businesse environment

1. Unit 4: Reference Handouts/ BBM 505
Sources of Foreign Capital:
 FDI/FII
 Export
 Government Borrowing
 Foreign Aid/ Grant
 IMF/World Bank & other Agencies
 Foreign Remittances
Sources of foreign exchange are areas in which economic and financial transactions
between countries affect exchange rate levels. These sources comprise monetary
payments and receipts whose respective levels are driven by supply and demand for
goods and services, investments and currency.
International Trade
 The trade of goods and services between countries requires each to purchase
the currency of the other in order to make payments. Therefore, the international
demand for a country's output (exports) directly affects the demand, and
consequently the price, of its currency.
Capital Investments
 When foreign investors buy and sell capital investments or securities (ex. stocks
and bonds) issued in a given country, they must engage in foreign exchange in
order to complete transactions. Similar to trade, the international demand for a
country's capital investments has a direct effect on the demand for and price of
its currency. Following a decline in a country's currency value, all things being
equal, foreign investors may be inclined to invest in that country's securities,
taking advantage of the exchange rate-reduced prices.
Foreign Institutional Investors
Positive tidings about the Indian economy combined with a fast-growing market have
made India an attractive destination for foreign institutional investors (FIIs).
FIIs showed huge interest in 2007, pumping in the highest ever net investment of US$
17.2 billion in the equity markets and were instrumental in the Bombay Stock Exchange
(BSE) and National Stock Exchange (NSE) clocking record index levels of over 20,000
and 6,000, respectively. In fact, during the year, FIIs were net buyers in 10 out of 12
months, turning net sellers in the rest, primarily to make up the losses on account of the
sub-prime crisis in the US.

2. Out of the total net inflows, a whopping 70 per cent was invested through the
instruments of Foreign Currency Convertible Bonds (FCCBs), Qualified Institutional
Placements (QIPs), and initial public offerings (IPOs). Of these, in the current year, all
corporates in India raised around US$ 11-13 billion of FCCBs, QIPs raised US$ 3.2
billion in 2007 and IPOs - India Inc has raised a record US$ 12.41 billion through public
issues --IPOs and FPOs--in the fiscal 2007-08. India's mobilisation of funds through
public equity offerings more than doubled this year as against US$ 5.94 billion mobilised
in 2006-07, data compiled by primary market tracking firm Prime shows. The remaining
30 per cent was invested through overseas offers, preferential offers and conversion of
warrants. Of these, outstanding NRI deposits at end-March 2008, stood at US$ 43.7
billion. Also, investments in securities have also gone up. Out of the US$ 299.23 billion
foreign currency assets as on 31 March 2008, US$ 103.56 billion were invested in
securities.
This surge in FII investment has led to the cumulative net investments by FII in to Indian
equities to total US$ 66.8 billion by the end of 2007, since December 1993, when FIIs
were allowed to enter India. This is a clear index of how bullish this category of investors
has been on the prospects of the Indian market.
Government Initiatives
FIIs are allowed to invest in the primary and secondary capital markets in India through
the portfolio investment scheme (PIS). Under this scheme, FIIs can acquire
shares/debentures of Indian companies through the stock exchanges in India.
The ceiling for overall investment for FIIs is 24 per cent of the paid-up capital of the
Indian company, and limit is 20 per cent of the paid-up capital in the case of public
sector banks. The ceiling of 24 per cent for FII investment can be raised up to sectoral
cap/statutory ceiling, subject to the approval of the board and the general body of the
company passing a special resolution to that effect.
To further increase FII participation in the Indian market, the government and SEBI have
taken several measures:
 Allowed foreign individuals, corporates and other investors such as hedge funds
to register directly as foreign institutional investors.
 SEBI has FII investment limit in government securities being increased to US$ 5
billion from US$ 3.2 billion.
 Institutional investors--including FIIs and their sub-accounts--have been allowed
to undertake short-selling, lending and borrowing of Indian securities from
February 1, 2008.
 SEBI has simplified the registration norms for FIIs and sub-accounts.
 Significantly, it has allowed investment managers, advisors or institutional
portfolio managers in the NRI category to be registered as FIIs.
Consequent to the liberalisation of registration norms, the number of foreign institutional
investors (FIIs) registered with the Securities and Exchange Board of India (SEBI) has
increased to 1403 as on June 27, 2008 as compared with just 1051 FIIs a year back.
Simultaneously, the upgradation of India's sovereign ratings combined with the
improvement in the macro-economic situation and growth fundamentals has led to a

