International Trade Theory

International Trade Theory

Mercantilism The principal assertion of mercantilism was that gold and silver were the mainstays of

national wealth and essential to vigorous commerce. At that time, gold and silver were

the currency of trade between countries; a country could earn gold and silver by

exporting goods. By the same token, there were outflows of gold and silver while a

country was importing. The main principle of mercantilism was a country would maintain

a trade surplus, to export more than it imported.

Consistent with this belief, the mercantilist doctrine advocated government intervention

to achieve a surplus in the balance of trade. They saw no virtue in a large volume of

trade. Rather, they recommended policies to maximize exports and minimize imports. To

achieve this, imports were limited by tariff, and exports were subsidized.

The flaw with mercantilism was that it viewed trade as a zero-sum game; that is a game

in which one can gain at the cost of another’s loss. The following scenario will depict the

flaw –

Let us assume England had a balance of trade surplus with France, the resulting inflow

of gold and silver would swell the domestic money supply and generate inflation in

England. In France, however, the outflow of gold and silver would have the opposite

effect. France’s money supply would contract, and its prices will fall. This change in

relative prices between France and England would encourage the French to buy fewer

English goods as they were becoming more expensive, and the English to buy more

French goods as they were becoming cheaper. The result would be deterioration in the

English balance of trade and an improvement in France’s trade balance, until the English

trade surplus was eliminated. Hence, in the long run, no country could sustain a surplus

in the trade balance and so mercantilism doctrine is dead.

Absolute Advantage According to Adam Smith, countries should specialize in the production of goods for

which they have an absolute advantage and then trade these for goods produced by

other countries. Smith’s basic argument is that a country should never produce goods at

home that it can buy at a lower cost from other countries. Smith demonstrated that, by

specializing in the production of goods in which each has an absolute advantage, both

countries benefit by engaging in trade.

Let us analyze the below case –


Cocoa Rice Domestic Exchange Ghana 10 20 1:2

South Korea 40 10 4:1

International Exchange 1:4 2:1

Let us assume that total resource available is 200 units in each country

Production without Trade: If there is no trade, suppose the resources are being

utilized in equal amount for the production of both goods by both countries.

Cocoa Rice Ghana 10 5

South Korea 2.5 10

Total 12.5 15

Production with Specialization: According to the theory of absolute advantage, Ghana

will go for specialization in producing cocoa as it has absolute advantage compared to

South Korea, and for the opposite reason South Korea will go for specialization in

producing rice.


South Korea 0 20

Total 20 20

Consumption after Ghana Trades 6 Tons of Cocoa for 6 Tons of South Korea’s

Rice:


South Korea 6 14

Total 20 20

Increase in Consumption after Trade:


South Korea 3.5 4


Comparative Advantage According to Ricardo’s theory of comparative advantage, it makes sense for a country to

specialize in the production of those goods that it produces more efficiently and to buy

the goods that it produces less efficiently from other countries, even if this means buying

goods from other countries that it could produce more efficiently itself.

Cocoa Rice Domestic Exchange Ghana 10 13.33 1:1.33

South Korea 40 20 2:1

International Exchange 1:4 1:1.5

The theory of comparative advantage suggests that trade is a positive-sum game in

which all countries that participate realize economic gains.

Let us assume that total resource available is 200 units

Production without Trade: If there is no trade, suppose the resources are being

utilized in equal amount for the production of both goods by both countries.

Cocoa Rice Ghana 10 7.5

South Korea 2.5 5

Total 12.5 12.5

Production with Specialization: According to the theory of comparative analysis,

South Korea will go for specialization in producing rice as it has less comparative

disadvantage compared to Ghana, and for the opposite reason Ghana will go for

specialization in producing cocoa.


South Korea 0 10

Total 15 13.75


Consumption after Ghana Trades 4 units of Cocoa for 4 units of South Korean

Rice:


South Korea 4 6

Total 15 13.75

Increase in Consumption after Trade:


South Korea 1.5 1

Assumptions for the Comparative Advantage Doctrine

In this doctrine only two countries and two goods are assumed. In the real world,

there are many countries and many goods.

The transportation costs are not considered here.

The prices of resources are assumed to be same in the same countries.

It is assumed that the resources can move freely from one production to another

within a country.

In this doctrine, constant return of scale is considered.

It is assumed that each country has a fixed stock of resources and that free trade

does not change the efficiency with which a country uses its resources.

The effect of trade on income distribution within a country is not considered here.

