CHAPTER TWO

INTERNATIONAL MARKETING ENVIRONMENT

2.1 Framework for analyzing international Marketing environment
 In simple terms, ‘environment’ implies everything that is external to the organization. It is something
that surrounds an enterprise i.e. the sum-total of external factors within which the enterprise
operates.
 The international marketing environment is a complex constellation of demands &
constraints which the firm faces as it attempts to compete and grow. This international
marketing environment consists of a number of elements most of which lie outside the control of
the firm.
 International marketing environmental analysis is a pre-entry operation that starts from analysis which
is defined as the process by which strategists monitor the economic, governmental/legal,
market/competitive, supplier/technological, geographic, and social settings to determine opportunities
and threats to their firms.
2.2 Geographic environment in international Marketing
 Geography focuses on answering “Where?” questions. Where are things located? What is their
distribution across the surface of the earth?
 Once locations have been determined “Why?” and “How?” questions can be asked. Why are things
located where they are? How do different things relate to one another at a specific place? How do
different places relate to each other? How have geographic patterns and relationships changed over
time?
 These are the questions that take geography beyond mere description and make it a powerful approach
for analyzing and explaining geographical aspects of a wide range of different kinds of problems faced
by those engaged in international marketing.
 Geography answers questions related to the location of different kinds of economic activity and the
transactions that flow across national boundaries. It provides insights into the natural and human
factors that influence patterns of production and consumption in different parts of the world

2.3 Demographic environment in International Marketing

 Demography is the study of human populations in terms of size, density, location, age, gender, race,
occupation, and other statistics.
 Demographic environment is of major interest to marketers because it involves people, and people make
up markets.

1|Page
 Demographic factors such as size of the population, population growth rates, age composition, family
size, nature of the family, income levels etc. have very significant implications for business.
 The size of the population is an important determinant of demand for many products. There are
countries with only a few of people on the one hand and those with hundreds of millions on the
other hand.
 Several high-income nations, however, pose a problem for many businesses. Because of the decline
in the birth rates and the consequent fall in the size of the baby population, the market for baby
products has shrunk.
 The declining birth rate has been a boon to certain industries. For example, industries such as
hotels, airlines and restaurants have benefited from the fact that young childless couples have more
time and income for travel and dining out.
 Although birth rates have fallen in many developing countries, the population growth rates are
still very high. This coupled with a steady increase in income drives fast the growth of the
markets of a number of developing economies. High population growth rate also implies an
enormous increase in the labor supply. When the Western countries experienced industrial
revolution, the population growth was comparatively slow. Labor shortage and rising wages
encouraged the growth of labor-intensive methods of production. Capital intensive technologies,
automation, and even rationalization, are opposed by labor and many sociologists, politicians and
economists in developing countries. Cheap labor and a growing market have encouraged many
multinationals to invest in developing countries like India and China. Many companies in the
developed countries have relocated their production facilities, wholly or partially, in the developing
countries to reduce the labor costs. For example, automobile manufacturers of Korea, U.S and
Japan are setting up additional manufacturing units in India for exporting as well as for Indian
markets.

2.4 Cultural Environment

A worldwide business success requires a respect for local customs. International marketers need to
recognize and appreciate varying cultures because culture plays a significant role in influencing consumer
perception, which in turn influences preference and purchase. A good marketing plan can easily go awry
when it clashes with tradition. A marketing mix can be effective only as long as it is relevant to a given
culture.
Culture and Its Characteristics
Culture, an inclusive term, is a set of traditional beliefs and values that are transmitted and shared in a
given society. It is the total way of life and thinking patterns that are passed from generation to generation.

2|Page
Culture means many things to many people because the concept encompasses norms, values, customs, art,
and mores.
 Culture is Prescriptive: It prescribes the kinds of behavior considered acceptable in a society. As a
result, culture provides guidance for decision making. For example, principles enjoining compromise
are more salient in East Asian cultures than in North American culture. Hong Kong decision makers are
more likely than their American counterparts to compromise. The prescriptive characteristic of culture
simplifies a consumer’s decision-making process by limiting product choices to those which are
socially acceptable. This same characteristic creates problems for those products not in tune with the
consumer’s cultural beliefs. Smoking was socially acceptable behavior, but recently it has become more
and more undesirable – both socially and medically.
 Culture is Socially Shared: Culture, out of necessity, must be based on social interaction and creation.
It cannot exist by itself. It must be shared by members of a society, thus acting to reinforce culture’s
prescriptive nature. Chinese parents shared the preference of wanting their girl children to have small
feet. Large feet, viewed as characteristic of peasants and low class people.
 Culture Facilitates Communication: Culture usually imposes common habits of thought and feeling
among people. Thus, within a given group, culture makes it easier for people to communicate with one
another. Yet culture may also impede communication across groups due to a lack of shared common
cultural values. This is one reason why a standardized advertisement may have difficulty
communicating its message to consumers in foreign countries.
 Culture is Learned: Culture is not inherited genetically – it must be learned and acquired. Socialization
or enculturation occurs when a person absorbs or learns the culture in which he or she is raised. In
contrast, if a person learns the culture of a society other than the one in which he or she was raised, the
process of acculturation occurs. The ability to learn culture makes it possible for people to absorb new
cultural trends. Asian countries complained, their cultures are contaminated by rock music that they
consider undesirable and harmful.
 Culture is Subjective: People in different cultures often have different ideas about the same object.
What is acceptable in one culture may not necessarily be so in another. In this regard, culture is both
unique and arbitrary. As a result, the same phenomenon appearing in different cultures may be
interpreted in very different ways. In India, a woman is viewed as a burden to both her own family and
her husband to-be. When she marries, her family must offer a dowry to the bridegroom.
 Culture is Enduring: Because culture is shared and passed from generation to generation, it is
relatively stable and somewhat permanent. Old habits are hard to break, and a people tend to maintain
their heritage in spite of a continuously changing. India and China, despite severe overcrowding, have a
great deal of difficulty with birth control. They view a large family as a blessing and assume that

3|Page
 children will take care of parents when they grow old & great desire to have sons to preserve their
family name.
 Culture is Cumulative: Culture is based on hundreds or even thousands of years of accumulated
circumstances. Each generation adds something of its own to the culture before passing the heritage on
to the next generation. Therefore, culture tends to become broader based over time, because new ideas
are incorporated and become a part of the culture. Of course, during the process, some old ideas are also
discarded.
 Culture is Dynamic: Culture is passed on from generation to generation, but one should not assume
that culture is static and immune to change. Far from being the case, culture is constantly changing – it
adapts itself to new situations and new sources of knowledge. The dynamic aspect of culture can make
some products obsolete and can usher in new buying habits. Japanese tastes, for example, have been
changing from a diet of fish and rice to an accommodation of meat and dairy products.
 Influence of Culture on Consumption
Consumption patterns, lifestyles, and the priority of needs are all dictated by culture. Culture prescribes
the manner in which people satisfy their desires. Hindus and some Chinese do not consume beef at all,
believing that it is improper to eat cattle that work on farms, thus helping to provide foods such as rice and
vegetables. Not only does culture influence what is to be consumed, but it also affects what should not be
purchased. The marketing challenge is to create a product that fits the needs of a particular culture.
 Influence of Culture on Thinking Processes
In addition to consumption habits, thinking processes are also affected by culture. When traveling
overseas, it is virtually impossible for a person to observe foreign cultures without making reference,
perhaps unconsciously, back to personal cultural values. This phenomenon is known as the self-reference
criterion (SRC). Because of the effect of the SRC, the individual tends to be bound by his or her own
cultural assumptions. It is thus important for the traveler to recognize how perception of overseas events
can be distorted by the effects of the SRC.
Animals provide a good illustration of the impact of the SRC on the thinking processes. Americans and
Europeans commonly treat dogs as family members, addressing the animals affectionately and even letting
dogs sleep on family members’ beds. Arabs, however, view dogs as filthy animals. Some Far East cooks
and eats dogs – a consumption habit viewed as revolting and compared to cannibalism by Americans.
Hindus, in contrast, revere cows and do not understand how Westerners can eat beef.

In order to investigate a phenomenon in another country, a researcher or marketing manager must

attempt to eliminate the SRC effect. The presence of the SRC, if not controlled, can invalidate the results
of a research study.

James Lee coined the term ‘self-reference criterion’ as a useful concept to avoid cultural bias. He
suggested that problems should be first defined in terms of the cultural traits, habits, or norms of the
4|Page
home society. Then they should be redefined without value judgments, in terms of the foreign
cultural traits, habits, and norms.
 Influence of Culture on Communication Processes
A country may be classified as either a high-context culture or a low-context culture. The context of a
culture is either high or low in terms of in-depth background information. This classification provides an
understanding of various cultural orientations and explains how communication is conveyed and perceived.
North America and Northern Europe (e.g., Germany, Switzerland, and Scandinavian countries) are
examples of low-context cultures. In these types of society, messages are explicit and clear in the sense
that actual words are used to convey the main part of information in communication. The words and
their meanings, being independent entities, can be separated from the context in which they occur. What is
important, then, is what is said, not how it is said and not the environment within which it is said.
Japan, France, Spain, Italy, Asia, Africa, and the Middle Eastern Arab nations, in contrast, are high context
cultures. In such cultures, the communication may be indirect, and the expressive manner in which the
message is delivered becomes crucial. Because the verbal part (i.e., words) does not carry all the
information, much of it is contained in the nonverbal part of the message to be communicated. The context
of communication is high because it includes a great deal of additional information, such as the message
sender’s values, position, background, and associations in the society. As such, the message cannot be
understood without its context. One’s individual environment (i.e., physical setting and social
circumstances) determines what one says and how one is interpreted by others. This type of communication
emphasizes one’s character and words as determinants of one’s integrity, making it possible for
businesspeople to come to an agreement without detailed legal paperwork.

2.5 Political/Legal Environment

Political and legal factors often play a critical role in international marketing activities. Even the best
business plans can go wrong as a result of unexpected or legal influences, and the failure to
anticipate these factors can be the downfall of successful business venture. Of course, a single
international political and legal environment does not exist. The business executive must be aware of
political and legal factors on a variety of planes. In making decisions about firm’s international marketing
activities, the manager will need to concentrate on three areas: the political and legal circumstances of the
home country; those of the host country; and the bilateral and multilateral agreements, treaties and law
governing the relations between host and home countries.

