) that is used when the
merchandise is delivered at the port of departure in the exporter‘s country. With FCA, the exporter
can also deliver the goods at the dock, as in FAS, since the dock is part of the maritime terminal.
On the other hand, if FAS is used and there is a delay in the arrival of the ship, the merchandise
will be available to the buyer at the dock for several days and, on the contrary, if the ship arrives
in advance, the merchandise will not be available for shipment. Actually, FAS is only used for the
exportation of some commodities (minerals and cereals) and, in this sense, the Drafting
Committee is evaluating the convenience of creating a specific Incoterm for this type of products.
c. Unfold FCA in two Incoterms. FCA is the most used Incoterm (about 40% of the international
trade operations are carried out with this Incoterm) since it is very versatile and allows the delivery
of goods in different places (seller‘s address, land transport terminal, port, airport, etc.) that, most
of the times, are in the seller‘s country. The Committee is thinking about the possibility of creating
two Incoterms FCA; one for terrestrial delivery and another for maritime delivery.
d. FOB and CIF for container shipping. The modification made in the edition of Incoterms 2010
that when the merchandise does not travel in a container, Incoterms FOB and CIF should not be
used, but their counterparts FCA and CIP are not being applied by the vast majority of exporting
and importing companies, nor by agents involved in international trade (freight forwarders,
logistics operators, banks, etc.). This is due to the fact that FOB and CIF are two very old
Incoterms (FOB was already used in England at the end of the XVIII century), and the
International Chamber of Commerce has not made an effort to transmit this change adequately,
which is very important, since approximately 80% of the world trade is made in a container. In the
Incoterms 2020 version, it is possible that FOB and CIF can be used again for container shipping,
as was the case with Incoterms 2000 and earlier versions.
e. Creation of a new Incoterm: CNI. The new Incoterm would be denominated as CNI (Cost and
Insurance) and would cover a gap between FCA and CFR/CIF. Unlike FCA, which would include
the cost of international insurance on account of the seller-exporter, and as opposed to CFR/CIF
that would not include freight. As in the other Incoterms in ―C,‖ this new Incoterm would be an
―arrival Incoterm,‖ i.e., the risk of transport would be transmitted from the seller to the buyer at the
port of departure.

TWO INCOTERMS BASED IN DDP
As with FCA, DDP (Delivered Duty Paid) also generates some problems due to the fact that the
customs duties in the importing country are paid by the exporter-seller, regardless of the place of delivery
of the goods. For this reason, the Drafting Committee is considering creating two Incoterms based on
DDP:
1. DTP (Delivered at Terminal Paid): when the goods are delivered to a terminal (port, airport,
transport center, etc.) in the country of the buyer, and the seller assumes the payment of customs
duties.
2. DPP (Delivered at Place Paid): when the goods are delivered at any place other than a transport
terminal (for example, at the buyer‘s address), and the seller assumes the payment of the
customs duties.
In addition to the elimination and creation of some Incoterms, the Drafting Committee is analyzing other
issues to include in the new version of the Incoterms 2020. Among them are:
 Transportation security.
 Regulations on transportation insurance.
 The relationship between the Incoterms and the International Sale Contract.
Over the next few months, the Committee will meet periodically to address these and other issues that
will eventually be incorporated into Incoterms 2020. Hopefully, the version of Incoterms 2020 that comes
into force on January 1, 2020, will serve to facilitate international trade between exporters and importers,
adapting to the changes that have occurred in the last decade.
The new Incoterms 2020 would take effect on January 1, 2020, and this version drafted by the
International Chamber of Commerce includes some changes in relation to previous versions of Incoterms
Rules.
How to use the Incoterms 2020?

In order to use Incoterms®, this must be clearly stated in the contract of sale by indicating: the
Incoterms® rule chosen, the port, designated place or location, followed by "Incoterms® 2020".
Example: CIF Hong Kong Incoterms® 2020
1. Choose the appropriate Incoterms® rule. The choice of the Incoterm® is an integral part of a
commercial transaction. It has to be done in function with the organizational capacities of the
enterprise, the type of transportation used, the level of service that the enterprise wishes to
provide to the client or the resources of its supplier, or it could be in function to the common
practices of the market, or the practices used by the competitors, etc. The Incoterm® selected
must also be well-adapted to the type of goods that will be shipped and the type of transportation
that will be used.
2. Specify the place and port with precision. For an optimal application of Incoterms®, the contract's
parties are required to assign a place or a port with maximum exactitude: ex FCA 25 rue Saint
Charles, Bordeaux, France, Incoterms® 2020. It must be stressed in this part that for certain
Incoterms® such as CPT, CIP, CFR, CIF, the place designated is not the same as the place of
delivery: it designates the place of destination paid for. In order to specify the final destination of
the goods, it is advised to mention the specific address in order to avoid any ambiguity. The same
applies for the "out of the factory": Is it a factory in France or a factory established abroad by a
French company?
Other precautions to be taken

Some precautions must be taken when using Incoterms®, such as:
 A good knowledge of the meaning of each Incoterm® and its acronym;
 The usage of the variants of Incoterms® with exactitude in order to prevent confusions that could
result from a misinterpretation (ex: FOB USA).
The Incoterms® are standards accepted worldwide. In that capacity, like all standards (industry,
quality, pollution), their names do not cause any divergence. Use only the standardized
abbreviations. Any other code will be prohibited! As any standard, they are an explicit reference.
As the horses DIN or the ISO 9002, the three letters of the Incoterm must be followed by the
specific names of the designated places and the mention "Incoterm", see "Incoterm ICC". Do not
hesitate to consult an international law firm.
Today's tendency in international business is based on the fact that the buyer is released from all
logistics concerns. This valorizes the position of the exporter. It is essential to negotiate the terms of the
contract for the first shipment and, most of all, in the case of dealing with countries at risk, obtaining a
document of credit as a form of payment will be advised.
Code Name in English
EXW EX Works
FCA Free CArrier

*Possibility to add the on-board notation.
CPT Carriage Paid To
CIP Carriage and Insurance

*Integration of Institute Cargo Clause A of the Institute Cargo Clauses, including "All Paid to
Risks" insurance coverage.
DAP Delivered at Place

DPU* Delivered at Place

Unloaded
DDP Delivered Duty Paid
Incoterms® 2020 applicable to maritime and inland waterway transport

FAS Free AlongSide ship
FOB Free On Board
CFR Cost and Freight
CIF Cost, Insurance, Freight

*Incorporation of Institute Cargo Clause C, including "Minimum" insurance coverage.
* New for Incoterms® 2020
Sale on Departure, Sale on Arrival: a fundamental difference
Sale on Departure
A sale on departure means that the merchandise will be shipped at the risk and hazard of the
buyer, which means:
 from the moment that the goods are placed at disposal at the vendor's premises (EXW) ;
 from the moment that the goods are handed to the carrier in order to be shipped (FCA, FAS,
FOB, CFR, CIF, CPT et CIP) ;
The Incoterms® for a sale on departure assign to the buyer (in a more or less large amount) the
costs and the risks linked to the shipping of the merchandise.
Sale on Arrival
A sale on arrival means that the merchandise will be shipped at the risk and hazard of the seller
until it reaches the designated destination point or port. Three Incoterms® are provided:
 until the end of its maritime transportation and its disembarkation (DAP);
 until its destination point (DPU, DDP).

ARTICLE: RESFRESHING YOUR KNOWLEDGE OF INCOTERMS CAN SAVE THE DAY!
Almost every aspect of international trade and the transactions and costs associated with it are up for
negotiation, including pricing, expenses, custom duties, transportation and insurance. Each of these
issues must be negotiated between exporters and importers to clearly determine which party is legally
responsible for each specific aspect of the trade transaction. These discussions can be compounded by
disparities in language and culture. To improve communication and mitigate the risks of
misunderstandings, the ICC developed Incoterms (International Commercial Terms) to serve as universal
trade definitions. It is now far easier for trading partners in different languages and from different cultures
to do business. On September 10, 2019, the ICC published Incoterms® 2020, the first update to these
terms since 2010. The new Incoterms® will enter into effect January 2020. To get you up to speed on the
new Incoterms® 2020 rules and help you succeed in global markets, the Forum for International Trade
Training (FITT) and Canadian Chamber of Commerce (CCC) are offering the only Incoterms® 2020 in-
class training across Canada officially recognized by the International Chamber of Commerce. This
training is offered in partnership with the Canadian Trade Commissioner Service (TCS) and Export
Development Canada (EDC).
Learn more How and why to use Incoterms
The Incoterms establish clarity in issues such as:
Costs: Who pays for the various shipping expenses (packing, transportation, duties) encountered
throughout a shipment‘s journey?
Ownership/Responsibility: At various points of the shipment‘s journey, which party owns the goods and
assumes the risk?
Liability: If goods are damaged, who is responsible for paying damages, and at what point? Do use
Incoterms to establish party obligations, risks and costs with regard to: Delivery terms (destination,
timelines, proof requirements) Standards of conduct Required or government imposed licenses and
formalities Transportation mode and carriage terms Transfer of risk from seller to buyer Don‘t use
Incoterms to: Outline rights and obligations for service contracts or any contract other than delivery
Outline provisions before or after delivery (only during) Define breach remedies Determine how title of
goods is transferred Incoterms categories and responsibilities Each incoterm is referred to by a three-
letter abbreviation, and they are usually listed by category. Rules for any mode or modes of
transportation: EXW — Ex Works: The seller‘s minimum responsibility is to make the goods available at
the specified location. The buyer accepts all other risks and costs. FCA —
Free Carrier: The seller ensures the goods are made available for the buyer‘s named carrier at a specific
named location. The buyer then assumes all risks and costs. CPT — Carriage Paid To: The seller pays
the freight to a named destination. The buyer then assumes all risks and costs. CIP — Carriage and
Insurance Paid To: Same as for CPT, but the seller must also provide insurance. The buyer then