Extension of the Ricardian Model Immobile Resources

Resources do not always move easily from one economic activity to another. The

process creates friction and human suffering too. While the theory predicts that the

benefits of free trade outweigh the costs by a significant margin, this is of cold comfort to

those who bear the costs. Accordingly, political opposition to the adoption of a free trade

regime typically comes from those whose jobs are most at risk.

The pain caused by the movement toward a free trade regime is a short time

phenomenon, while the gains from trade once the transition has been made are both

significant and enduring.


Diminishing Returns

Diminishing returns to specialization occurs when more units of resources are required

to produce each additional unit. Diminishing return implies a convex PPF rather than the

straight line.

It is more realistic to assume diminishing returns for two reasons. First, not all resources

are of the same quality. As a country tries to increase its output of a certain good, it is

increasingly likely to draw on more marginal resources whose productivity is not as great

as those initially employed. The result is that it requires even more resources to produce

an equal increase in output.

A second reason for diminishing returns is that different goods use resources in different

proportions.

Diminishing returns show that it is not feasible for a country to specialize to the degree

suggested by the simple Ricardian model outlined earlier. Diminishing returns to

specialization suggest that the gains from specialization are likely to be exhausted

before specialization is complete. In reality, most countries do not specialize but,

instead, produce a range of goods. However, the theory predicts that it is worthwhile to

specialize until that point where the resulting gains from trade are outweighed by

diminishing returns.

Dynamic Effects of Economic Growth

Free trade might increase a country’s stock of resources as increased supplies of labor

and capital from abroad become available for use within the country.

Free trade might also increase the efficiency with which a country uses its resources.

Gains in the efficiency of resource utilization could arise from a number of factors.

Economies of large scale production might become available as trade expands the size

of total market available for domestic firms. Trade might make better technology from

abroad available, better technology can increase productivity of resources. Opening an

economy for foreign competition might stimulate producers to look for ways to increase

their efficiency.

The Samuelson Critique

The Samuelson model suggests that when a rich country enters into free trade with a

poor country, the lower prices that the rich country consumers pay for goods imported

from the poor country may not be enough to produce a net gain for the rich country

economy if the dynamic effect of free trade is to lower the real wage rates in the rich

country.


Samuelson concedes that free trade has historically benefited rich countries. Also he

notes that introducing protectionist measures to guard against the theoretical possibility

may harm the rich country in the future may produce a situation that is worse than the

disease they are trying to prevent.

Some economists note that as a practical matter developing nations are unlikely to be

able to upgrade the skill level of their workforce rapidly enough to give rise to the

situation in Samuelson model. In other words, they will quickly run into diminishing

returns.

Link between Trade and Growth

Countries that adopt a more open stance toward international trade enjoy higher growth

rates than those who close their economies to trade. Higher growth rate will raise

income levels and living standards. For every 10% increase in the importance of

international trade in an economy, average income level will rise by at least 5%.

Heckscher – Ohlin Theory Heckscher and Ohlin argues that comparative advantage arises not prom the

productivity, but from the differences in national factor endowments. By factor

endowments they mean the extent to which a country is endowed with resources. The

more abundant a factor, the lower its cost.

The Heckscher – Ohlin theory predicts that countries will export those goods that make

intensive use of factors that are locally abundant, while importing goods that make

intensive use of factors that are locally scarce.

Relative, not absolute, endowments are important; a country may have larger absolute

amounts of land and labor than another country, but be relatively abundant in one of

them.

A key assumption in this theory is that technologies are the same across countries.

The Leontief Paradox

Since US is relatively abundant in capital compared to other nations, US would be an

exporter of capital intensive good and an exporter of labor intensive goods; as

Heckscher – Ohlin theory suggests. But in reality it is opposite, which is called the

Leontief Paradox.

The probable reason behind this is US has a special advantage in producing new

products made with innovative technologies. Such product may be less capital intensive

than products whose technology has had time to mature and become suitable for mass


production. Thus US may be exporting goods that heavily use skilled labor and

innovative entrepreneurship.

Product Life Cycle Theory Raymond Vernon argued that most new products were initially produced in US.

Apparently, the pioneering firms believed that it was better to keep production facilities

close to the market and to the firm’s center of decision making, given the uncertainty and

risks inherent in introducing new products. Also, the demand for most new products

tends to be based on non-price factors. Consequently, firms can charge relatively high

prices for new products, which obviate the need to look for low cost production sites in

other countries.

Vernon went on to argue that early in the life cycle of a typical new product, while

demand is starting to grow rapidly in US, demand in other advanced countries is limited

to the high income groups. The limited initial demand in other advanced countries does

not make it worthwhile for the firms in those countries to produce the new product, but it

needs some exports from US.