2.2.1 Home Country Political and Legal Environment

No manager can afford to ignore the policies and regulations of the country from which he/she conducts
international marketing transactions. Wherever a firm is located, it will be affected by government policies

5|Page
and the legal system. Four main areas of governmental activities are of major concern to the international
marketer here. These are: embargoes or trade sanctions, export controls, import controls, and the
regulation of international business behavior.
 Embargoes and Sanctions: The terms trade sanction and embargoes as used here refer to governmental
actions that distort the free flow of trade in goods, services or ideas for decidedly adversarial and
political, rather than economic purposes. To understand them better, it is useful to examine the auspices
and legal justifications under which they are imposed. Trade sanctions have been used quite frequently
and successfully in times of war or to address specific grievances. The basic idea was that economic
sanctions could force countries to behave peacefully in the international community.
 Export Controls: Many nations have export control systems designed to deny the acquisition of
strategically important goods to adversaries or at least to delay their acquisition. Some countries require
that an exporter get export license for certain products from the appropriate government offices before
the export can take place. The international marketing repercussions of export controls have become
increasingly important. To design a control system that is effective and, in consideration of important
national concerns, restricts some international business activities is one thing. It is quite another when
controls lose their effectiveness and when, because of a control system, firms are placed at a
competitive disadvantage with firms in other countries whose control system is less severe or
nonexistent.
 Import Controls: Many nations exert substantial restraints on international marketers through import
controls. This is particularly true of countries that suffer from major balance-of-trade deficits or major
infrastructural problems. In these countries, either all imports or the imports of particular products are
controlled through mechanisms such as tariffs, voluntary restraint agreements, or quota systems. On
occasion, countries cut off imports of certain products entirely in order to stimulate the development of
a domestic industry. For the international marketer, such restrictions may mean that the most efficient
sources of supply are not available, because government regulations restrict importation from those
sources. The result is either second best products or higher costs for restricted supplies. This in turn
means that the customer is served less well and often has to pay significantly higher prices.
 Regulation of International Business Behavior: Home countries may implement special laws and
regulations in order to ensure that the international business behavior of their firms in conducted within
the legal, moral, and ethical boundaries considered appropriate. The definition of appropriateness may
vary from country to country and from government to government. Therefore, such regulations, their
enforcement and their impact on firms may differ substantially among nations. Arab nations, for
example have developed a blacklist of companies that deal with Israel. In addition, Arab customers
frequently demand from their suppliers assurances that the sources of the products purchased are not

6|Page
 Israel, and that the company does not do any business with Israel. The goal of these actions clearly is to
impose a boycott on business with Israel. Because of U.S. political ties to Israel, the U.S. government
in response to these Arab actions has adopted a variety of laws to prevent U.S. firms from complying
with this boycott.
2.2.2 Host Country Political and Legal Environment
The host country environment, both political and legal, affects the international marketing operations of
firms in a variety of ways. The good manager will understand the country in which the firm operates so that
he or she is able to work within the existing parameters and can anticipate and plan for changes they may
occur.
Political Action and Risk
Firms usually prefer to conduct business in a country with a stable and friendly government, but such
governments are not always easy to find. Therefore, international managers need to analysis the host
country’s government, its policies, and its stability to determine the potential for political change that could
adversely affect corporate operations.
Political risk occurs in every nation, but the range of risk varies widely from country to country. In general,
political risk is lowest in countries a history of stability, consistency. Conversely, political risk is highest in
nations lacking this kind of history. Nevertheless, in a substantial number of countries consistency and
stability were apparent on the surface, yet were quickly swept away by major popular movement that
benefited from pent-up frustrations of the population.
Possible Actions of Governments
What sort of changes in policy result from the various events described? The range of possible actions is
broad. All of them can affect international marketing operations, but not all are equal in weight. Except for
extreme cases, companies do not usually have to fear violence against employees, although violence
against company property is quite common. Common also are changes in policy that take a strong
nationalist and anti-foreign investment stance. The most drastic steps resulting from such policy changes
are usually confiscation and expropriation.
 Expropriation was an appealing action to many countries because it demonstrated nationalism and
transferred certain amount of wealth and resource from foreign companies to the host country
immediately. It did have costs to the host country however, to the extent that it made other firms more
hesitant to invest in the country. Expropriation does not relieve the host government of providing
compensation to the former owners. However, these compensation negotiations are often prolonged and
result in settlements that are frequently unsatisfactory to the owners. The use of expropriation as a
policy tool has sharply decreased over time.

7|Page
 Confiscation is similar to expropriation in that it results in a transfer of ownership from the foreign
firm to the host country. It differs, however, in that it does not involve compensation for the firm. Some
industries are more vulnerable than others to confiscation and expropriation because of their importance
to the host country economy and their lack of ability to shift operations. For this reason, sectors such as
mining, energy, public utilities, and banking have been targets of such government actions.
Confiscation and expropriation constitute major political risks for foreign investors. Other government
actions, however, are nearly as damaging. Many countries are turning from confiscation and
expropriation to more subtle forms of control, such as domestication. The goal of domestication is the
same, to gain control over foreign investment, but the method is different. Through domestication, the
government demands partial transfer of ownership and management responsibility, and imposes
regulation to ensure that a large share of the product it locally produced and a larger share of the profit
are retained in the country.
 Domestication can have profound effects on the international marketer for a number of reasons. First, if
a firm is forced to hire nationals as mangers, poor cooperation and communication can result. If the
domestication is imposed within a very short time span, corporate operations overseas may have to be
headed by poorly trained and inexperienced local mangers. Further, domestic content requirements may
force a firm to purchase supplies and parts locally, which can result in increased costs, inefficiency, and
lower quality products, thus further damaging a firm’s interest. Export requirements imposed on
companies may also create havoc for the international distribution plan of a corporation and force it to
change or even shut down operations in third countries. Finally, domestication usually will shield the
industry within one country from foreign competition. As result, inefficiencies will be allowed to grow
due to a lack of market discipline. In the long run this will affect the international competitiveness of an
operation abroad and may become a major problem when, years later, the removal of domestication is
considered by the government.

2.2.3 Ways to Lessen the Risk

Managers face political and economic risk whenever they conduct business overseas, but there may be
ways to lessen the risk. Among them:
A) Stimulation of the local economy
One defensive investment strategy calls for a company to link its business activities with the host country’s
national economic interest. A local economy can be stimulated in a number of different ways. One
strategy may involve the company’s purchasing local products and raw materials for its production and
operations. By assisting local firms, it can develop local allies who can provide variable political contacts.
A modification of this strategy would be to use subcontractors. Sometimes local sourcing is compulsory.

8|Page
Governments may require products to contain locally manufactured components because local content
improves the economy in two ways:
 It stimulates demand for domestic components and
 It saves the necessities of foreign exchange transaction. Further investment in local production
facilities by the company will please the government that much more.
b) Employment of nationals
Frequently foreigners make the simple but costly mistake of assuming that citizens of least developing
countries are poor by choice. It serves no useful purpose for a company to assume the local people are lazy,
unintelligent, unmotivated or uneducated. Such an attitude may become a self – fulfilling prophecy. Thus
the hiring of local workers should go beyond the filling of labor positions.
I.e. united Brand’s policy is to hire only locals as managers.
c) Sharing ownership
Instead of keeping complete ownership for itself, a company should try to share ownership with others,
especially with local companies. One method is to convert from a private company to a public one or form
a foreign company to local one (Joint venture). A wise strategy may be for the company to retain the
marketing or technical side of the business while allowing heavy local ownership in the physical assets and
capital investment portion of the investment.
d) Being civic minded
To shed the undesirable perception, multinationals should combine investment projects with civic projects.
Corporations rarely undertake civic projects out of total generosity, but such projects make economic sense
in the long run. It is highly desirable to provide basic assistance because many civic entities exist in areas
with slight or non-existent municipal infrastructures that would normally provide these facilities.
e) Political neutrality
For the best long – term interest of the company, it is not wise to become involved in political disputes
among local groups or between countries. A company should clearly but discreetly state that it is not in the
political business and that its primary concerns are economic in nature.
f) Behind the scene lobby
Companies may not only have to lobby in their own country, but they also may have to lobby in the host
country. Companies may want to do the lobbying themselves, or they may let their government do it on
their behalf.
g) Observation of political mood and reduction of exposure
Marketers should be sensitive to changes in political mood. A contingency plan should be in readiness
when the political climate turns hostile, when measures are necessary to reduce exposure.

9|Page
2.2.4 The International Environment
In addition to the politics and laws of both the home and host countries, the international marketer must
consider the overall international political and legal environment. Relations between countries can have a
profound impact on firms trying to do business internationally.
 International Politics: The effect of politics on international marketing is determined by both the
bilateral political relations between home and host countries and by multilateral agreements governing
the relation among groups of countries. The government -to-government relationship can have a
profound effect, particularly if it becomes hostile. International political relations do not always have
harmful effects on international marketers. If bilateral political relations between countries improve,
business can benefit. The good international marketer will be aware of political currents worldwide and
will attempt to anticipate changes in the international political environment, good or bad, so that his or
her firm can plan for them.
 International Law: International law plays an important role in the conduct of international business.
Although no enforceable body of international law exists, certain treaties and agreements respected by a
number of countries profoundly influence international business operations. As an example, the World
Trade Organization (WTO) defines internationally acceptable economic practices for its member
nations. Although it does not directly affect individual firms, it does affect them indirectly by providing
a more stable and predictable international market environment.
2.3 The Economic Environment
The assessment of a foreign market environment should start with the evaluation of economic variables
relating to the size and nature of the market. Because of the large number of worthwhile alternatives, initial
screening of markets should be done efficiently yet effectively enough, with a wide array of economic
criteria, to establish a preliminary estimate of market potential.
2.3.1 Market Characteristics
The main dimensions of a market can be captured by considering variables such as those relating to the
population and its various characteristics, infrastructure, geographical features of the environment and
foreign involvement in the economy.
Population
The number of people in a particular market provides one of the most basic indicators of market size and is
in itself, indicative of the potential demand for certain staple items that have Universal appeal and are
generally affordable.
Population figures themselves must be broken down into meaningful categories in order for the marketer to
take better advantage of them. Because market entry decisions may lie in the future, it is worthwhile to
analyze population projections in the areas of interest and focus on their possible implications United

10 | P a g e
Nations projected that there will be a population explosion in 2025, but mainly in the developing countries.
Northern Europe will show nearly zero population growth whereas population of Africa will triple.
Depending on the marketer’s interest, population figures can be classified to show specific characteristics
of their respective markets. Age distribution and life expectancy correlate heavily with the level of
development of the market.
The increased urbanization of many markets has distinctly changed consumption patterns. Urban
populations as a percentage of the total will vary from a low of 6 percent in Burundi to a high of 97 percent
in Belgium. The degree of urbanization often dictates the nature of the marketing task the company faces,
not only in terms of distribution but also in terms of market pestilential and buying habits. Urban areas
provide larger groups of consumers who may be more receptive to marketing efforts because of their
exposure to other consumers (the demonstration effect) and to communication media.
Income
Markets require not only people but also purchasing power which is a faction of income, prices, savings
and credit availability. In General, income figures are useful in the initial screening of markets. However ,
in product specific cases, income may not play a major role, and startling scenarios may emerge.
Some products, such as motorcycles and television sets in China, are in demand regardless of their
high price in relation to wages because of their high-prestige value.
Consumption Patterns
Depending on the sophistication of a country’s data collection systems, economic data on consumption
patterns can be obtained and analyzed. The share of income spent on necessities will provide an indication
of the market’s development level as well as an approximation of how much money the consumer has left
for other purchases. Engel’s laws provide some generalizations about consumers spending patterns and
are useful generalizations when precise data are not available.
Infrastructure
The availability and quality of infrastructure is critically important in evaluating marketing operations
abroad. Each international marketer will rely heavily on services provided by the local market for
transportation, communication, and energy as well as on organizations participating in the facilitating
functions of marketing: marketing communications, distributing , information, and financing. Indicators
such as steel consumption, cement production, and electricity production relate to the overall
industrialization of the market and can be used effectively by suppliers of industrial products and
services. As an example, energy consumption per capita may serve as indicator of market potential
for electrical markets, provided evenness of distribution exists over the market. Yet the marketer must
make sure that the energy is affordable and compatible (in terms of current and voltage) with the products
to be marketed.