assumes all risks and costs DAT — Delivered to Terminal or Port (Used for ocean or inland waterway
transport or multimodal transport): The seller pays all transport costs to a named port but does not clear
the goods through customs. The buyer then assumes all risks and costs. DAP — Delivered at Place
(Used for all modes of transport, as long as the final shipment to the named place is by land): The seller‘s
obligations terminate when the goods are delivered to the specified place. The buyer is responsible for
clearing customs. The buyer assumes all risks and costs from this point on. DDP — Delivered Duty Paid:
The seller pays all costs, including customs clearance, associated duty/taxes and delivery costs, to the
buyer‘s named delivery address. Rules for sea and inland waterway transportation: FAS — Free
Alongside Ship: The seller‘s obligations are fulfilled when the goods have been placed alongside the
principal ship at the dock or specified port. The buyer then assumes all risks and costs. FOB — Free on
Board: The seller‘s obligations are fulfilled when the goods are placed on board the ship by the exporter.
The buyer then assumes all risks and costs. CFR — Cost and Freight: The seller pays all costs
necessary to transport the goods to the named destination. Risks are transferred to the buyer when the
goods pass over the ship‘s rails. CIF — Cost Insurance Freight: Same as for CFR, but the seller must
also provide marine insurance. Each of these groups reflects varying degrees of seller cost and risk, and
establishes the balance of responsibilities between the buyer and the seller. Departure, main carriage
unpaid and main carriage paid Incoterms are all shipment contracts. In these, the seller delivers simply
by handing over the contract goods to a carrier somewhere on the seller‘s side. Depending on the terms,
the place could be the seller‘s premises, a carrier‘s terminal, and a forwarder‘s warehouse, or alongside
or on board a ship. The need for payment to be made to the seller is recognized as soon as this delivery
occurs. Incoterms letter meanings Terms beginning with the letter ‗E‘ indicate that the seller‘s
responsibilities are fulfilled when the goods are made available for shipping by the buyer‘s chosen carrier.
Terms beginning with the letter ‗F‘ refer to shipments where the primary cost of shipping is not paid for by
the seller.
Terms beginning with the letter ‗C‘ refer to shipments where the seller pays for a portion of the shipping
but the seller‘s responsibility ends when the goods are delivered to the carrier somewhere on the seller‘s
side. Terms beginning with the letter ‗D‘ are destination contract terms because the seller delivers
somewhere on the buyer‘s side. The shipper or seller‘s responsibility ends when the goods arrive at a
predefined point. Delivery on the buyer‘s side means that recognition of payment is deferred. It is
advisable for entrepreneurs to become familiar with Incoterms to accurately and clearly understand what
rights they are entitled to and obligations they are responsible for when transporting goods
internationally. This in turn can help them determine the insurance requirements compatible with their
business needs.

ASSESSMENTS:
1. The Incoterms clarifies all matters affecting international commercial transactions especially
pertaining to whose financial obligations a certain item falls?
2. What are the possible shortcomings of Incoterms in as far as adherence is concern; that all
parties involved follow its principles strictly? Explain
3. What makes the term CIF– Cost, Insurance and Freight less attractive to sellers? Discuss.
4. The Ex-Works term although burden the buyer with everything in relation to the shipping of his
merchandise, in what instance, this term maybe a blessing in disguise to him? Discuss
5. The FOB– Free on Board provides guarantee on assumption of risks by the seller although most
cost related to transportation and insurance are borne by the buyer. Discuss
6. What makes this term Delivered Ex-Quay (DEQ) highly preferable to buyers especially cost and
protection against loss? Explain.
7. Compare and contrast the different rules of modes between the buyers and the sellers.

LESSON SEVEN
INTERNATIONAL MARKETING
OVERVIEW
International marketing is not the same thing as international trade. Only a part of the international
trade flows represent international marketing. Further, there is a category of international marketing,
which is not captured by the international trade statistics. Walsh, who states international marketing is
perhaps best regarded as a shorthand expression for the special international aspects of marketing,
defines international marketing as: ―the marketing of goods and services across national frontiers, and
the marketing operations of an organisation that sells and/or produces within a given country when: that
organisation is part of, or associated with, an enterprise which also operates in other countries; and there
is some degree of influence on or control of the organisation‘s marketing activities fro outside the country
in which it sells and/or produces. Another view is that international marketing is simply an attitude of
mind, the approach of a company with a truly global outlook, seeking its profit impartially around the
world, ―home‖ market included, on a planned and systematic basis. Thus, many firms in their own home
market face the technological, financial, organisational, marketing and other managerial prowess of the
multinationals.
Learning Outcomes:
 Describe the stages, decisions and factors affecting international marketing;
 Identify international marketing, planning, organization and control; and
 Develop an understanding how globalization has a great impact on the firm‘s operations
COURSE MATERIALS
I. THE CONCEPT OF INTENATIONAL MARKETING AND GLOBALIZATION
International marketing is the marketing function of multinational companies. It is marketing in an

internationally competitive environment, no matter whether the market is home or foreign. For example,
although its market is confined almost entirely to India, the competition which Nirma encounters is indeed
international. Its major competitors include MNCs like Unilever, P&G, Colgate Palmolive, etc. Besides,
there is also competition from imported products. Thus, many firms in their own home market face the
technological, financial, organisational, marketing and other managerial prowess of the multinationals.

The sale abroad of a good produced in India is international trade but from a truly managerial
point of view it can be regarded as international marketing if it is sold to the ultimate buyer under the
brand name of the exporter. Many of India‘s exports are repacked or further processed and sold to the
ultimate buyer under foreign brand names. For example, the spices imported in bulk from India are
packed in consumer pack, after processing or in the same condition as it was imported, and sold under
foreign brands. Even products exported in consumer packs from India are repacked abroad, without any
further processing, and sold under foreign brand names. In such cases, the Indian exports represent
international trade but not international marketing. It may also be noted that a considerable share of
several products sold abroad under the Indian brand names, like pickles and curry powders, are bought
by the ethnic population (i.e., the Indian population abroad).
Globalisation is a term frequently used by many but is vaguely defined. One finds trouble in even
finding two authors who defines globalisation in the same, exact way. But even that being the case, there
is no denying that global markets, in particular emerging ones, offer attractive potential. For many
organisations it is the only approach for growth as existing markets mature with few chances for
profitable opportunities. As global markets open through the increasing use of the Internet and with
improved supply chains, it is likely that there are many untapped segments around the world that would
open to a multinational company, regardless of the industry. More and more, the world is becoming an
available global market place. To stop marketing activities at one‘s home-base borders is not only
arbitrary, but also short-sighted. International marketing is often defined largely in terms of the level of
involvement of the company in the global marketplace, and export, multinational and global marketing are
most widely considered. Multinational enterprises (MNEs) develop international marketing strategies in
order to improve corporate performance though growth and strengthening their competitive advantage.
However, MNEs differ in their approach to international marketing strategy development and the speed
and the progress they make in achieving an international presence. There is a focus on the effects of
globalisation to international marketing strategies with reference to PepsiCo, the parent company of
Pepsi-Cola and Frito Lay.
A common approach to marketing is to regard it as the function of finding customers for goods
that the firm has already decided to supply. Thus, management select products that are economical to
put on the market relative to production cost and resource availabilities and then sets up a marketing
department to persuade customers to purchase the goods. This approach although fairly common, does
not accord with the marketing concept. The alternative approach is for the firm to evaluate the marketing
opportunities before it decides the product characteristics to offer, assesses potential demand for various
items, determines the product attributes most needed and desired by consumers, predicts the prices
consumers are willing to pay., and then supplies goods corresponding to these requirements. Firms that
adopt marketing concept are more likely to sell their products because these will have been conceived
and developed to satisfy customer demands. The marketing concept, then, is the proposition that the
supply of goods and services should depend on the demands for them. Even the most vigorous
advertising and other promotional campaigns will fail if people do not want the products. The international
marketing concept implies a shift away from looking for foreign customers who appreciate the
firm‘s products and towards a focus on the supply of the goods that foreign consumer‘s desire.
Manifestations of the latter approach include:

 Careful research into foreign consumer behaviour.
 Willingness to create new products and adapt existing products to satisfy the needs of world
markets. Products may have to be adapted to suit the tastes, needs, purses and other
characteristics of consumers in specific regions. Firms cannot assume that an item that sells well
in one country will be equally successful in others.
 Integration of the international side of the company‘s business with all aspects of its operations.
International marketing considerations must be taken into account when designing and
developing products, when selecting transport and distribution system, when dealing with banks,
advertising agencies and so on, and when structuring the overall organisation of the firm. The
international marketing manager needs to be involved in corporate planning, sales forecasting,
the recruitment and training of marketing personnel, and the control of salespeople ‗in the field‘.
Evolution Process of Global Marketing
Whether an organisation markets its goods and services domestically or internationally, the
definition of marketing still applies. However, the scope of marketing is broadened when the organisation
decides to sell across international boundaries, this being primarily due to the numerous other
dimensions which the organisation has to account for. For example, the organisation‘s language of
business may be ―English‖, but it may have to do business in the ―French language‖. This not only
requires a translation facility, but the French cultural conditions have to be accounted for as well. Doing
business ―the French way‖ may be different from doing it ―the English way‖. This is particularly true when
doing business with the Japanese.
Post-Modern Era of Marketing
It is recognised that in the ―postmodern‖ era of marketing, even the assumptions and long
standing tenets of marketing like the concepts of ―consumer needs‖, ―consumer sovereignty‖, ―target
markets‖ and ―product/market processes‖ are being challenged. The emphasis is towards the emergence
of the ―customising consumer‖, that is, the customer who takes elements of the market offerings and
moulds a customised consumption experience out of these. Even further, post modernism, posts that the
consumer who is the consumed, the ultimate marketable image, is also becoming liberated from the sole
role of a consumer and is becoming a producer. This reveals itself in the desire for the consumer to
become part of the marketing process and to experience immersion into ―thematic settings‖ rather than
merely to encounter products. So in consuming food products for example, it becomes not just a case
of satisfying hunger needs, but also can be rendered as an image - producing act. In the post modern
market place the product does not project images, it fills images. This is true in some foodstuffs. The
consumption of ―designer water‖ or ―slimming foods‖ is a statement of a self image, not just a product
consuming act.
 Acceptance of postmodern marketing affects discussions of products, pricing, advertising,

distribution and planning. However, given the fact that this textbook is primarily written with
developing economies in mind, where the environmental conditions, consumer

sophistication and systems are not such that allow a quantum leap to postmodernism, it is
intended to mention the concept in passing. Further discussion on the topic is available
in the accompanying list of readings.
 When organisations develop into global marketing organisations, they usually evolve into
this from a relatively small export base. Some firms never get any further than the
exporting stage. Marketing overseas can, therefore, be anywhere on a continuum of
―foreign‖ to ―global‖. It is well to note at this stage that the words ―international‖,
―multinational‖ or ―global‖ are now rather outdated descriptions. In fact ―global‖ has
replaced the other terms to all intents and purposes. ―Foreign‖ marketing means marketing
in an environment different from the home base, it‘s basic form being ―exporting‖. Over
time, this may evolve into an operating market rather than a foreign market.
The Four Stages of Global Marketing
Stage One: Domestic in focus, with all activity concentrated in the home market. Whilst many
organisations can survive like this, for example raw milk marketing, solely domestically oriented
organisations are probably doomed to long term failure.
Stage Two: Home focus, but with exports (ethnocentric). Probably believes only in home values, but
creates an export division; usually ripe for the taking by stage four organisations.
Stage Three: Stage two organisations which realize that they must adapt their marketing mixes to
overseas operations. The focus switches to multinational (polycentric) and adaption becomes paramount.
Stage Four: Global organizations which create value by extending products and programs and focus on
serving emerging global markets (geocentric). This involves recognising that markets around the world
consist of similarities and differences and that it is possible to develop a global strategy based on
similarities to obtain scale economies, but also recognises and responds to cost effective differences. Its
strategies are a combination f extension, adaptation and creation. It is unpredictable in behaviour and
always alert to opportunities.

Reasons /Motives of International Marketing
There are several answers to the question ‗why firms go international?‘ The factors which
motivate or provoke firms to go international may be broadly divided into two groups, viz., the pull factors
and the push factors. The pull factors, most of which are proactive reasons, are those forces of attraction
which pull the business to the foreign markets. In other words, companies are motivated to
internationalise because of the attractiveness of the foreign market. Such attractiveness includes broadly,
the relative profitability and growth prospects. The push factors refer to the compulsions of the domestic
market, like saturation of the market, which prompt companies to internationalize. Most of the push
factors are reactive reasons. Important reasons for going international are described below.
 Profit motive. One of the most important objectives of internationalisation of business is the
profit advantage. International business could be more profitable than the domestic. As pointed
out earlier, there are cases where more than 100 per cent of the total profit of the company is
made in the foreign markets (in which case the domestic operation, obviously, is incurring loss).
Even when international business is less profitable than the domestic, it could increase the total
profit.
 Growth opportunities. The enormous growth potential of many foreign markets is a very strong
attraction for foreign companies. In a number of developing countries, both the population and
income are growing fast. It may be noted that several developing countries, the newly
industrialising countries (NICs) and the Peoples‘ Republic of China in particular, have been
growing much faster than the developed countries. Growth rate of India has also been good and
the liberalisation seems to have accelerated the growth. Even if the market for several goods in
these countries is not very substantial at present, many companies are eager to establish a
foothold there, considering their future potential. Similarly, when the East European economies
have been opened up, there has been a rush of MNCs to establish a base in these markets.
 Domestic market constraints. Domestic demand constraints drive many companies to

expanding the market beyond the national border. The market for a number of products tends to
saturate or decline in the advanced countries. This often happens when the market potential has
been almost fully tapped. In the United States, for example, the stock of several consumer
durables like cars, TV sets etc. exceed the total number of households. Estimates are that in the
first quarter of the 21st century, while the population in some of the advanced economies
would saturate or would grow very negligibly, in some others there would be a decline. Such
demographic trends have very adverse effects on certain lines of business. For example, the fall
in the birth rate implies contraction of market for several baby products. Another type of domestic
market constraint arises from the scale economies. The technological advances have
increased the size of the optimum scale of operation substantially in many industries making it
necessary to have foreign market, in addition to the domestic market, to take advantage of the
scale economies. It is the thrust given to exports that enabled certain countries like South Korea
to set up economic size plants. In the absence of foreign markets, domestic market constraint
comes in the way of benefiting from the economies of scale in some industries. Domestic
recession often provokes companies to explore foreign markets. One of the factors
which prompted the Hindustan Machine Tools Ltd. (HMT) to take up exports very seriously was

the recession in the home market in the late 1960s. The recession in the automobile industry in
the early 1990s, similarly, encouraged several Indian auto component manufacturers to explore or
give a thrust to foreign markets.
 Competition. This may become a driving force behind internationalisation. A protected market
does not normally motivate companies to seek business outside the home market. Until the
liberalisations which started in July 1991, the Indian economy was a highly protected market. Not
only that the domestic producers were protected from foreign competition but also domestic
competition was restricted by several policy induced entry barriers, operated by such
measures as industrial licensing and the MRTP regulations.
 Government policies and regulations. The government policies and regulations may also
motivate internationalisation. There are both positive and negative factors which could cause
internationalisation. Many governments give a number of incentives and other positive
support to domestic companies to export and to invest in foreign countries. Similarly, several
countries give a lot of importance to import development and foreign investment. Sometimes, as
was the case in India, companies may be obliged to earn foreign exchange to finance their
imports and to meet certain other foreign exchange requirements like payment of royalty,
dividend, etc.
II. CHALLENGES AND SCOPE OF INTERNATIONAL MARKETING
The Domestic Market Expansion Concept
The domestic company that seeks sales extension of its domestic products into foreign markets
illustrates this orientation to international marketing. It views its international operations as secondary to
and an extension of its domestic operations. The primary motive is to dispose of excess domestic
production. Domestic business is its priority and foreign sales are seen as a profitable extension of
domestic operations. While foreign markets may be vigorously pursued, the orientation remains basically
domestic. Its attitude toward international sales is typified by the belief that if it sells in Peoria, it will sell
anywhere else in the world. Minimal, if any, efforts are made to adapt the marketing mix to foreign
markets.
The firm‘s orientation is to market to foreign customers in the same manner the company markets
to domestic customers. It seeks markets where demand is similar to the home market and its domestic
product will be acceptable. This Domestic Market Expansion Strategy can be very profitable. Large and
small exporting companies approach international marketing from this perspective.
Multi Domestic Market Concept
Once a company recognises the importance of differences in overseas markets and the
importance of offshore business to their organisation, its orientation toward international business may
shift to a Multi-Domestic Market Strategy. A company guided by this concept has a strong sense that
country markets are vastly different (and they may be, depending on the product) and that market
success requires an almost independent programme for each country. Firms with this orientation market
on a country-by-country basis with separate marketing strategies for each country. Subsidiaries operate

independently of one another in establishing marketing objectives and plans. The domestic market and
each of the country markets have separate marketing mixes with little interaction among them. Products
are adapted for each market with minimum coordination with other country markets, advertising
campaigns are localized as are the pricing and distribution decisions. A company with this concept does
not look for similarity among elements of the marketing mix that might respond to standardisation.
Rather, it aims for adaptation to local country markets. Control is typically decentralised to reflect the
belief that the uniqueness of each market requires local marketing input and control.
Global Marketing Concept
A company guided by this new orientation or philosophy is generally referred to as a global