Over time demand for the new product grows in other advanced countries and it

becomes worthwhile for foreign producers to begin producing for their home markets. In

addition, US firms might set up production facilities in those advanced countries where

demand is growing. Consequently, production within other advanced countries begins to

limit the potential for exports from US.

As the market in US and other advanced countries matures, the product becomes more

standardized, and price becomes the main competitive weapon. As this occurs, cost

considerations start to play a greater role in the competitive process. Producers based in

advanced countries where labor costs are lower than in US might now be able to export

to US. If cost pressure becomes intense, the process might not stop here. The cycle by

which US lost its advantage to other advanced countries might be repeated once more,

as developing countries begin to acquire a production advantage over advanced

countries.

Thus, the locus of global production initially switched from US to other advanced

countries, and later to the developing countries.


The New Trade Theory The new trade theory suggests that nations may benefit from trade even when they do

not differ in factor endowments or technology. Trade allows a nation to specialize in the

production of certain products, attaining scale of economies and lowering the cost of

production. Economies of scale are unit cost reduction associated with large volume of

output. Economies of scale have a number of sources, including the ability to spread

fixed cost over a large volume, and the ability of large producers to utilize specialized

resources.

New trade theory makes two important points –

Through its impact on economies of scale, trade can increase the variety of goods

available to consumers and decrease the average costs of those goods.

In those industries when the output required to attain economies of scale represents

a significant proportion of total world demand, the global market may only be able to

support a small number of enterprises. Thus, world trade in certain products may be

dominated by countries whose firms were first movers in their production.

Increasing Product Variety and Reducing Costs

In the era of free trade, individual national markets are combined into a larger world

market. As the size of market expands due to trade, individual firms may be able to

better attain economies of scale. The implication according to the new trade theory, is

that each nation may be able to specialize in producing a narrower range of products

than it would in the absence of trade, yet by buying goods from other countries, each

nation can simultaneously increase the variety of goods available to its consumers and

lower the costs of those goods – thus trade offers an opportunity for mutual gain even

when countries do not differ in their resource endowments or technology.

Trade is mutually beneficial because it allows for the specialization of production, the

realization of scale of economies, the production of a greater variety of products, and

lower prices.

Economies of Scale, First Mover Advantages, and the Pattern of Trade

The trade pattern we observe in the world economy may be the result of economies of

scale and first mover advantage. First mover advantages are the economic and strategic

advantages that accrue to early entrants into an economy. The ability to capture scale

economies ahead of later entrants, and thus benefit from a lower cost structure, is an

important first mover advantage.


The new trade theory argues that for those products where economies of scale are

significant and represent a substantial proportion of world demand, the first movers in an

industry can gain a scale based cost advantage that later entrants find almost impossible

to match. Thus the trade pattern we observe for such products may reflect the first

mover advantage. Countries may dominate in the export of certain goods because

economies of scale are important in their production and because firms located in those

countries are the first to capture scale economies, giving them a first mover advantage.

National Competitive Advantage: Porter’s Diamond Classical theories of international trade propose that comparative advantage resides in

the factor endowments that a country may be fortunate enough to inherit. Factor

endowments include land, natural resources, labor, and the size of the local population.

Michael E. Porter argued that a nation can create new advanced factor endowments

such as skilled labor, a strong technology and knowledge base, government support,

and culture. Porter used a diamond shaped diagram as the basis of a framework to

illustrate the determinants of national advantage. This diamond represents the national

playing field that countries establish for their industries.

Firm,strategy,structureand rivalry.

Chance

Factor Conditions

Related and Supporting Government

Demand Conditions

Industries


The individual points on the diamond and the diamond as a whole affect four ingredients

that lead to a national comparative advantage. These ingredients are:

The availability of resources and skills

Information that firms use to decide which opportunities to pursue with those

resources and skills

The goals of individuals in companies

The pressure on companies to innovate and invest

I. Factor Conditions

A country creates its own important factors such as skilled resources and

technological base.

The stock of factors at a given time is less important than the extent that they are

upgraded and deployed.

Local disadvantages in factors of production force innovation. Adverse conditions

force firms to develop new methods, and this innovation often leads to a national

competitive advantage.

II. Demand Conditions

When the market for a particular product is larger locally than in foreign markets, the

local firms devote more attention to that product than do foreign firms, leading to a

competitive advantage when the local firms begin exporting the product.

A more demanding local market leads to national advantage.

A strong, trend-setting local market helps local firms anticipate global trends.

III. Related and Supporting Industries

When local supporting industries are competitive, firms enjoy more cost effective and

innovative inputs.

This effect is strengthened when the suppliers themselves are strong global

competitors.