3. near tripling of FII investments in the debt market. Total investment in the country's debt
market till November amounted to US$ 1.59 billion as against US$ 487 million in the
corresponding period in 2006.
Also, with the government raising the investment limit for the FIIs in the Government
Securities, the FIIs are rushing in to buy Government paper. As of 27 June, 2008 FIIs
have already invested US$ 3.87 billion in the debt market, as against US$ 2.29 billion in
debt at the close of 2007. Earlier in May 2008, SEBI had hiked the investment
allocations to FIIs in both government and corporate debt collectively by US$ 3.5 billion,
taking the total investment limit to US$ 8 billion.
Foreign Technology Collaboration in India
Foreign Technology Collaboration-Glimpses
Foreign Technology Collaboration in India permits transfer of technology by the
means of Government approval or through the automatic route delegated by RBI.
The collaboration induces the required amount of technological development and
promotion of technologically advanced industries. Foreign Technology Collaboration
in India is undertaken with the objective of improving technology levels in the Indian
industries. This helps to increase the efficiency and productivity of the industries in
India.
Foreign Technology Collaboration-Methods of approval
The methods of approval Foreign Technology Collaboration in India helps in
effective transfer of technical aspects. The transfer of foreign technology plays an
important role in the Foreign Direct Investments. With the introduction of the 1991
Economic Policy, foreign investments started inflowing in large amounts. The Central
government has allowed the transfer of technology in various industrial sectors.
Significant technology transfers have taken place since the economic reforms.
The Central Government presented the Statement on Industrial Policy in 1991, which
provided simplified methods for the better governance of the Foreign Technology
Agreements. Sec 39C deals with Foreign Technology Agreements. There are certain
standardized clauses for the approval of the Foreign Technology Collaboration in
India.
The approval techniques follow two methods, namely automatic approval and
government approval
Government Approval
The manufacturing and products should be compliant with the small scale industries
Proposals which involve previous trademark agreement, joint ventures, technology
transfer, etc In case of an extension of the foreign technology collaboration
agreements which had been automatically approved earlier
Automatic Approval
The royalty paid is 1 % in case of domestic sales and 2 % in case of exports as
granted under automatic route for use of the trademark foreign collaborator

4. The royalty to be paid is restricted to 5 % in case of domestic sales, 8 % in case of
exports and total payment should be 8 % on sales for a period of 10 years
The royalty paid is 5 % in case of domestic sales and 8 % in case of exports as
granted under automatic route for wholly owned subsidiaries
FOREIGN INVESTMENT POLICY-FDI & FII A. Foreign Direct Investment Policy-FDI
RBI-Automatic FIPB
100 74 49 26 100 74 49 26
Flori-Horticulture Ground Scheduled Insurance Tea Basic & ARCs Defence
handling air transport Cigarette Cellular production
Mining-Gold, (air)-NRI (NRI-100%) services DTH
minerals, silver, 100 Courier (FDI+FII) FM radio-
coal & lignite services ISP 20%
(Captive) Private Commodity
banking Basic & Non-news exchange Newspaper
Alcohol-distillation (FDI+FII) Cellular channels
services Credit News
Hazardous Non- Magazine information channels
chemicals, scheduled ISP Journals company
Industrial air transport
explosives, Drugs Refining
& Pharma (PSU)
Power Single
brand
Airports product
(Greenfield) retailing
(51%)
Construction
development
projects, SEZs
Industrial parks
Refining
(private)
Telecom
equipments
Wholesale trading

5. NBFCs
All Remaining 100% FDI-Automatic, subject to regulations applied viz. PSU
reservation etc.
B. Foreign Institutional Investments-FIIs
This surge in FII investment has led to the cumulative net investments by FII in to Indian
equities to total US$ 66.8 billion by the end of 2007, since December 1993, when FIIs
were allowed to enter India. This is a clear index of how bullish this category of investors
has been on the prospects of the Indian market.
Government Initiatives
 The ceiling for overall investment for FIIs is 24 per cent of the paid-up capital of
the Indian company,
 20 per cent of the paid-up capital in the case of public sector banks.
 The ceiling of 24 per cent for FII investment can be raised up to sectoral
cap/statutory ceiling, subject to the approval of the board and the general body of
the company passing a special resolution to that effect.
 Allowed foreign individuals, corporates and other investors such as hedge funds
to register directly as foreign institutional investors.