11 | P a g e
 The existence and expansion of basic infrastructure has contributed significantly to increased agricultural
output in Asia and Latin America. The Philippines has allocated 5 percent of agricultural development
funds to rural electrification programs. On a similar level, basic roads are essential to moving agricultural
moving agricultural products. In many parts of Africa, farmers are more than a day's walk from the nearest
road. As a result, measures to improve productive without commensurate improvement in transportations
and communications are of title use because the crops cannot reach the market. In addition, the lack of
infrastructure cuts the farmer off from new technology, inputs, and ideas.
Communication is as important as transpiration. The ability of a firm to communicate with entities both
outside and within the market can be estimated by using indicators of the communication infrastructure
telephones, computers, broadcast media and print media in use. Data on the availability of commercial
(marketing-related) infrastructure are often not readily available. Data on which to base an assessment may
be provided by government sources, trade associations, and by trade publications. The more extensive the
firm’s international involvement, the more it can rely on it’s already existing support network of banks,
advertising agencies, and distributors to assets new markets.
Foreign Involvement in the Economy
For the international marketer interested in entering a foreign market, it is important to know the extent to
which such entry is accepted by a country. An economy’s overall acceptance of foreign involvement can
be estimated by analyzing the degree of foreign direct investment by country and by industry in a
given market as well as by the rules governing such investment. Restrictions exist mainly by industry
type, but also by origin of investor. Many nations have established investment-screening agencies to assess
direct investment proposals.
2.3.1 Regional Economic Integration
Economic integration has been one of the main economic developments affecting world markets since
World War II. Countries have wanted to engage in economic cooperation to use their respective resources
more effectively and to provide larger markets for member -country producers. Some integration efforts
have had quite ambitious goals, such as political integration, some have failed as the result of
perceptions of unequal benefits from the arrangement or parting of ways politically. These economic
integration efforts are dividing the world into trading blocs.
i. Free Trade Area: The free trade area is the least restrictive and loosest form of economic integration
among nations. In a free trade area, all barriers to trade among member countries are removed. Goods and
services are freely traded among member countries. Each member country maintains its own trade
barriers vis-a-vis nonmembers.
ii. Customs Union: The customs union is one step further along the spectrum of economic integration. As in
the free trade area, members of the customs union dismantle barriers to trade in goods and services among

12 | P a g e
 members. In addition, however, the customs union establishes a common trade policy with respect to
nonmembers. Typically, this takes the form of a common external tariff whereby imports from
nonmembers are subject to the same tariff when sold to any member country.
iii. Common Market: The common market amounts to a customs union covering the exchange of goods
and services, the prohibition of duties in exports and imports between members, and the adoption of
a common external tariff in respect to nonmembers . In addition, factors of production (labor, capital, and
technology are mobile among members. Restrictions on immigration and cross border investment are
abolished. The importance of factor mobility for economic growth cannot be overstated. When factors
of production are mobile, then capital, labor, and technology may be employed in their most
productive uses.
iv. Economic Union: The creation of a true economic union requires integration of economic policies
in addition to the free movement of goods, services, and factors of production across borders. Under
an economic union, members will harmonize monetary policies, taxation, and government spending. In
addition, a common currency is to be used by members. This could be accomplished, de facto, by a
system of fixed exchange rates. Clearly, the formation of economic union requires members to
surrender a large measure of their national sovereignty to supranational authorities in community
wide institutions such as the European parliament. The final step would be political union calling for
political unification.

Economic Integration and the International Marketer

Regional economic integration creates opportunities and potential problems for the international marketer.
It may have an impact on a company’s entry mode by favoring direct investment, because one of the basic
rationales of integration is to generate favorable condition for local production and intraregional trade. By
design, larger markets are created with potentially more opportunity. Because of harmonization efforts,
regulations may be standardized, thus positively affecting the international marketer.
The international marketer must however, make integration assessments to envision the outcome of the
change. Change in the competitive land scape can be dramatic if scale opportunities can be exploited
in relatively homogeneous demand conditions.

13 | P a g e
 Chapter Two

International Marketing Environment

2.1 Framework for Analyzing International Marketing environments

In simple terms, ‘environment’ implies everything that is external to the organization. It is

something that surrounds an enterprise i.e. the sum-total of external factors within which the
enterprise operates.

The international marketing environment is a complex constellation of demands &

constraints which the firm faces as it attempts to compete and grow. This international
marketing environment consists of a number of elements most of which lie outside the control of the firm.

International marketing environmental analysis is a pre-entry operation that starts from analysis
which is defined as the process by which strategists monitor the economic, governmental/legal,
market/competitive, supplier/technological, geographic, and social settings to determine
opportunities and threats to their firms.

Environmental diagnosis consists of managerial decisions made by analyzing the significance of

the data (opportunities and threats) of the environmental analysis.

Today a much greater emphasis is given than in the past to the fact that environmental analysis is
an essential prerequisite for strategic management decision-making.

It is now unquestionably accepted that the prospects of a business depend not only on its
resources but also on the environment.

Just as the life and success of an individual depend on his innate capability, including
physiological factors, traits and skills, to cope with the environment, the survival and success of a
business firm depend on its innate strength – the physical resources, financial resources, skill
and organization – and its adaptability to the environment.

2.2 Economic environment

Economic conditions, economic policies and the economic system are the important economic
factors that constitute the economic environment of a business.

14 | P a g e
The economic conditions of a country-for example, the nature of the economy, the stage of
development of the economy, economic resources, the level of income, the distribution of income
and assets, etc- are among the very important determinants of business strategies.

In a developing country, the low income may be the reason for the very low demand for a product.
The sale of a product for which the demand is income-elastic naturally increases with an increase
in income. But a firm is unable to increase the purchasing power of the people to generate a
higher demand for its product. Hence, it may have to reduce the price of the product to increase
the sales. The reduction in the cost of production may have to be effected to facilitate price
reduction. It may even be necessary to invent or develop a new low-cost product to suit the low-
income market.

In countries where investment and income are steadily and rapidly rising, business prospects are
generally bright, and further investments are encouraged.

There are a number of economists and businessmen who feel that the developed countries are no
longer worthwhile propositions for investment because these economies have reached more or
less saturation levels in certain respects.

In developed economies, replacement demand accounts for a considerable part of the total
demand for many consumer durables whereas the replacement demand is negligible in the
developing economies.

The economic policy of the government has a very great impact on business. Some types or
categories of business are favorably affected by government policy, some adversely affected, while
it is neutral in respect of others. For example, a restrictive import policy, or a policy of protecting
the home industries, may greatly help the import-competing industries.

Similarly, an industry that falls within the priority sector in terms of the government policy may
get a number of incentives and other positive support from the government, whereas those
industries which are regarded a s inessential may have the odds against them.

1. International Trade Theories

a. The Theory of Absolute Cost Advantage

For trade to take place, all nations who partner to trade must anticipate gain from it. In other
words, trade is a positive sum game-in that the participants are placed in a favorable condition.

15 | P a g e
Adam smith may have been the first scholar to investigate formally the rationale behind foreign
trade. Smith used the principle of absolute advantage as the justification for international trade.

The principle of absolute cost advantage holds that a country can have cost advantage by
producing some commodities/services more efficiently than any other country with whom to
build trade relationship i.e. exporting to those countries commodities the country can produce
cost effectively and importing commodities it can produce less cost effectively.
e.g.
Cost/quintal in Available resources in money Units to be
Country Commodities
USD (USD) produced
Coffee 50 5000 100
Ethiopia
Rice 60 7500 125
Coffee 80 6400 80
Thailand
Rice 40 8000 200

Ethiopia and Thailand have an absolute cost advantage over coffee and rice production
respectively. Total production of coffee =100+80=180quin and total production of rice
=125+200=325quin

The situation of absolute advantage with specialization:

Commoditie Cost/quintal in Available resources in money Units to be

Country
s USD (USD) produced
Ethiopia Coffee 50 5000+7500 250
Thailand Rice 40 6400+8000 360

The situation of absolute advantage with specialization results in total production of coffee
=250qu and total production of rice = 360qu. Therefore, when the two countries specialize in
each commodity, extra 70 quintals of coffee and 35 quintals of rice would be gained.

The principle of absolute advantage fails to explain whether trade will take place if one nation has
an absolute advantage for all products under consideration. In view of this theory, a country
which has absolute advantage in the production of all goods and services may not benefit from
international trade.

a. Theory of Comparative Cost Advantage

This theory argues that a country can obtain/be benefited from international trade even if it is
able to produce all offers more cost efficiently than its trading partners. A country can specialize
16 | P a g e
in the production of those commodities that it can produce cost efficiently than other products
and exchange with other countries even if it can more cost effectively produce those imported
commodities than their trade partners. Assume the following example:

Cost/unit in Available resources in Units that can be

Country Commodities
USD money (USD) produced
Leather shoe 20 15000 750
Ethiopia
Jeans 90 18000 200
Leather shoe 10 15000 1500
Turkey
Jeans 30 18000 600
Ethiopia has an absolute advantage neither in leather shoe nor in jeans production. On the other
hand, Turkey has an absolute advantage in the production of both leather shoe and jeans.

To see the efficiency ratio

Turkey Ethiopia
Shoe ratio 2 1

Jeans ratio 3 1

Ethiopia is 3 times less efficient/3 times disadvantageous than Turkey in the production of jeans.
Again Ethiopia is 2 times less cost efficient/2times disadvantageous than Turkey in the
production of leather shoe. Whereas Turkey is 3 times more efficient/3times more advantageous
and 2 times more cost efficient in the production of jeans and leather shoe respectively. This
implies that Ethiopia can specialize in the production of leather shoe and export to Turkey
because Ethiopia is only 2 times less efficient and can import jeans from Turkey. The resources
that would be spent to produce jeans by Ethiopia will be shifted to produce leather shoe. The
same is true for Turkey; the resources from leather shoe can be shifted to jeans.

a. Factor endowment theory

Elihickscher, Bertinohlim and Michael porter argue that the pattern of international trade is
determined by the differences in factor endowment. The most important factors suggested are
land, labor and capital. Factor endowment theory predicts that countries should invest in those
goods and services which will be produced using locally abundant resources and should import
commodities and service which can be produced using locally scarce resources. For example, if a
country is endowed with manpower but has capital deficiency, this country can export labor
intensive outputs and can import capital intensive outputs.

Balance of Payment

17 | P a g e
When countries trade, financial transactions among and between them occur. Commodities and
services are imported and exported; people make vacations and foreign travels. In both cases,
cash out flows from a nation and cash inflows to a nation exists. In short, balance of payment is a
summary of/an accounting record of financial transactions between and among countries over
time usually in a year. If a country imports more than it exports, negative balance of
payment/trade deficit is recorded. On the other extreme, if a country exports more than it
imports, positive balance of payment/trade surplus is recorded. Finally, if the amount imported
equals the amount exported, the record shows neither surplus nor deficit i.e. equilibrium.

Balance of payment contains a record of all the goods and services a nation exchanged with other
nations over time i.e. recurrent transactions, foreign private investments, government
borrowings, lending and payments of debts i.e. long term capital flows.

The balance of payment is an indicator of the international health of a country. This helps
government policy makers plan monetary, fiscal and foreign exchange policies. Such data can also
provide information for decisions in international marketing. Two important decisions for a firm
are the choice of location of supply for foreign markets and the selection of supply to sell to.