IV. Firm Strategy, Structure, and Rivalry

Local conditions affect firm strategy. For example, German companies tend to be

hierarchical. Italian companies tend to be smaller and are run more like extended

families. Such strategy and structure helps to determine in which types of industries

a nation's firms will excel.

In Porter’s Five Forces model, low rivalry made an industry attractive. While at a

single point in time a firm prefers less rivalry, over the long run more local rivalry is


better since it puts pressure on firms to innovate and improve. In fact, high local

rivalry results in less global rivalry.

Local rivalry forces firms to move beyond basic advantages that the home country

may enjoy, such as low factor costs.

The Diamond as a System

The effect of one point depends on the others. For example, factor disadvantages

will not lead firms to innovate unless there is sufficient rivalry.

The diamond also is a self-reinforcing system. For example, a high level of rivalry

often leads to the formation of unique specialized factors.

Government's Role

Encourage companies to raise their performance, for example by enforcing strict

product standards.

Stimulate early demand for advanced products.

Focus on specialized factor creation.

Stimulate local rivalry by limiting direct cooperation and enforcing antitrust

regulations.

Chances Influencing Competitive Advantage

Acts of pure invention;

Major technological discontinuities (e.g. biotechnology, microelectronics);

Discontinuities in input costs such as the oil crisis;

Significant shifts in world financial markets or exchange rates ;

Surges of world or regional demand;

Political decision by foreign governments; and

Wars.

Environment

Economic Environment Markets require buying power as well as people. The economic environment consists of

factors that affect consumer purchasing power and spending patterns. Marketers should

he aware of the following predominant economic trends.

Income Distribution and Changes in Purchasing Power

Global upheavals in technology and communications over the 1990s brought about a

shift in the balance of economic power from the West towards the East. Official statistics

suggest that, by 2010, purchasing power income per head in countries like Singapore

and South Korea will exceed that of the United States. Economic growth projections

suggest that Europe will drop down the economic rankings. Assuming annual growth in

western Europe and the United States of 2.5 per cent, and 6 per cent in Asia as a whole,

the share of world grows domestic product (GDP) taken by Asian developing countries,

including China and India, could rise to 28 per cent in 2010 from 18 per cent in 1990.

Western Europe's share will fall to 17 per cent from 22 per cent, while the United States

will drop to 18 per cent from 23 per cent.

Although there has been a narrowing of the wealth and living standards gap between the

developed western and rising Asian countries in recent decades, the uncertain economic

climate in the Asian economies has important implications for international marketers.

They must determine how changing incomes affect purchasing power and how they

translate into marketing threats and opportunities for the firm. Where consumer

purchasing power is reduced as in countries experiencing economic collapse or in an

economic recession, value-far-money becomes a key purchasing criterion. Marketers

must pursue value-based marketing to capture and retain price-conscious customers

during lean economic times, unlike boom periods when consumers become literally

addicted to personal consumption rather than offering high quality at a high price, or

lesser quality at very low prices, marketers have to look for ways to offer the more

financially cautious buyers greater value - just the right combination of product quality

and good service at a fair price.

Consumers with the greatest purchasing power are likely to belong to the higher socio-

economic groups, whose rising incomes mean that their spending patterns are less

susceptible to economic downturns than lower-income groups. So, marketers must

determine a population's income distribution. The upper economic group of a society

become primary targets for expensive luxury goods, the middle income groups are more

careful about spending, but can usually afford some luxuries sometimes, while the lower

Environment

group will afford only basic food, clothing and shelter needs. In some countries, an

underclass exists – people permanently living on state welfare and/or below the poverty

line - which has little purchasing power, often struggling to make even the most basic

purchases.

Changing Consumer Spending Patterns

Generally, the total expenditures made by households tend to vary for essential

categories of goods and services, with food, housing and transportation often using up

most household income. Marketers also want to identify how spending patterns of

consumers at different income levels vary. Some of these differences were noted over a

century ago by Ernst Engel, who studied how people shifted their spending as their

income rose. He found that as family income rises, the percentage spent on food

declines, the percentage spent on housing remains constant (except for such utilities as

gas. electricity and public services, which decrease), and both the percentage spent on

other categories and that devoted to savings increase. Engel's laws have generally been

supported by later studies. Changes in major economic variables such as income, cost

of living, interest rates, and savings and borrowing patterns have a large impact on the

market-place. Companies watch these variables by using economic forecasting.

Businesses do not have to be wiped out by an economic downturn or caught short in a

boom. With adequate warning, they can take advantage of chances in the economic

environment.

