7.1: Introduction to Global Marketing

7.1.1: Global Marketing in the U.S.

International market entry allows companies to expand their customer base and grow their profitability with either custom or standard products.

Learning Objective

Examine different global marketing methods and entities

Key Points

The basic principles of domestic marketing apply to international marketing, but environmental factors in a foreign country can affect international efforts.
International approaches to marketing, such as cost-based product development by the Japanese, put U.S. competitors at a disadvantage. It is important to address the various approaches and find new operating methodologies in order to compete successfully on a global scale.
For small and medium-sized firms in particular, exporting remains the most promising alternative to a full-blooded international marketing effort, since it appears to offer a degree of control over risk, cost, and resource commitment.
The various methods of entering the global market are through exporting, licensing, joint ventures, direct investment, U.S. Commercial Centers, trade intermediaries and alliances.

Key Term

marketing mix: The marketing mix is often crucial when determining a product or brand’s unique selling point (the unique quality that differentiates a product from its competitors), and is often synonymous with the four Ps: price, product, promotion, and place.

Example

Example: The primary objective of the company is to achieve a synergy in the overall operation, so that by taking advantage of different exchange rates, tax rates, labor rates, skill levels, and market opportunities, the organization as a whole will be greater than the sum of its parts. Thus, Toyota Motors started out as a domestic marketer, eventually exported its cars to a few regional markets, grew to become a multinational marketer, and today is a true global marketer, building manufacturing plants in the foreign country as well as hiring local labor, using local ad agencies, and complying to that country’s cultural mores. As it moved from one level to the next, it also revised attitudes toward marketing and the underlying philosophy of business. Ultimately, the successful marketer is the one who is best able to manipulate the controllable tools of the marketing mix within the uncontrollable environment. The principal reason for failure in international marketing results from a company not conducting the necessary research, and as a consequence, misunderstanding the differences and nuances of the marketing environment within the country that has been targeted. Example of Alliances Heineken, the premium Dutch beer, is consumed by more people in more countries than any other beer. It is also the number-one imported beer in America. Miller and Budweiser, the two largest American beer producers, have entered into global competition with Heineken, partly because the American beer market has been flat. They are doing so by forming alliances with global breweries such as Molson, Corona, and Dos Equis. Heineken has responded to the challenge, heavily promoting products such as Amstel Light and Murphy’s Irish Stout. Heineken has also begun developing an alliance with Asia Pacific Breweries, the maker of Tiger Beer. Example of Franchising: Holiday Inn, Hertz Car Rental, and McDonald’s have all expanded into foreign markets through franchising. Example of Joint Venture: A domestic firm may wish to engage in a joint venture for a variety of reasons; for example, General Motors and Toyota have agreed to make a subcompact car to be sold through GM dealers using the idle GM plant in California. Toyota’s motivation was to avoid US import quotas and taxes on cars without any US-made parts.

U.S. firms choose to engage in international marketing for many reasons, the most attractive of which are market expansion and new profit opportunities. In general, the basic principles of domestic marketing can be applied to international marketing, but when attempting the latter, environmental factors in foreign countries must be taken into account. These include the (a) economic environment, (b) competitive environment, (c) cultural environment, (d) political/legal environment, (e) technological environment, and (f) ethical environment in foreign countries

There are five basic ways a firm can enter a foreign market, the selection of which depends largely on how much control a firm wishes to maintain over its marketing. When a firm chooses to market internationally, it must decide whether to adjust its domestic marketing program. Some firms customize their market programs, adjusting their marketing mix for each target market. Others use a standard marketing mix everywhere.

The Global Competitive Environment

U.S. companies must compete internationally with foreign marketers, who might have superior business strategies. Japanese companies, for example, have a method for designing products that is less wasteful than American strategies. Japanese companies typically begin a design process by determining what a market will be willing to pay for a product, and then advise their design teams to make a product based on this target cost. American companies, on the other hand, typically develop a product first, before determining whether a market can afford its cost.

The Types of International Exposure

Firms typically approach international marketing cautiously. For smaller firms in particular, exporting is often chosen over other strategies, because it offers a degree of control over risk, cost, and resource commitment. Smaller firms often only export in response to an unsolicited overseas order, which is perceived as low-risk.

Decision Sequence in International Marketing

The challenge of international marketing is to ensure that any international strategy has thorough research and an accurate evaluation of what is required to achieve a competitive advantage.

A diagram that shows the decision sequence in international marketing based on the corporate, business, and functional levels.

Exporting

Exporting is low-risk and is attractive for several reasons. First, products in the maturity stage of a domestic life-cycle might find new growth opportunities overseas. Second, some firms find it less risky and more profitable to export current products, instead of developing new products. Third, firms that face seasonal domestic demand might choose to market abroad in relation to these demands. Finally, some firms might export because there is less competition overseas.

Licensing/Franchising

Under a licensing agreement, a firm (licensor) provides a product to a foreign firm (licensee) by granting that firm the right to use the licensor’s manufacturing process, brand name, patents, or sales knowledge, in return for payment. The licensee obtains a competitive advantage in this arrangement, while the licensor obtains inexpensive access to a new market. Scarce capital, import restrictions, or government restrictions often make this the only way a firm can market internationally. This method does contain some risks. It is typically the least profitable method for entering a foreign market, and it is a long-term commitment. Furthermore, if a licensee firm fails to successfully reproduce a particular product, it could tarnish that product’s original brand image.

Joint Ventures

A joint venture is a partnership between a domestic and foreign firm. Both partners invest money, share ownership, and share control of the venture. Joint ventures require a greater commitment from firms than other methods, because they are riskier and less flexible.

Direct Investment

Multinational organizations may choose to engage in full-scale production and marketing abroad by directly investing in wholly-owned subsidiaries. As opposed to the previously mentioned methods of entry, this type of entry results in a company directly owning manufacturing or marketing subsidiaries overseas. This allows firms to compete more aggressively abroad, because they are literally “in” the marketplace. However, because the subsidiary is responsible for all the marketing activities in a foreign country, this method requires a much larger investment. This strategy is also risky, because it requires a complete understanding of business conditions and customs in a foreign country.

U.S. Commercial Centers

These centers provides resources to promote the export of U.S. goods and services abroad. The commercial center does this by familiarizing U.S. firms with industries, markets, and customs in other countries. U.S. commercial centers provide the following services: business facilities; translation and clerical services; a commercial library with legal information; and assistance with contracts and export/import arrangements. They also facilitate contacts between buyers, seller, bankers, distributors, and governmental officials.

Trade Intermediaries

If a small company lacks the resources or expertise to enter a foreign market, they can hire trade intermediaries, who do possess relationships in other countries. These entrepreneurial middlemen typically purchase U.S. produced goods at 15 per cent below a manufacturer’s best discount, and then resell these products in overseas markets.

Alliances

In alliances, two or more separate entities jointly promote and sell a single concept, product, or service that is beneficial to all stakeholders. The stakeholders in such a case think a combined marketing approach will produce more significant results.

7.1.2: Trade and Globalization

Countries engage in international trade to focus on producing goods most efficiently and to achieve economies of scale in production.

Learning Objective

Review the relationship between trade and globalization from a marketing perspective

Key Points

Factors influencing international trade include trade sanctions, trade barriers, and the free trade movement.
The World Trade Organization (WTO) deals with trade regulations, provides a framework for negotiating trade agreements, and fosters a dispute resolution process aimed at enforcing adherence to WTO agreements.
The Doha Development Round of the World Trade Organization’s negotiations aims to lower barriers to trade around the world, with a focus on making trade fairer for developing countries.
Future prospects for trade liberalization versus trade protection will depend on the length and severity of the economic crisis. If the crisis abates soon, liberalization may return, but if it continues for years and if unemployment rates remain high, then demands for trade protection may increase.

Key Terms

protectionism: The term is mostly used in the context of economics, where it refers to policies or doctrines that protect businesses and workers within a country by restricting or regulating trade with foreign nations.
globalization: The process of international integration arising from the interchange of world views, products, ideas, and other aspects of culture.

Countries engage in international trade for two basic reasons, each of which contributes to the country’s gain from trade. First, countries trade because they are different from one another. Nations can benefit from their differences by reaching agreements in which each party contributes its strengths and focuses on producing goods efficiently. Second, countries trade to achieve economies of scale in production. If each country produces only a limited range of goods, it can produce each of these goods at a larger scale and hence more efficiently than if it tried to produce everything.

International Trade

While international trade has been present throughout much of history, its economic, social, and political importance have increased in recent centuries, mainly because of industrialization, advanced transportation, globalization, multinational corporations, and outsourcing. In fact, it is probably the increasing prevalence of international trade that is usually meant by the term “globalization. ” Empirical evidence for the success of trade can be seen in the contrast between countries such as South Korea, which adopted a policy of export-oriented industrialization, and India, which historically had a more closed policy (although it has begun to open its economy, as of 2005). South Korea has done much better by economic criteria than India over the past fifty years, though its success also has to do with effective state institutions.

The World Trade Organization (WTO) was formed to supervise and liberalize international trade on January 1, 1995 under the Marrakech Agreement. The organization deals with regulation of trade between participating countries. It provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements.

World Trade Organization Participation

The WTO was founded in 1995 with 123 member countries. By 2009, it included 153 countries.

A global map that shows the World Trade Organization’s participation.

Trade Sanctions

Trade sanctions against a specific country are sometimes imposed in order to punish that country for some action. An embargo, a severe form of externally imposed isolation, is a blockade of all trade by one country on another. For example, the United States has had an embargo against Cuba for over 40 years.

Trade Barriers

Although there are usually few trade restrictions within countries, international trade is usually regulated by governmental quotas and restrictions, and often taxed by tariffs. Tariffs are usually on imports, but sometimes countries may impose export tariffs or subsidies. All of these are called trade barriers, which are established by a government who implements a protectionist policy.. If a government removes all trade barriers, a condition of free trade exists.

Fair Trade

The fair trade movement promotes the use of labor, environmental, and social standards for the production of commodities, particularly those exported from the Third and Second Worlds to the First World. Importing firms voluntarily adhere to fair trade standards or governments may enforce them through a combination of employment and commercial law. Proposed and practiced fair trade policies vary widely, ranging from the common prohibition of goods made using slave labor, to minimum price support schemes such as those for coffee in the 1980s. Non-governmental organizations (NGOs) also play a role in promoting fair trade standards by serving as independent monitors of compliance with fair trade labeling requirements.

Current Trends

The WTO is attempting to complete negotiations on the Doha Development Round, which was launched in 2001 with an explicit focus on addressing the needs of developing countries. As of June 2012, the future of the Doha Round remains uncertain: The conflict between free trade on industrial goods and services, but retention of protectionism on farm subsidies to the domestic agricultural sector (requested by developed countries) and the substantiation of the international liberalization of fair trade on agricultural products (requested by developing countries) remain the major obstacles. These points of contention have hindered any progress toward launching new WTO negotiations beyond the Doha Development Round.

China

Beginning around 1978, the People’s Republic of China (PRC) began an experiment in economic reform. In contrast to the previous Soviet-style, centrally planned economy, the new measures progressively relaxed restrictions on farming, agricultural distribution and, several years later, urban enterprises and labor.

The more market-oriented approach reduced inefficiencies and stimulated private investment, particularly by farmers, that led to increased productivity and output. The reforms proved successful in terms of increased output, variety, quality, price, and demand. In real terms, the economy doubled in size between 1978 and 1986. By 2008, the economy was 16.7 times the size it was in 1978, and 12.1 times its previous per capita levels.

International trade progressed even more rapidly, doubling on average every 4.5 years. Total two-way trade in January 1998 exceeded that for all of 1978. In the first quarter of 2009, trade exceeded the full-year 1998 level. In 2008, China’s two-way trade totaled US $2.56 trillion. In 1991, the PRC joined the Asia-Pacific Economic Cooperation group, a trade-promotion forum. In 2001, it also joined the World Trade Organization.

7.1.3: Are Global Corporations Beneficial?

International expansion can drive significant shareholder value, but the net impact of globalization is hotly contested.

Learning Objective

Discuss the benefits and challenges of global corporations from a marketing perspective

Key Points

Despite the general opportunities a global market provides, there are significant challenges MNCs face in penetrating these markets. These challenges can loosely be defined through four factors: Public Relations, Ethics, Org. Structure, & Leadership.
Those in favor of globalization theorize that a wider array of products, services, technologies, medicines, and knowledge will become available and that these developments will have the potential to reach significantly larger customer bases.
Opponents argue that the expansion of global trade creates unfair exchanges between larger and smaller economies, arguing that developed economies capture significantly more value because of financial leverage.

Key Term

globalization: The process of international integration arising from the interchange of world views, products, ideas, and other aspects of culture.

Global Corporations

A global company is generally referred to as a multinational corporation (MNC). An MNC is a company that operates in two or more countries, leveraging the global environment to approach varying markets in attaining revenue generation. These international operations are pursued as a result of the strategic potential provided by technological developments, making new markets a more convenient and profitable pursuit both in sourcing production and pursuing growth.

McDonald’s Locations

Over the last 70 years, McDonald’s has become a global corporation.

A map that shows McDonald’s presence globally.

International operations are therefore a direct result of either achieving higher levels of revenue or a lower cost structure within the operations or value-chain. MNC operations often attain economies of scale, through mass producing in external markets at substantially cheaper costs, or economies of scope, through horizontal expansion into new geographic markets. If successful, these both result in positive effects on the income statement (either larger revenues or stronger margins), but contain the innate risk in developing these new opportunities.

