1. International Marketing Lecture week 6 International Marketing Environment Political and economic

2. Agenda Discuss how the political environment will affect the attractiveness of foreign market Distinguish between political factors in the home country and host country environment Political risk analysis Tariff and non tariff barriers Discuss how the economic environment will affect the attractiveness of foreign market Define regional integration and identify different level of integration Benefits and drawbacks of regional economic integration

3. The International Marketing Environment Definition ‘Those variables, largely out of the organisation’s control but which it must account for, within which it conducts its business internationally’ (Lee & Carter, 2009) 3 Source: Lee and Carter (2009)

4. Political/legal environment The political/legal environment comprises primarily two dimensions: 1. the home country environment; 2. the host country environment.

5. Home country environment A firm’s home country political environment can constrain its international operations as well as its domestic operations. It can limit the countries that the international firm may enter – For example South Africa political pressure induced some international firms from US and Japan to leave the country altogether. Threat from third market other than host and home country. – For example, today European firms face trouble in US if they do business in Cuba

6. Home country environment ( contd..) Concern about bribery and corruption- – in many countries no work is done without bribery and corruption. Issue is shall the company give bribe to gain the contract or maintain their moral principles? – Giving bribe to gain contract may lead to loose moral standards among managers and employees and – may result in a concentration on how best to bribe rather than on how best to produce and market products. The global marketer must distinguish carefully between – reasonable ways of doing business internationally – including compliance with foreign expectations – and – outright bribery and corruption

7. Promotional activities- sponsored by government organisation Government promote exporting Regulatory supportive activities to make country’s product more competitive in world market. Granting of subsidies: – export subsidies to export industries and – tariff to domestic industries: to ensure the profitability of home country firms when faced with full competition. Subsidy: lower tax on profit, refunding of various indirect tax, direct grant.

8. Financial activities National government act as a role of international banker. Granting subsidies is financial based promotional activity of national governments. Credit policy: vital factor for company’s export marketing programme. – Better payment terms- more sales even though high price or low quality – Extended credit terms- risk of non payment – Transfer the risk to government through insurance.

9. Information services For many companies especially smaller companies or newcomers to global marketing, national government is the major source of basic marketing information Types of information provided by government: – Economic, social and political data on individual countries, including their infrastructure – Summary and detailed information on aggregate global marketing transactions – Individual report on foreign firms – Specific export opportunities – List of potential overseas buyers, distributors and agents for various product in different countries – Information on government regulations both at home and abroad

10. Export facilitating activities Number of government activities can stimulate exports – Trade development offices abroad – Government sponsored trade fairs and exhibitions – Sponsoring trade missions of business people For example: Nepal international trade fair organised by FNCCI ( Federation of Nepalese Chambers of Commerce and Industry) in association with government to promote the commodities that are in the priority list of government. This activity will provide companies low cost ways of making direct contact with potential buyers in overseas markets.

11. Promotion by private organisations Various non governmental organisation play a role in the promotions of global marketing – Industry and trade associations: for e.g. Nepal Merchant Association, silk association of Nepal – Chamber of commerce: e.g. Nepal chamber of commerce, FNCCI – Other organisation concerned with trade promotion- for e.g. organisation carrying out export research – Export service organisations such as banks, transport companies and trading companies

12. Host country environment Managers must continually monitor the government, its policies and its stability to determine the potential for political change that could adversely affect operations of the firm. Political risk – Ownership risk: exposes property and life – Operating risk: interference with ongoing activities – Transfer risk: problem when companies want to transfer capital between countries

13. Political risks- action and their effect Import restrictions- – force foreign industry to purchase within the host country Local content laws- – product sold within the country should contain locally made parts- e.g. EU requires 45% local content in foreign owned assemblers Market control- – prevent foreign companies from competing in certain markets- e.g. US government boycotted foreign firms trading with Cuba. Price control- – on essential product such as pharmaceuticals, food, petrol etc. during inflationary period to control environmental behaviour of consumers or cost of living. Labour restrictions: – labour union persuading government to pass very restrictive laws that support labour at heavy cost of business.

14. Political risks- action and their effect Tax controls: – tax raised without warning and in violation of formal agreements. E.g. in underdeveloped countries where increase in tax in international firm is the quickest way to find operating funds Change of government party: – new government may not honour an agreement that the previous government has made with the company Nationalization: – takeover of foreign companies by the host government. Mexico's seizure of oil properties owned by U.S. corporations (1938) Domestication: – control and restriction placed in foreign firm through imposing different controls for e.g. decision making power to nationals, more product produced locally etc.