6.  SEBI has FII investment limit in government securities and corporate bonds
being increased to US$ 8 billion.
 Institutional investors--including FIIs and their sub-accounts--have been allowed
to undertake short selling, lending and borrowing of Indian securities from
February 1, 2008. (Temporarily recently banned, Oct 2008)
 SEBI has simplified the registration norms for FIIs and sub-accounts.
 it has allowed investment managers, advisors or institutional portfolio managers
in the NRI category to be registered as FIIs.
GLOBALISATION:
Globalization can be traced to times when Buddhism spread from India to China in Ist
century AD. That was when cultural links between both countries were established. By
1300 AD, the Song Dynasty in China linked Europe and China by land and sea across
Eurasia and the Indian Ocean. The year 1300 saw the creation of the Ottoman Empire
which spanned Europe, North Africa, and the Middle East, and connected the
dynasties in Central Asia and India.
This led to the expansion of trading activities between Europe and Asia. By 1300,
networks of trade ran from England to China, France, Italy, across the Mediterranean
to Egypt, and then to Central Asia (the Silk Route). The trade in commodities
continued well into the 17th century. By 1800, the Atlantic and Indian Ocean systems
were connected to one another through the flow of commodities and by the operations
of the British, French, and Dutch overseas companies.
The economic conditions that prevailed in the eighteenth century continued well into the
nineteenth century. With the introduction of railways and steamships, transportation
costs came down significantly, and this created new circuits of capital accumulation. In
the twentieth century, technological developments were further reducing natural barriers
like geographical distance. The cost of information processing and communication fell
significantly in the last few decades, accelerating the pace of globalization.
Firms go abroad for organizational and environmental reasons. Organizational factors
are internal to the organization, while environmental reasons are external to the
organization. Internal reasons might range from wanting to exploit worldwide market
imperfections to opportunities that arise in different stages of the lifecycle of a firm’s
product. There are six ways to enter a foreign market. They are: exporting, turnkey
projects, licensing, franchising, setting up a joint venture with a host country firm, and
setting up a wholly-owned subsidiary in the host country.
An organization goes through five stages of evolution: domestic, international,
multinational, global, and transnational stages before becoming a metanational
corporation. The classification is based on the firm’s orientation at each stage. To be
competitive, companies have to constantly innovate and make their own products
obsolete. Competition has transformed the marketplace from a seller's market to a
buyer's market where the customers' focus is on value. Metanational companies see the
world as a place with specialized knowledge pockets: market intelligence, technology
and capabilities, scattered around. These companies sense the untapped potential in
these knowledge pockets, and try to exploit it to the fullest extent.

7. Measuring globalization:
Globalization has had an impact on different cultures around the world.
Japanese McDonald's fast food as an evidence of international integration.
Looking specifically at economic globalization, demonstrates that it can be measured in
different ways. These center around the four main economic flows that characterize
globalization:
 Goods and services, e.g. exports plus imports as a proportion of national income
or per capita of population
 Labor/people, e.g. net migration rates; inward or outward migration flows,
weighted by population
 Capital, e.g. inward or outward direct investment as a proportion of national
income or per head of population
 Technology, e.g. international research & development flows; proportion of
populations (and rates of change thereof) using particular inventions (especially
'factor-neutral' technological advances such as the telephone, motorcar,
broadband)
As globalization is not only an economic phenomenon, a multivariate approach to
measuring globalization is the recent index calculated by the Swiss think tank KOF. The
index measures the three main dimensions of globalization: economic, social, and
political. In addition to three indices measuring these dimensions, an overall index of
globalization and sub-indices referring to actual economic flows, economic restrictions,
data on personal contact, data on information flows, and data on cultural proximity is
calculated. Data is available on a yearly basis for 122 countries, as detailed in Dreher,
Gaston and Martens (2008). According to the index, the world's most globalized country
is Belgium, followed by Austria, Sweden, the United Kingdom and the Netherlands. The
least globalized countries according to the KOF-index are Haiti, Myanmar the Central
African Republic and Burundi.A.T. Kearney and Foreign Policy Magazine jointly publish
another Globalization Index. According to the 2006 index, Singapore, Ireland,
Switzerland, the U.S., the Netherlands, Canada and Denmark are the most globalized,
while Indonesia, India and Iran are the least globalized among countries listed.
Effects of globalization
Globalization has various aspects which affect the world in several different ways such
as:
 Industrial - emergence of worldwide production markets and broader access to a
range of foreign products for consumers and companies. Particularly movement
of material and goods between and within national boundaries.
 Financial - emergence of worldwide financial markets and better access to
external financing for borrowers. Simultaneous though not necessarily purely
globalist is the emergence of under or un-regulated foreign exchange and
speculative markets.
 Economic - realization of a global common market, based on the freedom of
exchange of goods and capital.
 Political - some use "globalization" to mean the creation of a world government,
or cartels of governments (e.g. WTO, World Bank, and IMF) which regulate the
relationships among governments and guarantees the rights arising from social
and economic globalization. [13] Politically, the United States has enjoyed a

