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| Risks in International Marketing |
Managers must
anticipate the risks and obstacles in doing business in foreign markets.
Several complex problems confront companies that 'go global'.
High Foreign Country Debt
High debt, inflation, and unemployment in several countries have resulted in volatile governments and currencies, which limit trade and expose firms to many risks. Debt-laden and/or currency-starved countries are often not able to pay despite their willingness to purchase.
The inability of poorer countries, for example in Eastern Europe,
to pay by normal (cash) methods becomes a serious obstacle for supplying
companies.
Exchange Rate Volatility
The level of a country's exchange rate affects the company's competitiveness in the foreign market. A weak pound will favor exports of British goods.
A strong exchange rate intensifies the level of competition the firm faces at home. For European companies whose countries are members of the Exchange Rate Mechanism (ERM), much of Che's uncertainty is removed from fluctuating exchange rates.
On the one hand, this is favorable for companies doing a great portion of their international business in the EU.
On
the other, however, the ERM does impose constraints on company decisions, such
as productivity levels and government policy (e.g. in its flexibility to reduce
interest rates).
Foreign Government Entry Requirements
Companies often face constraints imposed by the foreign or 'host' country government.
Some of these market entry conditions relate to a variety of working practices including the degree of control (ownership) allowed; the hiring of local nationals; local content rules; the percentage of output exported; and the number of profits that can be taken from the country. India, China, Mexico, Brazil, and many African countries maintain formal, and often strict, entry conditions, while more advanced countries, such as Japan and the United States, impose strict 'quality' criteria.
Costs of Marketing Mix Adaptation
Although the international firm gains from
economies of scale in production, these must be weighed against the higher
costs of product modification, distribution, and communication expenditures in
overseas markets. For example, the complex, multilayered distribution system
traditionally used in Japan, together with high Japanese product quality
expectations and expensive media costs, is a considerable barrier to market
entry for many foreign firms.
Other Problems
War, terrorism, and corruption are other dangers that confront international businesses. The number of localized conflicts in Eastern Europe is predicted to increase as a result of die resurgence in nationalism and ethnic rivalries in the post-Cold War New World Order1.
Previous hostage-taking episodes in the Middle East and the widely publicized murders of Western businessmen in Turkey, Shanghai (China), and Russia highlight a problem that international companies have long been aware of.
The problem of widespread corruption in some countries, where officials often award contracts to the highest briber, not the lowest bidder, also presents a dilemma to many Western businesspeople, particularly where anti-corruption principles are well laid down in their firm's own business charter.
The firm must therefore establish clear guidelines for their staff who have to do business in countries where corruption is an increasing problem.
These guidelines should help them decide whether or not to bid for business, in the first instance, and, if so, where and when to draw the line.
The difficulties associated with doing business in foreign markets, however, should not deter firms from engaging in international marketing.
Rather, these risks and problems must be identified by managers and planned for. Like all marketing activities, the chance of success is far higher when obstacles are anticipated rather than reacted to.
The rest of this chapter is devoted to examining the important international marketing decisions that firms make.
The eight
dimensions shown are useful for identifying the keys to foreign market success.
Each dimension will be discussed in turn.
Analysis of International Market
Opportunity
Deciding Whether or Not to Go Abroad
Doing international business successfully requires firms to take a market-led approach.
A critical evaluation of why firms enter foreign markets shows that, in many cases, the practice of international business falls short of the market-led approach essential for long-term success.
Firms must consider the factors that draw them into the
international arena.
A surprisingly large proportion of sales to foreign markets are made in response to change orders coming either from customers who are international players or from other sources such as foreign buyers attending a domestic exhibition.
Such 'passive exporting' is not international marketing, although it contributes to international trade. It does not associate with the central principle of creating customer value and market targeting, there is little assessment of critical factors for competitive success, and it is unlikely to build a long-term market position, Limited domestic growth and/or intense domestic competition is a key reason why firms enter foreign markets and was a prime motivator behind the Japanese companies' overseas expansion program during the 1970s and 1980s.
In practice, many firms quickly suspend foreign market activity when the domestic economy improves or when they fail to make money in overseas operations.
Finns driven to exporting because of domestic recession often fail to anticipate the wider external constraints to doing business in a foreign market and tend to take a short-term orientation to international marketing.