Political Environment Marketing decisions are strongly affected by developments in the political environment.

The political environment consists of laws, government agencies and pressure groups

that influence and limit various organizations and individuals in a given society.

Legislation Regulating Business

Even the most liberal advocates of free-market economies agree that the system works

best with at least some regulation. Well-conceived regulation can encourage competition

and ensure fair markets for goods and services. Thus governments develop public policy

to guide commerce - sets of laws and regulations that limit business for the good of

society as a whole. Almost every marketing activity is subject to a wide range of laws

and regulations. Understanding the public policy implications of a particular marketing

activity is not a simple matter.

Environment

First, there are many laws created at different levels: for example, in the EU, business

operators are subject to European Commission, individual member state and specific

local regulations; in the USA, laws are created at the federal, state and local levels, and

these regulations often overlap.

Second, the regulations are constantly changing - what was allowed last year may now

be prohibited. In the single European market, deregulation and ongoing moves towards

harmonization are expected to take time, creating a state of flux, which challenges and

confuses both domestic and international marketers. They must therefore work hard to

keep up with these changes in the regulations and their interpretations.

In many developed economies, legislation affecting business has increased steadily over

the years. This legislation has been enacted for a number of reasons.

The first is to protect companies from each other. Although business executives may

praise competition, they sometimes try to neutralize it when it threatens them. So laws

are passed to define and prevent unfair competition. Anti-trust agencies and monopolies

and mergers commissions exist to enforce these laws.

The second purpose of government regulation is to protect consumers from unfair

business practices. Some firms, if left alone would make shoddy products, tell lies in

their advertising and deceive consumers through their packaging and pricing. Unfair

business practices have been defined and are enforced by various agencies.

The third purpose of government regulation is to protect the interests of society against

unrestrained business behavior. Profitable business activity does not always create a

better quality of life. Regulation arises to ensure that firms take responsibility for the

social costs of their production or products.

International marketers should additionally be aware of regional, country and local laws

that affect their international marketing activity.

Growth of Public Interest Groups

The number and power of public interest groups have increased during the past two

decades. The role of public interest groups is as watchdogs on consumer interests and

lifted consumerism into a powerful social force.

Consumerism has spilled over to countries in Western

Europe and other developed market economies such as Australia. Hundreds of other

consumer interest groups, private and governmental, operate at all levels - regional,

national, state/county and local levels. Other groups that marketers need to consider are

Environment

those seeking to protect the environment and to advance the rights of various groups

such as women, children, ethnic minorities, senior citizens and the handicapped.

Increased Emphasis on Ethics and Socially Responsible

Written regulations cannot possibly cover all potential marketing abuses, and existing

laws are often difficult to enforce. However, beyond written laws and regulations,

business is also governed by social codes and rules of professional ethics. Enlightened

companies encourage their managers to look beyond what the regulatory system allows

and simply to 'do the right thing'. These socially responsible firms actively seek out ways

to protect the long-run interests of their consumers and the environment. Increased

concerns about the environment have created fresh interest in the issues of ethics and

social responsibility. Almost every aspect of marketing involves such issues.

Unfortunately, because these issues usually involve conflicting interests, well-meaning

people can disagree honestly about the right course of action in a particular situation.

Thus many industrial and professional trade associations have suggested codes of

ethics, and many companies are now developing policies and guidelines to deal with

complex social responsibility issues.

Cultural Environment The cultural environment is made up of institutions and other forces that affect society's

basic values, perceptions, preferences and behaviors. A classic definition is provided by

Sir Edward Taylor: “Culture is that complex whole which includes knowledge, belief, art,

morals, law, custom, and any other capabilities and habits acquired by individuals as

members of society”. It is commonly agreed that a culture must have three

characteristics:

1. It is learned, that is people over time transmit the culture of their group from

generation to generation.

2. It is interrelated, that is, one part of the culture is deeply connected with another part,

such as religion with marriage, or business with social status.

3. It is shared, that is, the tenets of the culture are accepted by most members of the

group.

Another characteristic of culture is it does not stand still, but slowly, over time, changes.

This change is partly in response to environmental needs and partly through the

influence of outside forces. From the marketer’s point of view, one way of gaining

cultural understanding is to examine the following cultural elements within a country.

Environment

Material Life: Material life refers to economics, that is, what people do to drive their

livelihood. The tools, knowledge, techniques, methods, and processes that a culture

utilizes to produce goods and services, as well as their distribution and consumption, are

all part of material life. Thus, two essential parts of material life are knowledge and

economics.

The material life of any given society will fall on a continuum between traditional and

industrialized poles. That position indicates a society’s overall way of life and can be

analyzed to determine opportunities for the marketers.