8. position of power among the world powers; in part because of its strong and
wealthy economy. With the influence of globalization and with the help of The
United States’ own economy, the People's Republic of China has experienced
some tremendous growth within the past decade. If China continues to grow at
the rate projected by the trends, then it is very likely that in the next twenty years,
there will be a major reallocation of power among the world leaders. China will
have enough wealth, industry, and technology to rival the United States for the
position of leading world power.
 Informational - increase in information flows between geographically remote
locations. Arguably this is a technological change with the advent of fibre optic
communications, satellites, and increased availability of telephony and Internet.
 Language - the most popular language is English
o About 75% of the world's mail, telexes, and cables are in English.
o Approximately 60% of the world's radio programs are in English.
o About 90% of all Internet traffic is using English.
 Competition - Survival in the new global business market calls for improved
productivity and increased competition. Due to the market became worldwide not
specific area, there are many industries around the world. Industries have to
upgrade their products and use technology skillfully for facing the competition
and increasing their competitive.[16]
 Cultural - growth of cross-cultural contacts; advent of new categories of
consciousness and identities which embodies cultural diffusion, the desire to
increase one's standard of living and enjoy foreign products and ideas, adopt
new technology and practices, and participate in a "world culture". Some bemoan
the resulting consumerism and loss of languages. Also see Transformation of
culture.
 Ecological- the advent of global environmental challenges that might be solved
with international cooperation, such as climate change, cross-boundary water
and air pollution, over-fishing of the ocean, and the spread of invasive species.
Since many factories are built in developing countries with less environmental
regulation, globalism and free trade may increase pollution. On the other hand,
economic development historically required a "dirty" industrial stage, and it is
argued that developing countries should not, via regulation, be prohibited from
increasing their standard of living.
 Social (International cultural exchange) - increased circulation by people of all
nations with fewer restrictions.
o Spreading of multiculturalism, and better individual access to cultural
diversity (e.g. through the export of Hollywood and Bollywood movies).
Some consider such "imported" culture a danger, since it may supplant
the local culture, causing reduction in diversity or even assimilation.
Others consider multiculturalism to promote peace and understanding
between peoples.
o Greater international travel and tourism
o Greater immigration, including illegal immigration
o Spread of local consumer products (e.g. food) to other countries (often
adapted to their culture).
o Worldwide fads and pop culture such as Pokémon, Sudoku, Numa Numa,
Origami, Idol series, YouTube, Orkut, Facebook, and MySpace.
Accessible to those who have Internet or Television, leaving out a
substantial segment of the Earth's population.

9. o Worldwide sporting events such as FIFA World Cup and the Olympic
Games.
o Incorporation of multinational corporations in to new media. As the
sponsors of the All-Blacks rugby team, Adidas had created a parallel
website with a downloadable interactive rugby game for its fans to play
and compete.
 Technical
o Development of a global telecommunications infrastructure and greater
transborder data flow, using such technologies as the Internet,
communication satellites, submarine fiber optic cable, and wireless
telephones
o Increase in the number of standards applied globally; e.g. copyright laws,
patents and world trade agreements.
 Legal/Ethical
o The creation of the international criminal court and international justice
movements.
o Crime importation and raising awareness of global crime-fighting efforts
and cooperation.
Whilst it is all too easy to look at the positive aspects of Globalization and the great
benefits that are apparent everywhere, there are also several negative occurrences that
can only be the result of or major motivating factors that inspire some corporations to
globalize. Globalization – the growing integration of economies and societies around the
world – has been one of the most hotly-debated topics in international economics over
the past few years. Rapid growth and poverty reduction in China, India, and other
countries that were poor 20 years ago, has been a positive aspect of globalization. But
globalization has also generated significant international opposition over concerns that it
has increased inequality and environmental degradation.
PUSH VS PULL FACTORS

10. ADVANTAGES & LIMITATIONS OF MNCS
Multinational Corporations:
Though there is no universally acceptable definition of MNCs they may be
generally defined as companies that operate in more than one country and
invest directly in operations instead of being involved in licensing, franchising,
etc. The operations are not just confined to sales but also involve
manufacturing and R&D. MNCs tend to be oligopolistic and dynamic in sensing
and exploiting local opportunities.
The various subsidiaries of an MNC enjoy substantial autonomy in decision
making, except in some critical areas, which are handled by the parent firm.
MNCs can be vertically or horizontally integrated. They can also take the form
of conglomerates, joint ventures, or strategic alliances. The growth of MNCs in
the last few decades may be attributed to the revolution in information
technology and the removal of restrictions on capital flows by several countries
around the globe. Many theories have been framed to explain the evolution of
MNCs.
Advantages:
• New investment and New technology
• Innovative and competitive practices
• Contributions of taxation
• Foreign exchange/Export
• Integrating Economies
• Economy building
Disadvantages:
• High competitive advantages over local firms
• Operate polices that may create distortion in local market
• Misuse the environment and resources
• Avoid tax by practicing transfer pricing
• Political Pressure
Multinational Corporations:
Though there is no universally acceptable definition of MNCs they may be