Balance of payment analysis can show which countries are importers and exporters of the
products in question. The firm can identify its own best import and export targets that are
countries to sell to and countries to supply from. Furthermore, the firm can get an indication of
the competition in those countries to operate by noting the nations supplying the products under
consideration or identifying low price suppliers and high quality/high price suppliers. Looking at
the capital account provides a nation’s international solvency over several years. If a country is
losing its foreign exchange reserves, there is a strong likely hood of currency devaluation or some
kind of exchange control, meaning that the government restricts the amount of money send out of
the country. With exchange control, the firm has difficulty of getting foreign exchange to import
products. During shortage of foreign exchange, governments give priority for the importation of
necessary commodities to the public. Thus, the scarce foreign exchange goes to prioritized offers.

1. Economic Integration
Economic integration refers to an agreement among countries of varied geographic regions aimed
at reducing and ultimately eliminating tariff and non-tariff barriers so as to allow the free flow of
commodities and factors of production between and among each other.

1. Levels of Economic Integration

18 | P a g e
There are many levels of economic integration ranging from an agreement to reduce trade
barriers to the full-scale economic and political integration.

a. Free trade area

It is the first economic integration in which all barriers to trade among members are abolished.
However, each member country is allowed to determine its own trade policies to non-member
countries. Thus, the tariff imposed on the product of non-member countries may vary among
member countries. North American free trade agreement (NAFTA), the agreement signed by
United States, Mexico and Canada in 1992 is an example of free trade area. Those member
countries are each other’s largest customers/suppliers.

a. Customs union
The customs union is one step further along the road to full economic and political and adopts a
common external trade policy. Establishment of a common external trade policy necessitates
significant administrative machinery to oversee trade relations with nonmembers.

a. Common market
A common market has no barriers to trade between member countries and has common external
trade policy and allows factors of production to move freely between members. There are no
restrictions on immigration or cross border flow of people, raw materials, working equipment and
capital between member countries. Employment policies look the same.

a. Economic union
An economic union entails even closer economic integration and cooperation than a common
market. Like the common market, an economic union involves the free flow of products and
factors of production between member countries and the adoption of a common external trade
policy, but it also requires a common currency, harmonization of members’ tax rates, and a
common monetary and fiscal policy. Such a high degree of integration demands a coordinating
bureaucracy and the sacrifice of significant amounts of national sovereignty to that bureaucracy.
The EU is an economic union, although an imperfect one since not all members of the EU have
adopted the euro, the currency of the EU and differences in tax rates across countries still remain.

a. Political union
The move towards economic union raises the issue of how to make a coordinating bureaucracy
accountable to the citizens of member countries. The central political apparatus coordinates the
economic, social and foreign policy of member countries. The EU is on the road towards at least

19 | P a g e
partial political union. The EU parliament has been directly elected by citizens of the EU member
countries since 1970s. In addition, the councils of ministers (the controlling and decision making
body of the EU) is composed of government ministers from each EU member.

Advantages of economic integration

 Trade creation -The ultimate goal of economic integration is to replace high production costs with
low production costs. Trade creation occurs when high cost domestic producers are replaced by low
cost producers within the free trade area. It may also occur when higher cost external producers are
replaced by lower cost external producers.
 Border conflicts reduce
 Open markets for foreign investment and export
 Creating employment opportunities
 Common currency facilitates investment (because no need of currency conversion to invest in and
for profit remittance)
 Common currency reduces the risk of exchange rate fluctuation and unavailability of foreign reserve
 Common currency enables to compare the price of a commodity between member countries
 Common currency saves commission for conversion.

Disadvantages/challenges of economic integration

 Complexity in adjusting the national economic policy with member countries
 Unfair competition between domestic and foreigners
 Unfair resource utilization between developed and developing countries
 Trade diversion (probably low cost of production may be replaced by high cost of
production
 Common currency impedes national authorities to control over monetary policy for
inflation monitoring
 Increases price competition
 The issue of sovereignty

1. Political and legal environment in International Marketing

Political environment is made up of governmental institutions, political parties, and
organizations that rulers and people use to wield power. Political environment is another factor
for success as well as existence of a firm. The political environment that MNCs face is a complex
one because they must cope with the politics of more than one nation.
20 | P a g e
The political environment is composed of three different types: Domestic political environment
(domestic laws in the homeland of the international marketer that intervene in international
trade), foreign political environment (the impact of overseas politics where in the firm wants to
do business) and international political environment (the political influence of countries other
than the respective trade partners).
1. Types of government: Political systems vs economic systems
A system of the form governments can take can be useful in appraising the political climate.
Government systems differ in terms of consulting with citizens from time to time for the purpose
of learning about opinions and preferences.

Thus, governments may be classified as parliamentary, two-party, multi-party, single-party, and

dominated one-party. Each approaches international business differently.

Economic systems provide basis for classification of governments. These systems serve to explain
whether businesses are privately owned or government owned or a combination. Three systems
can be identified, communism, socialism and capitalism.

a. Communism
Communism assumes that all resources should be owned and shared by the people i.e. not by
profit-seeking enterprises for the benefit of the society. In practice it is the government that
controls all productive resources and industries and as a result the government determines jobs,
production, price, education and just about anything else. There is no an incentive to motivate
employees and managers to improve production. Competition among production plants is none.

Despite communist countries’ precaution with control of industries, it would be an error to

conclude that all communist governments are exactly alike.

a. Socialism
The degree of government control that occurs under socialism is somewhat less than under
communism. A socialist government owns and operates the basic, major industries but leaves
small businesses to private ownership. Socialism is a matter of degree and not all socialist
countries are the same. Some socialist countries lean toward communism as evidenced by their
rigid control over prices and distribution. Some other socialist nations are much closer to
capitalism.

a. Capitalism
The philosophy of capitalism provides for a free market system that allows business competition
and freedom of choice for both consumers and companies. It is a market-oriented system in
21 | P a g e
which individuals motivated by private gain are allowed to produce goods and services for public
consumption under competitive conditions. Product’s price is determined by demand and supply.
This system serves the needs of the society by encouraging decentralized decision making, risk
taking and innovation. The results include product variety, product quality, efficiency, and
relatively lower prices.

Privatization
Both multinational and local firms should notice a trend toward privatization and its competitive
implications. Government-owned enterprises are often characterized by overstaffing, poor
financial performance, dependence on subsidies, centralized and politicized organizations, and
lack of competition.

Among the objectives of privatization are: promotion of competition and efficiency, reduction of
debt and subsidies, and broadening domestic equity ownership.

1. Types of political risks

There are a number of political risks with which marketers must contend.
i. Confiscation
It is the act of a government’s taking ownership of a property without compensation. Example:
Chinese government’s seizure of American property after the communists took power in 1949.
i. Expropriation
It is the process whereby the company whose property is expropriated is forced to sell at low price
or to be compensated. Unlike confiscation, there is some compensation even if not equivalent.
i. Creeping expropriation
It is a set of actions whose cumulative effect is to deprive investors of their fundamental rights to
the investment. Laws that affect corporate ownership, control, profit, production, reinvestment
and license renewal can easily be enacted. Countries can change the rules of the game in the
middle of the game. Because countries can change the rules in the middle of the game, companies
must adopt adequate safeguards.

i. Nationalization
It involves government ownership and it is the government that operates the business being taken
over. Governments’ rationale for nationalization varies widely and includes national interests,
vote getting, prevention of foreigners’ exploitation, and an easy, cheap, and quick way of
acquiring wealth.
i. Domestication

22 | P a g e
Foreign companies relinquish control and ownership either completely or partially to the
nationals. The result is that private entities are allowed to operate the deprived property.
Domestication may sometimes be a voluntary act that takes place in the absence of confiscation
or nationalization. Usually, the causes of this action are either poor economic performance or
social pressures.
Another classification system of political risks is the one used by Root. Based on this
classification, four sets of political risks may be identified:
General instability risk: it is related to the uncertainty about the future viability of a host
country’s political system.
Operation risks: It proceeds from the uncertainty that a host government might constrain the
investor’s business operations in all areas, including production, marketing, and finance.
Transfer risks: It applies to any future acts by a host government that might constrain the ability
of a subsidiary to transfer payments, capital and profit out of the host country back to the parent
firm.
Political sanctions: One or a group of nations may boycott another nation, thereby stopping all
trade between the countries, or may issue sanctions against the trade of specific products.
The above politics related risks will likely be less in the future for several reasons.

Many governments have experienced very poor records in running the businesses nationalized
and have found that their optimistic projections have not materialized. Furthermore, many
nations have realized that such actions have created difficulties in attracting new technology and
foreign investment as well as in borrowing from foreign banks. There is also the possibility of
open retaliation by other governments.

1. Analysis and management of political risks/country risk

Political risk is an uncertainty that stems from the exercise of power by governments and non-
governmental actors. Typical hazards include political instability, politicized government policy,
expropriation, creeping expropriation, contract frustration, and currency inconvertibility.

Some assessment methods are country specific in the sense that a risk report is based on a
particular country’s unique political and economic circumstances.

Many different methods may be employed to predict, measure and analyze political risks.
 Developing questionnaire to be sent to experts or local citizens in order to gauge the political
mood of prospective nations. Using the system the marketer rates countries as per their
political conditions.

23 | P a g e
  Econometrics rating- the level of economic development and the type of political system can
be used for risk assessment. This system assumes that an economically developed country is
most often politically stable.
 Gauging information from experienced people like Ambassadors and businessmen working in
the proposed countries.
 Rely on the advice of firms specializing in this area. Those firms advise companies on the
danger of doing business in some countries. They offer information and provide training for
executives on how to protect themselves, and guide their employees in political crises.
 Browsing online sources which furnish abundant information about the host countries’
political situation. All the aforementioned are information sources prior to going
internationally.
1. Measures to minimize political risks
To reduce political risks, MNCs consider any of or combination of the following strategies.
Avoidance- screening out politically uncertain countries. In addition to political unrest internally,
MNCs, due to their presence in a large number of countries, must be mindful of terrorist threats.
According to the World Markets Research Center, there are 10 top listed countries deemed to be
the most likely targets of a terrorist attack.
1. Colombia, (2) Israel, (3) Pakistan, (4) USA, (5) Philippines, (6) Afghanistan, (7) Indonesia,
(8) Iraq, (9) India, and (10) United Kingdom.
MNCs with anti-terrorist programs may focus on security equipment, training executives and
their families of protective and defensive mechanisms as well as negotiating skills.

 Insurance- by having government or private insurance, MNCs can transfer the risk to some
other party i.e. if they lost their property, they will be reimbursed an equivalent amount.
Events like confiscation, expropriation, creeping expropriation, Currency inconvertibility,
terrorism get coverage in political insurance.
 Employing most host country nationals by hopping that country’s government does not
consider confiscation or expropriation to care its citizens working in the company.
 Using local resources- if an international marketer uses the host countries’ supplies as an
input or serve as a supplier for processing plants in those countries, the governments
consider the tight link with the economy.

Sometimes local sourcing is compulsory. Governments may require products to contain locally
manufactured components because local contents improve the economy into two ways:Further
investment in local production facilities by the company will please the government.

24 | P a g e
Finally, the company should attempt to assist the host country by being export oriented.