Opportunities

As gross domestic product (GDP) growth migrates from mature economies, such as the US and EU member states, to developing economies, such as China and India, it becomes highly relevant to capture growth in higher growth markets. is a particularly strong visual representation of the advantages a global corporation stands to capture, where the darker green areas reppresent where the highest GDP growth potential resides. High growth in the external environment is a strong opportunity for most incumbents in the market.

GDP Growth Rate

This map highlights (via dark green) where the strongest growth opportunities currently are as of 2010.

Challenges

However, despite the general opportunities a global market provides, there are significant challenges MNCs face in penetrating these markets. These challenges can loosely be defined through four factors:

Public Relations: Public image and branding are critical components of most businesses. Building this public relations potential in a new geographic region is an enormous challenge, both in effectively localizing the message and in the capital expenditures necessary to create momentum.
Ethics: Arguably the most substantial of the challenges faced by MNCs, ethics have historically played a dramatic role in the success or failure of global players. For example, Nike had its brand image hugely damaged through utilizing ‘sweat shops’ and low wage workers in developing countries. Maintaining the highest ethical standards while operating in developing countries is an important consideration for all MNCs.
Organizational Structure: Another significant hurdle is the ability to efficiently and effectively incorporate new regions within the value chain and corporate structure. International expansion requires enormous capital investments in many cases, along with the development of a specific strategic business unit (SBU) in order to manage these accounts and operations. Finding a way to capture value despite this fixed organizational investment is an important initiative for global corporations.
Leadership: The final factor worth noting is attaining effective leaders with the appropriate knowledge base to approach a given geographic market. There are differences in strategies and approaches in every geographic location worldwide, and attracting talented managers with high intercultural competence is a critical step in developing an efficient global strategy.

Combining these four challenges for global corporations with the inherent opportunities presented by a global economy, companies are encouraged to chase the opportunities while carefully controlling the risks to capture the optimal amount of value. Through effectively maintaining ethics and a strong public image, companies should create strategic business units with strong international leadership in order to capture value in a constantly expanding global market.

Globalization

Opportunities

Those in favor of globalization theorize that a wider array of products, services, technologies, medicines, and knowledge will become available and that these developments will have the potential to reach significantly larger customer bases. This means larger volumes of sales and exchange, larger growth rates in GDP, and more empowerment of individuals and political systems through acquiring additional resources and capital. These benefits of globalization are viewed as utilitarian, providing the best possible benefits for the largest number of people.

Challenges

Along with arguments supporting the benefits of a more globally-connected economy, there are criticisms that question the profits that are captured. Opponents argue that the expansion of global trade creates unfair exchanges between larger and smaller economies, arguing that developed economies capture significantly more value because of financial leverage. Other commonly raised concerns include damage to the environment, decreased food safety, unethical labor practices in sweatshops, increased consumerism, and the weakening of traditional cultural values.

7.1.4: Global Marketing Standardization

To the extent that global consumers desire standardized products, companies can easily lower operating costs and expand their consumer bases.

Learning Objective

Discuss the concept of global marketing standardization

Key Points

Firms ascribing to Global Standardization theory view the world as one entity, not a collection of national markets. These firms compete on a basis of appropriate value, i.e. an optimal combination of price, quality, reliability, and delivery of products that are identical in design and function.
Critics of global standardization say each country should have custom marketing strategies since the average product requires about 4 – 5 adaptations of the 11 marketing elements: label, package, materials, colors, name, product features, advertising themes, media, execution, price, and promotion.
Global marketing doesn’t have to be either full standardization or local control. Rather it can fall anywhere on a spectrum from tight worldwide coordination on programming details to loose agreements on a product ideas.

Key Term

competitive advantage: The strategic advantage one business entity has over its rival entities within its competitive industry. Achieving competitive advantage strengthens and positions a business better within the business environment.

In 1983, Theodore Levitt, the famous Harvard marketing professor wrote an article entitled, “The Globalization of Markets”. Since then, the field of marketing has not been the same. According to Levitt, a new economic reality—the emergence of global consumer markets for single standard products–has been triggered in part by technological developments. Worldwide communications ensure the instant diffusion of new lifestyles and pave the way for a mass transfer of goods and services. Adopting this global strategy provides a competitive advantage in cost and effectiveness. In contrast to multinational companies, standardized (global) corporations view the world and its major regions as a single entity rather than a collection of national markets. These world marketers compete on a basis of appropriate value, i.e. an optimal combination of price, quality, reliability, and delivery of products that are identical in design and function. Ultimately, consumers tend to prefer a good price/quality ratio to a highly customized but less cost-effective item. Levitt distinguished between products and brands. While the global product itself is standardized or sold with only minor modifications, the branding, positioning, and promotion may have to reflect local conditions.

Critics of Levitt’s perspective suggest that his argument for global standardization is inaccurate and that market strategy should be customized to each country. According to Kotler, one study found that 80 per cent of US exports require one or more adaptations. Furthermore, the average product requires at least four to five adaptations out of a set of eleven marketing elements, namely, labeling, packaging, materials, colors, name, product features, advertising themes, media, execution, price, and sales promotion. Kotler suggests that all eleven factors should be evaluated before standardization is considered.

To date, no study has empirically validated either perspective. While critics of Levitt can proffer thousands of anecdotes contradicting the validity of standardization, a more careful read of Levitt’s ideas indicate that he offers standardization as a strategic option, not a fact. Although, global marketing has its pitfalls, it also has some great advantages. Standardized products can lower operating costs. More importantly, effective coordination can exploit a company’s best product and marketing ideas. Too often, executives view global marketing as an either/or proposition-either full standardization or local control. But when a global approach can fall anywhere on a spectrum – from tight worldwide coordination on programming details to loose agreements on product ideas – there is no reason for this rigid view. In applying the global marketing concept and making it work effectively, flexibility is essential. The big issue today is not whether to go global, but how to tailor the global marketing concept to meet the specific needs of each business.

Coca-Cola

Coke has used a mix of standardization and localized marketing. For instance, the classic red and white colors remain the same globally, while the flavor profile is slightly tweaked based on region of distribution.

A display case that shows Coke signs from around the globe.

7.2: The Global Marketing Environment

7.2.1: The Importance of Sociocultural Differences

While cultural differences between the U.S. and foreign nations may seem small, those who ignore them risk failure in marketing programs.

Learning Objective

Formulate an understanding of social and cultural differences from a global marketing perspective

Key Points

Cultural environments consist of the influence of religious, family, educational, and social systems within the marketing system. Various features of a culture can create an illusion of similarity.
The world has more than 3,000 languages and this can cause marketers many problems in designing advertising campaigns and product labels. Colors have different meanings in different cultures and all cultures have their own unique set of customs and taboos.
An individual’s personal values arise from moral or religious beliefs learned through experiences. Aesthetics refers to the concepts of beauty and good taste, which can also vary across cultures.
The value of time and a country’s business norms are important to consider when marketing across borders. Religious beliefs can also affect shopping patterns and products purchased, in addition to the consumers’ values.

Key Term

aesthetics: The concepts of beauty and good taste; the study of sensory or sensori-emotional values, sometimes called judgments of sentiment and taste. More broadly, scholars in the field define aesthetics as “critical reflection on art, culture, and nature. “

Example

Illustrations of Cultural Differences Around the World In Ireland, the evening meal is called tea, not dinner. In Asia, when a person bows to you, bow your head forward equal or lower than theirs. A nod means “no” in Bulgaria and shaking the head side-to-side means “yes.” The number 7 is considered bad luck in Kenya, good luck in the Czech Republic, and has magical connotations in Benin. Pepsodent toothpaste was unsuccessful in Southeast Asia because it promised white teeth to a culture where black or yellow teeth are symbols of prestige. In Quebec, a canned fish manufacturer tried to promote a product by showing a woman dressed in shorts. golfing with her husband, and planning to serve canned fish for dinner. These activities violated cultural norms. Maxwell House advertised itself as the “great American coffee” in Germany. It found out that Germans have little respect for American coffee. General Motors’ “Body by Fisher” slogan became “Corpse by Fisher” when translated into Japanese. In German, “Let Hertz Put You in the Driver’s Seat” means “Let Hertz Make You a Chauffeur.” In Cantonese, the Philip Morris name sounded the same as a phrase meaning no luck. In Hong Kong, Korea, and Taiwan, triangular shapes have a negative connotation. In Thailand, it is considered unacceptable to touch a person’s head, or pass something over it. Red is a positive color in Denmark, but represents witchcraft and death in many African countries. Americans usually smile as they shake hands. Some Germans consider smiles overly familiar for new business acquaintances. Americans should not say “Wie gehts?” (“How goes it? “); it is also too informal for first meetings. If you offer a compliment to a Chinese-speaking person, he or she will decline it, because disagreeing is the polite way to accept praise. Do not say “Merci” (“Thanks”) to a French person’s compliment. You might be misinterpreted as making fun. Italians wave goodbye as Americans beckon someone–with palm up and fingers moving back and forth; but in Asia, waving with the palm down is not interpreted as goodbye, but rather, “come here.” Offering gifts when you visit a home is expected in Japan, but in the Soviet Union it may be considered a bribe. In Brazil and Portugal, business people like to entertain foreigners in their homes. When it is time to go, the host may feel constrained to insist that the foreigner stay. Foreigners should politely take their leave.

Cultural environments consist of the influence of religious, family, educational, and social systems within the marketing system. Marketers who intend to market products overseas must be sensitive to foreign cultures. While the differences between our cultural background in the United States and those of foreign nations may seem small, marketers who ignore these differences risk failure in implementing marketing programs.

This task is not as easy as it sounds, as various features of a culture can create an illusion of similarity. Even a common language does not guarantee similarity of interpretation. For example, in the U.S. we purchase “cans” of various grocery products, but the British purchase “tins.” The following are a few cultural differences that may cause marketers problems in attempting to market their products overseas.

Language

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

Languages in India

India has over 200 different dialects. It is important to consider different languages in a country when creating product campaigns.

A map that shows the geographic distribution of languages in India.

Colors

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

Customs and Taboos

All cultures have their own unique set of customs and taboos. It is important for marketers to learn about these customs and taboos so that they will know what is acceptable and what is not for their marketing programs.

Values

An individual’s personal values arise from his/her moral or religious beliefs and are learned through experiences. For example, in America we place a very high value on material well-being, and are more likely to purchase status symbols than people in India. Similarly, in India, the Hindu religion forbids the consumption of beef, and fast-food restaurants such as McDonald’s and Burger King would encounter tremendous difficulties without product modification. Additionally, Americans spend large amounts of money on soap, deodorant, and mouthwash because of the value placed on personal cleanliness.

Aesthetics

The phrase “Beauty is in the eye of the beholder” is a very appropriate description for the differences in aesthetics that exist between cultures. For example, Americans believe that suntans are attractive, youthful, and healthy; however, the Japanese do not.

Time

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

Business Norms

Business norms also vary from one country to the next and may present challenges to foreigners not used to operating within the particular norms of the host country

Religious Beliefs

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

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

7.2.2: Measuring the Economic Environment

A nation’s economic output represents its capacity to produce goods and services, and can help determine market opportunities.

Learning Objective

Analyze how an economic environment is measured from a global marketing perspective

Key Points

Economic growth is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as a percentage change in the Gross Domestic Product (GDP) or Gross National Product (GNP).
Inflation or deflation can make it difficult to measure economic growth. To express real growth rather than changes in prices for the same goods, statistics on economic growth are often adjusted for inflation or deflation.
A way of classifying the economic growth of countries is to divide them into three groups: (a) industrialized, (b) developing, and (c) less-developed nations.
Usually, the most significant marketing opportunities exist among the industrialized nations, but they also have stable population bases and market saturation for many products.
Developing nations have growing population bases, and although they currently import limited goods and services, there exists a long-run potential for growth in these nations.

Key Terms

developing nation: Countries with more advanced economies than less-developed nations (nations with a low living standard, undeveloped industrial base, and low Human Development Index (HDI)), but which have not yet fully demonstrated the signs of a developed country.
Industrialized: A highly developed economy and advanced technological infrastructure relative to other, less-developed nations. Developed countries have post-industrial economies, meaning the service sector provides more wealth than the industrial sector.
per capita incomes: The average income or income per person that is calculated by taking a measure of all sources of income in the aggregate (such as GDP or Gross National Income) and dividing it by the total population. It does not attempt to reflect the distribution of income or wealth.

Economic growth is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as a percentage change in the Gross Domestic Product (GDP) or Gross National Product (GNP). These two measures, which are calculated slightly differently, total the amounts paid for the goods and services that a country produced. As an example of measuring economic growth, a country that creates 9,000,000 in goods and services in 2010 and then creates 9,090,000 in 2011 has a nominal economic growth rate of 1% for 2011.

GDP per Capita (2008)

The GDP varies for economies across the globe.

In order to compare per capita economic growth among countries, the total sales of the countries to be compared may be quoted in a single currency. This requires converting the value of currencies of various countries into a selected currency, for example U.S. dollars. One way to do this conversion is to rely on exchange rates among the currencies, for example, how many Mexican pesos buy a single U.S. dollar? Another approach is to use the purchasing power parity method. This method is based on how much consumers must pay for the same “basket of goods” in each country.