11. generally defined as companies that operate in more than one country and
invest directly in operations instead of being involved in licensing, franchising,
etc. The operations are not just confined to sales but also involve
manufacturing and R&D. MNCs tend to be oligopolistic and dynamic in sensing
and exploiting local opportunities.
The various subsidiaries of an MNC enjoy substantial autonomy in decision
making, except in some critical areas, which are handled by the parent firm.
MNCs can be vertically or horizontally integrated. They can also take the form
of conglomerates, joint ventures, or strategic alliances. The growth of MNCs in
the last few decades may be attributed to the revolution in information
technology and the removal of restrictions on capital flows by several countries
around the globe. Many theories have been framed to explain the evolution of
MNCs.
Organizational Structure of MNCs
Organizational structure is a representation of the formal reporting relationships within
an organization. Span of control refers to the maximum number of subordinates a
manager can effectively supervise. A narrow span of control means fewer number of
people reporting to a manager and a wide span means more subordinates reporting to
one manager.
While a narrow span of control creates a tall organization with many managers and
centralized decision making, wide span creates a flat organization with fewer managers
and more delegation of authority. The degree to which authority is delegated determines
centralization and decentralization.
Though centralization helps avoid conflict of interest that could arise in a decentralized
environment, it generally leads to slower, ineffective and inefficient decision-making.
Horizontal differentiation is concerned with how the departments in an organization
function together. An organization based on functions is the traditional and the most
logical.
But a firm offering many product lines, will find this structure less successful. In a product
division based organizational structure, product heads are responsible for all functions
relating to a product. This enables the managers to gain expertise of various functions
relating to the product. Marketing plans can vary among product groups and need not be
tied up with the overall organizational marketing plan.
Most MNCs in their initial stages of globalization employed an international division
covering certain regions of the world to supervise the functions in those regions. But
conflicts could arise between the functional heads and the heads of the international
division. WorldWide Area Structure and Strategic Business Units (SBU) are more
popular forms of organizational structure in big corporations. SBUs function as
independent organizations with a separate income statement and balance sheet. But the
challenge of globalization and the growth in technology have brought about more
complex organizational structures like the Matrix structure and the management
networks. Matrix organizations are a hybrid of the functional and divisional structures.
Normally, this results in a subordinate having to report to two bosses. But matrix
structures can prove very effective without any conflict in the reporting relationships, if
they are well chalked out. Network or virtual organizations use technology to collect and
disseminate information. They identify customer requirements and deliver products and
services through a network of specialists.
Ex: Matrix
Wipro has an advantage. What they are doing now is that putting SBU heads there. So
the healthcare head is based in Boston, energy and utilities head is based in London.

12. The manufacturing head is based now in California. All these units are roughly a little
under billion dollars. So if you look at size of our operations, roughly this will represent
40% of our revenues. And if you take the aggregate, I would say about half our business
is based overseas. It’s not a bad idea (having one CEO based overseas).
In the present era of globalization, many firms do not confine themselves to their
domestic market but choose to enter international markets at some point. There are two
modes for entry into international markets. These are: low or shared and the high or full
control modes. Firms entering international markets should make a careful study of the
pros and cons of each entry mode.
Firms which are large, and have ambitious objectives, and those which are willing to
take risks, prefer to have greater control over their operations in international markets.
So, they either acquire firms in international markets or start their own operations, both
of which are high control modes. High control modes of entry also offer high returns. But
firms which do not take risk or cannot commit resources opt for a shared/low control
mode. This can be in the form of exporting, contracts, joint ventures or strategic
alliances. The returns are moderate in the low control mode.
The choice of the entry mode depends on a set of internal and external factors relating
to the firm. The social ties of a firm also affect the choice of entry mode choice for the
firms. Firms which interact with different groups, get information very easily. Firms often
prefer to do business with acquaintances in foreign markets or with parties who are
introduced by their common friends. After choosing the entry mode, the right timing for
entry into the international markets is critical.
The factors that are specific to a firm, industry and to the host country will have a
combined influence on the timing of the firm's entry. Japanese firms usually take a long
term perspective when entering foreign markets. They prefer a high control mode of
entry. The stake of the firm, risk factors, resource commitment, need for local
contribution, and government regulations are the five important factors that influence the
entry mode decision of a Japanese firm. In general, all high-tech start-up companies
prefer a low entry mode.
Only in rare cases do they opt for a high control mode. Firms, which sell customized
products, usually adopt a direct exporting strategy whereas firms that sell standardized
products prefer to have intermediaries. In countries where the risk factor is high, firms
adopt a low control entry mode and in economies where the risk factor is low, a high
control entry mode is preferred. The entry strategies of pharma companies can take five
forms - exporting, licensing, joint venture, mergers and acquisitions, and establishing a
subsidiary of their own. The decision regarding the mode of entry in the pharma industry
is basically guided by the objectives of the firms concerned.
 Exporting
 Turnkey Projects
 Licensing
 Franchising
 Joint Ventures
 M&A
 Wholly owned Subsidiaries
The advantage of exporting is that it facilitates realization of experience curve
economies and prevents cost of setting up manufacturing operations in another country.