 Sharing ownership: Instead of keeping complete ownership for itself, a company

should try to share ownership with others, especially with local companies. Say, for
example converting a private company to a public one or from a foreign company to a local
one. One of the most common techniques for shared ownership is simply forming a joint
venture. Any loss of control as a result can, in most cases, be more than compensated for
by the derived benefits. Voluntary domestication, in most cases, is not a desirable course of
action because it is usually a forced decision. The company should therefore plan for
domestication in advance instead of waiting until it is required, because by that time the
company has lost much of its leverage and bargaining power.
 Being civic minded: It is not sufficient that the company simply does business in a
foreign country; it should also be a good corporate citizen there. To shed the undesirable
perception, multinationals should combine investment projects with civic projects.

Corporations rarely undertake civic projects out of total generosity, but such projects make
economic sense in the long run. It is highly desirable to provide basic assistance because many
civic entities exist in areas with minimal or nonexistent municipal infrastructures that would
normally provide these facilities. A good idea is to assist in building schools, hospitals, roads, and
water systems because such projects benefit the host country as well as the company, especially in
terms of the valuable good-will generated in the long run.

 Political neutrality
For the best long-term interests of the company, it is not wise to become involved in political
disputes among local groups or between countries.

A company should clearly but discreetly state that it is not in the political business and that its
primary concerns are economic in nature.

 Expanding the investment base

Including several investors and banks in financing an investment in the host country is another
strategy. This has the advantage of engaging the power of the banks whenever any kind of
government takeover or harassment is threatened.

This strategy becomes especially powerful if the banks have made loans to the host country; if the
government threatens expropriations or other types of takeover, the financing bank has
substantial power with the government.

25 | P a g e
  Licensing
A strategy that some firms find eliminates almost all risks is to license technology for a fee.
Licensing can be effective in a situation where the technology is unique and the risk is high. Of
course, there is some risk assumed because the licensee can refuse to pay the required fees while
continuing to use the technology.

 Adopt a local personality. A practical approach may require that the company blend in
with the environment.
There is not much to be gained by a company being ethnocentric and trying to Americanize,
Europeanize, or Japanize the host country’s citizens. It is far better to be flexible and adapt-able.
The main reason that certain MNCs use local corporate staff is to make it look like a local
company. The company is thought to be American in the USA, British in the United Kingdom,
and Australian in Australia.

1. Legal environment in international marketing

There is a multiplicity of legal environments: domestic, foreign, and international. At their worst,
laws can prohibit the marketing of a product altogether. To most businesspeople, laws act as an
inconvenience.

There are many products that cannot be legally imported into most countries. Examples include
counterfeit money, illicit drugs, pornographic materials, and espionage equipment. It is usually
also illegal to import live animals and fresh fruits unless accompanied by the required certificates.
Furthermore, many products have to be modified to conform to local laws before these products
are allowed across the border.

The modification may be quite technical from an engineering standpoint or only cosmetic, as in
the case of certain packaging changes. A company’s production and marketing strategy can be
affected by the legal environment.

1. Legal systems
To understand and appreciate the varying legal philosophies among countries, it is useful to
distinguish between the two major legal systems: common law and statute law.

There are some twenty-five common law or British law countries. A common law system is a legal
system that relies heavily on precedents and conventions. Judges’ decisions are guided not so
much by statutes as by previous court decisions and interpretations of what certain laws are or
26 | P a g e
should be. As a result, these countries’ laws are tradition oriented. Countries with such a system
include the USA, Great Britain, Canada, India, and other British colonies.

Countries employing a statute law system, also known as code or civil law, include most European
countries and Japan. Most countries – over seventy – are guided by a statute law legal system. As
the name implies, the main rules of the law are embodied in legislative codes.

Every circumstance is clearly spelled out to indicate what is legal and what is not. There is also a
strict and literal interpretation of the law under this system.

In practice, the two systems overlap, and the distinction between them is not clear-cut. Although
judges in common law country rely greatly on other judges’ previous rulings and interpretations,
they still refer to many laws that are contained in the statutes or codes. For statute law countries,
many laws are developed by courts and are never reduced to statutes. Therefore, the only major
distinction between the systems is the freedom of the judge in interpreting laws. In a common law
country, a judge’s ability to interpret laws in a personal way gives that judge a great deal of power
to apply the law as it fits the situation. In contrast, a judge in a civil law country has a lesser role
in using personal judgment to create or interpret laws because that judge must strictly follow the
“letter of the law.”

Islamic law (sheri’ah) is derived from the interpretation of the Quran and found in Pakistan,
Iran, Saudi Arabia, and other Islamic states. The unique aspects of Islamic law are the prohibition
against the payment of interest.

1. Legal form of organization

Firms doing business in various overseas markets have the following options for the legal form of
organization: a branch, subsidiary, limited company, sole proprietorship, partnership, and
corporation.

These legal forms of organizations vary in terms of ownership (public or private), the decision to
sell securities to the public or to private companies, requirements in terms of registration and
capital structure, subscription for shares, profits and assets available for distribution, in terms of
limited liability. Those business forms apply different nomenclature as part of their trade names
in different countries. Some nomenclatures include Corp., Inc., ltd., or ltd. co., PLC.

To eliminate confusion and to ensure some uniformity, European countries are now encouraging
the use of PLC instead of other nomenclature.

27 | P a g e
Once a business is in operation, there is confrontation of various countries rules and regulations.
Countries’ legal approach of intellectual property registration requirements, protection,
protection of inventions by locals and foreigners, time span in which the property is protected,
measures against bribery, counterfeiting, etc is different.

Some countries may refuse to recognize certain patents granted elsewhere, or they may refuse to
approve foreign firms’ patent applications in their own countries. Some countries do not give
patents for some product categories. For instance, China does not give patents for chemicals and
pharmaceuticals. Membership to international organizations and economic integrations influence
countries’ legal approach of intellectual property protection.

Many countries participate in international conventions designed for mutual recognition &
protection of intellectual property rights.

There are three major international conventions:

 The Paris conventions for the protection of industrial property, commonly referred to as the
Paris convention, includes the USA and other 100 countries.
 The Inter- American convention including most of Latin American nations and the USA
 The Madrid arrangement, which established the bureau for international registration of
trademark, includes 26 European countries.
 In addition, the world intellectual property organization (WIPO) of the United Nations is
responsible for the promotion of the protection of intellectual property and for the
administration of the various multilateral treaties through the cooperation among its member
states.

Prior Use of brand mark versus registration of brand mark

In the process of filing for patent protection, it is good idea to make a distinction between
common law countries and statute law countries. A common law country determines patent
ownership by priority in use.

In a statute law country, in comparison, is determined by priority in registration i.e. the first file is
granted a patent even if an innovation was actually created or used earlier by someone else.

The failure to protect intellectual property rights adequately in the world market place can lead to
legal loss of rights in potentially profitable markets.

Market Laws

28 | P a g e
All countries have laws regulating marketing activities in promotion, product development,
labeling, pricing, and channels of distribution. For example, premium offers, free gifts, or
coupons are differently governed in different countries.

1. Jurisdiction and extraterritoriality

There is no international law per se that deals with business activities of companies in the
international arena. There are only national laws that vary from one country to another.

One aspect of the law that does not have universal acceptance involves its extraterritorial
application. A nation wishing to protect its own interests often applies its laws to activities outside
its own territory. In the case of a country’s firms which have foreign subsidiaries, it is
questionable whether these subsidiaries must comply with the base government’s decrees.

Legal disputes can arise in three situations:

 Between Governments:
 Between a company and a government and
 Between two companies
Jurisdiction is generally determined in one of three ways:
 On the basis of jurisdictional clauses included in contracts,
 On the basis of where the contract was entered into, or
 On the basis of where the provisions of the contract were performed

Each country’s legal approach of cases is different.

In preparing a contract, a seller or buyer should stipulate a particular legal system that is to take
precedence in resolving any contract dispute. The court to be used for legal remedy should also be
specified. The company must keep in mind that to earn a legal victory in its home court is one
thing, but to enforce a judgment against a foreign party is something else altogether. Enforcement
is difficult unless that foreign party has the desire to continue to do business in the country where
the judgment is obtained. Given the disparity of national laws, an international marketer will
need to seek assistance from either a local lawyer or an international law firm.

It is often necessary to file a lawsuit in the defendant’s home country. To make certain that the
foreign court will have jurisdiction to hear the case, the contract should contain a clause that
allows the company to bring a lawsuit in either the home country or the host country. As per
international conventions like Brussels Convention on Jurisdiction and the Enforcement of
Judgments, the place where the matter in controversy is located is the exclusive forum for

29 | P a g e
disputes regarding real property, status of a corporate entity, public records, trademark,
copyright and patent, and enforcement of judgments.

1. International dispute resolution

When things go wrong in a commercial transaction, the buyer refuses to pay, the product is of
inferior quality, the shipment arrives late, or any one of the myriad problems that can arise-what
recourse does the international marketer have.

There are four steps to settle disputes both domestic and international:

a. Informal Talks
The 1st step the international marketer should do is he has to try to resolve the issue informally,
but if that fails the foreign marketer must resort to more resolute actions

a. Conciliation (Mediation)
Conciliation is a non-binding agreement between parties to resolve disputes by asking a 3 rd party
to mediate differences.

The function of the mediator is to carefully listen to each party and to explore, clarify and discuss
the various practical options and possibilities for a solution with the intent that the parties will
agree on a solution.

The Chinese believes that when a dispute occurs, informal, friendly negotiation should be used
first to solve the problem; if that fails, conciliation should be tried.

a. Arbitration
It is the settlement of a dispute by a person or persons chosen to hear both sides and come to a
decision. If conciliation is not used or an agreement cannot be reached, the next step is
arbitration. When all else fails, arbitration rather than litigation is preferred method for resolving
international commercial disputes. The usual arbitration procedure is for the parties involved to
select a disinterested and informed party or parties as referee to determine the merits of the case
and make a judgment that both parties agree to honor.

In most countries, decisions reached in formal arbitration are enforceable under the law.

The popularity of arbitration has led to a proliferation of arbitral centers established by countries,
organizations, and institutions. All have adopted standardized rules and procedures to
administer cases.

a. Litigation
30 | P a g e
It is the act of or process of carrying a lawsuit. When all else fails, the final step is to solve the
dispute is litigation.

1. Socio-cultural environment
The socio-cultural environment encompassing, language, traditions and beliefs,
tastes/preferences, social institutions, buying and consumption habits which are important
factors for business.
1. Characteristics of Culture
There has also been debate about gifts. Traditionally, US firms provide Christmas gifts for their
customers, employees, and those who have assisted the firm. In foreign countries, gifts may be
given for other occasions, such as a New Year holiday or birthday. These gifts are often considered
by Westerners as bribes.
In any case, a good basic definition of the concept is that culture is a set of traditional beliefs and
values that are transmitted and shared in a given society. Culture means many things to many
people.
Culture is prescriptive. It prescribes the kinds of behavior considered acceptable in the
society. The prescriptive characteristics of culture simplify a consumer’s decision-making process
by limiting product choices to those which are culturally acceptable. It creates problems for those
products not in tune with the consumer’s cultural beliefs.

Culture is socially shared. Culture, out of necessity, must be based on social interaction and
creation. It cannot exist by itself. It must be shared by members of a society, thus acting to
reinforce culture’s prescriptive nature.

