Scope And Size Of International Markets

Introduction

A company manufacturing a product finds that the market for its product is currently saturated.

The managing director of the company calls a meeting of all the functional heads to discuss the problem. In the meeting it emerges that while the production runs cannot be shortened or cut off because of the underlying economics, the market doesn’t seem to let up.

The problem before the managing director is ‘what should be done now?’

One of the suggestion that emerges during the meeting is to “expand the market size by crossing the national frontiers”.

To this suggestion the managing director has posed certain fundamental questions:

Where should we expand? How can we do this? Would it be feasible to maintain the expansion even when the domestic market lets up?

Basically the managing director has raised the fundamental questions that are posed by any international marketer. We shall attempt to answer these questions in this block but before we answer these questions, let us understand the definition and reasons for international marketing and foreign trade.

 

Definitions

When a country crosses its national frontiers to market its product it is indulging in international marketing. As defined by Phillip Cateora and John M. Hess “International marketing is the performance of business activities that direct the flow of a company’s goods and services to consumers or users in more than one nation.”

Yes, the definition sounds very similar to that of marketing, for it is meant to be, the only difference being that marketing task is carried out in more than one nation. This fact by itself adds many complexities to the marketing task [as we shall see later on]. As per the definition given by the American Marketing Association, “Marketing is the process of planning and executing the conception, pricing, promotion and distribution of goods, services and ideas to create exchanges that satisfy individual and organizational objectives.” This definition can be extended to define international marketing as “The process of planning and executing the conception, pricing, promotion and distribution of goods, services and ideas to create exchanges that satisfy individual and organizational objectives, in more than one nation”. It means in international marketing, activities are undertaken in several countries and such activities should be coordinated across nations. Thus international marketing is the coordinated marketing process undertaken is several countries.

In the common parlance, the terms international marketing and foreign trade are used interchangeably. But actually they are different and deal with different issues. The term foreign trade is used when we want to talk about trade between nations. It has a macro perspective whereas international marketing [IM] has a managerial perspective. IM deals with issues which concern a firm and not the nation as a whole and therefore the questions raised in each area are of a different nature as we shall see later.

 

Reasons And Motivations Underlying International Trade And International Business

There is growing contraction of the world because of better communication and transportation facilities, and the rapid development of domestic economies and concomitant increases in purchasing power of the people. The current interest in international marketing and foreign trade can be explained in terms of changing structures and dynamic changes in demand characteristics of world markets.

Both, the firm and country have reasons for entering into international business and foreign trade. While the reasons are often inter-linked, each has its own premise.

• International Business

The vast domestic markets have provided the firms an opportunity for continued growth which finally reaches a point where the possibility of continued expansion levels off. The survival of these firms has come into question, for it has become increasingly difficult for these firms to sustain customary rates of growth as demanded by their shareholders.

These companies have been forced by the ‘Economic Criterion’ to locate international markets to sell their surplus production and to gain cost advantages. Besides this, foreign markets may offer high profit margins, which gives added impetus for going international. Most of tile firms world over are gearing up for action for besides these reasons the Governments of various countries are providing support and incentives to firms involved in foreign trade.

• Reasons For Entering Into International Markets

Although profit is the underlying motive, most of the firms are directed into International Markets because of any of the following five reasons as identified by Vern Terpstra:

1. 1. Product Life Cycle: And product may be at the end of its life cycle in one market and not even introduced in another. The unwillingness of the firm to write off its productive assets may force it into international markets.
   2. Competition: In an effort to avoid competition which may be intense in the domestic market, the firm may choose to go international.
   3. Excess Capacity: In an effort to minimize its fixed cost per unit, tile firm may undertake foreign orders.
   4. Geographic Diversification: This has to do with the strategy that a firm may adopt. Instead of extending its product line the firm may just choose to expand its market by going international.
   5. Increasing The Market size: In an effort to expand its operation a firm may choose to go international.

• International Trade

With the growth of materialism, every individual has become interested in improving his/her standard of living in terms of material comforts. This has forced the governments into foreign trade to yield the underlying economic benefits and thereby improving the standard of living of its people.

The gains from international trade arise from the local production advantages which in itself is a function of differences in availability and the cost of factors of production.

Thus the difference in factors like the capital availability and cost of capital, specialization of labor, their wage factor, availability of managerial talent, determine the area of product specialization that a country will enter into to gain the cost advantage. The production specialization will lead to an improvement in productivity and thereby an increase in the real income if the countries indulge in free trade. This explains the reason for importance of balance of payment of a nation and exchange rate.

• Theories Of International Trade

Historically, nations have been trading with each other for hundreds of years for profit or because they do not have enough resources [land, labor and capital] to satisfy all the needs of consumers.