13. Disadvantages include high transport costs, trade barriers and problems with local
marketing agents. Turnkey projects allow firms to export their process technology where
FDI is not permitted.
The disadvantage is that the firm may create competitors in the process. The main
advantage of licensing is that the licensee bears the cost and risk of opening a foreign
market. The disadvantages include the risk of losing technological know-how to the
licensee.
The advantage of franchising is similar to that of licensing and the disadvantage is that
the franchiser has to keep strict control over the franchisee. The advantage of joint
ventures is the partners share the costs and risk of opening a foreign market and of
gaining knowledge and political influence. The disadvantage is the risk of losing control
over technology.
The advantages of wholly owned subsidiary include tight control over operations and
technology. However, the firm has to bear all the costs and risks of opening a foreign
market. We have also seen that the multiple measures of risk should be taken into
consideration while selecting an entry mode. We also discussed strategic alliances and
its advantages and disadvantages.
The advantage of strategic alliance is that it facilitates entry into foreign market and
enables partners to share the fixed costs and risks associated with new products and
processes. The disadvantage is that firms may sometimes have to give away
technological know-how and market access to the alliance partner.
To make the alliance work, factors to be taken into consideration are selection of
partner, structure of the alliance and management of the alliance. The key issues
involved in managing alliances are building trust and learning from each other.
 Continuum of Internationalization:
International –Multinational/Transnational-Global
 Entry strategies:
Export-Licensing-Franchising-Turnkey projects-subsidiary-Joint ventures
 Organizational structure:
International division-Functional-Geographic-Product-Matrix-Network
******************
International Business Entry Strategies (Modes/Channels):
Entry strategies
There are a variety of ways in which organisations can enter foreign markets. The three
main ways are by direct or indirect export or production in a foreign country
Exporting

14. Exporting is the most traditional and well established form of operating in foreign
markets. Exporting can be defined as the marketing of goods produced in one country
into another. Whilst no direct manufacturing is required in an overseas country,
significant investments in marketing are required. The tendency may be not to obtain as
much detailed marketing information as compared to manufacturing in marketing
country; however, this does not negate the need for a detailed marketing strategy.
The advantages of exporting are:
The disadvantage is mainly that one can be at the "mercy" of overseas agents and so
the lack of control has to be weighed against the advantages. For example, in the
exporting of African horticultural products, the agents and Dutch flower auctions are in a
position to dictate to producers.
A distinction has to be drawn between passive and aggressive exporting. A passive
exporter awaits orders or comes across them by chance; an aggressive exporter
develops marketing strategies which provide a broad and clear picture of what the firm
intends to do in the foreign market. Pavord and Bogart2 (1975) found significant
differences with regard to the severity of exporting problems in motivating pressures
between seekers and non-seekers of export opportunities. They distinguished between
firms whose marketing efforts were characterized by no activity, minor activity and
aggressive activity.
Those firms who are aggressive have clearly defined plans and strategy, including
product, price, promotion, distribution and research elements. Passiveness versus
aggressiveness depends on the motivation to export. In countries like Tanzania and
Zambia, which have embarked on structural adjustment programmes, organisations are
being encouraged to export, motivated by foreign exchange earnings potential, saturated
domestic markets, growth and expansion objectives, and the need to repay debts
incurred by the borrowings to finance the programmes. The type of export response is
dependent on how the pressures are perceived by the decision maker. Piercy (1982) 3
highlights the fact that the degree of involvement in foreign operations depends on
"endogenous versus exogenous" motivating factors, that is, whether the motivations
were as a result of active or aggressive behaviour based on the firm's internal situation
(endogenous) or as a result of reactive environmental changes (exogenous).
If the firm achieves initial success at exporting quickly all to the good, but the risks of
failure in the early stages are high. The "learning effect" in exporting is usually very
quick. The key is to learn how to minimise risks associated with the initial stages of
market entry and commitment - this process of incremental involvement is called
"creeping commitment"
Exporting methods include direct or indirect export. In direct exporting the organisation
may use an agent, distributor, or overseas subsidiary, or act via a Government agency.
In effect, the Grain Marketing Board in Zimbabwe, being commercialised but still having
Government control, is a Government agency. The Government, via the Board, are the

15. only permitted maize exporters. Bodies like the Horticultural Crops Development
Authority (HCDA) in Kenya may be merely a promotional body, dealing with advertising,
information flows and so on, or it may be active in exporting itself, particularly giving
approval (like HCDA does) to all export documents. In direct exporting the major
problem is that of market information. The exporter's task is to choose a market, find a
representative or agent, set up the physical distribution and documentation, promote and
price the product. Control, or the lack of it, is a major problem which often results in
decisions on pricing, certification and promotion being in the hands of others. Certainly,
the phytosanitary requirements in Europe for horticultural produce sourced in Africa are
getting very demanding. Similarly, exporters are price takers as produce is sourced also
from the Caribbean and Eastern countries. In the months June to September, Europe is
"on season" because it can grow its own produce, so prices are low. As such, producers
are better supplying to local food processors. In the European winter prices are much
better, but product competition remains.
According to Collett4 (1991)) exporting requires a partnership between exporter,
importer, government and transport. Without these four coordinating activities the risk of
failure is increased. Contracts between buyer and seller are a must. Forwarders and
agents can play a vital role in the logistics procedures such as booking air space and
arranging documentation. A typical coordinated marketing channel for the export of
Kenyan horticultural produce is given in figure below.
In this case the exporters can also be growers and in the low season both these and
other exporters may send produce to food processors which is also exported.
The export marketing channel for Kenyan horticultural products.
Exporting can be very lucrative, especially 'if it is of high value added produce. For
example in 1992/93 Zimbabwe exported 5 338,38 tonnes of flowers, 4 678,18 tonnes of
horticultural produce and 12 000 tonnes of citrus at a total value of about US$ 22 016,56
million. In some cases a mixture of direct and indirect exporting may be achieved with
mixed results. For example, the Grain Marketing Board of Zimbabwe may export grain
directly to Zambia, or may sell it to a relief agency like the United Nations, for feeding the