Culture facilitates communication: culture usually imposes common habits of thought and
feeling among people. Thus, within a given group culture makes it easier for people to
communicate with one another. Culture may also impede communication across groups because
of a lack of shared common cultural values.

This is one reason why a standardized advertisement may have difficulty communicating its
message to consumers in foreign countries.

Culture is learned: culture is not inherited genetically. It may be learned and

acquired. Socialization or enculturation occurs when a person absorbs or learns the culture
in which he /she is raised. In contrast, if a person learns the culture of a society other than the
one in which he or she is raised, the process of acculturation occurs. The ability to learn culture
makes it possible for people to absorb new cultural trends. Asian countries are complaining

31 | P a g e
bitterly, about how their cultures are being contaminated by rock-and-roll music and western
sexual & social permissiveness - foreign elements they consider undesirable and harmful.

Culture is subjective: people in different cultures often have different ideas about the same
object. What is acceptable in one culture may not necessarily be so in another. In this regard,
culture is both unique and arbitrary. As a result, the same phenomenon appearing in different
cultures can be interpreted in every different manner.

It is customary in many cultures for a bridegroom’s family to offer a dowry to a bride’s family,
either for the bride’s future security or to compensate her family for raising her. In India, an
entirely different set of cultural rules applies. A woman there is viewed as a burden to both her
own family and her husband-to-be. When she marries, her family must offer a dowry to the
bridegroom.

Culture is enduring: Because culture is shared and passed down from generation to
generation, it is relatively stable and somewhat permanent. Old habits are hard to break, and
people tend to maintain its own heritage in spite of a continuously changing world.

Culture is cumulative: Culture is based on hundreds or even thousands of years of

accumulated circumstances. Each generation adds something of its own to the culture before
passing the heritage on to the next generation. Therefore, culture tends to become broader based
over time, because new ideas are incorporated and become a part of the culture.

Of course, during the process, some old ideas are also discarded.

Culture is dynamic: culture is passed along from generation to generation, but one should not
assume that culture is static & immune to change. Culture is constantly changing-it adapts itself
to new situations and new sources of knowledge. The dynamic aspect of culture can make some
products obsolete and can usher in new buying habits.

Sellers must examine the ways consumers in different countries think about and use certain
products before planning a marketing program.

For example, Germanys and the French eat more packaged and branded spaghetti than do
Italians. Italians’ children like to eat chocolate bars between slices of bread as a snack. Women in
Tanzania will not give their children eggs for fear of making them bald and impotent.

South Americans like to sit or stand very close to each other when they talk business. On the other
hand, American business executives tend to keep backing away as the South Americans move
closer.
32 | P a g e
In most parts of the world, wedding gowns are white color, whereas in Asian countries black
colors are preferable. Furthermore, some citizens believe that foreign investors coming to their
country are driven by an intense interest of exploiting the local resources and leaving the country
underdeveloped.

1. Influence of culture on consumption

Consumption patterns, lifestyles, and the priority of needs are all dictated by culture. Culture
prescribes the manner in which people satisfy their desires.

Hindus and some Chinese do not consume beef at all, believing that it is improper to eat cattle
that work on farms, thus helping to provide foods such as rice and vegetables.

The edibles we eat, the beverages we drink, the occasions we have eating, the ways of eating,
working on products differ among overseas countries.

1. Influence of culture on thinking processes

Thinking processes are also affected by culture. When traveling over-seas, it is virtually
impossible for a person to observe foreign cultures without making reference, perhaps
unconsciously, back to personal cultural values.

This phenomenon is known as the self-reference criterion (SRC) i.e. an unconscious reference to
one’s own cultural values, experiences, and knowledge as a basis for decisions. The SRC impedes
the ability to assess a foreign market in its true light. Because of the effect of the SRC, the
individual tends to be bound by his or her own cultural assumptions. It is thus important for the
traveler to recognize how perception of overseas events can be distorted by the effects of the SRC.

When confronted with a set of facts, we react spontaneously on the basis of knowledge
assimilated over a lifetime; knowledge that is a product of the history of our culture. Quite often
we do not know ourselves why we behave in a certain way in a certain situation as we do that
unconsciously. We seldom stop to think about a reaction, we react. Thus, when faced with a
problem in another culture, the tendency is to react instinctively referring only to our SRC for a
solution. Our reaction, however, is based on meanings, values, symbols and behavior relevant to
our own culture and usually different from those of the foreign culture. Such decisions are often
not helpful.

To illustrate the impact of the SRC, consider misunderstandings that can occur about personal
space between people of different cultures. In the West, unrelated individuals keep a certain
physical distance between themselves and others when talking to each other or in groups. We do
not consciously think about that distance; we just know what feels right without thinking. When
33 | P a g e
someone is too close or too far away, we feel uncomfortable and move either further away or get
closer to correct the distance – we are relying on our SRC.

Your SRC can prevent you from being aware that there are cultural differences or from
recognizing the importance of those differences.

1. Influence of culture on communication

Culture also influences the communication process. A country can be classified as either high
context culture or a low context culture. This classification provides an understanding of valuable
cultural orientations and explains how communication conveyed and perceived. North American
and northern Europe (Germany, Switzerland, and Scandinavian Countries) are examples of low
context cultures. In these types of society, messages are explicit and clear in the sense that actual
words are used to convey the main part of information in communication. What is important is
what is said not how it is said and not the environment within which it is said.

Asia, Africa, Middle Eastern Arab nations and some European countries like Spain, Italy and
France are high context cultures. In such cultures, the communication may be indirect and the
expression manner in which the message is received becomes critical. Because the verbal part
(words) does not carry most of the information, much of it is contained in the non-verbal part of
the message to be communicated.

The context of communication is high because it includes a great deal of additional information,
such as the message sender’s values, position, back-ground, and associations in the society. As
such, the message cannot be understood without its context.

1. Communication through verbal and non-verbal languages

Language is a significant part of culture, and communication is impossible without it. A language
may be spoken, written, or nonverbal.

Each native speaker is naturally going to feel that one’s own native language is superior. England
and France are going to claim that their many former colonies use their languages.

There is no question that English is the world’s language of business, diplomacy, and aviation.

1. Communication through non-verbal languages

People do not always communicate solely through the spoken or written word. Knowingly or not,
people routinely communicate with one another in a nonverbal manner. Body language includes
movement, appearance, dress, facial expressions, gestures, posture, use of silence, use of touch,

34 | P a g e
timing, distance between speakers and listeners, physical surroundings, tone, and rhythm of
speech.

Some body-languages (e.g., a smile) are universal, but other phrases vary in meaning across
cultural lines. Whereas the Japanese view prolonged eye contact as rude, Americans instead feel
that avoidance of eye contact is impolite.

Indonesians are polite people. A business guest will often be served something to drink and
should not reach for his drink until the host gestures to do so. It is polite to at least sample the
drink or any food offered. Indonesians are not known for their punctuality, so offence should not
be taken if events do not start on time or if your guest arrives late. Indonesians avoid the use of
the left hand when offering food and other objects, as it is regarded as the unclean hand. It is also
considered rude to point with a finger.

There is a need to appreciate cultural differences in matters concerning the language of time,
space, objects, friendship patterns, and agreements.

In some countries, particularly middle east, the official weekend is on Friday, and the new week
begins on Saturday.

Therefore, Friday in most of the Middle East countries is like Sundays in the West. As a result, the
outside world can do business with Jordan and other Muslim countries only on Mondays,
Tuesdays, Wednesdays, and half of Thursdays (when most businesses close down early).

The relationship between time and the importance of a matter varies between countries. In USA,
when a matter is important, it requires immediate attention and action. In some countries, a
reverse relationship exists. A matter of importance requires more time to ponder, and to declare a
deadline is to exert undue pressure.

a. Language of time
Time has different meanings in different countries. An American and an Asian do not mean the
same thing when they say: “why don’t you come over sometime?” In the United States, the
statement takes a formal tone, implying that advance notice should be given if the visit is to take
place. For an Asian the meaning is exactly what is said-drop in any time without any
appointment, regardless of how early or late it may be in the day.

Time is cultural, subjective and variable.

For example:
“The clock didn’t invent man.” (Nigeria)
35 | P a g e
“If you wait long enough, even an egg will walk.” (Ethiopia)
“Before the time, it is not yet the time, after the time it is too late.” (France)
“Time is money.” (USA):They often feel that things need to be settled and completed as soon as
possible and that they have no time to waste or spare. American impatience is not a virtue in
dealing with foreign firms. In general, American negotiators tend to skip the non-task activities
and go directly to the agreement stage.

Russians are patient and careful before making a move, often taking extra time just to gain an
advantage in the process of negotiation.

Lack of punctuality may even imply importance and status in some places. For instance, the
Chinese observe strict punctuality for social occasions and appointments whereas; there is a lack
of punctuality in other Asians and Africa. It is common for people to be half an hour or an hour
late for an appointment. Usually, no excuse is offered to those who are kept waiting.

Very specifically, in Ethiopia, the startup and completion of construction projects is experiencing
a considerable delay. In addition, for example in invitations and other social gatherings, people
become late minutes or even hours.

There is also a culture that one should not travel in a time period determined to be unsafe or
unlucky. This creates a dilemma for those who are traveling on a plane whose departure time is
deemed to be inappropriate.

a. Language of space
Space has its own special meaning. Space has implication for personal selling. Latin Americans
are comfortable with just a few inches of distance. Asians on the other hand, prefer substantial
conversational distance and no physical contact. For Americans, a comfortable distance is
something in between those extremes.

In addition in USA a person occupying an office at the top of a building is supposed to be top
manager, chief executive (a person with the first responsibility in running the organization).

In Japan, top executives have offices on the ground floor.

a. Language of agreement
The USA is a very legalistic society. Americans are both specific and explicit in terms of
agreement, making legal contracts common and indispensable. Not surprisingly, lawyers become
partners in virtually all business deals. Culture dictates how a disagreement is expressed &

36 | P a g e
resolved. North Americans generally prefer a straight forward approach. Elsewhere, one must be
careful in a disagreement never to make someone else lose face.

Asians, in particular, are sensitive to affronts and can become violent when “loss face” results.
Public humiliation criticism must thus be avoided in Asia where politeness is valued over blunt
truth. Asian cultures do not teach workers to argue point-blank with immediate supervisors.

In many cultures, written contracts are not as binding as one’s word. According to people in these
societies, if a person cannot be trusted as a friend, then it is futile to expect that person to live up
to obligations

a. Language of friendship
Americans have the unique characteristics of being friendly, even at first meeting. They seem to
have no difficulty in developing friendship in a very short time and this trait is carried over into
business relationship. American business persons are impatient to develop the deep personal ties
that are critical overseas. In many countries, friendship is not taken lightly.

The quick friendship characteristics of the United States prompt Americans to use first names in
social as well as business encounters soon after a first meeting. The American practice of using
first names can be very offensive in other countries, where formality and respect are strongly
established traditions.

Addressing someone by a first name is not common outside of the western hemisphere, unless the
first name is accompanied by the proper pronoun or adjective (Mr. or Mrs.). It is thus, very
important for a businessperson to remember to address foreign counterparts with formal
pronouns unless or until being asked to do something else. A formal last-name approach is used
in Europe.

a. Language of Negotiation
Negotiation styles vary greatly; In some countries, a lack of eye contact is usually viewed as
indication that something is not quite right. But the cultural style of negotiation in Japan requires
a great deal less eye contact between speakers. Furthermore, in Japan periods of silence are
common during interactions, and a response of silence should not come as a surprise.