Inflation or deflation can make it difficult to measure economic growth. If GDP, for example, goes up in a country by 1% in a year, was this due solely to rising prices (inflation) or because more goods and services were produced and saved? To express real growth rather than changes in prices for the same goods, statistics on economic growth are often adjusted for inflation or deflation.

For example, a table may show changes in GDP in the period 1990 to 2000, as expressed in 1990 U.S. dollars. This means that the single currency being used is the U.S. dollar, with the purchasing power it had in the U.S. in 1990. The table might mention whether the figures are “inflation-adjusted” or real. If no adjustments were made for inflation, the table might make no mention of inflation-adjustment or might mention that the prices are nominal.

A way of classifying the economic growth of countries is to divide them into three groups: (a) industrialized, (b) developing, and (c) less-developed nations. The industrialized nations are generally considered to be the United States, Japan, Canada, Russia, Australia and most of Western Europe. The economies of these nations are characterized by private enterprise and a consumer orientation. They have high literacy, modem technology, and higher per capita incomes. Developing nations are those that are making the transition from economies based on agricultural and raw materials production to industrial economies. Many Latin American nations fit into this category, and they exhibit rising levels of education, technology, and per capita incomes. Finally, there are many less-developed nations in today’s world. These nations have low standards of living, low literacy rates, and very limited technology.

Usually, the most significant marketing opportunities exist among the industrialized nations, as they have higher levels of income, one of the necessary ingredients for the formation of markets. However, most industrialized nations also have stable population bases, and market saturation for many products already exists.

The developing nations, on the other hand, have growing population bases, and although they currently import limited goods and services, there exists a long-run potential for growth in these nations. Dependent societies seek products that satisfy basic needs like food, clothing, housing, medical care, and education. Marketers in such nations must be educators, emphasizing information in their market programs. As the degree of economic development increases, so does the sophistication of the marketing effort focused on the countries.

7.2.3: Political and Regulatory Environment

Political stability, trade blocs, tariffs, and expropriation are risks that should be evaluated prior to marketing in foreign countries.

Learning Objective

Show how international political and trade regulations impact global marketing

Key Points

Business activity tends to grow and thrive when a nation is politically stable. When a nation is politically unstable, multinational firms can still conduct business profitably.
US companies make one-third of their revenues from products marketed abroad, in places such as Asia and Latin America. The North American Free Trade Agreement (NAFTA) further boosts export sales by enabling companies to sell goods at lower prices because of reduced tariffs.
The creation of the single European market in 1992 was expected to change marketing worldwide. It meant the birth of a market that was larger than the United States, and the introduction of European Currency (Euros) in place of the individual currencies of member nations.
Most nations encourage free trade by inviting firms to invest and to conduct business there, while encouraging domestic firms to engage in overseas business. However, some governments such as Communist nations openly oppose free trade.
Multinational firms face the risk of expropriation which place them at the mercy of foreign governments, which are sometimes unstable, and which can change the laws they enforce at any point in time to meet their needs.

Key Term

expropriation: The act of expropriating; the surrender of a claim to private property; the act of depriving of private propriety rights.

Political and Regulatory Environment

The nationalistic spirit that encourages self-reliance in many nations has led them to engage in practices that have been very damaging to other countries’ marketing organizations.

For example, foreign governments can intervene in marketing programs in the following ways:

Contracts for the supply and delivery of goods and services
The registration and enforcement of trademarks, brand names, and labeling
Patents
Marketing communications
Pricing
Product safety, acceptability, and environmental issues

Political Stability

Business activity tends to grow and thrive when a nation is politically stable. When a nation is politically unstable, multinational firms can still conduct business profitably. Most firms prefer to engage in the export business rather than invest considerable sums of money in investments in foreign subsidiaries. Inventories will be low and currency will be converted rapidly. The result is that consumers in the foreign nation pay high prices, get less satisfactory products, and have fewer jobs.

Trading Blocs and Agreements

US companies make one-third of their revenues from products marketed abroad, in places such as Asia and Latin America. The North American Free Trade Agreement (NAFTA) further boosts export sales by enabling companies to sell goods at lower prices because of reduced tariffs.

NAFTA Member Countries

Events, such as the signing of the North American Free Trade Agreement (NAFTA), highlight the differences among special interest groups and the competition that takes place between them to capture policymakers’ attention.

Members sign the North American Free Trade Agreement.

Regional trading blocs represent a group of nations that join together and formally agree to reduce trade barriers among themselves. The Association of Southeast Asian Nations (ASEAN) is an example of a regional trading block. This agreement allows for the free exchange of trade, service, labor, and capital across the 10 independent member nations. In addition, ASEAN promotes the regional integration of transportation and energy infrastructure.

One of the potentially interesting results of trade agreements like ASEAN or NAFTA is that many products previously restricted by dumping laws, which are laws designed to keep out foreign products, would be allowed for sale.

Almost all the countries in the Western hemisphere have entered into one or more regional trade agreements. Such agreements are designed to facilitate trade through the establishment of a free trade area, customs union or customs market. Free trade areas and customs unions eliminate trade barriers between member countries while maintaining trade barriers with non-member countries. Customs unions maintain common tariffs and rates for non-member countries. A common market provides for harmonious fiscal and monetary policies while free trade areas and customs unions do not.

The creation of the single European market in 1992 was expected to change the way marketing is done worldwide. It meant the birth of a market that was larger than the United States, and the introduction of European Currency Units (Euros) in place of the individual currencies of member nations. Experience in multilingual marketing would help non-European companies succeed in this gigantic market. With new technologies such as multilingual processing programs, it would be possible to target potential customers anywhere in Europe, in any language, with the same marketing campaign.

Progress toward European unification has been slow, so many doubt that complete unification will ever be achieved. However, on January 1, 1999, 11 of the 15 member nations took a significant step toward unification by adopting the Euro as the common currency. These 11 nations represented 290 million people and a USD 6.5 trillion market. Still, with 14 different languages and distinct national customs, it is unlikely that the European Union (EU) will ever become the “United States of Europe.”

Tariffs

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

The most common form of restriction of trade is the tariff, which is a tax placed on imported goods. Protective tariffs are established in order to protect domestic manufacturers against competitors by raising the prices of imported goods. Not surprisingly, US companies with a strong business tradition in a foreign country may support tariffs to discourage entry by other US competitors.

Expropriation

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

7.2.4: Demographics of New Markets

Evaluating the demographic profile of a country can help assess whether or not there is demand for the product or service being marketed.

Learning Objective

Relate the uses of demographic evaluation to global marketing

Key Points

A demographic profile typically involves age bands, social class bands, and gender delineations. It can also include religious affiliations, income brackets, and a variety of other characteristics used to separate a country’s population into groups similar to a company’s customer.
Researchers want to determine what segments or subgroups exist in the overall population, in order to develop a marketing strategy and marketing plan specific to the population.
Critics of demographic profiling argue that such broad-brush generalizations can only offer a limited insight, and that their practical usefulness is debatable.

Key Term

generational cohort: A group of individuals (within some population definition) who experience the same event within the same time interval. The notion of a group of people bound together by the sharing of the experience of common historical events developed in the early 1920s. Today, the concept has found its way into popular culture through well-known phrases like “baby boomer” and “Generation X”.

New Market Demographics

Marketers typically combine several variables to define a demographic profile. A demographic profile (often shortened to a “demographic”) is a term used in marketing and broadcasting to describe a demographic grouping or a market segment. This typically involves age bands (as teenagers do not wish to purchase denture fixant), social class bands (as the rich may want different products than middle and lower classes, and may be willing to pay more) and gender (partially because different physical attributes require different hygiene and clothing products, and partially because of the male/female mindsets). It can also include religious affiliations, income brackets, and a variety of other characteristics used to separate a country’s population into groups similar to a company’s core customer. A demographic profile also provides enough information about the typical member of this group to create a mental picture of this hypothetical aggregate. For example, a marketer might speak of the single, female, middle-class, age 18 to 24, college-educated demographic.

Country of Birth

Demographics can be measured in a variety of ways. The map shows an estimation of Sweden’s foreign-born residents in 2001.

Researchers typically have two objectives in this regard: first, to determine what segments or subgroups exist in the overall population; and second, to create a clear and complete picture of the characteristics displayed by typical members of each segment. Once these profiles are constructed, they can be used to develop a marketing strategy and marketing plan. The five types of demographics for marketing are age, gender, income level, race, and ethnicity.

After evaluating the demographic information, determining what segment or subgroup exists within the population, recommendations are made to change, increase, decrease or expand on the type of goods or services offered. Marketers data may alter the way or where a product or service is sold in order to reach a market segment that has the most potential as buyers.

A demographic profile can be used to determine when and where advertising should be placed so as to achieve maximum results. In all such cases, it is important that the advertiser get the most results for their money, and so careful research is done to match the demographic profile of the target market to the demographic profile of the advertising medium. For instance, shortly after the cancellation of Star Trek in 1969, NBC’s marketing department complained that it was premature. They explained that their newly instituted demographic audience profiling techniques indicated that the series’ main young urban audience was highly desirable for advertisers. In 1971, CBS acted on their own marketing department’s demographic findings about their television network’s programming and canceled several series that appealed primarily to older and rural audiences. This move was nicknamed “the rural purge. “

A good way to figure out the intended demographic of a television show, TV channel, or magazine is to study the ads that accompany it. For example, in the United States, the television program “The Price is Right” most frequently airs from 11 a.m. to Noon. The commercials on it (besides the use of product placement in the show itself) are often for things like arthritis pain relievers and diapers. This indicates that the target demographics are senior citizens and parents with young children, both of whom would be home at that time of day and see that show. Another example would be MTV, with its many ads for digital audio players, indicating that the channel is targeted to young adults and teenagers and/or fans of music.

Criticisms of Demographic Profiling

Demographic profiling is essentially an exercise in making generalizations about groups of people. As with all such generalizations, many individuals within these groups will not confirm to the profile. Demographic information is aggregate and offers probabilistic data about groups, not about specific individuals. Critics of demographic profiling argue that such broad-brush generalizations can only offer a limited insight, and that their practical usefulness is debatable.

Most demographic information is also culturally based. The generational cohort information above, for example, applies primarily to North America (and to Western Europe, to a lesser extent), and it may be unfruitful to generalize conclusions more widely as different nations face different situations and potential challenges.

7.2.5: Natural Resources, Infrastructure, and Technology of New Markets

The natural resources, infrastructure, and technology of a nation will determine the ease and viability of entering that country’s market.

Learning Objective

Outline the impact natural resources, infrastructure and technology has on new markets within the global marketing environment

Key Points

A country’s natural resources will determine what types of businesses can achieve the highest profitability there due to access to low-cost inputs. For example, a country with abundant arable land and government farming subsidies may support companies wanting to go into organic food production.
A country’s infrastructure will help determine the ease of doing business within that nation. For example, a country with poor road conditions and intense traffic may not be the best place to start a business that requires goods to be transported from city to city by land.
A country’s technological capabilities will help determine what types of operations are possible in that nation. For example, in a country where people are not used to operating computers would not be an ideal place for a customer support call center.

Key Terms

ubiquitous resource: Existing or occurring everywhere
inexhaustible: Unlikely to be depleted in foreseeable future

Natural Resources

Natural resources are materials and components (something that can be used) that can be found within the environment. They occur naturally within environments that exist relatively undisturbed by mankind. A natural resource is often characterized by amounts of biodiversity and geo-diversity existent in various ecosystems. Some of them are essential for our survival while most are used for satisfying our wants. Every man-made product is composed of natural resources at its fundamental level. A natural resource may exist as a separate entity, such as fresh water, or as a living organism, such as fish. It may exist in an alternate form which must be processed to obtain the resource such as metal ores, oil, and most forms of energy. There is much debate worldwide over natural resource allocations, partly due to increasing scarcity but also because the exportation of natural resources is the basis for many economies. Natural resources that can be found everywhere, such as sunlight and air, are known as ubiquitous resources. However, most resources are not ubiquitous and only occur in small sporadic areas; these resources are known as localized resources. There are very few resources that are considered inexhaustible – solar radiation, geothermal energy, and air (though access to clean air may not be). The vast majority of resources are exhaustible, which means they have a finite quantity, and can be depleted if managed improperly.

New Market Implications

A country’s abundant natural resources will help determine what types of businesses can achieve the highest profitability there due to access to low-cost inputs. For example, a country with abundant arable land and government farming subsidies may support companies wanting to go into organic food production. Other environmental factors such as demographics and demand will also weigh in on a company’s potential success in a country.

Infrastructure

Infrastructure are basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function. It can be generally defined as the set of interconnected structural elements that provide a framework supporting an entire structure of development. It is an important term for judging a country or region’s development. The term typically refers to the technical structures that support a society, such as roads, bridges, water supply, sewers, electrical grids, telecommunications, and so forth.Viewed functionally, infrastructure facilitates the production of goods and services and the distribution of finished products to markets, as well as basic social services such as schools and hospitals. For example, roads enable the transport of raw materials to a factory. In military parlance, the term refers to the buildings and permanent installations necessary for the support, redeployment, and operation of military forces.

New Market Implications

A country’s infrastructure will help determine the ease of doing business within that nation. For example, a country with poor road conditions and intense traffic may not be the best place to start a business that requires goods to be transported from city to city by land.

Infrastructure

Poor road infrastructure, like potholes, can create difficulties for businesses that rely on road transportation.

A road with potholes in Poland.