company, its marketing activity is global marketing, and its market coverage is the world. A company
employing a Global Marketing Strategy strives for efficiencies of scale by developing a standardised
product, of dependable quality, to be sold at a reasonable price to a global market (that is, the same
country market set throughout the world). Important to the Global Marketing Concept is the premise that
world markets are being‖ driven toward a converging commonalty‖ that seek much the same ways to
satisfy their needs and desires and thus, constitute significant market segments with similar demands for
the same product the world over. With this orientation a company attempts to standardise as much of the
company effort as is practical on a world-wide basis. Some decisions are viewed as applicable
worldwide, while others require consideration of local influences. The world as a whole is viewed as the
market and the firm develops a global marketing strategy
International business
While the reasons are often inter-linked, each has its own premise. The vast domestic markets
have provided the firms, an opportunity for continued growth which finally reaches a point where the
possibility of continued expansion levels off. The survival of these firms has come into question, for it has
become increasingly difficult for these firms to sustain customary rates of growth as demanded by their
shareholders. These companies have been forced by the ‗economic criterion‘ to locate international
markets to sell their surplus production and to gain cost advantages. Besides this, foreign markets may
offer high profit margins, which gives added impetus for going international. Most of tile firms world over
are gearing up for action for besides these reasons the Governments of various countries are providing
support and incentives to firms involved in foreign trade.
Reasons for Entering into International Markets
Although profit is the underlying motive, most of the firms are directed into International markets
because of any of the following five reasons:
1. Product life cycle: A product may be at the end of its life cycle in one market and not
even introduced in another. The unwillingness of the firm to write off its productive assets
may force it into international markets.

2. Competition: In an effort to avoid competition, which may be intense in the domestic
market, the firm may choose to go international.
3. Excess capacity: In an effort to minimise its fixed cost per unit, tile firm may undertake
foreign orders.
4. Geographic diversification: This has to do with the strategy that a firm may adopt.
Instead of extending its product line the firm may just choose to expand its market by
going international.
5. Increasing the market size: In an effort to expand its operation a firm may choose to go
international.
International Trade
With the growth of materialism, every individual has become interested in improving his/her
standard of living in terms of material comforts. This has forced the governments into foreign trade to
yield the underlying economic benefits and thereby improving the standard of living of its people.
The gains from international trade arise from the local production advantages which in itself are a
function of differences in availability and the cost of factors of production. Thus, the difference in factors
like the capital availability and cost of capital, specialisation of labour, their wage factor, availability of
managerial talent, determine the area of product specialisation that a country will enter into to
gain the cost advantage. The production specialisation will lead to an improvement in productivity and
thereby an increase in the real income-if the countries indulge in free trade. This explains the reason for
importance of balance of payment of a nation and exchange rate.
Theories of International Trade
Historically, nations have been trading with each other for hundreds of years for profit or because
they do not have enough resources (land, labour and capital) to satisfy all the needs of consumers. For
example, Japan has a highly skilled labour force that use technologically advanced equipments to
produce cars and electrical equipment; however it does not have its own oil fields. Saudi Arabia has large
supplies of oil, but lacks the resources to produce cars and electrical equipments. Trade between Saudi
Arabia and Japan will allow both countries to obtain goods and services that they cannot produce
themselves. Specialisation and trade can then deliver higher living standards to all countries as
resources are being used more efficiently. In economics, three theories have been propounded for
explaining tile reason for foreign trade. These theories are equilibrium theory. Underlying each of these
theories is the theory of relative advantage.

Nature of International Marketing
The task of marketing manager is to mould the endogenous and exogenous factors in the light of
opportunities and threats facing the company. These endogenous and exogenous factors might again be
controllable or uncontrollable. Therefore the manager is basically framing his controllables in the light of
uncontrollables. The controllables for a marketing manager include the four P‘s of marketing and
resources within the company. Whereas, the uncontrollables can further be classified into domestic
uncontrollables and foreign uncontrollables.
Which markets first?
Many businesses expect to expand internationally by targeting countries. But one country may comprise
several markets. Which markets within that country do you target first?
Which country first?
For a start, that‘s the wrong question. As you already know, Indian and American aren‘t languages, but
rather names for the denizens of India and America. Therein lies the problem.
III. INTERNATIONAL MARKETING, PLANNING, ORGANISING AND CONTROL
A multinational corporation manufacturing and marketing a consumer durable product was faced
with a problem. The CEO and the corporation has portrayed the following scenario The corporation has
just entered into the French market, investing heavily in developing the manufacturing facilities. Since,
the idea was to gain economies of scale, the corporation resorted to penetration pricing. It was at this
time that the country manager for ‗France‘ revealed to the CEO that the French market share of 80% was
being rapidly eroded by competition, Competition, according to the country manager, was eating into the
market share from two directions, On the one hand, the substitute product instead had developed rapidly
and, on the other hand, the only competitor, who was manufacturing a differentiated product, had
stepped up his advertising expenditure. The country manager wants to introduce a substitute product
and undertake an aggressive promotion programme to combat competition on both sides. He believes
that he can to approve the country manager‘s proposal or not.
From the above example, it becomes clear that every organisation needs to direct and coordinate
its marketing effort. For undertaking this, it must frame a marketing plan. While the task of developing a
domestic marketing plan is in itself complex, it gets further compounded when a firm gets into
international operation; for international marketing entails a multi country scenario necessitating
marketing planning at two levels viz., country level and corporate level. Having developed the marketing
plan, the corporation must implement them again at two levels i.e., at country level and at the corporation
level. These are the issues that have been addressed in this unit.

Developing a International Marketing Plan
As already pointed out, the marketing plan must be developed at two levels i.e., at the country
level and at the international level. At the country level, the marketing plan resembles any domestic
marketing plan, in the sense that it lays down the strengths and weaknesses of the organisation and the
opportunities and threats faced by the organisation. It proceeds to set an objective along with the
assumptions. Having done the above, it lays down a broad action plan, the organisation structure and the
control system necessary for accomplishing the above plan. The international marketing plan is more
than a mere integration of the country plans, for it seeks to direct end coordinate the activities of the
corporation on a global basis and at a country level. These variables are as follows.
 Knowledge of the market.

 Knowledge of the product.
 Knowledge of the marketing systems.
The corporation must decide how it will obtain information about all these variables on global and
country basis. This information will then be formalised into a marketing plan to provide guidance to each
country manager.
Standardized approach
This refers to standardization in four major decision areas decision, price decision, promotion
decision and the distribution decision. The organisation should decide about this as a policy. The
underlying premise of the standardized approach in recognition of the globalisation of market. The oder
Levitt in his article on ‗The Globalisation of Market‘ points out that because of technological and
communication revolution, consumers in one country would know about the products that are available in
other countries and would seek to procure them through formal or informal channels. Once this premise
is accepted, it should become possible for an organisation to encash the advantages of standardisation,
which include cost saving in all areas right from manufacturing (because the message becomes common
as demonstrated by Exxon‘s ‗put a tiger in your tank‖). The corporation also has the advantage of
maintaining the international customer, a class which is growing as demonstrated by the increase in
international air traffic, for, wherever he goes in the world, he is sure of getting the same product,
However, this approach is not free from limitations. Although theoretically, a corporation may
demand standardisation in practise, it is not always possible because of heterogeneity of the markets.
Thus, tariffs dumping laws, retail maintenance laws etc. may limit standardisation of price variable and
non-availability of media vehicles may limit standardisation of communication variables.
Organisation for International Marketing
Planning will not give success unless it is properly implemented, Therefore, once the plan has
been prepared it becomes necessary to implement it, For this, resources have to be deployed and efforts
have to be directed to utilize resources effectively. This is possible only when a structural framework
exists for allocating the requisite authority and responsibility.

This structure should be capable of meeting the varying challenges inherent in international
marketing. It is, perhaps, for this reason, that international marketing organisations are characterised by
flexibility. Development of such organisational structure should be preceded by development of a plan.
Such a plan is undertaken at the corporate level and, normally, the following parameters are considered:
 Company objectives and history

 Government policies influencing the firm‘s operations
 Marketing Operations
 Decision-making policy and the levels involved in decision-making
 Length of chain of command
 Degree of control
 Degree of involvement in the marketing functions.
These parameters, along with the available resources are aligned with objectives on a production
or a function or a geographical basis. The basis also takes into account the method of decision-making.
Historically, organisational structures were designed around the production function. However, in the
present global economy where organisations-fight intensively to attract and retain customers, it is the
finance and marketing functions which give rise to the organisational structure. Most of the existing
organisations can be identified as belonging to one of the three categories: centralised, decentralised or
regionalised.
Framework for International Marketing Planning
As noted earlier, planning in the international context is more difficult than planning for domestic
operations, partly because there are more unknowns in the former than in the latter. However,
conceptually it encompasses all the steps used in the preparation of any typical marketing plan. To
reiterate, a marketing plan shall normally consist of the following steps:
1. Diagnosis of the situation or situation analysis.
2. Identification of corporate strengths and weaknesses as well as environmental opportunities and

threats.
3. Definition of the objectives.
4. Forecasted estimates of sales, costs, and profits.
5. Designing an appropriate marketing programme based on objectives and estimates.
6. Deciding on the relevant appropriations for the plan.