16. Mozambican refugees in Malawi. Payment arrangements may be different for the two
transactions. Nali products of Malawi gives an interesting example of a "passive to
active" exporting mode.
CASE 7.1 Nali Producers - Malawi
Nali group, has, since the early 1970s, been engaged in the growing and exporting of
spices. Spices are also used in the production of a variety of sauces for both the local
and export market. Its major success has been the growing and exporting of Birdseye
chilies. In the early days knowledge of the market was scanty and thus the company was
obtaining ridiculously low prices. Towards the end of 1978 Nali chilies were in great
demand, yet still the company, in its passive mode, did not fully appreciate the
competitive implications of the business until a number of firms, including Lonrho and
Press Farming, started to grow and export.
Again, due to the lack of information, a product of its passivity, the firm did not realise
that Uganda, with their superior product, and Papua New Guinea were major exporters,
However, the full potential of these countries was hampered by internal difficulties. Nali
was able to grow into a successful commercial enterprise. However, with the end of the
internal problems, Uganda in particular, began an aggressive exporting policy, using
their overseas legations as commercial propagandists. Nali had to respond with a more
formal and active marketing operation. However it is being now hampered by a number
of important "exogenous" factors.
The entry of a number of new Malawian growers, with inferior products, has damaged
the Malawian chili reputation, so has the lack of a clear Government policy and the lack
of financing for traders, growers and exporters.
The latter only serves to emphasise the point made by Collett, not only do organisations
need to be aggressive, they also need to enlist the support of Government and
importers.
It is interesting to note that Korey (1986) warns that direct modes of market entry may be
less and less available in the future. Growing trading blocs like the EU or EFTA means
that the establishing of subsidiaries may be one of the only means forward in future.
It is interesting to note that Korey5 1986 warned that direct modes of market entry may
be less and less available in the future. Growing trading blocks like the EU or EFTA
means that the establishment of subsidiaries may be one of the only ways forward in
future. Indirect methods of exporting include the use of trading companies (very much
used for commodities like cotton, soya, cocoa), export management companies,
piggybacking and countertrade.
Indirect methods offer a number of advantages including:
- in the operating market or worldwide
ce takes burden from manufacturer.

17. Piggybacking
Piggybacking is an interesting development. The method means that organisations with
little exporting skill may use the services of one that has. Another form is the
consolidation of orders by a number of companies in order to take advantage of bulk
buying. Normally these would be geographically adjacent or able to be served, say, on
an air route. The fertilizer manufacturers of Zimbabwe, for example, could piggyback
with the South Africans who both import potassium from outside their respective
countries.
Countertrade
By far the largest indirect method of exporting is countertrade. Competitive intensity
means more and more investment in marketing. In this situation the organisation may
expand operations by operating in markets where competition is less intense but
currency based exchange is not possible. Also, countries may wish to trade in spite of
the degree of competition, but currency again is a problem. Countertrade can also be
used to stimulate home industries or where raw materials are in short supply. It can,
also, give a basis for reciprocal trade.
Estimates vary, but countertrade accounts for about 20-30% of world trade, involving
some 90 nations and between US $100-150 billion in value. The UN defines
countertrade as "commercial transactions in which provisions are made, in one of a
series of related contracts, for payment by deliveries of goods and/or services in addition
to, or in place of, financial settlement".
Countertrade is the modem form of barter, except contracts are not legal and it is not
covered by GATT. It can be used to circumvent import quotas.
Countertrade can take many forms. Basically two separate contracts are involved, one
for the delivery of and payment for the goods supplied and the other for the purchase of
and payment for the goods imported. The performance of one contract is not contingent
on the other although the seller is in effect accepting products and services from the
importing country in partial or total settlement for his exports. There is a broad
agreement that countertrade can take various forms of exchange like barter, counter
purchase, switch trading and compensation (buyback). For example, in 1986 Albania
began offering items like spring water, tomato juice and chrome ore in exchange for a
contract to build a US $60 million fertilizer and methanol complex. Information on
potential exchange can be obtained from embassies, trade missions or the EU trading
desks.
Foreign production
Besides exporting, other market entry strategies include licensing, joint ventures,
contract manufacture, ownership and participation in export processing zones or free
trade zones.
Licensing: Licensing is defined as "the method of foreign operation whereby a firm in
one country agrees to permit a company in another country to use the manufacturing,
processing, trademark, know-how or some other skill provided by the licensor".