Technology

The level of technological development of a nation affects the attractiveness of doing business there, as well as the type of operations that are possible. Consider some of the following technological problems that firms may encounter in doing business overseas:

Foreign workers must be trained to operate unfamiliar equipment
Poor transportation systems increase production and physical distribution costs
Maintenance standards vary from one nation to the next
Poor communication facilities hinder advertising through the mass media
Lack of data processing facilities makes the tasks of planning, implementing, and controlling marketing strategy more difficult

New Market Implications

A country’s technological capabilities will help determine what types of operations are possible in that nation. For example, in a country where people are not used to operating computers would not be an ideal place for a customer support call center.

7.3: Important International Bodies and Agreements

7.3.1: The North American Free Trade Agreement (NAFTA)

NAFTA is a 1994 agreement to removes taxes on products traded between North American countries (US, Canada and Mexico).

Learning Objective

Discuss the goals of ways that the North American Free Trade Agreement (NAFTA) serves its members

Key Points

NAFTA protects copyright, patents and trademarks between the three countries. It was updated with the North American Agreement on Environmental Cooperation, which helped reduce pollution and set more environmental regulations.
Since NAFTA took away taxes between products traded between the US, Canada and Mexico, Mexico has been buying more products from the US.
Some say NAFTA has been positive for Mexico, which has seen poverty rates fall and real income rise, while others argue that NAFTA has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from the US.

Key Terms

foreign direct investment: Direct investment into production in one country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.
maquiladora: Mexican factories that take in imported raw mateirals and produce goods for export.

NAFTA

The North American Free Trade Agreement (NAFTA) is an agreement between Mexico, the United States and Canada. The agreement was signed by US President George H.W. Bush, Canadian Prime Minister Brian Mulroney, and Mexican President Carlos Salinas on December 17, 1992 in San Antonio, Texas, and took effect on January 1, 1994.

NAFTA

NAFTA is an agreement between the US, Mexico, and Canada, as represented by the 3 flags in its logo.

A flag that’s made up of the three countries in NAFTA – the US, Mexico, and Canada.

The bill removed taxes on products traded between the three countries. It also protects copyright, patents, and trademarks between those countries. It was updated with the North American Agreement on Environmental Cooperation, which helped reduce pollution and set more environmental regulations. It was also updated with the North American Agreement for Labor Cooperation, which helped people fight for better labor conditions.

Effects

Since NAFTA took away taxes for products traded between the US, Canada, and Mexico, Mexico has been buying more products from the US. It saved U.S. companies the cost of selling products to Mexico, and saved Mexican companies the cost of buying items from US companies.

A benefit of the bill is that labels on products exchanged between the three countries come in French, English and Spanish. That way, Mexicans and Americans who speak Spanish can read the Spanish label, Americans and Canadians can read the English label, and Canadians who speak French can read the French label.

NAFTA also encourages more immigration from Mexico to the US. Since small businesses can no longer be protected by tariffs, many small business owners in Mexico cannot compete with the prices of subsidized products from the US. As a result, many Mexicans have gone to the US looking for work. Some believe that NAFTA has been positive for Mexico, which has seen its poverty rates fall and real income rise.

Others argue that NAFTA has been beneficial to business owners in all three countries, but has had negative impacts on farmers in Mexico. Mexican farmers have seen food prices fall due to cheap imports from US agribusiness, while US workers in manufacturing and assembly industries have lost jobs. Critics also argue that NAFTA has contributed to the rising levels of inequality in both the US and Mexico.

Goals of NAFTA

NAFTA was created to eliminate barriers to trade and investment between the US, Canada and Mexico. The implementation of NAFTA immediately eliminated tariffs on more than one-half of Mexico’s exports to the US and more than one-third of US. exports to Mexico. Within 10 years of implementation, all US-Mexico tariffs would be eliminated except for some US agricultural exports that were to be phased out within 15 years. NAFTA also seeks to eliminate non-tariff trade barriers and to protect the intellectual property right of the products.

In the area of intellectual property, the North American Free Trade Agreement Implementation Act made changes to the copyright law of the US, foreshadowing the Uruguay Round Agreements Act of 1994 by restoring copyright (within NAFTA) on certain motion pictures which had entered the public domain.

Trade

The agreement opened the door for free trade, ending tariffs on various goods and services, and implementing equality between Canada, the US and Mexico. Since the implementation of NAFTA, the countries involved have been able to do the following:

The US had a services trade surplus of $28.3 billion with NAFTA countries in 2009 (the latest data available).
Foreign direct investment of Canada and Mexico in the US (stock) was $237.2 billion in 2009, up 16.5% from 2008.
Income in the maquiladora sector has increased 15.5% since the implementation of NAFTA in 1994.
To alleviate concerns that NAFTA would have negative environmental impacts, in 1994 the Commission for Environmental Cooperation (CEC) was given a mandate to conduct ongoing ex-post environmental assessment of NAFTA.
Agriculture is the only section that requires three separate agreements between each pair of parties. The Canada–US agreement contains significant restrictions and tariff quotas on agricultural products, whereas the Mexico–US pact allows for a wider liberalization within a framework of phase-out periods.
Mexico has gone from a minor player in the pre-1994 US export market to the 2^nd largest importer of U.S. agricultural products.
According to the Department of Homeland Security Yearbook of Immigration Statistics (2006), 73,880 foreign professionals were admitted into the US for temporary employment under NAFTA.

7.3.2: The European Union (EU)

The European Union (EU) was established in November 1993 and is an economic and political union of 27 member states.

Learning Objective

Describe the economic, political and legal methodology of the European Union

Key Points

The EU has developed a single market through a standardized system of laws which apply in all member states.
EU policies aim to ensure the free movement of people, goods, services, and capital; enact legislation in justice and home affairs; and maintain common policies on trade, agriculture, fisheries, and regional development.
The euro is designed to build a single market by eliminating exchange rate problems, providing price transparency, creating a single financial market and low interest rates, providing a currency used internationally, and protecting against economic fluctuations through internal trade.

Key Terms

Euro Zone: The eurozone is an economic and monetary union of 17 European Union (EU) member states that have adopted the euro (€) as their common currency and sole legal tender. The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
tariff: A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.
GDP: A measure of the economic production of a particular territory in financial capital terms over a specific time period.

The European Union

The European Union (EU) was formally established when the Maastricht Treaty—whose main architects were Helmut Kohl and François Mitterrand—came into force on November 1, 1993. The European Union is an economic and political union of 27 member states which are located primarily in Europe. Its de facto capital is Brussels. In 2004, the EU saw its biggest enlargement to date when Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia joined its ranks. On December 9, 2011, Croatia signed the EU accession treaty making it the 28^th member state as of July 2013.

The EU operates through a system of supranational independent institutions and intergovernmental negotiated decisions by the member states. Important institutions of the EU include the European Commission, the Council of the European Union, the European Council, the Court of Justice of the European Union, and the European Central Bank. The European Parliament is elected every five years by EU citizens.

The EU has developed a single market through a standardized system of laws which apply to all member states. EU policies aim to ensure the free movement of people, goods, services, and capital; enact legislation in justice and home affairs; and maintain common policies on trade, agriculture, fisheries, and regional development.

With a combined population of over 500 million inhabitants, or 7.3% of the world population, the EU generated the largest nominal world gross domestic product (GDP) of 17.6 trillion US dollars in 2011. This figure represented approximately 20% of the global GDP when measured in terms of purchasing power parity.

The Eurozone and Economy

In 2002, EU notes and coins replaced national currencies in 12 member states. Since then, the eurozone (or Euro Zone) encompasses 17 countries. The monetary policy of theeurozone is governed by the European Central Bank .

Eurozone Countries

Adopted in 2002, the euro promotes a single market within 17 countries in the European Union.

A map that highlights which countries are in the Eurozone.

The euro is designed to help build a single market by easing travel of citizens and goods; eliminating exchange rate problems; providing price transparency; creating a single financial market, price stability, and low interest rates; and providing a currency used internationally and protected against shocks by the large amount of internal trade within the eurozone. It is also intended as a political symbol of integration and stimulus for more.

Of the top 500 largest corporations measured by revenue, 161 have their headquarters in the EU. In 2007, unemployment in the EU stood at 7% while investment was at 21.4% of GDP, inflation at 2.2%, and current account balance at −0.9% of GDP. In other words, there was slightly more importing than exporting in the EU. As of August 2012, unemployment in the EU stood at 11.4%.

Political and Legal

The EU operates solely within those competencies conferred on it by the treaties and according to the principle of subsidiary (which dictates that action by the EU should only be taken where an objective cannot be sufficiently achieved by a member state alone). Laws made by the EU institutions are passed in a variety of forms. Generally speaking, they can be classified into two groups: those which come into force without the necessity for national implementation measures, and those which require national implementation measures.

On December 1, 2009, the Lisbon Treaty entered into force and reformed many aspects of the EU. In particular, it changed the legal structure of the EU, merging its three pillars system into a single legal entity provisioned with legal personality, and created a permanent President of the European Council.

The Internal Market

The single market involves the free circulation of goods, capital, people, and services within the EU, and the customs union involves the application of a common external tariff on all goods entering the market. Once goods have been admitted into the market, they cannot be subjected to customs duties, discriminatory taxes or import quotas, as they travel internally. The non-EU member states of Iceland, Norway, Liechtenstein, and Switzerland participate in the single market but not in the customs union.

Free movement of capital is intended to permit movement of investments such as property purchases and the buying of shares between countries. The free movement of persons means that EU citizens can move freely between member states to live, work, study, or retire. This required the lowering of administrative formalities and recognition of professional qualifications of other states.

The free movement of services and of establishment allows self-employed persons to move between member states to provide services on a temporary or permanent basis. While services account for 60% to 70% of GDP, legislation in the area is not as developed as in other areas.

7.3.3: The Common Market of the Southern Cone (MERCOSUR)

Mercosur is an economic and political agreement among Argentina, Brazil, Paraguay, Uruguay, and Venezuela created in 1991 to promote free trade.

Learning Objective

Identify the purpose of the formation of the Common Market of the Southern Cone (MERCOSUR) and its objectives.

Key Points

Its purpose is to promote free trade and the fluid movement of goods, people, and currency. The official languages are Guaraní, Portuguese, and Spanish.
Intra-Mercosur merchandise trade grew from $10 billion at the inception of the trade bloc in 1991, to $88 billion in 2010.
With a population of more than 270 million people, and a GDP of the full-member nations in excess of $3 trillion a year, Mercosur is the fifth-largest economy in the world, just behind the European Union.

Key Terms

GDP: A measure of the economic production of a particular territory in financial capital terms over a specific time period.
trade bloc: is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states.
tariff: A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.

MERCOSUR

Mercosur is an economic and political agreement among Argentina, Brazil, Paraguay, Uruguay, and Venezuela . Established in 1991 by the Treaty of Asunción, it was later amended and updated by the 1994 Treaty of Ouro Preto.

Mercosur Member Countries

Mercosur has five full member countries (Argentina, Brazil, Paraguay, Uruguay, Venezuela), and two associate members (Bolivia and Chile).

The purpose of Mercosur is to promote free trade and the fluid movement of goods, people, and currency. The official languages are Guaraní, Portuguese and Spanish. Mercosur acts as a full customs union and works toward a continuing process of South American integration into the Union of South American Nations. The program also proposed the Gaucho as a currency for regional trade.

The founding of the Mercosur Parliament was agreed at the December 2004 presidential summit.

Objectives

Mercosur seeks the free transit of produced goods, services, and factors among the member states. Among other things, this includes the elimination of customs rights and lifting of non-tariff restrictions on the transit of goods or any other measures with similar effects.
Mercosur seeks to fix a common external tariff (CET), adopt a common trade policy with regard to nonmember states or groups of states, and coordinate positions in regional and international commercial and economic meetings.
Mercosur seeks to coordinate macroeconomic and sector policies of member states relating to foreign trade, agriculture, industry, taxes, monetary system, exchange and capital, services, customs, transport and communications, and any others they may agree on, in order to ensure free competition between member states.
Mercosur seeks to commit to the integration process by making the necessary adjustments to member state’s laws in pertinent areas. The common market will allow (in addition to customs unification) the free movement of manpower and capital across the member nations. Because member states will implement the trade liberalization at different speeds, during the transition period the rights and obligations of each party will initially be equivalent but not necessarily equal.

Trade and Economy

Intra-Mercosur merchandise trade (excluding Venezuela) grew from USD 10 billion at the inception of the trade bloc in 1991, to $88 billion in 2010; Brazil and Argentina accounted for 43% of this total. The trade balance within the bloc has historically been tilted toward Brazil, which recorded an intra-Mercosur balance of over $5 billion in 2010. Trade within Mercosur amounted to only 16% of the four countries’ total merchandise trade in 2010, and trade with the European Union (20%), China (14%), and the United States (11%) was of comparable importance.

Exports from the bloc are highly diversified, and include a variety of agricultural, industrial, and energy goods. Merchandise trade with the rest of the world in 2010 resulted in a surplus for Mercosur of nearly $7 billion; trade in services, however, was in deficit by over $28 billion.

The bloc comprises a population of more than 270 million people, and the combined Gross Domestic Product of the full-member nations is in excess of $3 trillion a year according to the International Monetary Fund (IMF), making Mercosur the fifth-largest economy in the world. It is the fourth-largest trading bloc after the European Union.