Definition of the objectives is considered by some as the first step in the marketing planning
process. Others feel that realistic objectives should be set only after the Strengths, Weaknesses,
Opportunities, Threats (SWOT) analysis and in the light of the information and data thrown up by
situation analysis. What is, however, important to bear in mind is that since marketing planning is an
iterative process, it requires monitoring, revaluation and adaptation of objectives and strategies in the
light of constantly changing environment. Strategic planning in the international marketing should
encompass the following decision areas:
 Commitment decision. Considering the resource position of the firm and its home market
situation, does the international market offer an attractive opportunity worth striving for?
 Area of operation decision. Which country/countries present the most attractive alternative(s) as
potential target markets?
 Entry mode and operation decision. What could be the most effective entry technique for
entering the international markets and conducting the marketing operations?
 Marketing mix strategy. Which possible combination of the marketing mix elements would be
suitable to achieve the objectives in the given environment?
 International marketing organisation. What is the best possible organisational arrangement

which will guarantee sufficient flexibility in and effective control over operations?
International Marketing Control
International marketing displays an interesting paradox with respect to control situations. While
control of multinational operations is far more formidable and poses additional challenges, not many
business firms exercise control over international operations as thoroughly as they should. The additional
difficulty in control of international activities emanates from a number of reasons. The speed and width of
environmental change in a multinational company is a factor dependent on each of the markets in which
the company operates. As the rate of exchange and the characteristics undergoing change differ in each
of these national markets, this dimension becomes complex. In addition, the far greater heterogeneity of
environmental challenges‘ makes the task of the marketing controller more difficult. In larger companies,
the size of international operations necessitates formation of intermediate headquarter, creating an
additional organisational level for the control mechanism. Further, international operations present unique
communication problems emanating from the distance between markets and corporate headquarters,
and variations in languages, cultures and business practices across the national markets. Thus time lags,
cultural lags, communication lags and varying objectives contribute to the problem of
establishing and managing effective international marketing control systems. In order to perform at
optimum profit levels consistently, all functional areas need systematic control and coordination. While
the requirements of an international marketing control system are similar to those of the domestic
system; the specific challenges posed by the former necessitate that consideration be given to the
following:

a. Since international control can seldom be as complete as that of domestic operations, the
tools used need to be reasonable and realistic. A cumbersome or complex system is likely
to become non-functional soon.
b. The cost of control system must be commensurate with the benefits accruing from it.
c. In order to be effective in meeting the challenges posed by the rapidly changing

environments in heterogeneous market places, the control system must be sensitive and
quick so that the organisation retains the flexibility to react to environmental opportunities
and challenges.
d. The control system may need variation according to the needs posed by different
subsidiaries. Though this sounds a simple theoretical principle, most companies tend to
adopt a standardised system regardless of the type of county and location in which the
system is to be operationalized.
e. The control system in the international markets needs to be streamlined enough so that
the corporate headquarter is not inundated with masses of data, but only key variables are
presented to alert the organisation to departures from the planned performance.
The Control Sequence
The control operations in international operation follow similar logical sequence as that in
domestic marketing though the implementation may vary depending on the relationships among the
steps involved in the control process. Figure below shows the international marketing control systems.
Companies may differ in the entry objectives they seek in international markets. For the purpose
of designing adequate control systems, management needs to clearly outline its specific long run and
short run objectives in respect of specific international markets. Companies with distant foreign
subsidiaries often fail to communication enough about the firm‘s objectives and goals relating to specific
operating units. Unless objectives are conveyed explicitly they cease to have relevance to the operating
units.

IV. INTERNATIONAL MARKETING ENTRY DECISIONS
Entry Modes
One of the critical decisions of international marketing is the mode of entering the foreign market.
At one extreme, a company may decide to produce the product domestically and export it to the foreign
market. In this case, the company need not make any investment overseas. On the other extreme, the
company may establish manufacturing facilities in the foreign country to sell the product there. This
strategy requires direct foreign investment by the company. In between these two extremes, there are
several options each of which demands different levels of foreign investment. No matter how mighty your
company may be, it is not a practical strategy to enter all markets with a single entry method. With all its
power, even a largest company may have to formulate different entry strategies to different countries.
The company may opt for one entry strategy in one market and another strategy in another market,
because one entry strategy may not suit all countries. As stated already, international marketing activities
of business firms can take varied modes ranging from indirect/ export on the one hand to direct
investment in manufacturing facilities abroad on the other. Each of these strategies
require different levels of investment ranging from no additional investment to high investment in
production facilities, where the investment is low, the international business firm faces less risk, less
control over the foreign market and may not be able to reap all the profits.
On the other hand, when the investments are high in the form of manufacturing facilities abroad,
international firm can have full control over the market and reap all the profits, but faces higher risk. Look
at the figure below carefully and note various modes of market entry, and the associated risks and
advantages.
Foreign Market Entry Mode

Exporting may be appropriate under the following circumstances:
 The volume of foreign markets is not large enough to justify production in the foreign market.
 Cost of production is higher in the foreign market.
 Foreign market is characterised by production bottlenecks like infrastructural problems, problems
of materials supply, labour unrest, etc.
 There are political or other risks of investments in the foreign country.
 There is no guarantee of the market available for longer period.
 Foreign investment is not encouraged by the concerned foreign government.
 There is excess production capacity in the domestic market or expansion of existing facility is less
expensive and easier than setting up production facilities abroad.
 Very attractive incentives are available in the country for establishing facilities for export
production.
Exporting allows a firm to centrally manufacture its products for several markets and obtain
economies of scale. Furthermore, when exports represent incremental volume out of an existing
production operation located elsewhere, the marginal profitability of such exports tends to be high. The
main advantage of an exporting strategy is that it is easy to implement. Risks are least because the
company simply exports its excess production when it receives orders from abroad. A firm has the
following two basic options in carrying out its export operations: indirect exporting, and direct exporting.
Indirect exporting
When a firm delegates the task of selling goods abroad to an outside agency, it is called indirect
exporting. Markets can be contacted through a domestically located middleman (located in the exporter
country of operation). Several types of middlemen located in die domestic market assist a manufacturer
in contacting foreign buyers. The major advantage of using a middleman lies in the middleman‘s
knowledge of foreign market conditions and avoidance of problems connected with export procedures
and documentation or leaving the manufacturer to concentrate on production. For small companies with
little or no experience in exporting, the use of a domestic middleman readily provides expertise. The most
common types of middlemen are merchant exporter, export house, trading house, and
buying house of overseas firms located in the manufacturer‘s country. Exporting through a merchant
exporter or an export house can confer the following advantages:
 The manufacturer can overcome the problems, of direct exporting such as investment of
resources in collecting marketing intelligence for setting up of export department, etc. and can
receive instant foreign market knowledge. Since the operational cost of export house/merchant
exporter will be spread over, several parties, going through export house/merchant exporter will
result in saving in unit cost.
 In case the export house works on commission basis, there is incentive for the export house to
expand sales.

 In view of the fact that the export house will be effecting consolidated shipments, there is a
possibility of reduction in unit freight.
 The reputation of export house will enable the manufacturer to get better representation for his
products abroad, in case the export house is selling complementary products, sales might
increase.
Main disadvantages of involving an export house or a merchant exporter are as follows:
 The export house merchant exporter, in order to earn more through commission, may take an too
many unrelated lines resulting in the producer getting neither the expertise nor the attention he is
looking for.
 Under this arrangement, there is a possibility of the manufacturer continually depending on the
export house and not developing export expertise himself.
 There is also possibility of both the manufacturer and the export house lacking personal
involvement in the export business since either party may drop the other at any moment.
 In view of the fact that the export house will be pushing the product abroad on its own name and
reputation, the foreign customers may not be able to relate the product with the manufacturer at
all. This danger is more if the export house uses its letter-head and brand name.
 Another form of indirect export is the consortium approach i.e., a limited number of manufacturers
of the same product joining together and exporting on a cooperative basis. In this arrangement,
export management function is performed for several firms at the same time. There is closer
cooperation and control as compared to merchant exporter or export house.
 Export orders will be procured on a joint basis and distributed amongst the constituent units.
 The individual units will be permitted to use their own letter-head and brand name. This
arrangement confers more bargaining power on the consortium since the parties coming together
can bargain over a position of strength. As in the case of exporting through export house, there is
a possibility of saving in unit freight on account of consolidated shipment.
 Under-cutting is reduced to a great extent and all the economics of scale associated with joint
operation can be reaped.
 The great disadvantage of consortium approach is that for this approach to succeed there should
be perfect understanding among the members and each should put in his best. As is well known,
cooperation can succeed only to the extent the individual members want it to succeed.
Misunderstanding may arise over many issues and one unscrupulous member is enough to spoil
the business of the entire consortium.