Social Interactions: Social interactions establish the roles that play in a society and

their authority/responsibility patterns. These roles and patterns are supported by

society’s institutional framework, which includes, for example, education and marriage.

Social roles are also established by culture. For example, a woman can be a wife, a

mother, a community leader, and/or an employee. What role is preferred in different

situations is culture-bound. Most Swiss women consider household work as their primary

role. For this reason, they resent modern gadgets and machines.

Behavior also emerges from culture in the form of conventions, rituals, and practices on

different occasions such as festivals, marriages, informal get-togethers, and times of

grief or religious celebration.

The authority of the aged, the teacher, the religious leader in many societies is derived

from the culture. The educational system, the social settings, customs and traditions

prescribe roles and patterns for individuals and groups.

With reference to marketing, social interactions influence family decision making and

buying behavior and define the scope of personal influence and opinion. In Latin

America and Asia the extended family is considered the most basic and stable unit of

social organization. It is the center of all economic, political, social, and religious life,

providing companionship, protection, and a common set of values with specially

prescribed means for fulfilling them. In contrast, the nuclear family is the focus of social

organization in the US.

Language: Language as part of culture consists not only the spoken word, but also

symbolic communication of time, space, things, friendships, and agreements. Nonverbal

communication occurs through gestures, expressions, and other body movements.

The many different languages of the world do not literally translate from one to another,

and understanding the symbolic and physical aspects of different cultures’

communication is even more difficult to achieve.

Environment

In addition, meanings differ within the same language used in different places. The

English language differs so much from one English speaking country to another that

sometimes the same word means something entirely opposite in a different culture.

“Table the report” in the US means postponement; in England it means “bring the matter

to the forefront”.

Language differences can affect all sorts of business dealings, contracts, negotiations,

advertising, and labeling. Symbolic communication poses some cross-cultural dangers,

too. To be on time for an appointment is an accepted norm in the US. Whereas in many

countries, like Bangladesh, 11 AM means about that time, not precise.

Greetings vary from culture to culture, encompassing the handshake, kiss, hug, and

placing hands in praying position. Lack of awareness concerning a country’s accepted

form of greetings can lead to awkward encounters and sometimes offended feelings.

Aesthetics: Aesthetics include the art, drama, music, folkways, and architecture

endemic to a society. These aspects of a society convey its concept of beauty and

modes of expression. The aesthetic values of a society show in the design, colors,

expressions, symbols, movements, emotions, and postures valued and preferred in a

particular culture. These attributes have an impact on the design and promotion of

different products.

Likewise, space, and the way that a person occupies it, communicates something about

social position in the terms of each culture. A large office on the top floor of building in

US means that the person occupying that office is important in an organizational

hierarchy. Such a conclusion elsewhere would not always be right. Japanese executives

usually share an office.

In the US worldly possessions and material things are often used as symbols of

success. However, in many countries, it may not be true. Particularly in the Islamic

countries, an emphasis on material possessions is frowned upon.

Religion and Faith: Religion influences a culture’s outlook on life, its meaning and

concept. In general, the religion practiced in a society influences the emphasis placed on

material life, which in turn affects the attitudes toward owning and using goods and

services. Religious traditions may even prohibit the use of certain goods and services

altogether.

Religion also influences male-female roles, as well as societal institutions and customs

such as marriage and funeral rites. Religion affects patterns of living in various other

Environment

ways. It establishes authority relationships, an individual duties and responsibilities both

in childhood and as an adult, and the sanctity of different acts such as hygiene.

In general, organized religion and faith inevitably motivate people and their customs in

numerous ways. The impact of religion is continuous and profound. Consequently,

international marketers must be sensitive to the religious principles of each host country.

Pride and Prejudice: Cultural pride and prejudice make many nations reject foreign

ideas and imported products. But the reverse also occurs; a perception of greatness

attributes to another culture may lead to the eager acceptance of things reflecting that

culture. For example, the Japanese are proud of their culture and economic

achievement and prefer to buy Japanese manufactures. Yet the words “Made in USA”

marked on a product communicate quality and sophistication to them.

Ethics and More: The concept of what is right and what is wrong is based on culture. To

be straightforward and openly honest are considered morally right in the US; even if

feelings are hurt. In Latin cultures people avoid direct statements that would embarrass

or make another uncomfortable.

The differences in mannerisms between the Japanese and the Koreans illustrate this

point. The Japanese are formal and reserved; the Koreans are informal and outgoing. A

Korean saleswoman puts her hand on a customer’s shoulder as she walks him to the

door; a Korean executive invites a business acquaintance home to meet the family.