3 Furthermore, companies that are struggling to survive at home are highly unlikely to successfully take on and beat sophisticated competitors in foreign markets.
The domestic market must be secured first before going abroad and it should be maintained thereafter. Japan's top two car manufacturers, Toyota and Nissan, are arch rivals at home.
They took this rivalry overseas and in the process have raised the level of competitive activity to new heights in North America and Europe while striving to remain strong performers in their home base.
Geographic market diversification to reduce country-specific risk - that is, the risk of operating in only one country, due to different political-economic cycles - is a popular reason behind firms' international expansion drive.
Firms must understand that market needs may be strikingly different, even for apparently similar products, and that different management skills and approaches are needed for different country markets.
So, managers must weigh the costs and
barriers to global diversification against the benefits of risk reduction.
Firms spread production costs over more units if the output is expanded for overseas markets.
While economies of scale give firms a strong incentive to expand into foreign markets, the firm must also take on board additional administration, selling, distribution, and marketing co. sts. A 'cost-led' approach or a 'selling orientation' in international marketing is unlikely to lead to long-term success.
Without H marketing-led orientation, where customers' needs are identified and satisfied, and the firm's marketing mix is adapted for the foreign market, the international business activity of the firm is unlikely to flourish.
In summary, firms enter overseas markets for profits and/or survival. However, firms must not confuse exporting with international marketing.
The latter is about taking a long-term perspective of foreign market potential and relentlessly adopting a market-led approach to identifying, anticipating, and satisfying the needs of customers in target international markets.
Before going abroad, the firm must weigh the risks and question its ability to operate globally. Can the company learn to understand the preferences and buying behavior of customers in other country markets?
Can it offer competitively attractive products?
Will it be able to adapt to other countries' business cultures and deal effectively with foreign nationals?
Do the company's managers have the requisite international experience?
Has management considered the impact of foreign regulations and political environments?
International marketing is really about exploiting market opportunities based on a sound environment and specific market analyses.
Understanding the Global Environment Before deciding whether or not to sell abroad, a company must thoroughly understand the international marketing environment.
That environment has changed a great deal in the last two decades, creating both new opportunities and new problems.
The world economy has globalized. First, world trade and investment have grown rapidly, with many attractive markets opening up in Western and Eastern Europe, Russia, China, the Pacific Rim, and elsewhere.
Official sources suggest that world trade in goods grew by 8 percent in volume terms and FDI rose some 40 percent over 1996 alone. In fact, during the 1990s, international trade has grown faster than the world's output.
4 There has been a growth of global brands in motor vehicles, food, clothing, electronics, and many other categories.
The number of global companies has grown dramatically. While the United States' dominant position in world trade has declined, other countries, such as Japan and Germany, have increased their economic power in world markets.
The international financial system has become more complex and fragile.
In some country markets, foreign companies face increasing trade barriers, erected to protect domestic markets against outside competition.
There has also been increasing concern among members outside the European Union that 'Fortress Europe' presents greater barriers to penetrating the EU markets.
Japanese car plants, for example, have been
attracted to the United Kingdom by the thought that they can bypass the EU's
restrictions on imports of Japanese cars.
• The International Trade System
The company looking abroad must develop an understanding of the international trade system.
When selling to another country, the firm faces various trade restrictions.
The most common is the tariff, which is a tax levied by a foreign government against certain imported products.
The tariff may be designed either to raise revenue or to protect domestic firms: for example, those producing motor vehicles in Malaysia and whisky and rice in Japan, The exporter also may face a quota, which sets limits on the number of goods the importing country will accept in certain product categories.
The purpose of the quota is to conserve foreign exchange and to protect local industry and employment.
An embargo is the strongest form of quota, which totally bans some kinds of imports.
Firms may face exchange controls that limit the amount of foreign exchange and the exchange rate against other currencies.
The company may also face nontariff trade barriers, such as biases against company bids or restrictive product standards that favor or go against product features.
5 At the same time, certain forces help trade
between nations. Examples are the General Agreement on Tariffs and Trade
(replaced by the World Trade Organization in 1993) and various regional free
trade agreements
The General Agreement, on Tariffs and Trade and World Trade Organization
The General Agreement on Tariffs and Trade (GATT) is an international treaty designed to promote world trade by reducing tariffs and other international trade barriers.