7.3.4: The Asia-Pacific Economic Cooperation (APEC)

APEC is a forum for 21 Pacific Rim countries that seeks to promote free trade and economic cooperation throughout the Asia-Pacific region.

Learning Objective

Discuss the purpose of the Asia-Pacific Economic Council (APEC)

Key Points

APEC includes newly industrialized economies and members account for approximately 40% of the world’s population, approximately 54% of the world’s gross domestic product and about 44% of world trade.
Established in 1989 in response to the growing interdependence of Asia-Pacific economies and the advent of regional trade blocs in other parts of the world.
APEC works to raise living standards and education levels through sustainable economic growth and to foster a sense of community and an appreciation of shared interests among Asia-Pacific countries.

Key Terms

trade bloc: is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states.
free trade: international trade free from government interference, especially trade free from tariffs or duties on imports

Asia-Pacific Economic Cooperation (APEC) is a forum of 21 Pacific Rim countries that seeks to promote free trade and economic cooperation throughout the Asia-Pacific region. APEC includes newly industrialized economies and its members account for approximately 40% of the world’s population, approximately 54% of the world’s gross domestic product and about 44% of world trade. APEC currently has 21 members, including most countries with a coastline on the Pacific Ocean. However, the criterion for membership is that the member is a separate economy, rather than a state. As a result, APEC uses the term member economies rather than member countries to refer to its members.

APEC’s 21 Members

APEC’s 21 members have a Pacific Coastline and a separate economy.

Reasons for Establishment

Established in 1989 in response to the growing interdependence of Asia-Pacific economies and the advent of regional trade blocs in other parts of the world.
In response to fears that highly industrialized Japan would come to dominate economic activity in the Asia-Pacific region.
To establish new markets for agricultural products and raw materials beyond Europe (where demand had been declining).

Goals

During a meeting in 1994 in Bogor, Indonesia, APEC leaders adopted the Bogor Goals that aim for free and open trade and investment in the Asia-Pacific by 2010 for industrialized economies and by 2020 for developing economies. In 1995, APEC established a business advisory body named the APEC Business Advisory Council (ABAC), composed of three business executives from each member economy.

APEC works to raise living standards and education levels through sustainable economic growth and to foster a sense of community and an appreciation of shared interests among Asia-Pacific countries.

APEC carries out work in three main areas:

Trade and Investment Liberalization: According to the organization, when APEC was established in 1989, average trade barriers in the region stood at 16.9 percent, but was reduced to 5.5% in 2004.
Business Facilitation: Between 2002 and 2006 the costs of business transactions across the region was reduced by 6%, thanks to the APEC Trade Facilitation Action Plan (TFAPI). According to a 2008 research brief published by the World Bank as part of its Trade Costs and Facilitation Project, increasing transparency in the region’s trading system is critical if APEC is to meet its Bogor Goal targets. The APEC Business Travel Card, a travel document for visa-free business travel within the region is one of the concrete measures to facilitate business.
Economic and Technical Cooperation: APEC is considering the prospects and options for a Free Trade Area of the Asia-Pacific (FTAAP), which would include all APEC member economies. Since 2006, the APEC Business Advisory Council, promoting the theory that a free trade area has the best chance of converging the member nations and ensuring stable economic growth under free trade, has lobbied for the creation of a high-level task force to study and develop a plan for a free trade area.

Criticism

APEC has been criticized for failing to clearly define itself or serve a useful purpose. According to the organization, it is “the premier forum for facilitating economic growth, cooperation, trade and investment in the Asia-Pacific region” established to “further enhance economic growth and prosperity for the region and to strengthen the Asia-Pacific community”. However, whether it has accomplished anything constructive remains debatable, especially from the viewpoints of European countries that cannot be part of APEC.

7.3.5: The World Trade Organization (WTO)

The WTO was formed in 1995 and has 157 member countries working together to supervise and liberalize international trade.

Learning Objective

Review the purpose and status of the World Trade Organization (WTO)

Key Points

The WTO provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements signed by representatives of member governments.
The General Agreement on Tariffs and Trade (GATT) preceded the WTO, but after about 40 years, its members concluded that it was straining to adapt to a new globalizing world economy. As a result, in 1994 members agreed to create the WTO at in the last round of GATT negotiations in Uruguay.
The conflict between free trade on industrial goods and services, but retention of protectionism on farm subsidies to domestic agricultural sector and the support of international liberalization of fair trade on agricultural products remain the major obstacles in the Doha Development Round.

Key Terms

accession: The act by which one power becomes party to engagements already in force between other powers.
protectionism: A policy of protecting the domestic producers of a product by imposing tariffs, quotas or other barriers on imports.

The World Trade Organization (WTO) was officially formed on January 1, 1995 under the Marrakesh Agreement, with the goal of supervising and liberalizing international trade between participating countries. The WTO provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements signed by representatives of member governments. The organization is attempting to complete negotiations on the Doha Development Round, which was launched in 2001 with an explicit focus on addressing the needs of developing countries. As of June 2012, the future of the Doha Round remains uncertain.

World Trade Organization

The WTO has managed international trade negotiations among its members since 1995.

A map that shows the countries in the WTO.

WTO Predecessor

The General Agreement on Tariffs and Trade (GATT) was established after World War II in the wake of other new multilateral institutions dedicated to international economic cooperation Well before GATT’s 40^th anniversary, its members concluded that the GATT system was straining to adapt to a new globalizing world economy. As a result, the WTO was formed in the final Uruguay Round of GATT in 1994. The WTO has supervision over the GATT treaties as well as 60 other agreements made during the Marrakesh Agreement.

Functions

The most important functions of the WTO are as follows:

Oversees the implementation, administration, and operation of the covered agreements.
Provides a forum for negotiations and for settling disputes.
Reviews and propagates national trade policies.
Ensures the coherence and transparency of trade policies through surveillance in global economic policy-making.
Assists in developing, least-developed, and low-income countries in transition to adjust to WTO rules and disciplines through technical cooperation and training.
Regularly assesses the global trade picture in its annual publications and research reports.
Cooperates closely with the IMF and the World Bank.

Members and Observers

The WTO has 157 members and 27 observer governments. WTO members do not have to be full sovereign nation-members. Instead, they must be a customs territory with full autonomy in the conduct of their external commercial relations. Iran is the biggest economy outside the WTO. Most observers must start accession negotiations within five years of becoming observers. Fourteen states and two territories so far have no official interaction with the WTO.

The Doha Development Round

The Doha negotiations round was to be an ambitious effort to make globalization more inclusive and to help the world’s poor, particularly by slashing barriers and subsidies in farming. The initial agenda comprised both further trade liberalization and new rule-making, underpinned by commitments to strengthen substantial assistance to developing countries. According to a European Union statement, “The 2008 ministerial meeting broke down over a disagreement between exporters of agricultural bulk commodities and countries with large numbers of subsistence farmers on the precise terms of a ‘special safeguard measure’ to protect farmers from surges in imports. ” The position of the European Commission is that “The successful conclusion of the Doha negotiations would confirm the central role of multilateral liberalization and rule-making. It would confirm the WTO as a powerful shield against protectionist backsliding. ” An impasse remains and as of June 2012, agreement has not been reached, despite intense negotiations at several ministerial conferences and at other sessions.

Major Obstacles

The conflict between free trade on industrial goods and services, but retention of protectionism on farm subsidies to the domestic agricultural sector (requested by developed countries) and the substantiation of the international liberalization of fair trade on agricultural products (requested by developing countries) remain the major obstacles. These points of contention have hindered any progress to launch new WTO negotiations beyond the Doha Development Round.

Agreements

The WTO oversees about 60 different agreements which have the status of international legal texts. Some of the most important agreements are as follows:

Agreement on Agriculture has three central “pillars”: domestic support, market access, and export subsidies.
General Agreement on Trade in Services was established in 1995 to extend the multilateral trading system to service sector, in the same way as the General Agreement on Tariffs and Trade (GATT) provided such a system for merchandise trade.
Agreement on Trade-Related Aspects of Intellectual Property Right sets down minimum standards for many forms of intellectual property (IP) regulation.
Agreement on Technical Barriers to Trade ensures that technical negotiations and standards, as well as testing and certification procedures, do not create unnecessary obstacles to trade.
Agreement on Customs Valuation adopts the “transaction value” approach and prescribes methods of customs valuation that members are to follow.

7.4: Types of International Business

7.4.1: Countertrade

Countertrade is a system of exchange in which goods and services are used as payment rather than money.

Learning Objective

Explain the various methods of countertrading

Key Points

Countertrade is the exchange of goods or services for other goods or services. This system can be typified as simple bartering, switch trading, counter purchase, buyback, or offset.
Switch trading: Party A and B are countertrading salt for sugar. Party A may switch its obligation to pay Party B to a third party, known as the switch trader. The switch trader gets the sugar from Party B at a discount and sells it for money. The money is used as Party A’s payment to Party B.
Counter purchase: Party A sells salt to Party B. Party A promises to make a future purchase of sugar from Party B.
Buyback: Party A builds a salt processing plant in Country B, providing capital to this developing nation. In return, Country B pays Party A with salt from the plant.
Offset agreement: Party A and Country B enter a contract where Party A agrees to buy sugar from Country B to manufacture candy. Country B then buys that candy.

Key Terms

Switch trading: Practice in which one company sells to another its obligation to make a purchase in a given country.
counter purchase: Sale of goods and services to one company in another country by a company that promises to make a future purchase of a specific product from the same company in that country.
barter: The exchange of goods or services without involving money.

Examples

Bartering: One party gives salt in exchange for sugar from another party.
Switch trading: Party A and Party B are countertrading salt for sugar. Party A may switch its obligation to pay Party B to a third party, known as the switch trader. The switch trader gets the sugar from Party B at a discount and sells it for money. The money is used as Party A’s payment to Party B.
Counter purchase: Party A sells salt to Party B. Party A promises to make a future purchase of sugar from Party B.
Buyback: Party A builds a salt processing plant in Country B, providing capital to this developing nation. In return, Country B pays Party A with salt from the plant.
Offset agreement: Party A and Country B enter a contract where Party A agrees to buy sugar from Country B to manufacture candy. Country B then buys that candy.

Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary valuation can, however, be used in counter trade for accounting purposes. Any transaction involving exchange of goods or service for something of equal value.

Bartering

Bartering involves exchanging goods or services for other goods or services as payment.

A newspaper illustration in Harper’s Weekly where two men engaging in a barter. One man offers chickens in exchange for his yearly newspaper subscription.

There are five main variants of countertrade:

Barter: Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment.
Switch trading: Practice in which one company sells to another its obligation to make a purchase in a given country.
Counter purchase: Sale of goods and services to one company in aother country by a company that promises to make a future purchase of a specific product from the same company in that country.
Buyback: This occurs when a firm builds a plant in a country, or supplies technology, equipment, training, or other services to the country, and agrees to take a certain percentage of the plant’s output as partial payment for the contract.
Offset: Agreement that a company will offset a hard currency purchase of an unspecified product from that nation in the future. Agreement by one nation to buy a product from another, subject to the purchase of some or all of the components and raw materials from the buyer of the finished product, or the assembly of such product in the buyer nation.

Countertrade also occurs when countries lack sufficient hard currency or when other types of market trade are impossible. In 2000, India and Iraq agreed on an “oil for wheat and rice” barter deal, subject to UN approval under Article 50 of the UN Persian Gulf War sanctions, that would facilitate 300,000 barrels of oil delivered daily to India at a price of $6.85 a barrel, while Iraq oil sales into Asia were valued at about $22 a barrel. In 2001, India agreed to swap 1.5 million tonnes of Iraqi crude under the oil-for-food program.

7.4.2: Direct Investment

FDI is practiced by companies in order to benefit from cheaper labor costs, tax exemptions, and other privileges in that foreign country.

Learning Objective

Explain the effects of foreign direct investment (FDI) for the investor and the host country

Key Points

FDI is the flow of investments from one company to production in a foreign nation, with the purpose of lowering labor costs and gaining tax incentives.
FDI can help the economic situations of developing countries, as well as facilitate progressive internal policy reforms.
A major contributing factor to increasing FDI flow was internal policy reform relating to trade openness and participation in international trade agreements and institutions.

Key Term

Foreign direct investment: investment directly into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

Example

Intel is headquartered in the United States, but it has made foreign direct investments in a number of Southeast Asian countries where they produce components of their products in Intel-owned factories.

Foreign direct investment (FDI) is investment into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

FDI is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges, such as tax exemptions, offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. FDI is in contrast to portfolio investment which is a passive investment in the securities of another country, such as stocks and bonds.

One theory for how to best help developing countries, is to increase their inward flow of FDI. However, identifying the conditions that best attract such investment flow is difficult, since foreign investment varies greatly across countries and over time. Knowing what has influenced these decisions and the resulting trends in outcomes can be helpful for governments, non-governmental organizations, businesses, and private donors looking to invest in developing countries.

Sao Paulo, Brazil

Sao Paulo, Brazil, is home to a growing middle class and significant direct investments.

Paulista Avenue in Sao Paulo, Brazil.

A study from scholars at Duke University and Princeton University published in the American Journal of Political Science, “The Politics of Foreign Direct Investment into Developing Countries: Increasing FDI through International Trade Agreements,” examines trends in FDI from 1970 to 2000 in 122 developing countries to assess what the best conditions are for attracting investment. The study found the major contributing factor to increasing FDI flow was internal policy reform relating to trade openness and participation in international trade agreements and institutions. The researchers conclude that, while “democracy can be conducive to international cooperation,” the strongest indicator for higher inward flow of FDI for developing countries was the number of trade agreements and institutions to which they were party.