Such acts of familiarity would be very unusual in Japan.

Indirect Export

Indirect Export: Indirect export occurs when the exporting manufacturer uses

independent organizations located in the producer’s country. In this situation the

dependent organization does not actively engage in any international sales activities.

Types of Indirect Export Organization: International Marketing Organization

Home Country Based Merchants

Export Merchants

Trading Company

Export Desk Jobber

Home Country Based Agents

Export Commission House

Confirming House

Resident Buyer

Broker

Export Management Company

Manufacturer’s Export Agent

Cooperative Organization

Piggyback Marketing

Exporting Combinations

Export Merchants

The domestic-based export merchant buys and sells on own account. Generally

engaged in both exporting and importing, it operates in a manner similar to a regular

domestic wholesaler.

All aspects of the international marketing task are handled by export merchant

except for any modification needed for the product itself, packaging, or the quantity

included in the unit package to meet any special needs of individual overseas

markets.

The export merchant company is free to choose what it will buy, where it will buy,

and what prices. The same freedom exists for sales.

The export merchant is a powerful commercial organization, able to exist without the

cooperation of any manufacturer, or group of manufacturers.

Potential limitations of using export merchants:

Indirect Export

Export merchants are interested in staple commodities, which are generally open

market items not subject to a high degree of identification by the producer.

Export merchants are reluctant to take considerable amount of sales effort.

They are unwilling to allow the manufacturers much more than a manufacturing

profit on any merchandise.

Trading Company

Type Rationale for Grouping

General Trading Company (GTC) Historical involvement in generalized

import/export activities.

Export Trading Companies (ETC) Specific mission to promote growth of

exporters

Federated export Marketing Group (FMG) Loose collaboration among exporting

companies supervised by a third party and

usually market specific

Trading Arms of Multinational Corporations

(MNC-ETC)

Import/export and trading activities specific

in parent company’s operations

Bank Based Trading Groups (Bank – ETC) Extension of traditional banking activities

into commercial fields

Commodity Trading Company (TDC) Long-standing export trading in a specific

market, secretive, fast-paced and high-risk

activities

Sogo Shosha Offers financial services, supply-demand

oriented, and problem solvers

Three distinct contributions of trading companies:

Lowering transaction cost

Creating new markets and finding new sources of supply

Introducing marketing technology and credit into the local distribution – catalytic

contribution

Export Desk Jobber Export desk jobber is also termed as export drop shipper, and cable merchant.

Primarily they were engaged in the international sales of raw material.

Indirect Export

They never physically acquire the goods that they buy or sell.

The manufacturer using EDJ is responsible for the physical movement of the

products to the EDJ’s customer.

EDJs know the sources of supply and markets. They relieve the producers of the risk

of determining the reliability of the purchase.

EDJs are not conducive to the establishment of continuous markets for a

manufacturer’s product; rather they conduct business too quickly for there to be a

permanent market relationship.

Export Commission House The export commission house (export buying agent) is a representative of foreign

buyers who resides in the exporter’s country.

This type of agent is permanently the overseas customer’s hired purchasing agent in

the exporter’s domestic market, operating on the basis of orders received from these

buyers.

Since the ECH operates in the interest of the buyer, it is the buyer who pays the

commission.

The exporting producer is not directly involved in determining the terms of purchase;

these are worked out between the commission house and the overseas buyer.

ECH scans the domestic market, and sends out specifications to manufacturers

inviting bids. Other conditions being equal, the lowest bidder gets the order.

From exporter point of view, export is easier in a way that prompt payment is

guaranteed in the exporter’s home country; the exporter has no responsibility on the

physical movement of goods.

On the other hand, exporter has little direct control over the international marketing of

its products.

Confirming House The basic function of a CH is to assist the overseas buyer by confirming orders

already placed, so that the exporter may receive payment from the CH when the

goods are shipped.

The confirming house interposes its credit between the buyer in the importing

country and the exporter in the exporting country.

The confirming house may be involved in making arrangements for the shipper.

Indirect Export

Medium and small-sized companies may be benefited by confirming house, as all

contracts between buyer and exporter go through the confirming house.

Resident Buyer Resident buyers represent all types of overseas buyers and are domiciled in the

exporter’s home market.

RBs represent foreign concerns that want to have close and continuous contract with

their overseas sources of supply, and either sent to the local market or are local

people appointed as representatives.

Because RBs are permanently employed representatives of foreign buyers, the

exporter has a good chance to build up a steady and continuous business with

foreign markets.