For example, Japan has a highly skilled labor force that use technologically advanced equipment to produce cars and electrical equipment, however it does not have its own oil fields. Saudi Arabia has large supplies of oil, but lacks the resources to produce cars and electrical equipment.

Trade between Saudi Arabia and Japan will allow both countries to obtain goods and services that they cannot produce themselves. Specialization and trade can then deliver higher living standards to all countries as resources are being used more efficiently.

In economics, three theories have been propounded for explaining tile reason for foreign trade. These theories are equilibrium theory. Underlying each of these theories is the theory of relative advantage.

• The Theory Of Relative Advantage

The theory of relative advantage deals with the trade of goods and commodities. It is based on the premise that a nation gains by trading with other nations in those goods in which it has an advantage over the other nations in terms of cost of production. This advantage in terms of cost of production could be absolute or comparative. Let us illustrate this further using the classical theory to explain these concepts:

A – Factor Endowments:- Each country has different types and amounts of resources that will determine what they can or cannot produce. The combination of these resources [land, labor, capital and enterprise] is referred to as a country’s factor endowment. Factor endowments are determined by:

• • Geographical features such as climatic conditions and natural resources.
  • Historical development and political stability.
  • Social and demographic issues.
  • Economic development, size and quality of the workforce and access to capital.
  • Entrepreneurial skills and the freedom to pursue entrepreneurial activities.

For example, India has a large supply of natural resources such as coal, iron ore and cheap manpower. Japan has a highly skilled workforce that uses advanced technology to produce cars and electrical equipment. China has a large population and can supply cheap labor to produce competitively priced textile, clothing and footwear products. Bolivia, however is a land locked country with few natural resources and an unstable political environment.

Because of the different factor endowments, trade would be beneficial for each of these countries. Trade allows countries to have access to goods and services that are not produced or cannot be produced efficiently.

B – The Theory Of Absolute Advantage:- The Scottish economist Adam Smith first explained the theory of absolute advantage in 1776. He argued that a country has an absolute advantage in the production of a good when it can produce more of that good with a given amount of resources than another country. It would be in the interest of each of these countries to specialize in production of the commodity in which it has an absolute cost advantage and trade. This way the productivity of both nations increases and thereby both nations stand to gain.

Thus while India can produce tea more cheaply than Great Britain and Britain can produce engineering goods more cheaply than India, it would be in the interest of both countries to concentrate on the production of the goods in which they have absolute cost advantage and then to trade. Of course the cost advantage in production must be greater than the cost of transportation incurred in moving the goods.

When each country specializes in the production of the goods in which they have an absolute advantage, increase in the production of all the goods could occur. It is quite realistic to think that one country has an absolute advantage over another country in the production of some goods. Finland has done this recently by specializing in the production and distribution of mobile handsets.

C – The Theory Of Comparative Advantage:- Adam Smith’s theory of absolute advantage is a simple explanation of the benefits of international trade. However, if one country has an absolute advantage in the production of all goods, can there be benefits from trade?

The answer is Yes.

In 1817, David Ricardo, a classical economist developed the principal of comparative advantage to explain this situation. The principal is based on the relative efficiencies of production where each country has a comparative advantage in producing the commodity in which it has the lower opportunity cost.

Let us assume that there are two countries A and B and two products X and Y. Each of these countries has a workforce of ten men. While in country A each man can produce 6 units of X or 6 units of Y, each man in country B can produce 4 units of X or 2 units of Y.

Now assuming that men are equally deployed and no trade exists, the following scenario emerges.

Production Per Working Day

Country	X	Y	Total
A	30	30	60
B	20	10	30
	50	40	90

Here we see that country A has two times the production than that of country B. The real income of A is therefore also two times that of B.

Now if the countries agree to specialize so as to maximize the total production by specializing in the products in which each has relative advantage, the following scenario emerges.

Country	X	Y	Total
A	10	50	60
B	40	00	40
	50	50	100

Thus we see that the total production of both economies taken together increases by 10 i.e. both economies stand to gain. Various combinations of this are possible. But it has to do with gain, how this gain will be distributed depends upon the market.

But these models are based on the following assumptions:

• • There must be demand for these products.
  • The production gains are greater than the cost of trading.
  • Products must be identical i.e. product differentiation concept does not exist.
  • There must be an effective market information so that the traders are aware of the cost differentials as they exist.
  • The differentials must be large enough to interest the entrepreneur.
  • Tariffs must not exceed the difference in cost after transportation and profits are considered.
  • No other political or financial restrictions inhibit the trading process.

As pointed out earlier this is a macro-economic theory that deals in the trade of commodities or goods. But like all macro-economic theories it fails to explain other related phenomena because of its underlying assumptions. One phenomena that it fails to explain is the existence of multinational concerns, and their desire to invest in foreign lands. Two theories have been expounded to explain why multinationals/transnationals exist.