Direct exporting
When a manufacturing firm itself performs the task of selling goods abroad rather than entrusting
it to any outside agency it is called direct exporting. Usually a home based export/ international marketing
department in the fm is given responsibility for selling abroad. The exporting firm may also establish its
own sales subsidiary as an alternative mode. When a manufacturer engages in direct export, he takes
more risks but gets more returns. More than anything else, direct export means more involvement for the
manufacturer, more control and more expertise within the firm. Of the about 300,000 manufacturing
companies in the United States, about 10 per cent are actively exporting. Almost 85 per cent of the US
exports, however, is accounted for by the top 250 US companies, which means that a substantial part of
export operations is undertaken by merchant exporters. In Japan also, major share of exports are
effected by their ―sogashosas‖ which are specialised merchandising firms. While direct exporting
operation requires a greater degree of expertise and involvement and involves greater risks. It also
provides the company with greater control over its operations than will be the case under indirect
exporting.
Licensing
A manufacturer should consider licensing when capital is scarce and import restrictions, discourage
direct entry, and the country is sensitive to foreign ownership. When the company finds it difficult to
export and at the same time not ready to invest money in the foreign country, licensing could be suitable
strategy. Under licensing, a company assigns the right to undertake production locally using its patent
(which protects a product, technology/ process) or a trademark (which protects a product name) to
a local company for a fee or royalty. Under this strategy, the company (licensor) gives license to a foreign
company (licensee) to manufacture the company‘s product for sale in that foreign country and some-
times in other specified markets also. Licensing enables a company to gain market presence and Enby
overseas without equity investment.
The local company or licensee gains the right to commercially exploit the patent or trademark
either on an exclusive (the exclusive right to a certain geographic region) or unrestricted basis.
Licenses are signed for a variety of time periods, depending on the period to pay off the initial investment.
Typically, the licensee will make all necessary capital investments (such as in machinery and inventory),
and market the products in the assigned sales territories, which may consist of one or several countries.
Licensing agreements are subject to negotiation and tend to vary considerably from company to
company and from industry to industry. In general, a license c6ntract should include these six basic
elements:
 Product and territorial coverage

 Length of contract, quality control
 Grant back and cross-licensing
 Royalty rate and structure
 Choice of currency
 Choice of law

Reason for Licensing
Companies have used licensing for a number of reasons, Licensing strategy is very flexible as it
allows a quick and easy way to enter the foreign market if there are some direct import restrictions in the
foreign market. Licensing is a better alternative than exporting when the transportation costs are higher in
relation to product value. For one, a company may not have the knowledge or the time to engage more
actively in international marketing. The market potential of the target country may also be too small to
invest in manufacturing facilities in that country. A licensee has the advantage of adding the licensed
products volume to an ongoing operation, thereby reducing the need for large scale additional
investment. For a company with limited resources, it can be advantageous to have a foreign partner for
marketing its products by signing a licensing agreement. Licensing not only saves capital
since no additional investment is necessary, but it also saves scarce managerial resources. In some
cases when the firm‘s product enjoys huge demand, it may not be able to satisfy the demand unless
licenses are granted to other companies with the required manufacturing capacity. In some countries
where the political or economic situation appears uncertain, a licensing agreement will avoid the potential
risk associated with investments in fixed facilities under such uncertain conditions, licensing is a suitable
entry strategy since both commercial and political risks are absorbed by the licensee.
Disadvantages of Licensing
A major disadvantage of licensing is the substantial dependence on the local licensee to generate
revenues and pay royalties. Once a license is granted, royalties (usually paid as percentage on sales
volume only) will only be paid if the licensee is capable of performing an effective marketing job. Since
the local companies marketing skills may be less developed, revenues from licensing may suffer
accordingly. Traditionally, Johnson & Johnson, the large US based health care company, had been
licensing its newly discovered drugs in markets where it had little penetration. In 1985, the company
licensed Hismanal: a non-sedating antihistamine, to Mochida, a Japanese pharmaceutical
company. The drug, now selling in some 116 countries and the company‘s fastest growing drug, earns
only thin royalties from the Japanese market. As a result, the company has moved into developing its
own sales force in Japan by hiring about 300 sales representatives through its majority-owned affiliate.
Several drugs are now in the process of being licensed and none are planned to be licensed to third
companies. Pepsico experienced the limitations on relying on a licensing partner in France. Pepsi was
licensed through Perrier, the French mineral water company. However, the retail structure in France
changed and supermarkets emerged as important channels. Other French brands, such as Badoit and
Evian, did better in those channels. The resulting decline for Perrier also had a negative impact for Pepsi
losing almost half of its market share. This led to the breakup of the relationship and Pepsico has decided
to develop the French market on its own, in future. Another disadvantage of the licensing arrangement
relates to the incapability of the local firm to produce products of quality standard for which the parent
company is known. The parent company‘s image may suffer if a local licensee markets a product of
substandard quality. Ensuring uniform high quality might require additional resources from the licensor,
which may reduce the profitability of the licensing activity.

When license is granted, the foreign firm (licensee) gains technological and product knowledge;
this is in a way nurturing a prospective competitor. Another problem often develops when the licensee
performs poorly. Termination of the license may be a very complicated task when the licensee is
performing very unsatisfactorily. If the license is not terminated, it may even prevent the company
(licensor) to directly enter the market. If the licensee does not adhere to the quality standards, it can
damage the product image.
Franchising
Franchising is a special form of licensing in which a parent company (the franchiser) grants
another independent company (the franchisee) the right to do business in a prescribed manner. In this
arrangement, the franchisor makes a total marketing programme (including the brand name, logo, and
the method of operation) available to the franchisee. Usually, the franchise agreement is more
comprehensive than a regular licensing agreement in as much as the total operation of the franchisee is
described. Numerous companies that have successfully exploited franchising as a distribution strategy in
their home market are adopting the same strategy to exploit opportunities abroad also. Burger King,
McDonalds and other US fast food chains with operations in Latin America, India and European countries
are good examples of such firms. Another common form of franchising is where the franchisor supplies
an important ingredient art, material, etc) for the finished product. For example, Coca Cola and Pepsi
foods have franchise arrangement with their bottling units all over the world. They supply the
concentrated syrup to the bottlers. Similarly, in India you can notice NJIT training centres all over India,
which look similar and provide the same training programmes with same fee structure. All these training
centres are the franchisees of NJIT. Some of the major forms of franchising are: manufacturer-retailer
systems (such as automobile dealership), manufacturer-wholesaler systems (such as soft drink company
with its bottlers), and service for-retailer systems such as fast food outlets). Franchising had all the
advantages and disadvantages of licensing strategy. One added advantage over licensing is
the better control over the product and the franchisee.
Control Manufacturing. Under contract manufacturing, a company arranges to have its products
manufactured by an independent local company on a contractual basis. A company doing international
marketing enters into contract with a local firm in the foreign country to manufacture the product, while
retaining the responsibility of marketing. The local manufacturer produces and supplies the product to the
international company, while international company assumes responsibilities for sales, promotion, and
distribution. In a way, the international company hires the production capacity of the local firm without
establishing its own plant and thus circumvents barriers on import of its products. This strategy is
practicable only when there is a foreign producer with the necessary manufacturing capacity and ability to
maintain quality. The local producer undertakes manufacturing based on orders from the international
firm and the international firm gives virtually no commitment beyond the placement of orders.

Assembly. By moving to an assembly operation, the international firm locates a portion of the
manufacturing process in the foreign country. Typically, assembly is the last stage of manufacturing and
depends on the ready supply of components or manufactured parts to be shipped from another country.
Assembly usually involves heavy use of labour rather than extensive investment in capital outlays or
equipment. Under assembly strategy, most of the components or ingredients are produced domestically
and the finished product is assembled in the foreign country. In several cases, parts or components are
produced in various countries in order to gain each country‘s comparative advantage, and labour
intensive assembling is carried in another country where labour is abundant and labour costs are lower. It
allows the company to be price competitive against cheap imports. For example, US apparel makers ship
the pre-cut fabric to a low wage country for sewing before bringing them back to the USA for finishing and
packaging. Thus, they achieve price competitiveness in the US markets.
Joint venture. In the context of international business, an international joint venture is an enterprise
formed by the international business company sharing ownership and control with a local company in the
foreign country. International joint venture is another alternative strategy you may consider to enter in
overseas market. In countries where fully foreign owned firms are not allowed or favoured, joint venture is
the alternative if the international marketer is interested in establishing an enterprise in the foreign
market. Many foreign companies entered the communist, socialist and other developing countries by joint
venturing. The essential feature of a joint venture is that the ownership and management are shared
between a foreign firm and a local firm. In some cases, there are more than two parties involved. For
example, Pepsi‘s Indian joint venture involved Voltas and Punjab Agro Industries Corporation. Under a
joint venture arrangement, the local company invites an outside partner to join as an owner in the new
unit. The terms of participation may vary with companies accepting either a minority or majority stake. A
joint ownership venture may be brought about by a foreign investor buying an interest in a local company
or a local firm acquiring an interest in an existing foreign fm or by both the foreign and local
entrepreneurs jointly forming a new enterprise. The disadvantages of joint ventures are:
 International marketing
 Entry decision
 Selection
 Entry
Strategic alliance. A more recent phenomenon is the development of a range of strategic alliances.
Alliances are different from traditional joint ventures in which two partners contribute a fixed amount of
resources and the venture develops on its own. In an alliance, two firms pool their resources directly in a
collaboration that goes beyond the limits of a joint venture/although a new entity may be formed, it is not
a requirement. Sometimes, the alliance is supported by some equity acquisition of one or both the
partners. In an alliance, partners bring a particular skill or resource, usually one that is complementary to
each other. By joining forces, both are expected to profit from each other‘s experience. Typically,
alliances involve either distribution access or technology transfers or production technology, with each
partner contributing a different aspect to the venture.