7.4.3: Franchising

Franchising enables organizations a low cost and localized strategy to expanding to international markets, while offering local entrepreneurs the opportunity to run an established business.

Learning Objective

Examine the benefits of international franchising

Key Points

A franchise agreement is defined as the franchiser granting an entrepreneur or local company (the franchisee) access to its brand, trademarks, and products.
Franchising is designed to enable large organizations rapid access to new markets with relatively low barriers to entry.
Advantages of franchising (for the franchiser) include low costs of entry, a localized workforce (culturally and linguistically), and a high speed method of market entry.
Disadvantages of franchising (for the franchiser) include loss of some organizational and brand control, as well as relatively lower returns than other strategic entry models (albeit, with lower risk).

Key Terms

franchisee: A holder of a franchise; a person who is granted a franchise.
franchiser: A franchisor, a company or person who grants franchises.

What is Franchising?

In franchising, an organization (the franchiser) has the option to grant an entrepreneur or local company (the franchisee) access to its brand, trademarks, and products.

In this arrangement, the franchisee will take the majority of the risk in opening a new location (e.g. capital investments) while gaining the advantage of an already established brand name and operational process. In exchange, the franchisee will pay a certain percentage of the profits of the venture back to the franchiser. The franchiser will also often provide training, advertising, and assistance with products.

Why Franchise

Lower Barriers to Entry

Franchising is a particularly useful practice when approaching international markets. For the franchiser, international expansion can be both complex and expensive, particularly when the purchase of land and building of facilities is necessary. With legal, cultural, linguistics, and logistical barriers to entry in various global markets, the franchising model offers and simpler, cleaner solution that can be implemented relatively quickly.

Localization

Franchising also allows for localization of the brand, products, and distribution systems. This localization can cater to local tastes and language through empowering locals to own, manage, and employ the business. This high level of integration into the new location can create significant advantages compared to other entry models, with much lower risk.

Speed

It is also worth noting that franchising is a very efficient, low cost and quickly implemented expansionary strategy. Franchising requires very little capital investment on behalf of the parent company, and the time and effort of building the stores are similar outsources to the franchisee. As a result, franchising can be a way to rapidly expand both domestically and globally.

Starbucks’ Expansion

Starbucks operates with a wide variety of strategic alliances, including a franchising program.

A chart that shows how various forms of strategic alliance can rapidly increase rates of expansion.

Downsides to Franchising

Franchising has some weaknesses as well, from a strategic point of view. Most importantly, organizations (the franchisers) lose a great deal of control. Quality assurance and protection of the brand is much more difficult when ownership of the franchise is external to the organization itself. Choosing partners wisely and equipping them with the tools necessary for high levels of quality and alignment with the brand values is critical (e.g., training, equipment, quality control, adequate resources).

It is also of importance to keep the risk/return ratio in mind. While the risk of franchising is much lower in terms of capital investment, so too is the returns derived from operations (depending on the franchising agreement in place). While it is a faster and cheaper mode of entry, it ultimately results in a profit share between the franchiser and the franchisee.

7.4.4: Multinational Firms

With the advent of improved communication and technology, corporations have been able to expand into multiple countries.

Learning Objective

Explain how a multinational corporation (MNC) operates

Key Points

Multinational corporations operate in multiple countries.
MNCs have considerable bargaining power and may negotiate business or trade policies with success.
A corporation may choose to locate in a special economic zone, a geographical region that has economic and other laws that are more free-market-oriented than a country’s typical or national laws.

Key Term

Multinational corporation: A corporation or enterprise that operates in multiple countries.

Example

McDonalds operates in over 119 different countries, making it a fairly large MNC by any standard

A multinational corporation (MNC) or multinational enterprise (MNE) is a corporation registered in more than one country or has operations in more than one country. It is a large corporation which both produces and sells goods or services in various countries . It can also be referred to as an international corporation. The first multinational corporation was the Dutch East India Company, founded March 20, 1602.

Ford

Ford is a multinational corporation with operations throughout the world.

Corporations may make a foreign direct investment. Foreign direct investment is direct investment into one country by a company located in another country. Investors buy a company in the country or expand operations of an existing business in the country.

A corporation may choose to locate in a special economic zone, a geographical region with economic and other laws that are more free-market-oriented than a country’s typical or national laws.

Multinational corporations are important factors in the processes of globalization. National and local governments often compete against one another to attract MNC facilities, with the expectation of increased tax revenue, employment and economic activity. To compete, political powers push toward greater autonomy for corporations. MNCs play an important role in developing economies of developing countries.

Many economists argue that in countries with comparatively low labor costs and weak environmental and social protection, multinationals actually bring about a “race to the top.” While multinationals will see a low tax burden or low labor costs as an element of comparative advantage, MNC profits are tied to operational efficiency, which includes a high degree of standardization. Thus, MNCs are likely to adapt production processes in many of their operations to conform to the standards of the most rigorous jurisdiction in which they operate.

As for labor costs, while MNCs pay workers in developing countries far below levels in countries where labor productivity is high (and accordingly, will adopt more labor-intensive production processes), they also tend to pay a premium over local labor rates of 10% to 100%.

Finally, depending on the nature of the MNC, investment in any country reflects a desire for a medium- to long-term return, as establishing a plant, training workers and so on can be costly. Therefore, once established in a jurisdiction, MNCs are potentially vulnerable to arbitrary government intervention like expropriation, sudden contract renegotiation and the arbitrary withdrawal or compulsory purchase of licenses. Thus both the negotiating power of MNCs and the “race to the bottom” critique may be overstated while understating the benefits (besides tax revenue) of MNCs becoming established in a jurisdiction.

7.4.5: Offshoring

Offshoring entails a company moving a business process from one country to another.

Learning Objective

Explain the benefits of offshoring

Key Points

Offshoring is the relocation of certain business processes from one country to the other, resulting in large tax breaks and lower labor costs.
Offshoring can cause controversy in a company’s domestic country since it is perceived to impact the domestic employment situation negatively.
Offshoring of a company’s services that were previously produced domestically can be advantageous in lowering operation costs, but has incited some controversy over the economic implications.

Key Terms

offshoring: The location of a business in another country for tax purposes.
outsourcing: The transfer of a business function to an external service provider.
captive: held prisoner; not free; confined

“Offshoring” is a company’s relocation of a business process from one country to another. This typically involves an operational process, such as manufacturing, or a supporting process, such as accounting. Even state governments employ offshoring. More recently, offshoring has been associated primarily with the sourcing of technical and administrative services that support both domestic and global operations conducted outside a given home country by means of internal (captive) or external (outsourcing) delivery models.The subject of offshoring, also known as “outsourcing,” has produced considerable controversy in the United States. Offshoring for U.S. companies can result in large tax breaks and low-cost labor.

Worldwide Offshoring Business

The worldwide offshoring business is projected to equal $500 billion by 2020.

A chart that shows growth in the worldwide offshoring business.

Offshoring can be seen in the context of either production offshoring or services offshoring. After its accession to the World Trade Organization (WTO) in 2001, the People’s Republic of China emerged as a prominent destination for production offshoring. Another focus area includes the software industry as part of Global Software Development and the development of Global Information Systems. After technical progress in telecommunications improved the possibilities of trade in services, India became a leader in this domain; however, many other countries are now emerging as offshore destinations.

The economic logic is to reduce costs. People who can use some of their skills more cheaply than others have a comparative advantage. Countries often strive to trade freely items that are of the least cost to produce.

Related terms include “nearshoring,” “inshoring,” and “bestshoring,” otherwise know as “rightshoring.” Nearshoring is the relocation of business processes to (typically) lower cost foreign locations that are still within close geographical proximity (for example, shifting United States-based business processes to Canada/Latin America). Inshoring entails choosing services within a country, while bestshoring entails choosing the “best shore” based on various criteria. Business process outsourcing (BPO) refers to outsourcing arrangements when entire business functions (such as Finance & Accounting and Customer Service) are outsourced. More specific terms can be found in the field of software development; for example, Global Information System as a class of systems being developed for/by globally distributed teams.

7.4.6: Licensing

When considering strategic entry into an international market, licensing is a low-risk and relatively fast foreign market entry tactic.

Learning Objective

Identify the benefits and risks associated with licensing as a foreign market entry model

Key Points

Foreign market entry options include exporting, joint ventures, foreign direct investment, franchising, licensing, and various other forms of strategic alliance.
Of these potential entry models, licensing is relatively low risk in terms of time, resources, and capital requirements.
Advantages of licensing include localization through a foreign partner, adherence to strict international business regulations, lower costs, and the ability to move quickly.
Disadvantages to this entry mode include loss of control, potential quality assurance issues in the foreign market, and lower returns due to lower risk.
When deciding to license abroad, careful due diligence should be done to ensure that the licensee is a strong investment for the licensor and vice versa.

Key Terms

licensee: In a licensing relationship, the buyer of the produce, service, brand or technology being licensed.
licensor: In a licensing relationship, the owner of the produce, service, brand or technology being licensed.

When considering entering international markets, there are some significant strategic and tactical decisions to be made. Exporting, joint ventures, direct investment, franchising, licensing, and various other forms of strategic alliance can be considered as market entry modes. Each entry mode has different pros and cons, addressing issues like cost, control, speed to market, legal barriers, and cultural barriers with different degrees of efficiency.

Licensing

The 1933 Fiat 508 was manufactured under a license in Poland by Polski Fiat.

What is Licensing

A licensor (i.e. the firm with the technology or brand) can provide their products, services, brand and/or technology to a licensee via an agreement. This agreement will describe the terms of the strategic alliance, allowing the licensor affordable and low risk entry to a foreign market while the licensee can gain access to the competitive advantages and unique assets of another firm. This is potentially a strong win-win arrangement for both parties, and is a relatively common practice in international business.

Let’s consider an example. The licensor is a company involved in energy health drinks. Due to food import regulations in Japan, the licensor cannot sell the product at local wholesalers or retailers. In order to circumvent this strategic barrier, the licensor finds a local sports drink manufacturer to license their recipe to. In exchange, the licensee sells the product locally under a local brand name and kicks back 15% of the overall revenues to the licensor.

The Pros and Cons

Before deciding to use licensing as an entry strategy, it’s important to understand in which situations licensing is best suited.

Advantages

Licensing affords new international entrants with a number of advantages:

Licensing is a rapid entry strategy, allowing almost instant access to the market with the right partners lined up.
Licensing is low risk in terms of assets and capital investment. The licensee will provide the majority of the infrastructure in most situations.
Localization is a complex issue legally, and licensing is a clean solution to most legal barriers to entry.
Cultural and linguistic barriers are also significant challenges for international entries. Licensing provides critical resources in this regard, as the licensee has local contacts, mastery of local language, and a deep understanding of the local market.

Disadvantages

While the low-cost entry and natural localization are definite advantages, licensing also comes with some opportunity costs:

Loss of control is a serious disadvantage in a licensing situation in regards to quality control. Particularly relevant is the licensing of a brand name, as any quality control issue on behalf of the licensee will impact the licensor’s parent brand.
Depending on an international partner also creates inherent risks regarding the success of that firm. Just like investing in an organization in the stock market, licensing requires due diligence regarding which organization to partner with.
Lower revenues due to relying on an external party is also a key disadvantage to this model. (Lower risk, lower returns.)

7.4.7: Outsourcing

Outsourcing business functions to developing foreign countries has become a popular way for companies to reduce cost.

Learning Objective

Explain why companies outsource

Key Points

Outsourcing is the contracting of business processes to external firms, usually in developing countries where labor costs are cheaper.
This practice has increased in prevalence due to better technology and improvements in the educational standards of the countries to which jobs are outsourced.
The opposite of outsourcing is called insourcing, and it is sometimes accomplished via vertical integration. However, a business can provide a contract service to another business without necessarily insourcing that business process.

Key Terms

insourcing: The obtaining of goods or services using domestic resources or employees as opposed to foreign.
outsourcing: The transfer of a business function to an external service provider.
offshoring: The location of a business in another country for tax purposes.

Example

Corporations may outsource their helpdesk or customer service functions to 3rd party call centers in foreign countries because these skilled laborers can do these jobs at a lesser cost than their equivalents in the domestic country.

Outsourcing

Overview

Outsourcing is the contracting out of a business process, which an organization may have previously performed internally or has a new need for, to an independent organization from which the process is purchased back as a service. Though the practice of purchasing a business function—instead of providing it internally—is a common feature of any modern economy, the term outsourcing became popular in America near the turn of the 21^st century. An outsourcing deal may also involve transfer of the employees and assets involved to the outsourcing business partner. The definition of outsourcing includes both foreign or domestic contracting , which may include offshoring, described as “a company taking a function out of their business and relocating it to another country. “

Outsourcing

Outsourcing is the process of contracting an existing business process to an independent organization. The process is purchased as a service.

Businessmen talk and shake hands.

The opposite of outsourcing is called insourcing, and it is sometimes accomplished via vertical integration. However, a business can provide a contract service to another business without necessarily insourcing that business process.