A Modern Approach To Comparative Advantage – Michael Porter in his work – The Competitive Advantage of Nations [London, Macmillan 1990], suggests that instead of different factor endowments being the basis for international trade much of the world’s trade is taking place between nations with similar factor endowments.

Factor endowments and competitive advantages are important in countries that have industries based on natural resources and where production does not rely on high levels of technology or where the labor force is relatively unskilled.

Porter suggests that it is competitive advantage [based on lower costs, technological innovation and product differentiation] rather than comparative advantage that is becoming an important factor in determining the pattern and direction of international trade.

Transnational corporations are playing a very important role in this development because they are able to coordinate their production activities by moving resources, production components, investment funds, technology and labor across the world.

Product/International Product Life Cycle Approach – The product life cycle concept in marketing theory is a micro level explanation of stages of the life cycle. A product or service goes through in the context of its market life. Sales volume and profits become the critical micro variables in the product life cycle framework. In the introductory stage of a product’s life, sales are typically slow and profits negative. In the growth stage, both sales and profits rise at a rapid rate. During maturity, sales volume may continue to rise at a declining rate and profit may stay high. In the decline state, both sales and profit decrease. Sales and profits are the principal variables for marketing decisions. The product life cycle is essentially a tool for firms to design marketing mix strategies for different stages of the life span of a product or service.

The International Product life cycle can be defined as market life span stages the product goes through in international markets sequentially, simultaneously or asynchronously. The sequential stages are introduction, growth, maturity, decline and extinction in the international markets. When a product is positioned in different international markets at the same time and is going through similar life cycle stages, the cycle process is simultaneous. The life cycle stages are asynchronous when the product is in different stages in different international markets at the same time. The life cycle stage in which a product can be positioned is influenced by macro variables indigenous to country markets.

Thus while personal computers are in their maturity in the USA, they are in their growth in India. By moving the same product from the American market to the Indian market the companies can obtain large returns. As long as the demand can be created or utilized this approach is feasible.

 

Exchange Rate And Balance Of Payments

• Exchange Rate

A businessman operating in the international environment is faced with a two price system i.e., the price of the product and the price of the currency.

With the collapse of the Bretton Woods system of fixed but infrequently adjusted exchange rates in the early seventies, the generalized floating exchange rate concept has come into existence. With the advent of the generalized floating exchange rates in the second quarter of 1973, most countries are exposed to enhanced exchange rate risks because of frequent adjustment in nominal and real exchange rate.

This phenomena of generalized floating exchange rate has great implications for developing countries, owing to their dependence on developed countries for trade. Therefore any adjustment in the exchange rate of developed countries would mean implications on trade and balance of payments and thereby an influence on the price levels existing in the developing country’s economy.

There are a variety of variations existing in the generalized format. A country could peg its currency to the currency of any one country or to the currency of several countries. Alternatively it could follow a free floating or managed floating system.

After a brief trial of single currency peg, in 1975 India opted for a multi-currency peg to a weighted basket of currencies. This basket contained currencies of major trading partners of India.

In August 1994 the rupee became convertible on the current account, subject to the Reserve Bank of India’s ‘indicative limits’ on outward remittances. Partial capital account convertibility also exists, in the sense that foreign and non-resident Indian investors in India can repatriate their capital.

Until 1992 the exchange rate of the rupee was fixed by the government on a trade-weighted basis and foreign exchange was severely rationed. Continuing a series of trade-weighted devaluations, the rupee was devalued by a total of 22 percent against the dollar in two steps in July 1993. The dual exchange rate system; the Liberalized Exchange Rate Management System [LERMS] was replaced by a single, floating exchange rate with effect from March 1993.

• Balance Of Payments

The advent of generalized floating exchange rates has made it necessary for all countries to manage this. It has become necessary for all countries to maintain an account of all its financial transactions. This account is known as the Balance of Payment. It is similar to the double entry system of accounting and accounts for all inflows and outflows occurring from a country. Like all double entry accounts, even the balance of payment must balance i.e., inflows = outflows. The fact that balance of payment account balances does not mean that a nation is in a good or poor financial condition. It is in fact a record of conditions affecting the country and not a determinant of conditions affecting the country.

Thus, the Balance of Payment [BOP] is the measure of all economic transactions between one nation and others. The balance of payments is made up of the current account, showing trade in goods and services; and the capital account, which shows financial transactions. The balance of payments account helps marketers select the location of supply for foreign markets and the selection of markets. The capital account may show the nations which have control restrictions and hence be difficult to deal with. In this regard, African nations are generally disadvantaged.