This strategy seeks to enhance the long term competitive advantage of the firm by forming
alliance with its competition is (existing or potential in critical areas), instead of competing with each
other. The goals are to leverage critical capabilities, increase the flow of innovation and increase flexibility
in responding to market and technological changes. Strategic alliance is also sometimes used as a
market entry strategy. For example, a firm may enter a foreign market by forming an alliance with a firm
in that foreign market for marketing or distributing the farmer‘s product. Strategic alliance, more than an
entry strategy, is a competitive strategy. It enables companies to increase resource productivity and
profitability by avoiding unnecessary fragmentation of resources and duplication of investment and effort.
Alliances are growing in popularity and are very conspicuous in such industries as pharmaceuticals,
computer, nuclear, telematics, etc., which are characterised by high fixed costs in R & D and
manufacturing, high technology and fast changing technology.
Technology-based alliances. – exchanging technology for market access was the basis of the AT&T
alliance with Olivetti of Italy, entered into in 1984. AT&T needed to enter the European computer market
to obtain economies of scale for its US operations. But it did not have any marketing contacts of its own.
On the other hand, Olivetti was eager to add larger computers through its extensive distribution system in
Europe. In return, Olivetti became the key supplier to AT&T for personal computers and was able to use
AT&T as its distribution arm in the US market. Both companies were attempting to benefit from each
other‘s market cess and each other‘s production and technology resources. However, after a quick start
that involved mostly the sale of Olivetti-produced PC‘s through AT&T sales offices in the United States,
the alliance lapsed when the cooperation became too much of one-sided. In 1989, AT&T was able to
take a 20 per cent stake in Intel, the Italian state-owned telecommunications equipment company. With
this alliance, AT&T hoped to gain better access not only to the Italian market but to
other markets in West Europe as well.
Production-based alliances – in the automobile industry in particular a large number of production based
alliances have been formed over the past years. These alliances or linkages fall into groups. First, they
are in the search for efficiency through component linkages which may include engines or other key
components of a car.
Merger and Acquisition. These have been a very important market entry strategy as well as expansion
strategy. A number of Indian companies have used this entry strategy. In the case of a merger, the
international business firm absorbs one or more enterprises abroad by purchasing assets and taking over
liabilities of those enterprises on payment of an agreed amount. Similarly, the international business firm
may also take over the management of an existing company abroad by taking the controlling stake in the
equity of that company at a predetermined price. This is called acquisition. Merger and acquisition as an
entry strategy provides instant access to markets and distribution network. As one of the most difficult
areas in international marketing is distribution, this is often a very important consideration for M&A. The
General Electric (GE), USA, took over Hungary‘s light bulb maker Tungsram. Instead of starting a
‗greenfield‘ operation in Hungary by building a new factory and hiring the people needed, why did the
multinational giant take over Tungsram, a typical Hungarian enterprise bogged down with so many
problems calling for a painful restructuring. The answer is that Tungsram gave GE entry to the East
European light bulb market, from which it had been virtually excluded by Philips and Osram.

Tungsram‘s share of the market in the 1980s was a respectable 9 to 10 per cent.
Another important objective of M&A is to obtain access to new technology or a patent right. M&A also has
the advantage of reducing the competition. M&A may also give rise to some problems which arise mostly
because of the deficiencies of the evaluation of the case for acquisition. Sometimes the cost of
acquisition may be unrealistically high. Further, when an enterprise is taken over, all its problems are also
acquired with it. The success of the enterprise will naturally depend on the success in solving the
problems. It has also been observed that the takeover spree lands several companies in trouble. For
example, in the early 1990s a number of Japanese companies began to sell some of the foreign
businesses which they had acquired a few years ago. The main reason for this was the financial crunch.
Factors Affecting Entry Decisions
The selection of a company‘s best method of entry into overseas markets depends on several
factors, some of which are peculiar to the firm and the industry. A few of these main variables related to
the firm are:
 Company goals regarding the volume of international business desired, expected geographic
coverage and the time span of foreign involvement.
 The size of the company in terms of sales and assets.
 The company‘s product line and the nature of its products (industrial or consumer, high or low
unit price, technological content).
 Competition abroad
The firm must evaluate these factors for itself case by case. Beyond the factors peculiar to the
firm and the industry, there are other decision criteria that relate more generally
to the method of entry into foreign markets. This second group includes factors relatively independent of
the firm and the industry. They are briefly discussed below:
a. Number of markets covered. Different entry methods offer different coverage of

international markets. For example, wholly owned foreign operations are not permitted in
some countries; the licensing approach may be impossible in some other markets because
the firm may not be able to find qualified licensees; or a trading company might cover
some markets very well, but may not have representation in many other markets. To get
the kind of international market coverage it wants, the firm will probably have to combine
different kinds of market entry methods. In some markets, it may
have wholly owned operations; a marketing subsidiary in another and local distributors in
some other market.

b. Penetration with markets covered. Related to the number of markets covered in the
quality of the coverage a combination export manager, for example,
might claim to give the producer access to a number of countries, The producer must
probe further to find out if this ―access‖ is to the whole national market or it is limited to the
capital or a few large cities. Having a small catalogue sales office in the capital city is very
different from having a sales force to cover the entire national market.
c. Market feedback available. If it is important for the firm to know what is going on in its
foreign markets, it must choose an entry method that will provide this feedback. Although,
in general, the more direct methods of entry offer better market information, feedback
opportunities will depend on how the firm prepares and manages a particular form of
market entry.
d. International Market Selection. In the preceding units we have talked about economic
policies of India, methodologies for undertaking political, cultural and economic analysis.
All these analysis were essential for answering the question of which market to
enter. In this unit the topic is carried further. Here an attempt has been made to answer
questions-what should the company‘s corporate market portfolio look like in terms of
number and types of markets held and what is the process for coming to such an answer?
Put more simply, the company must answer how many markets will it capture and
what would their characteristics be like, and for a particular market it must answer whether
it will build, abandon or divest that market.
ASSESSMENTS:
1. ___________________ develop international marketing strategies in order to improve corporate

performance though growth and strengthening their competitive advantage.
a. Multinational enterprises (MNE‘s)

b. Small Medium enterprises (SME‘s)
c. Cottage industries
d. Private Limited Companies
2. In ______________________ concept, the firm‘s orientation is to market to foreign customers in the

same manner the company markets to domestic customers.
a. Domestic Market Expansion concept

b. Multi Domestic Market concept
c. Global Marketing concept
d. Expansion concept

3. In ______________________ concept, firms with this orientation market on a country-by-country basis
with separate marketing strategies for each country.

4. A company employing a ______________________ strives for efficiencies of scale by developing a

standardised product, of dependable quality, to be sold at a reasonable price to a global market (that is,
the same country market set throughout the world).

5. An ________________ is an organisation whether or not established by a treaty, in which two or more

states (or government agencies or publicly funded bodies) are members and in which a joint financial
interest is overseen by a governing body.
a. international institution
b. institution
c. apex body
d. avenue
6. _______________________ refers to standardisation in four major decision areas decision, price

decision, promotion decision and the distribution decision.
a. Multi-domestic approach
b. Standardised approach
c. Control sequence
d. Theory of equilibrium
7. _________________ in the control process involves the comparison of actual performance with
planned performance.
a. Evaluation and corrective action

b. Field audits
c. Periodic reporting
d. Company records

8. When a firm delegates the task of selling goods abroad to an outside agency, it is
called_________________.
a. indirect exporting
b. direct marketing
c. direct exporting
d. indirect marketing
9. The systematic and growing internationalisation of many companies is essentially a part of their
business policy or _______________
a. strategic management
b. direct management
c. standardised management
d. business management‘
10. Which of the following refers to standardisation in four major decision areas?
a. Standardised approach
b. Direct approach
c. Indirect approach
d. Strategice approach

GRADING SYSTEM
Class Standing 70%
Activities / Assessment
Midterm / Final Examinations 30%
TOTAL 100%
Midterm Grade + Final Term Grade = FINAL GRADE
REFERENCES
http://www.tradeready.ca/2015/fittskills-refresher/basic-introduction-incoterms/
https://courses.lumenlearning.com/boundless-business/chapter/types-of-international-busines
https://www.toppr.com/guides/business-studies/international-business/introduction-to-international-business-and-its-
benefits/
A paradigm shift in the global strategy of MNEs towards business ecosystems: A research agenda for new theory
development, Cha 2020
Cherunilam, F., 2010. International Marketing: Text and Cases, Global Media.
Geetanjali, 2010. International Marketing, Global Media.
International Business Management, Japan National University. First edition 2013

The impact of China‘s one belt one road initiative on international trade in the ASEAN region Nam Foo,,HooiHooi
Lean, , RuhulSalima, 2019
The environmental impact of industrialization and foreign direct investment
Eric Evans OseiOpoku, Micheal Kofi Boachie, 2019
Transmission of monetary policy through global banks: Whose
policy matters? Stefan Avdjiev, 2018
https://boycewire.com/foreign-direct-investment-definition/#Types
https://www.quora.com/What-are-the-four-elements-of-international-trade/Avi Sharma/Trade Financer (2015-
present)
https://incodocs.com/blog/incoterms-2020-explained-the-complete-guide/
https://www.trade.gov/know-your-incoterms
https://www.investopedia.com/terms/i/incoterms.asp
https://www.tibagroup.com/blog/incoterms-2020

https://www.doingbusiness.org/en/reports/case-studies/2009/trade-reform-in-madagascar
World Trade Reports 2007: Six Decades of Multilateral Trade Cooperation: What Have We Learnt The Economics
and Political Economy Of International Trade Cooperation
International Marketing Entry Decisions [Online] Available at: <http://www.egyankosh.ac.in/handle/
123456789/8787> [Accessed 14 September 2011].
International Marketing Planning Organising and control [Online] Available at: http://www.egyankosh.ac.in/
handle/123456789/7569 [Accessed 14 September 2011].
Perner Lars, The Global Market Place [Online] Available at: http://www.consumerpsychologist.com/
international_marketing.html [Accessed 14 September 2011].
Globalisation of Markets [Video Online] (Updated 29 May2008) Available at:http://www.youtube.com/watc
h?v=bOlOMGMLack&feature=related [Accessed 10 September 2011]
Strategic Planning [Video Online] Available at: http://freevideolectures.com/Course/2747/StrategicPlanning/13

[Accessed 14September 2011].