One advantage of an importer utilizing a RB and of the exporter dealing with such a

buyer is that any problem that might arise due to language, cultural, and business

customs are minimized, if not eliminated.

Broker The chief function of broker is to bring a buyer and a seller together. Thus a broker is

a specialist in performing the contractual function, and does not actually handle the

products sold or bought.

For this service the broker is paid a commission by the principal.

The broker commonly specializes in particular products or classes of products,

usually staple primary commodities.

Being a commodity specialist, there is a tendency to concentrate on just one or two

products.

Because the broker deals primarily in basic commodities, for many potential export

marketers this type of agent does not represent a practical alternative channel of

distribution.

The distinguishing characteristic of export brokers is that they may act as the agent

for either the seller or the buyer.

Export Management Company EMC is an international sales specialist who functions as the exclusive export

department for several allied but non-competing manufacturers.

Indirect Export

Being the export department of several manufacturers, the EMC conducts business

in the name of each manufacturer.

Benefits to a manufacturer using EMC –

Using EMC is one of the quickest ways for a manufacturer to enter foreign

markets. In addition to handling the selling activities, the EMC does research on

foreign markets, chooses the best type of channel within an overseas market,

and usually does its own advertising and promotion. Also EMC may serve as a

shipping and forwarding agent, and may furnish its principals with legal advice.

Where a buy-and-sell arrangement is involved, EMC provides the financing

assistances to the manufacturers.

The EMC offers experience. Being a daily contact with varying conditions in

different foreign markets, the EMC knows which markets are receptive to a

manufacturer’s products and how to sell them in those markets.

Manufacturer’s Export Agent The manufacturer’s export agent retains its own identity by operating in its own

name.

Also the MEA is paid straight commission and does not engage in buy-and-sell

arrangements with the manufacturers represented.

The MEA may be most effectively used when the firm wants to sell small orders to

overseas buyers, enter a new overseas market, or sell a product that is relatively

new to consumers in overseas market.

Because this type of export agent retains its own identity, it usually desires to

maintain the foreign sales representative on a permanent basis. Thus producers are

seldom encouraged to establish their own export departments.

Piggyback Marketing Piggyback marketing occurs when one manufacturer uses its foreign distribution

facilities to sell another company’s products alongside its own.

Piggyback marketing is used for products from different companies that are non-

competitive but related, complementary (allied), on unrelated.

Some companies view piggybacking as a way of broadening the product lines that

they can offer to foreign markets.

Indirect Export

Other companies engage in this type of operation in order to bolster decreasing

export sales.

Sometimes Government encouragement or regulation asks the larger companies to

piggyback the smaller ones.

There may be differences concerning which company’s name the product will be sold

under. Some company has a policy of using either the actual manufacturer’s name or

creating a private label – but never their own name. Other exporting companies have

the policy of using the corporate name that is best known, whether its own name or

that of its supplier.

Piggyback marketing provides an easy, low-risk way for a company to begin export

marketing operations. It is especially suited to manufacturers that are either too small

to go directly into exports or which do not want to invest heavily in foreign marketing.

For the smaller company this type of agreement means that the control over the

marketing of its products is given up, something that many firms dislike doing at least

in the long run.

Exporting Combinations A manufacturer can export cooperatively by becoming a member of some type of

exporting combination, which can be defined as a more or less formal association of

independent and competitive business firms, with membership being voluntary,

organized for purposes of selling to foreign markets.

There are two types of exporting combinations

Marketing cooperative associations of producers or merchandisers that engage

in exporting members’ products

Export cartels

The first type of exporting combinations is the normal domestic marketing

cooperative as is commonly found in certain primary product industries. The export

operations of such organizations are essentially the same as the export operations of

manufacturers and intermediaries.

A cartel is said to exist when two or more independent business firms in the same or

affiliated fields of economic activity join together for the purpose of exerting control

over a market.

A cartel may engage in price fixing, restriction of production or shipments, division of

marketing territories, centralization of sales, or pooling of profits.

Indirect Export

Three types of international cartels can be distinguished

The traditional international cartel formed for the purpose of truly dominating a

market of certain products.

International Commodity Agreements where both selling and buying countries

are parties to the agreement.

Cartel type organizations engaged solely in exporting that are formed so that the

individual members can compete more effectively in the overseas markets.

Limitations on Cartel

The association may become ineffective because the members cannot agree on

key matters. Thus cooperation may be missing.

If a manufacturer’s products are branded there is a measurable risk that the

independent identity of both the firm and its products might get lost.

International Trade Theory

Documents

balance of trade surplus

currency of trade

english balance of trade

english trade surplus

frances trade balance

production of goods

large volume of trade

country production