15. Trade barriers from home country to host country Advantage of free trade between nations – Increase output levels beyond their domestic markets – Allowing significant economies of scale – Increase in competition- price of goods falls in importing countries and increase in profit in exporting countries Trade barriers: – trade laws that favours local firms and discriminate against foreign ones. – Degree of control on foreign trade varies from country to country

16. Reasons for levying tariffs To protect domestic producers To generate revenue

17. Types of barriers Tariff – Direct taxes and charges imposed on imports – Generally straightforward and easy for the company to administer – They are visible and known quantity and so can be accounted for by companies when developing their marketing strategies – Used as a means for collecting revenues and protecting domestic industries – Useful tool for politicians to show that they are actively trying to protect their home markets.

18. Types of barriers Tariff – Common form of tariffs are Specific- charges are imposed on particular product by weight or volume Ad valorem: charge is the straight percentage of the value of goods Discriminatory: charge is for goods coming from particular countries – For example, Company XYZ produces cheese in Scotland and exports the cheese, which costs $100 per pound, to the United States. A 20% ad valorem tariff would require Company XYZ to pay the U.S. government $20 to export the cheese. A specific tax would involve charging $30 dollars per pound of cheese whether cheese sold for $100 or $200 per pound.

19. Non tariff barriers Non-tariff barriers are much more elusive and can be more easily disguised Their effect can be more devastating because they are unknown quantity and are much less predictable Non-tariff barriers could be in the form of – Quotas – Embargoes – Administrative delays – Local content requirements

20. Quotas A restriction on the amount of good that can enter or leave a country during a period of time Two reason for imposing import quotas – Protect domestic producers by placing the limit on amount of goods allowed to enter the country. Domestic producers win by protecting the market share but consumers lose because of high price and less selection due to lower competition. Other loser could be the domestic producers who need to import intermediate goods for the production. – To force the companies of other nations to compete against one another for the limited amount of imports allowed.

21. Quotas Reason for imposing export quotas – To maintain adequate supplies of product in the home market: for e.g. companies exporting natural resources – Restrict supply on world markets to increase the price of the goods: for e.g. Middle east countries attempts to restrict the world’s supply of crude oil to earn greater profits.

22. Embargoes A complete ban on trade in one or more products with a particular country Typically applied to accomplish political goals Example: US embargo on trade with Cuba.

23. Administrative delays Regulatory controls designed to impair the rapid flow of imports into a country Examples – Requiring international air carriers to land at inconvenient airports – Requiring product inspections that damage the product itself – Purposely under staffing customs offices to cause unusual delays – Requiring special licences that take long time to obtain

24. Local content requirements Law stating that a certain portion of end product consists of domestically produced goods Employ local resources in their production especially labour.

25. The political risk analysis procedure This includes analysing the potential political events and identifying the probable impact and responses to the firm. This help firm make the informed decision based on the ratio of return to risk, – firm can enter or stay in a country when the ratio is favourable and – avoid or leave a country when the ratio is poor. Generally political risk are addressed through the building of relationships with the various stakeholders of the companies – Government – Customers – Employees – The local community

26. The political risk analysis procedure Government: – lobbying, corruption/bribery Customers: – considerable support from them if there is good relationship as they fear losing the benefits that the firm provides Employees: – key to their own survival The local community: – good local citizen and reinvest in the local community

27. The economic environment

28. Economic factors that have effects on the working of the business. – Policies and nature of an economy, – trade cycles, – level of income, – distribution of income and wealth. It is very dynamic and complex in nature and does not remain the same.

29. The economic environment Economic development results from on of the three types of economic activity: – Primary: concerned with agriculture and extractive processes e.g. coal, iron ore, gold, fishing – Secondary: manufacturing activities – Tertiary: these activities are based upon services for example tourism, insurance and health care.

30. Exchange rate and business activities Movement of exchange rates affects the activities of both domestic and international companies When a country’s currency is weak- valued low relative to other currencies- the price of the export on the world market decline and the price of the import increases. – Lower prices makes the country’s export more appealing in world markets and hence take market share away from companies whose product are highly priced in comparison – On the other hand this devaluation of currency reduces the consumers buying power

31. Exchange rate and business activities Company selling in country with a strong currency while paying workers in a country with a weak currency improves its profits Therefore managers prefers exchanges rates to be stable – for the accuracy of financial planning including cash flow forecasts. Insuring against potential adverse exchange rate movements.