There have been eight rounds of GATT talks since its inception in 1948, in which member nations reassess trade barriers and set new rules for international trade. The first seven rounds of negotiations reduced average worldwide tariffs on manufactured goods from 45 percent to around 4 percent in industrial countries. The most recent GATT round, the Uruguay round, ended in 1993. Although the benefits of the Uruguay round will not be felt for many years, the new accord should promote robust long-term global trade growth.
It reduces the world's remaining manufactured goods tariffs by 30 percent, which could boost global merchandise trade by up to 10 percent, or $270 billion in current US dollars, by the year 2002.
The Uruguay round did much more than cut tariffs on goods. It heralded a big institutional change, creating the World Trade Organization (WTO) as a successor to GATT. WTO now boasts 132 members.
It also introduced three big changes to world trade rules. First, it began to open up the most heavily protected industries: agriculture and textiles.
Second, it vastly extended the scope of international trade rules to cover services as well as goods.
New issues, such as spurious technical barriers and health regulations to keep out imports and the protection of foreigners 'intellectual property, such as patents and copyrights, were addressed for the first time.
The third big change brought by the Uruguay Round was the creation of a new system for settling disputes. In the past, countries could (and sometimes did) break (5ATT rules with impunity. Under the new system, decisions can be blocked only by a consensus of WTO members. Once found guilty of breaking the rules, and sifter appeal, countries are supposed to mend their ways.
Under the WTO international trade issues continue to be addressed. As the new WTO builds up its credibility, more and more countries, including China, want to join
Regional Free-Trade Zones
In recent years, we have seen the growth of regional free-trade zones or economic communities - groups of nations organized to secure common goals in the regulation of international trade.
One such community is the European Union, which aims to create a single European market by reducing physical, financial, and technical barriers to trade among member nations.
7 Other free-trade communities exist. In fact, almost every member of the WTO is also a member of one or more such communities. And, of the one
Economic Environment
The international marketer must study each country's economy.
Two economic factors reflect the country's attractiveness as a market: the country's industrial structure and its income distribution.
The country's industrial structure shapes its product and service needs, income
levels, and employment levels. Four types of industrial structure should be
considered:
1. Subsistence economies. In a subsistence
economy, the vast majority of people engage in simple agriculture. They consume
most of their output and barter the rest for simple goods and services. They
offer few market opportunities.
2. Raw-material-exporting economies. These
economies are rich in one or more natural resources, but poor in other ways.
Much of their revenue comes from exporting these resources. Examples are Chile
(tin and copper), Zaire (copper, cobalt, and coffee), and Saudi Arabia (oil).
These countries are good markets for large equipment, tools and supplies, and
trucks. If there are many foreign residents and a wealthy upper class, they are
also a market for luxury goods.
3. Industrializing economies. In an
industrializing economy, manufacturing accounts for 10—20 percent of the
country's economy. Examples include China, the Philippines, India, and Brazil.
As manufacturing increases, the country needs more imports of raw textile materials,
steel, and heavy machinery, and fewer imports of finished textiles, paper
products, and motor vehicles. Industrialization typically creates a new rich
class and a small but growing middle class, both demanding new types of
imported goods. In China, for example, people with rising disposable income
want to spend on items such as fashion, video recorders, CD players, and
instant coffee.
4 . Industrial economies are large
exporters of manufactured goods and investment funds. They trade goods among
themselves and also export them to other types of the economy for raw materials
and semi-finished goods. The varied manufacturing activities of these
industrial nations and their large middle class make them rich markets for all
sorts of goods. Asia's newly industrialized economies, such as Taiwan,
Singapore, South Korea, and Malaysia, fall into this category. The second
economic factor is the country's income distribution. The international
marketer might find countries with one of five different income distribution
patterns: (1) very low family incomes; (2) mostly low family incomes; (3) very
low/very high family incomes; (4) low/medium/high family incomes; and (5)
mostly medium family incomes. However, even people in low-income countries may
find ways to buy products that are important to them, or sheer population
numbers can counter low average incomes. Also, in many cases, poorer countries
may have small but wealthy segments of upper-income consumers: In the US the
first satellite dishes sprang up in the poorest parts of Appalachia .., The
poorest slums of Calcutta are home to 70,000 VCRs. In Mexico, homes with color
televisions outnumber those with running water. Remember also that low
average-income figures may conceal a lively luxury market. In Warsaw (average
income: 02,500) well-dressed shoppers flock to elegant boutiques stocked with
Christian Dior perfume and Valentino shoes ... In China, where per capita
income is less than S600, the Swiss company Rado is selling thousands of its
81,000 watches." Thus, international marketers face many challenges in
understanding how the economic environment will affect decisions about which
global markets to enter and how.