Reasons for Outsourcing

Companies outsource to avoid certain types of costs. Among the reasons companies elect to outsource include avoidance of burdensome regulations, high taxes, high energy costs, and unreasonable costs that may be associated with defined benefits in labor union contracts and taxes for government mandated benefits. Perceived or actual gross margin in the short run incentivizes a company to outsource. With reduced short run costs, executive management sees the opportunity for short run profits while the income growth of the consumers base is strained. This motivates companies to outsource for lower labor costs. However, the company may or may not incur unexpected costs to train these overseas workers. Lower regulatory costs are an addition to companies saving money when outsourcing.

Import marketers may make short run profits from cheaper overseas labor and currency mainly in wealth consuming sectors at the long run expense of an economy’s wealth producing sectors straining the home county’s tax base, income growth, and increasing the debt burden. When companies offshore products and services, those jobs may leave the home country for foreign countries at the expense of the wealth producing sectors. Outsourcing may increase the risk of leakage and reduce confidentiality, as well as introduce additional privacy and security concerns.

7.4.8: Joint Ventures

In a joint venture business model, two or more parties agree to invest time, equity, and effort for the development of a new shared project.

Learning Objective

Outline the dynamics of a joint venture

Key Points

Joint business ventures involve two parties contributing their own equity and resources to develop a new project. The enterprise, revenues, expenses and assets are shared by the involved parties.
Since money is involved in a joint venture, it is necessary to have a strategic plan in place.
As the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project as well as the resulting profits.

Key Term

joint venture: A cooperative partnership between two individuals or businesses in which profits and risks are shared.

Example

Sony Ericsson is a joint venture between Swedish telecom corporation Ericsson and Japanese electronics manufacturer Sony to develop cellular devices.

Joint Ventures

A joint venture is a business agreement in which parties agree to develop a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets.

Joint Venture

Sony Ericsson is a joint venture between Swedish telecom corporation Ericsson and Japanese electronics manufacturer Sony.

When two or more persons come together to form a partnership for the purpose of carrying out a project, this is called a joint venture. In this scenario, both parties are equally invested in the project in terms of money, time and effort to build on the original concept. While joint ventures are generally small projects, major corporations use this method to diversify. A joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project as well as the resulting profits.

Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short, both parties must be committed to focusing on the future of the partnership rather than just the immediate returns. Ultimately, short term and long term successes are both important.To achieve this success, honesty, integrity and communication within the joint venture are necessary.

A consortium JV (also known as a cooperative agreement) is formed when one party seeks technological expertise, franchise and brand-use agreements, management contracts, and rental agreements for one-time contracts. The JV is dissolved when that goal is reached. Some major joint ventures include Dow Corning, MillerCoors, Sony Ericsson, Penske Truck Leasing, Norampac, and Owens-Corning.

7.4.9: Contract Manufacturing

In contract manufacturing, a hiring firm makes an agreement with the contract manufacturer to produce and ship the hiring firm’s goods.

Learning Objective

Compare the benefits and risks of employing a contract manufacturer (CM)

Key Points

A hiring firm may enter a contract with a contract manufacturer (CM) to produce components or final products on behalf of the hiring firm for some agreed-upon price.
There are many benefits to contract manufacturing, and companies are finding many reasons why they should be outsourcing their production to other companies.
Production outside of the company does come with many risks attached. Companies must first identify their core competencies before deciding about contract manufacture.

Key Terms

Contract manufacturing: a business model where a firm hires another firm to produce components or products
Contract manufacturing: Business model in which a firm hires a contract manufacturer to produce components or final products based on the hiring firm’s design.

A contract manufacturer (“CM”) is a manufacturer that enters into a contract with a firm to produce components or products for that firm. It is a form of outsourcing. In a contract manufacturing business model, the hiring firm approaches the contract manufacturer with a design or formula. The contract manufacturer will quote the parts based on processes, labor, tooling, and material costs. Typically a hiring firm will request quotes from multiple CMs. After the bidding process is complete, the hiring firm will select a source, and then, for the agreed-upon price, the CM acts as the hiring firm’s factory, producing and shipping units of the design on behalf of the hiring firm.

Contract Manufacturing

Ness Corporation is a contract manufacturer in Seven Hills, Australia.

Benefits

Contract manufacturing offers a number of benefits:

Cost Savings: Companies save on their capital costs because they do not have to pay for a facility and the equipment needed for production. They can also save on labor costs such as wages, training, and benefits. Some companies may look to contract manufacture in low-cost countries, such as China, to benefit from the low cost of labor.
Mutual Benefit to Contract Site: A contract between the manufacturer and the company it is producing for may last several years. The manufacturer will know that it will have a steady flow of business at least until that contract expires.
Advanced Skills: Companies can take advantage of skills that they may not possess, but the contract manufacturer does. The contract manufacturer is likely to have relationships formed with raw material suppliers or methods of efficiency within their production.
Quality: Contract Manufacturers are likely to have their own methods of quality control in place that help them to detect counterfeit or damaged materials early.
Focus: Companies can focus on their core competencies better if they can hand off base production to an outside company.
Economies of Scale: Contract Manufacturers have multiple customers that they produce for. Because they are servicing multiple customers, they can offer reduced costs in acquiring raw materials by benefiting from economies of scale. The more units there are in one shipment, the less expensive the price per unit will be.

Risks

Balanced against the above benefits of contract manufacturing are a number of risks:

Lack of Control: When a company signs the contract allowing another company to produce their product, they lose a significant amount of control over that product. They can only suggest strategies to the contract manufacturer; they cannot force them to implement those strategies.
Relationships: It is imperative that the company forms a good relationship with its contract manufacturer. The company must keep in mind that the manufacturer has other customers. They cannot force them to produce their product before a competitor’s. Most companies mitigate this risk by working cohesively with the manufacturer and awarding good performance with additional business.
Quality: When entering into a contract, companies must make sure that the manufacturer’s standards are congruent with their own. They should evaluate the methods in which they test products to make sure they are of good quality. The company has to ensure the contract manufacturer has suppliers that also meet these standards.
Intellectual Property Loss: When entering into a contract, a company is divulging their formulas or technologies. This is why it is important that a company not give out any of its core competencies to contract manufacturers. It is very easy for an employee to download such information from a computer and steal it. The recent increase in intellectual property loss has corporate and government officials struggling to improve security. Usually, it comes down to the integrity of the employees.
Outsourcing Risks: Although outsourcing to low-cost countries has become very popular, it does bring along risks such as language barriers, cultural differences, and long lead times. This could make the management of contract manufacturers more difficult, expensive, and time-consuming.
Capacity Constraints: If a company does not make up a large portion of the contract manufacturer’s business, they may find that they are de-prioritized over other companies during high production periods. Thus, they may not obtain the product they need when they need it.
Loss of Flexibility and Responsiveness: Without direct control over the manufacturing facility, the company will lose some of its ability to respond to disruptions in the supply chain. It may also hurt their ability to respond to demand fluctuations, risking their customer service levels.

7.4.10: Exporting

Exporting is the practice of shipping goods from the domestic country to a foreign country.

Learning Objective

Explain how exports are accounted for in international trade

Key Points

This term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country.
In national accounts “exports” consist of transactions in goods and services (sales, barter, gifts or grants) from residents to non-residents.
Statistics on international trade do not record smuggled goods or flows of illegal services. A small fraction of the smuggled goods and illegal services may nevertheless be included in official trade statistics through dummy shipments that serve to conceal the illegal nature of the activities.

Key Terms

export: to sell (goods) to a foreign country
import: To bring (something) in from a foreign country, especially for sale or trade.
exporting: the sale of capital, goods, and services across international borders or territories
exporting: the act of selling to a foreign country

Example

When individuals from Country A purchase goods from Country B, this process is known as exporting for Country B (since their goods are being sold) and importing for Country A (since they are buying the goods).

This term “export” is derived from the concept of shipping goods and services out of the port of a country . The seller of such goods and services is referred to as an “exporter” who is based in the country of export whereas the overseas based buyer is referred to as an “importer”. In international trade, exporting refers to selling goods and services produced in the home country to other markets.

Oil Exports 2006

The map shows barrels of oil exported per day in 2006. Russia and Saudi Arabia exported more barrels than any other oil-exporting countries.

Export of commercial quantities of goods normally requires the involvement of customs authorities in both the country of export and the country of import. The advent of small trades over the internet such as through Amazon and eBay has largely bypassed the involvement of customs in many countries because of the low individual values of these trades. Nonetheless, these small exports are still subject to legal restrictions applied by the country of export. An export’s counterpart is an import.

In national accounts, exports consist of transactions in goods and services (sales, barter, gifts, or grants) from residents to non-residents.The exact definition of exports includes and excludes specific “borderline” cases. A general delimitation of exports in national accounts is as follows: An export of a good occurs when there is a change of ownership from a resident to a non-resident; this does not necessarily imply that the good in question physically crosses any border. However, in specific cases, national accounts impute changes of ownership even though in legal terms no change of ownership takes place (e.g. cross border financial leasing, cross border deliveries between affiliates of the same enterprise, goods crossing the border for significant processing to order or repair). Smuggled goods must also be included in the export measurement.

Export of services consist of all services rendered by residents to non-residents. In national accounts, any direct purchases by non-residents in the economic territory of a country are recorded as exports of services; therefore, all expenditure by foreign tourists in the economic territory of a country is considered part of the export of services of that country. International flows of illegal services must also be included.

National accountants often need to make adjustments to the basic trade data in order to comply with national accounts concepts; the concepts for basic trade statistics often differ in terms of definition and coverage from the requirements in the national accounts:

Data on international trade in goods is mostly obtained through declarations to customs services. If a country applies the general trade system, all goods entering or leaving the country are recorded. If the special trade system (e.g., extra-EU trade statistics) is applied, goods which are received into customs warehouses are not recorded in external trade statistics unless they subsequently go into free circulation in the country of receipt.

7.4.11: Importing

Imports are the inflow of goods and services into a country’s market for consumption.

Learning Objective

Explain the methodology behind the selection of products to import

Key Points

A country specializes in the export of goods for which it has a comparative advantage and imports those for which it has a comparative disadvantage. By doing so, the country can increase its welfare.
Comparative advantage describes the ability of a country to produce one specific good more efficiently than other goods.
A country enhances its welfare by importing a broader range of higher-quality goods and services at lower cost than it could produce domestically.

Key Terms

import: To bring (something) in from a foreign country, especially for sale or trade.
comparative advantage: The concept that a certain good can be produced more efficiently than others due to a number of factors, including productive skills, climate, natural resource availability, and so forth.

Example

A country in certain tropical areas of the world has a comparative advantage at growing crops like sugar or coffee beans, but it would be much less efficient at growing wheat (due to the climate). Therefore, they should export their sugar/coffee beans and import wheat at a lower cost than trying to grow wheat themselves.

The term “import” is derived from the concept of goods and services arriving into the port of a country. The buyer of such goods and services is referred to as an “importer” and is based in the country of import whereas the overseas-based seller is referred to as an “exporter.” Thus, an import is any good (e.g. a commodity) or service brought in from one country to another country in a legitimate fashion, typically for use in trade. It is a good that is brought in from another country for sale.

Singapore

The Port of Singapore is one of the busiest ports in the world. Singapore has to import most of its food and consumer goods.

A large ship at the Port of Singapore.

Imported goods or services are provided to domestic consumers by foreign producers. An import in the receiving country is an export to the sending country. Imports, along with exports, form the basics of international trade. Import of goods normally requires the involvement of customs authorities in both the country of import and the country of export; those goods are often subject to import quotas, tariffs, and trade agreements. While imports are the set of goods and services imported, “imports” also means the economic value of all goods and services that are imported.

Imports are the inflow of goods and services into a country’s market for consumption. A country enhances its welfare by importing a broader range of higher-quality goods and services at lower cost than it could produce domestically. Comparative advantage is a concept often applied to importing and exporting. Comparative advantage is the concept that a country should specialize in the production and export of those goods and services that it can produce more efficiently than other goods and services, and that it should import those goods and services in which it has a comparative disadvantage.

7.5: Global Marketing Mix

7.5.1: The Relationship Between Product and Promotion

Product and promotion in global marketing can work together effectively with proper market research and communication techniques.

Learning Objective

Illustrate the relationship between product and promotion from a global marketing perspective

Key Points

The “Four P’s” of marketing—product, price, placement, and promotion—are all affected as a company moves through the different phases to become and maintain dominance as a global company.
It is the job of global marketers to create and place product advertisements in settings where local consumers will be most receptive to receiving and acting on those messages.
Promotion is one crucial component of the global marketing mix that enables a global company to send the same message worldwide using relevant, engaging, and cost-effective techniques.

Key Term

integrated marketing communications: an approach to brand communications where the different modes work together to create a seamless experience for the customer and are presented with a similar tone and style that reinforces the brand’s core message.

The Relationship Between Product and Promotion

With the rapidly emerging force of globalization, the distinction between marketing within an organization’s home country and marketing within external markets is disappearing very quickly. With this in mind, organizations are modifying their marketing strategies to meet the challenges of the global marketplace in addition to sustaining their competitiveness within home markets. These changes also have prompted brands to customize their global marketing mix for different markets, based on local languages, needs, wants, and values.

Product Marketing

An effective global marketing plan enables brands to tweak products for local markets while using the most effective promotional channels to reach consumers.

A package of feminine products that are manufactured and sold in China.