32. Law of one price The law of one price stipulates that – an identical product must have an identical price in all countries – when price is expressed in common denominator currency. Exchange rate doesn’t tell us – whether a specific product will actually cost us more or less in a particular country. The usefulness of the law of one price is that – it helps us determine whether the currency is over or under valued. (big mac index)

33. Law of one price Big mac index: Based on Purchasing Power parity theory – Dollar should buy the same amount in all countries Assumption is that the Big Mac in any country should equal the price of the Big Mac in the United States after being converted to a dollar price A country’s currency will be overvalued – if the big Mac price in dollar in foreign country is higher than the US price and vice versa.

34. Less developed countries (LDC’s) Underdeveloped and developing countries – GDP per capita less than $3000 – Limited amount of manufacturing activity – Very poor and fragmented infrastructure such as in transport, communications, education and health care. – Public sector is slow moving Heavily reliant on one product for example – Cuba- sugar; – Colombia- Coffee. Without real prospect of economic development private sources of capital are reluctant to invest in such countries. Therefore rely heavily on world aid programmes.

35. Classification by income Countries can be classified based on national income(GDP or GNP per capita) and the degree of industrialization. GDP – Gross domestic product is the value of all goods and services produced by the domestic economy over a one year period GNP – Gross national product is the income generated both by domestic production and by the country’s international activities. – GNP per capita is simply the GNP divided by its population

36. Regional economic integration Economic integration has been one of the main economic developments affecting world markets. Economic cooperation – to use their respective resources more effectively and – to provide large markets for member-country producers There is danger that it could fail as a result of – perceptions of unequal benefits from the arrangement or a parting of the ways politically

37. Level of economic integration Free trade area – Free trade among members Customs union – Common external trade policy Common market – Factor mobility Economic union – Harmonization of economic policies

38. Free trade area All barriers to trade such as tariffs and quotas among member countries are removed But each trade member maintains its own trade barriers for non members. For e.g – European Free Trade Area (EFTA) 1960 – US and Canada signed a free trade agreement in 1989 – NAFTA ( North American free trade agreement) 1994

39. Custom union In addition to free trade area, the custom union establishes a – common trade policy with respect to non-members. Import from non-members are – subject to same tariff when sold to any member country. For e.g. Benelux countries ( Belgium, Netherland and Luxemborg) formed a custom union in 1921 which later became part of European economic integration

40. Common market Same feature as custom union but in addition – factors of production (labour, capital and technology) are mobile among members. Restriction on immigration and cross border investment are abolished For example – East African common market (Burundi, Kenya, Rwanda, Tanzania and Uganda) – West African common market (Benin, Burkina Faso, Cote d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo)

41. Economic union Integration of economic policies in addition to free movement of goods, services and factor of production across borders. Under and economic union, members harmonize monetary policies, taxation and government spending. Common currency which leads to fixed exchange rates For example European Union (EU)

42. Benefits of regional integration Imagine there's no countries It isn't hard to do Nothing to kill or die for And no religion too Imagine all the people Living life in peace...

43. Benefits of regional integration Trade creation – Consumer and industrial buyers in the nation are faced with wider selection of goods and services – Can acquire goods and services at low cost Political cooperation – Group of nations can have significantly greater political weight in the world rather than the nations have individually – Reduces the military conflict between member nations

44. Drawbacks of regional integration Trade diversion – Reduced trade with more efficient non member producer and increased trade with less efficient producer within trading bloc Shifts in employment Loss of national sovereignty

45. Per capita income The statistic most frequently used to describe a country economically is its per capita income. Shorthand expression for country’s – level of economic development – degree of modernization and – progress in health education and welfare. It is used mostly to evaluate foreign economy is partially because – it is commonly available and widely accepted. – good indicator of the size or quality of market. Per capita income of Nepal- $742 (2012) Per capita income of US- $42,693 (2012)

46. Criticism of per capita income figures Uneven income distribution – Per capita figures are an average – Not necessary that there will be equal distribution of income among people – For e.g. Brazil: lowest 20% of people receive less than 3% of the national income whereas highest 20% receive 63% of that income Lack of comparability – European union budget: mostly on food clothing and shelter – Less developed countries these basics may be self provided and are therefore not reflected in national income totals.

47. POVERTY AS A MARKET OPPORTUNITY????

48. Conclusion Opportunities for successful business conduct depend largely on the structure and the content of that environment Marketers has to assess carefully the political/legal and economic environment of the international market