Political-Legal Environment
Nations differ greatly in their political-legal environments. At least four political-legal factors should be considered in deciding whether to do business in a given country: attitudes toward international buying, political stability, monetary regulations, and government bureaucracy.
We will consider each of these in turn.
ATTITUDES TOWARDS INTERNATIONAL BUYING.
Some nations are quite receptive to foreign firms, and others are quite hostile. Western firms have found newly industrialized countries in the Par East attractive overseas investment locations. In contrast, others like India are bothersome with their import quotas, currency restrictions, and limits on the percentage of the management team that can be non-national.
Switzerland remains a difficult market for many
imports as protectionism, mainly in the form of technical barriers, is rampant,
and the canonical governments remain reluctant to buy anything outside their
borders.4 In Poland, Slovakia, and the Czech Republic, after an initial
infatuation with all things 'Western', a backlash has started as national pride
reasserts itself and consumers begin to resent the commercial advance from the
West.
POLITICAL STABILITY.
Governments change hands, sometimes
violently. Even without a change, a government may decide to respond to new
popular feelings. The foreign company's property may be taken, its currency
holdings may be blocked, or import quotas or new duties may be set. International
marketers may find it profitable to do business in an unstable country, but the
unsteady situation will affect how they handle business and financial matters.
MONETARY REGULATIONS
Sellers want to take their profits in a currency of value to them. Ideally, the buyer can pay in the seller's currency or in other world currencies. Short of this, sellers might accept a blocked currency - one whose removal from the country is restricted by the buyer's government - if they can buy other goods in that country that they need themselves or can sell elsewhere for a needed currency. Besides currency limits, a changing exchange rate, as mentioned earlier, creates high risks for the seller. Most international trade involves cash transactions. Many Third World and former Eastern bloc nations do not have access to hard currency or credit terms to pay for their purchases from other countries. So Western companies, rather than lose the opportunity of a good deal, will accept payment in kind, which has led to a growing practice called countertrade. Countertrade is nothing new and was the way of doing business before money was invented. Today it accounts for about 25 percent of all world trade. Countertrade takes several forms. Barter involves the direct exchange of goods or services. For example, British coal mining equipment has been 'sold' for Indonesian plywood; Volkswagen cars were swapped for Bulgarian dried apricots; and Boeing 747s, fitted with Rolls-Royce engines, were exchanged for Saudi oil. Another form is compensation (or buyback), whereby the seller sells a plant, equipment, or technology to another country and agrees to take payment for the resulting products. Thus, Goodyear provided China with materials and training for a printing plant in exchange for finished labels.
Another form is a counter
purchase. Here the seller receives full payment in cash but agrees to spend
some portion of the money in the other country within a stated period. For
example, Pepsi sells its syrup to Russia for roubles and agrees to buy Russian
vodka for reselling in the United States. Countertrade deals can be very
complex. For example, Daimler-Benz recently agreed to sell 30 trucks to Romania
in exchange for 150 Romanian jeeps, which were then sold to Ecuador for bananas,
which were in turn sold to a German supermarket chain for German currency.
Through this roundabout process, Daimler Benz finally obtained payment in German
money.11 For some firms the bartering system has worked. However, companies
must be aware of the complexities and/or the limits: Rank Xerox, trying to sell
high technology to Russia, not surprisingly drew the line at accepting payment
in racing camels and goat horns!
GOVERNMENT BUREAUCRACY.
A fourth factor is the extent to which the
host government runs an efficient system for helping foreign companies:
efficient customs handling, good market information, and other factors that aid
in doing business. A common shock to Western businesspeople is how quickly
barriers to trade disappear if a suitable payment (bribe) is made to some
official
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