Midterm Examination
Prof. Cresilda M. Bragas, MBA
INSTRUCTIONS: Answer briefly the following statements and cite an example to justify your answer.
1. Identify and explain foreign countries' businesses in the Philippines and Philippines'
businesses abroad. (10 points)
2. Discuss how trading among countries is conducted during this period of COVID-19
pandemic. Provide a scenario to further explain your answer. (10 points)
3. What is the basis of PH economy before and after globalization with regard to the
following: (5 points each)
(a) trade;
(b) education;
(c) culture;
(d) Financial-intertest rate;
(e) technology; and
(f) products development
4. Explain briefly the basis of an economic strategy that a country may achieve full
development only through trade. Cite various countries that have fully developed through
trade.
--------- END OF MIDTERM EXAM ---------

Final Examination
Prof. Cresilda M. Bragas, MBA
Part One: Case Analysis
Big Bottom Market is a year-old restaurant and specialty food store in Guerneville, Calif., that also sells
wine and locally made crafts. It is a moonlighting venture for its three owners, among them is a San Francisco
public relations executive, Michael Volpatt, who saw an opportunity to fill a local need after buying a weekend home
in this Sonoma County town of 6,500.
How to survive the lean months, October through April, when visitors to the Russian River getaway decline?
After opening in July 2011, the market posted encouraging weekly sales of $20,000 to $24,000 in August — that
plummeted to as low as $4,000 by November, prompting staff layoffs and an emergency retreat to assess options.
Mr. Volpatt, who describes himself as a ―serious foodie and serious oenophile (lover of wine),‖ had long dreamed of
opening a specialty food and wine store. He decided to go ahead after settling deeper into the community of
Guerneville, a once-booming logging town formerly known as Big Bottom for its location on the alluvial flats of the
Russian River. Nowadays, the gay-friendly town is popular with weekenders and vacationers visiting nearby
vineyards, kayaking on the river or hiking in nearby Armstrong Woods in what remains of the old-growth redwoods.
Mr. Volpatt, 40, would keep his lucrative day job: he owns half of a 10-year-old bicoastal public relations firm,
Larkin/Volpatt Communications, serving clients such as the digital divisions of Publishers Clearing House and
Hearst. Mr. Volpatt and his business partner, Kate Larkin, 45, who is based in New York, had already invested
some of their earnings in real estate, including part ownership in an apartment building in St. Louis.
Both felt a market/breakfast and lunch spot was just what Guerneville needed. Chasing that opportunity
was a leap into the unfamiliar world of retailing and restaurants but one they cushioned by entrusting the kitchen
and market operations to a third founding partner with food and hospitality experience. Mr. Volpatt had become
friends with Crista Luedtke, a San Francisco mortgage broker and hands-on owner of Boon Hotel and Spa and
Boon Eat and Drink, two popular Guerneville businesses. With Ms. Luedtke overseeing day-to-day operations, Ms.
Larkin acting as chief financial officer and Mr. Volpatt in charge of marketing, Big Bottom Market opened in a 1,500-
square-foot Main Street storefront. The three partners provided $100,000 to transform the space, stock the shelves
and supply operating capital.
The new look was hip-casual. Hardwood floors, plenty of barn board, funky metal chairs at nine tables, stools at a
counter and a communal table. The executive chef, Tricia Brown, off a stint at New York‘s Gramercy Tavern,
created a menu featuring baguette sandwiches, soups and salads, and a signature-item-in-the-making: Big Bottom
biscuits (regular, Cheddar and thyme, ham and cheese, even a ―sea biscuit‖ with house-smoked salmon and capers
and pickled red onions). The biscuit recipe belonged to Ms. Luedtke‘s mother, who, as one of 20 employees, helped
with the baking.
Sales rose like the biscuit dough in the peak summer weeks and then tapered off in September. Still, the business
remained profitable, and with the biscuits getting good buzz, the fledgling owners pondered a spinoff venture,
considering wholesaling batches of frozen biscuits beyond the ones they sold from their own freezer cases. Then, in
October and November, the bottom fell out for Big Bottom. ―At the rate you guys are going,‖ their accountant
warned, ―You‘re going to have to close your doors.‖Yes, the owners had expected a downturn. ―We thought maybe
we‘d lose about 30 to 40 percent of our business,‖ Mr. Volpatt said; but not 80 percent. ―This is my first time at the
rodeo, and I‘ll tell you, we were freaking out.‖

Requirements:
1. Discuss key issues and causes of the problems in the case. (10 points)
2. List at least 5 possible alternative course of action or solution and choose the best
among them. (10 points)
3. Explain briefly how chosen solution can give an opportunity for the business especially in trading..
(20 points)
Part 2: WRITE UP (30 points)
Compose an article about how business organizations deal with the current global health crisis
situation and how COVID-19 global pandemic impact their strategy and market in conducting
international trade and business.
--------- END OF FINAL EXAM ---------

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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Office of the Vice President for Academic Affairs

INSTRUCTIONAL MATERIALS FOR

CRESILDA M. BRAGAS, MBA

PUP A. Mabini Campus, Anonas Street, Sta. Mesa, Manila 1016

THE COUNTRY’S 1st POLYTECHNIC U

LESSON 1: INTERNATIONAL BUSINESS AND TRADE ........................................................................ 4

LESSON 2: THE INTERNATIONAL BUSINESS ENVIRONMENT ........................................................... 7

LESSON 3: THE INTERNATIONAL BUSINESS OPERATIONS ........................................................... 17

LESSON 4: INTERNATIONAL TRADE ................................................................................................. 21

International Business and Trade Page 1 of 97

LESSON 5: GLOBAL TRADE AND INVESTMENT ENVIRONMENT .................................................... 36

I: The International Trade Theory......................................................................................................... 36

LESSON 6: INTERNATIONAL COMMERCIAL TERMS ........................................................................ 52

LESSON 7: INTERNATIONAL MARKETING MANAGEMENT ............................................................. 68

International Business and Trade Page 2 of 97

Globalization is an accepted phenomenon of the 21st century. As goods and services

After successfully completed this module, students will be able to:

 Understand the international business environment

International Business and Trade Page 3 of 97

 Define international business and trade

I. DEFINITION OF INTERNATIONAL BUSINESS

II. THE DIFFERENCE BETWEEN INTERNATIONAL BUSINESS AND INTERNATIONAL

International trade is an industrial concept or category. An international business constitutes one of

International business refers to international trade whereas a global business is a company

IV. BENEFITS IF INTERNATIONAL BUSINESS AND TRADE

International Business and Trade Page 5 of 97

1. Are business and trade inseparable in actual setting? Why?

5. What factors are the most to affect a firm‘s operation? Explain.

International Business and Trade Page 6 of 97

 Define Advantages and Disadvantages of International Business

I. ADVANTAGES AND DISADVANTAGES OF INTERNATIONAL BUSINESS

We can enumerate some of these advantages as follows:

International Business and Trade Page 7 of 97

 Improved consumer confidence

II. INTERNATIONAL BUSINESS PLAN

International Business and Trade Page 8 of 97

III. TYPES OF INTERNATIONAL BUSINESS

We can categorize international business as follows:

a. Exporting – selling finished products or unprocessed one including services abroad.

b. Licensing – is about giving permission to domestic firms abroad to process or produce

c. Franchising – is a form of business arrangement between the owner of the franchise

International Business and Trade Page 9 of 97

IV. FACTORS AFFECTING INTERNATIONAL BUSINESS

Factors of International Trade

International Business and Trade Page 10 of 97

V. DRIVING FORCES OF INTERNATIONAL BUSINESS

3. Technology: Technology in a powerful driving force of Globalization. Once a Technology is

International Business and Trade Page 11 of 97

4. Transportation and Communication revolutions: Technological revolution in several spheres,

International Business and Trade Page 12 of 97

VI. BARRIERS AND CONSTRAINTS IN INTERNATIONAL BUSINESS

 Tariffs  Voluntary Export Restraints

International Business and Trade Page 13 of 97

CASE: Trading Across Borders: Training for Trade Facilitation

International Business and Trade Page 15 of 97

International Business and Trade Page 16 of 97

 Identify and discuss the factors to consider in International Operations