BOP also acts as a reflector of the standard of living of the people of that country [standard of living is measured by the demand and the capacity to produce]. Of particular interest to any businessman operating in the international market is the country’s current account. The current account reflects the financial transactions accruing on account of trade in goods and services.

 

Basic Modes Of Entry

Once the firm has taken the decision to enter into the field of international business it must analyze the basic strategies/methods of entry.

There are basically live different strategies available for entry into a foreign market. They are exporting, licensing, joint venture, manufacturing and management contracts.

Exporting:- This is most commonly used methods for entering foreign markets. Commonly used in India, this method involves production of goods and services in the home country followed by distribution into foreign market. This method is commonly adopted by countries entering into the foreign market for the first time since it minimizes the financial risks involved.

Licensing:- When the company wants to protect its patent and trade mark rights, it simply licenses the production of its product in the foreign market to another company in return for a fixed royalty. This is done when either the market has developed very fast or when export barriers have been erected.

Joint Venture:- When a company does not possess the capacity to analyze and handle a particular market, it enters into a joint venture. The primary reason for sharing the control of the market is to protect itself against political and economic risks. Joint ventures are increasingly seen in the world market because of this very reason. The other reasons for its existence and growth are

• • • When the company does not possess competent personnel to handle foreign market or when it is short of capital.
    • When a company feels that it would be to their mutual advantage to enter in joint venture because of specific resources possessed by the other partner [e.g. distribution network, knowledge of culture].
    • Where wholly owned activities are not permitted by the foreign governments.

Manufacturing:- When the company moves along its life cycle [with reference to international business] it develops an international orientation. This motivates it to invest in foreign market and develop its own manufacturing and marketing systems within that market.

The primary reason for this is to reduce the additional costs involved in foreign marketing.

It has to pay no duties on products produced within a foreign country. The transportation cost is also minimized. It can take advantage of low cost labor and thereby minimize its production costs. In an effort to become competitive in the world markets increasing number of firms are undertaking this mode of entry. Nestle India and Hindustan Lever are illustrations of this mode of entry.

Management Contracts:- A country may not posses the required managerial or technical talent and therefore may not be in a position to exploit its imported assets procured in aid or assets maintained by an expropriated company.

In such a situation a company may sign a management contract with such a country’s government/company to manage the assets till such time that it has available to it the resources necessary for managing the assets. e.g. foreign companies managing refineries petrochemical plants in the Middle East.

This is not a common phenomena in international business but for some technologically oriented firm it does represents an entry mode.

Vern Terpstra has given a proposition on basic modes of entry in light of production i.e., where does the production taken place.

All these are methods for entering foreign markets. But before this it is necessary to understand the nature of marketing task involved.

 

Nature Of International Marketing

The task of marketing manager is to mold the endogenous and exogenous factors in the light of opportunities and threats facing the company.

These endogenous and exogenous factors might again be controllable or uncontrollable. Therefore the manager is basically framing his controllable in the light of uncontrollably.

The controllable for a marketing manager include the four P’s of marketing and resources within the company. Whereas, the uncontrollably can again be classified into domestic uncontrollably and foreign uncontrollably.

Which Market First? Many businesses expect to expand internationally by targeting countries. But one country may comprise several markets. Which markets within that country do you target first?

Which Country First? For a start, that’s the wrong question. As you already know, Indian and American aren’t languages, but rather names for the denizens of India and America. Therein lies the problem.

Reality Check Few international marketers recognize that it takes more than a border to make a market. From an International Marketing perspective, the political entity must combine with language and culture to create a distinct market.

Considerations

• • Japan is a homogeneous market where everyone speaks Japanese. Total: One market.
  • Canada is a multicultural country where English and French are the official languages, thus comprising two distinct markets. Total Provincial variation aside, these two linguistic markets, plus a growing population of Mandarin speakers in Vancouver and Toronto, mean that Canada actually comprises three markets.
  • Switzerland has three major linguistic populations – French, German, and Italian – and a splinter group of Romanic speakers. Total: Three or four markets, depending on the commercial reach of Romanic.

Bottom Line Considering the linguistic and cultural variations within a single country, the question becomes “Which market first?” instead of “Which country first?” In some cases, it may make sense to target only one of the markets within a country, national laws permitting.

While in national marketing the manager is involved in coordinating the domestic controllable and uncontrollable, in international marketing a new set of uncontrollable variables enter into the fray. They include the economic, political, cultural, legal and other environmental conditions prevalent in the foreign country.

These new variables complicate the task of international marketing and magnify the risks involved. For an international businessman, this means that he has to be alert to the changes taking place in both his home country and in the country he has business interests in.

 

Related Posts

Marketing Management: Sales Process
Marketing Management: Personal Selling
Introduction To Sales Management
Sales Management – Negotiation Skills
Types And Typical Structure Of A Presentation In Sales