Chinese negotiations are generally tough-minded, well-prepared, and under no significant time
constraints. They are prepared to use various tactics to secure the best deal. In china, foreigners
should expect repetitions and time-consuming negotiations.

a. Language of color
37 | P a g e
Flowers and colors have their own language and meaning. Preferences for particular colors are
determined by culture. Because of custom and taboo, some colors are viewed negatively. A color
deemed positive and acceptable in one culture can be inappropriate in another.

Swiss women do not want flowers with strong scents. To Swedish women, a cactus signals the end
of a romance.

Yellow is associated with disease in Africa. White is an appropriate color for a wedding gown in
the USA, yet white is used alternatively with black for mourning in India, Hong Kong, and Japan.

a. Language of Gifts
Cultural attitude concerning the presentation of gifts vary greatly across the Globe. Because of
varying perceptions of gifts and their appropriateness, good intention can turn into surprises and
even embarrassment when particular gifts violate cultural beliefs.

1. Cultural Sensitivity and Tolerance

Cultural sensitivity or cultural empathy must be carefully cultivated. International marketers
should recognize that cultures are not right or wrong, better or worse; they are simply different.

For every amusing, annoying, or repulsive cultural traits we find in a country, there is a similarly
amusing, annoying, or repulsive trait others see in our culture. For example, we bath, perfume
and deodorize our bodies in daily rituals that are seen in many cultures as compulsive, while we
become annoyed with those cultures less concerned with natural body orders.

Just because a culture is different does not make it wrong. Marketers must understand how their
own cultures influence their assumptions about another culture.

The more exotic the situation, the more sensitive, tolerant, and flexible one need to be.

1. Cultural Changes
Culture is the means used in adjusting to the environmental and historical components of human
existence. Societies usually have found answers by looking to other cultures from which they can
borrow ideas. Cultural changes may appear caused by economic environment, new generation,
cultural borrowings.

Marketers have two options when introducing an innovation to a culture:

i) They can wait: hopeful waiting for eventual cultural changes that prove their innovations to be
of value to the culture.

38 | P a g e
ii) They can cause a change: involves introducing an idea or product and deliberately setting
about to overcome resistance and to cause change that accelerates the rate of acceptance.

a) Planned changes of culture:

The steps in a planned change in a society are:
I. Determine which cultural factors conflict with an innovation, thus creating resistance to its
acceptance.
II. Make an effort to change those factors from obstacles into stimulants for change (gaining
acceptance for hybrid grains, better sanitation methods, improved farming methods, or
protein – rich diets among the peoples of underdeveloped societies) can be adopted by
marketers to achieve marketing goals.
III. Deliberately set out to change those aspects of the culture offering resistance to
predetermined marketing goals.
b. Unplanned changes of culture: Involves with introducing the product and hope for the
best.
Social Institutions: Social institutions including family, religion, school, the media,
government and corporations all affect the ways in which people relate to one another, organize
their activities to live in harmony with one another, teach acceptable behavior to succeeding
generations and govern themselves.

1. Demographic environment in international marketing

Demographic factors such as size of the population, population growth rates, age composition,
population diversity, gender mix, family size, life expectancy, new generation, income levels,
employment pattern, occupation, education level, etc. have very significant implications for
business.

The size of the population is an important determinant of demand for many products.

Poor countries with small population are generally not attractive for business. However, even
such countries may hold out opportunities for some companies. As these markets may not be of
interest for large companies, small firms may find promising niches in these markets.

Advanced countries, particularly with large population, are generally attractive markets. The
major part of the international trade and foreign investment naturally take place between these
nations. Because of the large potential of these markets, competition is generally strong in them.

39 | P a g e
Several high income nations, however, pose a problem for many businesses. Because of the
decline in the birth rates and the consequent fall in the size of the baby population, the market for
baby products has shrunk.

High population growth rate also implies an enormous increase in the labor supply. When the
Western countries experienced industrial revolution, the population growth was comparatively
slow. Labor shortage and rising wages encouraged the growth of labor intensive methods of
production.

Cheap labor and a growing market have encouraged many multinationals to invest in developing
countries. Many companies in the developed countries have relocated their production facilities,
wholly or partially, in the developing countries to reduce the labor costs.

Level of education: The rising number of educated people will increase the demand for quality
products, books, magazines, more travel/vacation, personal computers and internet services.

Increasing diversity
Countries vary in their ethnic and racial make-up. At one extreme is Japan where almost
everyone is Japanese. At the other extreme is the United States with people from virtually all
nations. Marketers are facing increasingly diverse markets across boundaries. The US population
is a 71% white, 12% Afro- Americans, 12 % Hispanics, 4% Asian- Americans, 1% American-
Indians, Eskimo and Aleut.

Hispanics tend to buy more branded higher quality products- generics do not sell well to this
group. They tend to make shopping a family affair. Children have a big say in which brand to buy.
They are brand loyal and tend to favor firms paying special attention to them.

Afro-Americans are more price conscious than other segments and also are strongly brand loyal.
They are fashion conscious.

Asian – Americans shop frequently and are brand conscious. However, they are the least brand-
loyal. They change brands more often than other groups.

Diversity in terms of labor: if labor is highly heterogeneous in respect of language, ethnic,

religion, etc. personnel management is likely to become more complex.

Occupation

40 | P a g e
Most occupations urge employees to use their time wisely/efficiently. This new generation is time
squeezed creating an opportunity for fast food firms, time saving devices/electronic devices,
dinning at hotels, etc.

Another phenomenon is the trend of women working outside home which creates labor market
opportunity for baby sitters/keepers, home maids, articles which women will use when going
outside.

1. Geographical factors that affect development

Climate
One of the most important factors in development is geography, where the country is in the
world, and climate. It’s no coincidence that the poorest countries are in the tropics, where it is
hot, the land is less fertile, water is more scarce, where diseases flourish. Conversely, Europe and
North America profit from huge tracts of very fertile land, a temperate climate, and good rainfall.
In extremes of climate, either hot or cold, too much energy goes into the simple business of
survival for there to be much leftover energy for development. You have to work twice as hard to
get enough to eat out of the ground, you have to irrigate where others can depend on rainfall. It
may be too hot to work between 11 and 2, so you lose three hours out of every day. Rain patterns
may give you a short growing season, while others can get two harvests in one year. Some
countries are just at a natural disadvantage.

Location
Secondly, geographical location plays a part in access to markets. All the great empires have been
based around trade routes, and these are almost always maritime. There are notable exceptions,
the medieval Mongol empire was based on the Silk Road from China to the west, but Jeffrey
Sachs sums it up well in his important book The End of Poverty: ‘Many of the world’s poorest
countries are severely hindered because they are landlocked; situated in high mountain ranges; or
lack navigable rivers, long coastlines, or good natural harbours.’

China has three of the world’s busiest ports, and so does the US. With ports you can raise money
through tolls and shipping services. If you have no access to the coast, not only do you miss out on
these services, you have to transport everything by land, which is much more expensive. And
what if your neighbors don’t like you? Ice-bound on its northern coastlines, Russian has
squabbled for centuries over access to a warm water port, the Crimean War being the most
serious. Countries like Afghanistan, Rwanda, Malawi, or Bolivia are all hindered by access to

41 | P a g e
ports. Other countries, like Ethiopia or Lesotho, are not only landlocked, but mountainous as
well, making trade even more expensive.

Resources
Thirdly, every country has been dealt a hand in natural resources. It takes infrastructure to
capitalize on these, but some places have a distinct advantage over others. Oil is the most obvious.
Nobody is any doubt about how Saudi Arabia or UAE make their money. Among other
advantages, gold and diamonds have helped South Africa build the most successful economy on
the continent. These are all non-renewable resources – once they’re gone, they’re gone, but while
stocks last there is wealth to be made.

Besides these there are renewable resources – forests, fish, stocks that, if correctly managed, will
refresh themselves. Much South American development has been based on the Amazon
rainforest, in natural rubber and then timber.

Finally, there are what are sometimes called ‘flow resources’. These are renewable that need no
management, wind, tide and solar resources. The Earth Policy Institute describes the American
Great Plains as ‘the Saudi Arabia of wind energy’, while sunshine-rich places like California, Sicily
and Portugal are able to invest in solar power. No natural resource is a license to print money,
and there are plenty of poor countries who are rich in resources, but it is a factor.

Stability
Finally, environmental stability can be a factor in development. Some countries are more stable
than others. Mohammad Yunus makes this point in describing his book Banker To The Poor:
‘Bangladesh is a land of natural disasters, so this is unfortunately an important factor in our doing
business here.’ If you are regularly beset by monsoons, floods and landslides, like Bangladesh or
the Philippines, things are going to be harder for you. You may be in an earthquake zone, and
we’ve all seen what a tsunami can do to a country.
Where I grew up in Madagascar, the annual cyclone season regularly swept away roads and
bridges, damaged railways and refineries, and took the roofs of houses and hotels all along the
east coast. How do you build and sustain infrastructure in those conditions? It’s not impossible,
but these are problems most countries don’t have to face.

1. International marketing barriers

Why nations impede free trade? The following are the reasons:
a. keeping money at home

42 | P a g e
Trade unions and protectionists often argue that international transaction will lead to an outflow
of money, making foreigners richer and local people poorer. This assumption is based on the
fallacy of regarding money as the sole indicator of wealth. Others assume even products can also
be indicators of wealth. For instance, it does not make sense to say a man is poor just because he
does not have much cash on hand when he has many valuable assets like jewelry and land.

a. Reducing unemployment
It is a standard practice for trade unions and politicians to attack imports and international trade
in the name of job protection. The argument is based on the assumption that import reduction
will create more demand for local products and subsequently create more jobs. Most marketing
analysts see this kind of thinking as one-sided, though not completely without merits.

a. Equalizing cost and price

Some protectionists attempt to justify their actions by invoking economic theory. They argue that
foreign items have lower prices because of lower production costs. Therefore, trade barriers are
needed to make price of imported products less competitive and local items more competitive.

a. Enhancing national security

Protectionists often present themselves as patriots. They usually claim that a nation should be
self-sufficient and even willing to pay for inefficiency in order to enhance national security.
Opponents of protectionists argue that a nation can never be completely self-sufficient because
resources are not found in the same proportion in all areas of the world.

a. Protecting infant industry

The necessity to protect an infant industry is perhaps the most credible argument for
protectionist measures. Some industries need to be protected until they become viable.

In practice, it is not an easy task to protect industries. The government must first identify
deserving industries. Next appropriate incentives should take place to encourage their
productivity. Finally, the government has to make sure that the resultant protection is only
temporary.

There are two major marketing barriers:

A. Tariffs
Tariffs is derived from a French word meaning rate, price, or list of charges, is a customs duty or
tax on products that move across borders.
Tariffs are classified based on the following issues:
43 | P a g e
1. Based on Direction: Import and Export Tariffs: Tariffs are often imposed on the basis
of the direction of product movement i.e. on imports & exports, with the latter being the less
common one. When export tariffs are levied, they usually apply to an exporting country’s scarce
resources or raw materials rather than finished manufactured products. For example, companies
exporting from Russia must pay an average export tariff of about 20% on a number of Goods sold
on cash transactions and an average export tariff of about 30% for goods sold in non-cash or
barter transactions.