The Marketing Mix in Global Marketing

The “Four P’s” of marketing—product, price, placement, and promotion—are all affected as a company moves through the different phases to become and maintain dominance as a global company. Promotion becomes particularly important for positioning the company in such a way that a single product can be tweaked instead of revamped for different markets. Coca-Cola is one strong example of global marketing. The drink brand uses two formulas (one with sugar and one with corn syrup) for all markets. The product packaging in every country incorporates Coca-Cola’s contour bottle design and signature ribbon in some shape or form. However, the bottle can also include the country’s native language and appear in identical sizes as other beverage bottles or cans in that country’s market.

Promotion and Product

Before launching promotional programs, global companies must first define their target markets and determine the products that will resonate most with those consumers and businesses. In addition to pinpointing which price point and distribution channels would best serve those country markets, global marketers must decide how to introduce their products. Promotional tactics for global audiences can range from television commercials to social media marketing on Facebook or YouTube. It is the job of global marketers to create and place product advertisements in settings where local consumers will be most receptive to receiving and acting on those messages.

After product research, development, and creation, promotion is generally the largest line item in a global company’s marketing budget. Integrated marketing communications can significantly increase efficiency and reduce promotional costs. Moreover, promotion is one crucial component of the mix that enables a global company to send the same message worldwide using relevant, engaging, and cost-effective techniques.

While global promotion enables global brands to engage in uniform marketing practices and promote a consistent brand and image, marketers also face the challenge of responding to differences in consumer response to marketing mix elements. Promotional and product marketing challenges also come into play when dealing with differences in brand and product development and fending off local or global competition.

7.5.2: Changes in Promotion

Local languages, colors, and religious beliefs all impact how global marketers promote their products and services in different countries.

Learning Objective

Analyze the rationale used to promote products within a global marketing mix

Key Points

To successfully implement global marketing strategies, brands must ensure their promotional campaigns take into account how consumer behavior is shaped by internal conditions and external influences.
Global companies must be nimble enough to adapt changing local market trends, tastes, and needs to their promotional mix.
When launching global advertising, public relations or sales campaigns, global companies test promotion ideas to provide results that are comparable across countries.
Using measures can be particularly helpful for marketers since they are based on visual, not verbal, elements of the promotion.

Key Terms

demographics: The observable characteristics of a population, such as physical traits, economic traits, occupational traits, and more.
measure: To ascertain the quantity of a unit of material via calculated comparison with respect to a standard.

Changes in Promotion

Before a company decides to become global, it must consider a multitude of factors unique to the international marketing environment. These factors are social, cultural, political, legal, competitive, economic, and even technological in nature. Ultimately, at the global marketing level, a company trying to speak with one voice is faced with many challenges when creating a worldwide marketing plan. Unless a company holds the same position against its competition in all markets (market leader, low cost, etc.), it is impossible to launch identical marketing plans worldwide. Thus, global companies must be nimble enough to adapt to changing local market trends, tastes, and needs .

Global Promotion

Language is usually one element that is customized in a global promotional mix.

For global advertisers, there are four potentially competing business objectives that must be balanced when developing worldwide advertising: building a brand while speaking with one voice, developing economies of scale in the creative process, maximizing local effectiveness of advertisements, and increasing the company’s speed of implementation. Global marketers can use the following approaches when executing global promotional programs: exporting executions, producing local executions, and importing ideas that travel.

Factors in Global Promotion

To successfully implement these approaches, brands must ensure their promotional campaigns take into how consumer behavior is shaped by internal conditions (e.g., demographics, knowledge, attitude, beliefs) and external influences (e.g., culture, ethnicity, family, lifestyle) in local markets.

Language – The importance of language differences is extremely crucial in global marketing, as there are almost 3,000 languages in the world. Language differences have caused many problems for marketers in designing advertising campaigns and product labels. Language becomes even more significant if a country’s population speaks several languages.
Colors – Colors also have different meanings in different cultures. For example, in Egypt, the country’s national color of green is considered unacceptable for packaging because religious leaders once wore it. In Japan, black and white are colors of mourning and should not be used on a product’s package. Similarly, purple is unacceptable in Hispanic nations because it is associated with death.
Values – An individual’s values arise from his or her moral or religious beliefs and are learned through experiences. For example, Americans place a very high value on material well-being and are much more likely to purchase status symbols than people in India. In India, the Hindu religion forbids the consumption of beef.
Business norms – The norms of conducting business also vary from one country to the next. In France, wholesalers do not like to promote products. They are mainly interested in supplying retailers with the products they need.
Religious beliefs – A person’s religious beliefs can affect shopping patterns and products purchased in addition to his or her values. In the United States and other Christian nations, Christmas time is a major sales period. But for other religions, religious holidays do not serve as popular times for purchasing products.

There are many other factors, including a country’s political or legal environment, monetary circumstances, and technological environment that can impact a brand’s promotional mix. Companies have to be ready to quickly respond and adapt to these challenges as they evolve and fluctuate in the market of each country.

Changing the Global Promotional Mix

When launching global advertising, public relations or sales campaigns, global companies test promotional ideas using marketing research systems that provide results comparable across countries. The ability to identify the elements or moments of an advertisement that contribute to the success of a product launch or expansion is how economies of scale are maximized in marketing communications. Market research measures such as flow of attention, flow of emotion, and branding moments provide insight into what is working in an advertisement in one or many countries. These measures can be particularly helpful for marketers since they are based on visual, not verbal, elements of the promotion.

Considering these measures along with conducting extensive market research is essential to determining the success of promotional tactics in any country or region. Once brands discover what works (and what does not) in their promotional mix, those ideas can be imported by any other market. Likewise, companies can use this intelligence to modify various elements in their promotional mix that are receiving minimal or unfavorable response from global audiences.

7.5.3: Changes in Placement

Successfully positioning products on a global scale requires marketers to determine the target market’s preferred combination of attributes.

Learning Objective

Examine the rationale behind product placement from a global marketing perspective

Key Points

Placement in global marketing involves conducting extensive research to accurately define the market, as well as the attributes that define the product’s potential environment.
Regardless of its size or visibility, a global brand must adjust its country strategies to take into account placement and distribution in the marketing mix.
In addition to where products are placed, global marketers must consider how these products will be distributed across the different shopping venues and communication channels unique to that particular country or market.

Key Terms

dollar store: A retail store selling inexpensive items, especially one in which all items have a price of one dollar.
marketing mix: A business tool used in marketing products; often crucial when determining a product or brand’s unique selling point. Often synonymous with the four Ps: price, product, promotion, and place.
positioning: The act of positioning; placement.

Changes in Placement

The global marketing mix comprises four main elements: product, price, placement and promotion. Although product development, promotional tactics and pricing mechanisms are the most visible during the marketing process, placement is just as important in determining how the product is distributed. Placement determines the various channels used to distribute a product across different countries, taking in factors such as competition and how similar brands are being offered to the target market.

Product Placement

Global brands attempt to place products in locations where consumers will be most receptive to the messaging.

Cases of products on the lower shelf in a grocery store.

Global marketing presents more challenges compared to domestic or local marketing. Consequently, brands competing in the global marketplace often conduct extensive research to accurately define the market, as well as the attributes that define the product’s potential environment. Successfully positioning products on a global scale also requires marketers to determine each product’s current location in the product space, as well as the target market’s preferred combination of attributes. These attributes span the range of the marketing mix, including price, promotion, distribution, packaging and competition.

Regardless of its size or visibility, a global brand must adjust its country strategies to take into account placement and distribution in the marketing mix. For example, not all cultures use or have access to vending machines. In the United States, beverages are sold by the pallet via warehouse stores. However, in India, this is not an option.

Moreover, placement decisions must also consider the product’s positioning in the marketplace. A global luxury brand would not want to be distributed via a “dollar store” in the United States. Conversely, low-end shoemakers would likely be ignored by shoppers browsing in an Italian boutique store.

In addition to where products are placed, global marketers must consider how these products will be distributed across the different shopping venues unique to that particular country or market. Customizing these placement strategies for national and local markets while retaining a strong and consistent brand image can help companies gain significant competitive advantages in the global market.

7.5.4: Changes in Pricing

Price in global marketing strategies can be influenced by distribution channels, promotional tactics, and the quality of the product.

Learning Objective

Summarize how proper pricing from a global marketing perspective impacts a company

Key Points

In the global marketing mix, pricing factors are manufacturing cost, market place, competition, market condition, and quality of product.
As one of the four “Ps” in the marketing mix, pricing is the only revenue generating element.
Price will always vary from market to market, and global brands must be prepared to deal with external influences such as trade tariffs, and political and economic shifts in the target country.

Key Terms

marketing mix: A business tool used in marketing products; often crucial when determining a product or brand’s unique selling point. Often synonymous with the four Ps: price, product, promotion, and place.
tariff: A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.
jurisdiction: the limits or territory within which authority may be exercised

Changes in Pricing

Pricing is the process of determining what a company will receive in exchange for its products. In the global marketing mix, pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. As one of the four “Ps” in the marketing mix, pricing is the only revenue generating element.

Pricing

Walmart uses placement, product, and promotion work in addition to pricing in its global marketing mix.

The goal of pricing in global marketing strategies falls under three criteria:

Achieving the financial goals of the company and generating profits
Matching the realities of the marketplace and consumer buying trends
Support a product’s positioning so that it is consistent with product, promotion and placement

General Factors Affecting Price

Like national marketing, pricing in global marketing is affected by the other variables of the marketing mix. Price in global marketing strategies can be influenced by distribution channels, promotional tactics, and the quality of the product. For instance, if distribution is exclusive, then prices are likely to be higher. High prices will also be needed to cover high costs of manufacturing, or extensive advertising and promotional campaigns. If manufacturing costs go up due to the rise in price of some raw material, then prices will need to rise as well.

The Role of Price in Global Marketing

Price will always vary from market to market. However, global marketers must be prepared to deal with not only cultural expectations of pricing, but also external variables including trade tariffs, political and economic fluctuations, and the administrative or legal criteria of specific jurisdictions. Pricing can also be affected by the cost of production (locally or internationally), natural resources (product ingredients or components), and the cost of delivery (e.g., the availability of fuel). For instance, if a country imposes a minimum wage law that forces the company to pay more to its workers, the price of the product is likely to raise to cover some of that cost. Natural resources, such as oil, may also fluctuate in price, changing the price of the final good.

Oil

The price of oil is a factor that impacts the prices of many goods due to increased transportation costs.

A Chevron gas sign.

Additionally, the product’s positioning in relation to the local competition influences the brand’s ultimate profit margin. Global marketers must carefully consider how to position their product in global markets, and whether their products are considered high-end, economical or something in-between according to cultural norms and customs.

7.5.5: Global Marketing and the Internet

The internet has allowed marketers to benefit from reduced geographic and time constraints, and reach consumers in various new ways.

Learning Objective

Translate the use of the Internet to marketing on a global level

Key Points

One of the great benefits of global marketing via the Internet is the elimination of geographic and time constraints.
The Internet provides scope and immediacy for marketers looking to reach large swaths of consumers across different demographics.
Technological tools such as behavioral targeting, as well as online groups and communities, allow companies to effectively target consumers in different markets with different needs.

Key Terms

personalization: The act of changing an option of a multi-user software product to change the product’s behavior or style for one user.
lead: Potential opportunity for a sale or transaction, a potential customer.

Global Marketing In Light Of the Internet

The Oxford University Press defines global marketing as “marketing on a worldwide scale reconciling or taking commercial advantage of global operational differences, similarities and opportunities in order to meet global objectives. ” The emergence of the Internet in the early 1990s and its gradual commercialization through the early 2000s would coincide with the globalization of media and cultural products. Brands around the world have since attempted to take advantage as well as keep abreast of the commercial, technological, and cultural trends around Internet marketing.

Global Marketing

Some of the most popular forms of online social media are Facebook, Twitter, and Pinterest.

The Twitter logo.

Time and Space Compression

The Internet’s most obvious benefit is the elimination of geographic and time constraints. Organizations have quickly realized that operating costs can be significantly reduced by moving services from physical locations into the digital world. Employees can work remotely from locations hundreds or even thousands of miles away from office headquarters, delivering the same services to clients and customers as employees working on-site. Virtual help desks can be outsourced, allowing technical staff to log into online systems to assist customers located in distant cities, states, and countries.

This same immediacy applies to global marketing, as it allows brands to reach consumers in various ways and offer a wide range of products and services simultaneously. The scope and reach of the Internet is especially beneficial for companies looking to deliver public relations, advertising, and sales messaging consistently across a broad and diverse audience.

The costs of traditional media (television, radio, print and billboard advertising) limit this kind of reach to multinational markets. For small businesses, eMarketing opens up access to potential customers around the world, all for much less the cost than traditional advertising.

The Internet’s accessibility and low barrier to entry enable anyone with an Internet connection to book a flight, test drive a service, or purchase a product with just a few clicks of a mouse. Moreover, the perpetual nature of the Internet makes business occur 24 hours per day, seven days per week, 52 weeks per year. By speeding the time between the delivery of marketing communications and the gathering of consumer responses, the length of the consumer buying cycle is reduced and the volume of lead generation is increased.

Demographics and Targeting

One of the biggest challenges of global marketing is not only communicating a consistent message and brand image, but developing a deep understanding of the cultural differences that separate consumer markets from one another.

Luckily for global companies, web monitoring and tracking tools have become increasingly sophisticated and offer insights into consumer behavior both online and offline. The nature of the Internet is such that users tend to organize themselves into far more focused groupings and in greater concentrations than in offline settings. For example, social networking websites and personalization features can offer valuable information for global marketers looking to access hard-to-reach and overseas markets.