18. It is quite similar to the "franchise" operation. Coca Cola is an excellent example of
licensing. In Zimbabwe, United Bottlers have the licence to make Coke.
Licensing involves little expense and involvement. The only cost is signing the
agreement and policing its implementation.
Licensing gives the following advantages:
ns and open the door to low risk manufacturing
relationships
marketing effort
take royalties in stock.
The disadvantages are:
- to length of agreement, specific product, process or
trademark
-how and so licence is short
- overcome by having cross technology transfer deals
and
Those who decide to license ought to keep the options open for extending market
participation. This can be done through joint ventures with the licensee.
Joint ventures
Joint ventures can be defined as "an enterprise in which two or more investors share
ownership and control over property rights and operation".
Joint ventures are a more extensive form of participation than either exporting or
licensing. In Zimbabwe, Olivine industries has a joint venture agreement with HJ Heinz
in food processing.
Joint ventures give the following advantages:
-depth knowledge with a foreign
partner with know-how in technology or process
They also have disadvantages:

19. If the partners carefully map out in advance what they expect to achieve and how, then
many problems can be overcome.
Ownership: The most extensive form of participation is 100% ownership and this
involves the greatest commitment in capital and managerial effort. The ability to
communicate and control 100% may outweigh any of the disadvantages of joint ventures
and licensing. However, as mentioned earlier, repatriation of earnings and capital has to
be carefully monitored. The more unstable the environment the less likely is the
ownership pathway an option.
These forms of participation: exporting, licensing, joint ventures or ownership, are on a
continuum rather than discrete and can take many formats. Anderson and Coughlan8
(1987) summarise the entry mode as a choice between company owned or controlled
methods - "integrated" channels - or "independent" channels. Integrated channels offer
the advantages of planning and control of resources, flow of information, and faster
market penetration, and are a visible sign of commitment. The disadvantages are that
they incur many costs (especially marketing), the risks are high, some may be more
effective than others (due to culture) and in some cases their credibility amongst locals
may be lower than that of controlled independents. Independent channels offer lower
performance costs, risks, less capital, high local knowledge and credibility.
Disadvantages include less market information flow, greater coordinating and control
difficulties and motivational difficulties. In addition they may not be willing to spend
money on market development and selection of good intermediaries may be difficult as
good ones are usually taken up anyway.
Once in a market, companies have to decide on a strategy for expansion. One may be to
concentrate on a few segments in a few countries - typical are cashewnuts from
Tanzania and horticultural exports from Zimbabwe and Kenya - or concentrate on one
country and diversify into segments. Other activities include country and market segment
concentration - typical of Coca Cola or Gerber baby foods, and finally country and
segment diversification. Another way of looking at it is by identifying three basic business
strategies: stage one - international, stage two - multinational (strategies correspond to
ethnocentric and polycentric orientations respectively) and stage three - global strategy
(corresponds with geocentric orientation). The basic philosophy behind stage one is
extension of programmes and products, behind stage two is decentralisation as far as
possible to local operators and behind stage three is an integration which seeks to
synthesize inputs from world and regional headquarters and the country organisation.
Whilst most developing countries are hardly in stage one, they have within them
organisations which are in stage three. This has often led to a "rebellion" against the
operations of multinationals, often unfounded.
Export processing zones (EPZ)
Whilst not strictly speaking an entry-strategy, EPZs serve as an "entry" into a market.
They are primarily an investment incentive for would be investors but can also provide

20. employment for the host country and the transfer of skills as well as provide a base for
the flow of goods in and out of the country. One of the best examples is the Mauritian
EPZ12, founded in the 1970s.
CASE 7.2 The Mauritian Export Processing Zone
Since its inception over 400 firms have established themselves in sectors as diverse as
textiles, food, watches. And plastics. In job employment the results have been startling,
as at 1987, 78,000 were employed in the EPZ. Export earnings have tripled from 1981 to
1986 and the added value has been significant- The roots of success can be seen on
the supply, demand and institutional sides. On the supply side the most critical factor
has been the generous financial and other incentives, on the demand side, access to the
EU, France, India and Hong Kong was very tempting to investors. On the institutional
side positive schemes were put in place, including finance from the Development Bank
and the cutting of red tape. In setting up the export processing zone the Mauritian
government displayed a number of characteristics which in hindsight, were crucial to its
success.
trouble
rather than maintaining the status quo
and characteristics.
Organisations are faced with a number of strategy alternatives when deciding to enter
foreign markets. Each one has to be carefully weighed in order to make the most
appropriate choice. Every approach requires careful attention to marketing, risk, matters
of control and management. A systematic assessment of the different entry methods can
be achieved through the use of a matrix (see table 7.2).
Table 7.2 Matrix for comparing alternative methods of market entry
Entry mode
Evaluation Indirect Direct Marketing Counter Licensing Joint Wholly EPZ
criteria export export subsidiary trade venture owned
operation
a) Company
goals

21. b) Size of
company
c) Resources
d) Product
e) Remittance
f) Competition
g) Middlemen
characteristics
h)
Environmental
characteristics
i) Number of
markets
j) Market
k) Market
feedback
l) International
market
learning
m) Control
n) Marketing
costs
o) Profits
p) Investment
q)
Administration
personnel
r) Foreign
problems
s) Flexibility
t) Risk
INTERNATIONAL TRADE THEOROES

22. ***************************