2. Based on purpose: protective and revenue tariffs

Protective tariffs: The purpose of a protective tariff is to protect home industry, agriculture,
and labor against foreign competitors by trying to keep foreign goods out of the country.

Revenue tariffs: The purpose of revenue tariffs is to generate tax revenues for the government.
Compared to a protective tariff, a revenue tariff is relatively low.

3. Based on length of time: Tariff surcharge versus countervailing duty:

Tariff surcharge: a temporary action taken, say for example to protect the local industry in line
with national interest. For example, the tariff on heavy motorcycles jumped from 4.4 % to 45 %
for one year and then declined to 35 %, 20 %, 15 %, and finally 10 % in subsequent years.

Countervailing duty: a permanent tariff imposed on certain imports when products are
subsidized by foreign governments. These duties are thus assessed to offset a special advantage or
discount allowed by an exporter’s government.

4. Based on rates: specific, Ad Val Orem, and combined

a. Specific duties: These are a fixed or specified amount of money per unit of weight, gauge, or
other measure of quantity. Based on a standard physical unit of a product, they are specific rates
of so many dollars or cents for a given unit of measure. ($1/gallon, 25¢/square yard, $2/ton, etc).
Product cost or prices are irrelevant here. The duties are constant for low and high-priced
products of the same kind.

b. Ad Valorem duties: These are duties “according to value”. They are stated as a fixed
percentage of the invoice value and are applied as a percentage to the dutiable value of the
imported goods. For example, Japans ad valorem tariffs on beef and processed cheese are 25 %
and 35 % respectively. This is the opposite of specific duties since the percentage is fixed but the
total duty is not. There is a direct relationship between the total duties collected and the price of
the product. It provides a continuous and relative protection against all price levels of a particular
product. Moreover, it provides an easy comparison of rates across countries and across products.

44 | P a g e
c. Combined rates or compound duty: These are a combination of the specific & ad valorem
duties on a single product. For example, the tariff may be 10¢ per pound plus 5% ad valorem.
Under this system, both rates are used together, though in some countries only the rate producing
more revenue may apply.

A. Non-Tariff Barriers
Tariffs, though generally undesirable, are at least straight forward and obvious. Non-tariff
barriers, in comparison, are more elusive or non-transparent. Non-tariff barriers can be grouped
into five major categories:

Government participation in trade

The degree of government involvement in trade varies from passive to active. The types of
participation include:
a. Administrative guidance: Many governments routinely provide trade consultation to
private companies. Japan has been doing this on a regular basis to help implement its industrial
policies. The government uses a carrot-and stick approach by exerting the influence through
regulations, recommendations, encouragement, discouragement, or prohibition.

b. Government procurement and state trading: State trading is the ultimate in

government participation, because the government itself is now the customer or buyer who
determines what, when, where, and how much to buy. In this practice, the state engages in
commercial operations, either directly or indirectly, through the agencies under its control. Such
activities are either in place of or in addition to private firms.

c. Subsidies: According to GATT, “subsidy is a “financial contribution” provided directly or

indirectly by a government and which confers a benefit.” Subsidies can take many forms
including cash, interest rate, various taxes, freight, insurance, and infrastructure. Subsidized
loans for priority sectors, and budgetary subsidies are among the various subsidy policies.
 Customs and entry procedures
Trade barriers in this category include classification, valuation, documentation, license,
inspection, and health and safety regulations.
a. Classification: Product classification is important because the way in which a product is
classified determines its duty status. Classification thus determines if certain product categories
are qualified for a special treatment, but it also determines whether some products should be
banned altogether. Most countries ban obscene, immoral, and seditious materials, as well as
imports of certain products. In South Korea, prohibited articles include books, printed matter,
motion pictures, phonograph records, sculptures, and other like articles that are deemed
45 | P a g e
subversive or injurious to national security or detrimental to the public interest, as well as articles
used for espionage or intelligence activities.

b. Valuation: Regardless of how a product is classified, each product must still be valued. The
value affects the amount of tariffs levied. A custom appraiser is the one who determines the value.

c. Documentation: Documentation can present another problem at entry and exit because
many documents and forms are often necessary, and the documents required can be complicated.
Documentation requirements vary from country to country. Usually, the following shipping
documents are required: commercial invoice, proforma invoice, certificate of origin, bill of lading,
packing list, insurances certificate, import license in general and for specific items as per
necessity, and shippers export declarations. Without proper documentation, goods may not be
cleared through customs. At the very least, such complicated & lengthy documents serve to slow
down product clearance.

d. License or Permit: Not all products can be freely imported; controlled imports require
licenses or permits. For example, importation of distilled spirits, wines, malt beverages, arms,
ammunition, and explosives into the USA require a license issued by the bureau of alcohol,
Tobacco, and Fire arms. India requires license for all imported goods.

e. Inspection: It is an integral part of a product clearance. Goods must be examined to

determine quality and quantity. First, Inspection classifies and values products for tariff
purposes. Second, inspection reveals whether imported items are consistent with those specified
in the accompanying documents & whether such items require any licenses. Third, inspection
determines whether products meet health and safety regulations in order to make certain that
food products are fit for human consumption or that the products can be operated
safely. Fourth, inspection prevents the importation of prohibited articles. Marketers should be
careful in stating the amount and quality of products, as well as in providing an accurate
description of products. Any deviations from the statements contained in invoices necessitate
further measurements and determination, more delay, and more expenses.

f. Health and Safety Regulations: Many products are subject to health and safety
regulations, which are necessary to protect the public health and environment. Both food and
non-food items have to be assessed for against health and safety regulations are not restricted to
agricultural products. For example, edibles and beverages, TV receivers, micro wave ovens, X-ray
devices, cosmetics, chemical substances, and wearing apparel. For example, Japan
bans aluminum softball bats from the United States which has a small hole in the top filled with a

46 | P a g e
rubber stopper; on the ground that the stopper may fly out and hurt someone which is
unfounded.

 Product requirements
For goods to enter a country, product requirements set by that country must be met.
Requirements may apply to product standards, packaging, labeling and marking.

a. Product standards: Each country determines its own product standards to protect the
health and safety of its consumers. Such standards may also be erected as barriers to prevent or to
slow down importation of foreign goods. Because of U.S grade, size, quality, and maturity
requirements, many Mexican agricultural commodities are barred from entering into the
U.S. Japanese product standards are even more complex, and they are based on physical
characteristics instead of product performance. Furthermore, these standards are frequently
changed in Japan in order to exclude imports.

b. Packaging, labeling and marking: These concepts are considered together because they
are interrelated. Many products must be packaged in a certain way for safety and other reasons.
Canada requires imported canned foods to be packed in specified can sizes, and instructions
contained within packages or on them must be English and French. The Canadian labeling Act
also requires all imported clothing to have labels in both languages. Products must also be
properly marked and labeled, and marking and labeling may apply either to products themselves
or to their packages. An Italian judge ordered a seizure of bottled coke because he felt that the
ingredients listed on the bottle cap were not properly described and labeled. France requires all
imported goods to carry labels of origin, and so does the USA. For identification and
transportation purposes, packages should bear a consignee’s mark, port mark, and package
numbers.

 Quotas
Quotas are a quantity control on imported goods. Generally, they are specific provisions limiting
the amount of foreign products imported in order to protect local firms and to conserve foreign
currency. From a policy standpoint, a quota is not as desirable as a tariff since a quota generates
no revenues for a country. There are three kinds of Quotas: absolute, tariff, and voluntary.

4.1. Absolute quotas

An absolute quota is the most restrictive of all. It limits in absolute terms the amount imported
during a quota period. Once filled, further entries are prohibited. Some quotas are global, but

47 | P a g e
others are allocated to specific foreign countries. Japan imposes strict quotas on oranges and
beef. To appease the EU, it has lifted quotas on skimmed milk powder and tobaccos from Europe.
The most extreme of the absolute quota is an embargo, or a zero quota, as shown in the case of
the U.S. Trade embargoes against Iraq and North Korea.

4.2. Tariff Quotas

Tariff Quotas are a quantity control on imported goods. A tariff quota permits the entry of a
limited quantity of the product at a reduced rate of duty. Quantities in excess of quota can
be imported but are subject to a higher duty rate. Through the use of tariff quotas, a
combination of tariffs and quotas is applied with the primary purpose of importing what are
needed and discouraging excessive quantities through higher tariffs. When the U.S.A increased
tariffs on imported motorcycles to protect the motorcycle industry, it exempted from the tax the
first 6,000 big motorcycles from Japan and the 1st 4,000-5,000 units from Europe.

4.3. Voluntary Quotas

A voluntary quota differs from other two kinds of quotas, which are unilaterally imposed. A
voluntary quota is a formal agreement between nations or between a nation and an industry. This
agreement usually specifies the limit of supply by product, country, and volume.

Orderly Marketing agreement (OMA): a negotiation between two governments to specify export
management rules, the monitoring of trade volumes, and consultation rights.

 Financial Control
Financial regulations restrict international trade. These restrictive monetary policies are designed
to control capital flow so that currencies can be defended or imports controlled. There four forms
of financial restrictions.

a. Exchange control: An exchange control is a technique that limits the amount of the currency
that can be taken abroad. The reasons exchange controls are usually applied is that the local
currency is overvalued, thus causing imports to be paid for in smaller amounts of currency.
Purchasers then try to use the relatively cheap foreign exchange to obtain items either unavailable
or more expensive in the local currency. It limits the length of time and amount of money an
exporter can hold for the goods sold. For example, French exporters must exchange the foreign
currencies for francs within one month. By regulating all types of capital outflows in foreign
currencies, the government either makes it difficult to get imported products or makes such items
available only at higher prices.

48 | P a g e
b. Multiple exchange rates: Multiple exchange rates are twofold: To encourage exports and
imports of certain goods and to discourage exports and imports of others. This means that there
is no single rate for all products or industries. But with the application of multiple exchange rates,
some products and industries will benefit and some will not. Spain once used low exchange rates
for goods designated for export and high rates for those it desired to retain at home. Multiple
exchange rates may also apply to imports. The high rates may be used for imports of particular
goods with the government’s approval, whereas low rates may be used for other imports.
c. Prior import deposits and credit restrictions: Both of these barriers operate by
imposing certain financial restrictions on importers.
 Prior import deposits: A government can require prior import deposit –forced deposits
that make imports difficult by tying up an importers capital. In effect, the importer is paying
interest for money borrowed without being able to use the money or get interest earnings on
money from the governments. Importers in Brazil and Italy must deposit a large sum of
money with their central banks if they intend to buy foreign goods.
 Credit restrictions: These restrictions are applied to importers; i.e. exporters may be able
to get loans from the government, usually at favorable rates, but importers will not be able to
receive any credit or financing from the government. Importers must look for loans in the
private sector-very likely at significantly higher rates, if such loans are available at all.

a. Profit remittance restrictions: ASIAN Countries share a common philosophy in allowing

unrestricted repatriation of profits earned by foreign companies. Singapore, in particular,
allows unrestricted movement of capital. But, many countries regulate the remittance of profits
earned in local operations and sent to a parent organization located abroad. Brazil uses
progressive rates in taxing all profits remitted to a parent company abroad, with such rates
going up to 60%. Other countries practice a form of profit remittance restriction by simply
having long delays in permission for profit expatriation.

https://hahuzone.com/international-marketing-environment

49 | P a g e