Unit 4: Reference Handouts/ BBM 505Sources of Foreign Capital: FDI/FII Export Government Borrowing Foreign Aid/ Grant IMF/World Bank & other Agencies Foreign Remittances Sources of foreign exchange are areas in which economic and financial transactions between countries affect exchange rate levels. These sources comprise monetary payments and receipts whose respective levels are driven by supply and demand for goods and services, investments and currency.International Trade The trade of goods and services between countries requires each to purchase the currency of the other in order to make payments. Therefore, the international demand for a countrys output (exports) directly affects the demand, and consequently the price, of its currency.Capital Investments When foreign investors buy and sell capital investments or securities (ex. stocks and bonds) issued in a given country, they must engage in foreign exchange in order to complete transactions. Similar to trade, the international demand for a countrys capital investments has a direct effect on the demand for and price of its currency. Following a decline in a countrys currency value, all things being equal, foreign investors may be inclined to invest in that countrys securities, taking advantage of the exchange rate-reduced prices.Foreign Institutional InvestorsPositive tidings about the Indian economy combined with a fast-growing market havemade India an attractive destination for foreign institutional investors (FIIs).FIIs showed huge interest in 2007, pumping in the highest ever net investment of US$17.2 billion in the equity markets and were instrumental in the Bombay Stock Exchange(BSE) and National Stock Exchange (NSE) clocking record index levels of over 20,000and 6,000, respectively. In fact, during the year, FIIs were net buyers in 10 out of 12months, turning net sellers in the rest, primarily to make up the losses on account of thesub-prime crisis in the US.
Out of the total net inflows, a whopping 70 per cent was invested through theinstruments of Foreign Currency Convertible Bonds (FCCBs), Qualified InstitutionalPlacements (QIPs), and initial public offerings (IPOs). Of these, in the current year, allcorporates in India raised around US$ 11-13 billion of FCCBs, QIPs raised US$ 3.2billion in 2007 and IPOs - India Inc has raised a record US$ 12.41 billion through publicissues --IPOs and FPOs--in the fiscal 2007-08. Indias mobilisation of funds throughpublic equity offerings more than doubled this year as against US$ 5.94 billion mobilisedin 2006-07, data compiled by primary market tracking firm Prime shows. The remaining30 per cent was invested through overseas offers, preferential offers and conversion ofwarrants. Of these, outstanding NRI deposits at end-March 2008, stood at US$ 43.7billion. Also, investments in securities have also gone up. Out of the US$ 299.23 billionforeign currency assets as on 31 March 2008, US$ 103.56 billion were invested insecurities.This surge in FII investment has led to the cumulative net investments by FII in to Indianequities to total US$ 66.8 billion by the end of 2007, since December 1993, when FIIswere allowed to enter India. This is a clear index of how bullish this category of investorshas been on the prospects of the Indian market.Government InitiativesFIIs are allowed to invest in the primary and secondary capital markets in India throughthe portfolio investment scheme (PIS). Under this scheme, FIIs can acquireshares/debentures of Indian companies through the stock exchanges in India.The ceiling for overall investment for FIIs is 24 per cent of the paid-up capital of theIndian company, and limit is 20 per cent of the paid-up capital in the case of publicsector banks. The ceiling of 24 per cent for FII investment can be raised up to sectoralcap/statutory ceiling, subject to the approval of the board and the general body of thecompany passing a special resolution to that effect.To further increase FII participation in the Indian market, the government and SEBI havetaken several measures: Allowed foreign individuals, corporates and other investors such as hedge funds to register directly as foreign institutional investors. SEBI has FII investment limit in government securities being increased to US$ 5 billion from US$ 3.2 billion. Institutional investors--including FIIs and their sub-accounts--have been allowed to undertake short-selling, lending and borrowing of Indian securities from February 1, 2008. SEBI has simplified the registration norms for FIIs and sub-accounts. Significantly, it has allowed investment managers, advisors or institutional portfolio managers in the NRI category to be registered as FIIs.Consequent to the liberalisation of registration norms, the number of foreign institutionalinvestors (FIIs) registered with the Securities and Exchange Board of India (SEBI) hasincreased to 1403 as on June 27, 2008 as compared with just 1051 FIIs a year back.Simultaneously, the upgradation of Indias sovereign ratings combined with theimprovement in the macro-economic situation and growth fundamentals has led to a
near tripling of FII investments in the debt market. Total investment in the countrys debtmarket till November amounted to US$ 1.59 billion as against US$ 487 million in thecorresponding period in 2006.Also, with the government raising the investment limit for the FIIs in the GovernmentSecurities, the FIIs are rushing in to buy Government paper. As of 27 June, 2008 FIIshave already invested US$ 3.87 billion in the debt market, as against US$ 2.29 billion indebt at the close of 2007. Earlier in May 2008, SEBI had hiked the investmentallocations to FIIs in both government and corporate debt collectively by US$ 3.5 billion,taking the total investment limit to US$ 8 billion. Foreign Technology Collaboration in India Foreign Technology Collaboration-Glimpses Foreign Technology Collaboration in India permits transfer of technology by the means of Government approval or through the automatic route delegated by RBI. The collaboration induces the required amount of technological development and promotion of technologically advanced industries. Foreign Technology Collaboration in India is undertaken with the objective of improving technology levels in the Indian industries. This helps to increase the efficiency and productivity of the industries in India. Foreign Technology Collaboration-Methods of approval The methods of approval Foreign Technology Collaboration in India helps in effective transfer of technical aspects. The transfer of foreign technology plays an important role in the Foreign Direct Investments. With the introduction of the 1991 Economic Policy, foreign investments started inflowing in large amounts. The Central government has allowed the transfer of technology in various industrial sectors. Significant technology transfers have taken place since the economic reforms. The Central Government presented the Statement on Industrial Policy in 1991, which provided simplified methods for the better governance of the Foreign Technology Agreements. Sec 39C deals with Foreign Technology Agreements. There are certain standardized clauses for the approval of the Foreign Technology Collaboration in India. The approval techniques follow two methods, namely automatic approval and government approval Government Approval The manufacturing and products should be compliant with the small scale industries Proposals which involve previous trademark agreement, joint ventures, technology transfer, etc In case of an extension of the foreign technology collaboration agreements which had been automatically approved earlier Automatic Approval The royalty paid is 1 % in case of domestic sales and 2 % in case of exports as granted under automatic route for use of the trademark foreign collaborator
The royalty to be paid is restricted to 5 % in case of domestic sales, 8 % in case of exports and total payment should be 8 % on sales for a period of 10 years The royalty paid is 5 % in case of domestic sales and 8 % in case of exports as granted under automatic route for wholly owned subsidiaries FOREIGN INVESTMENT POLICY-FDI & FII A. Foreign Direct Investment Policy-FDIRBI-Automatic FIPB100 74 49 26 100 74 49 26Flori-Horticulture Ground Scheduled Insurance Tea Basic & ARCs Defence handling air transport Cigarette Cellular productionMining-Gold, (air)-NRI (NRI-100%) services DTHminerals, silver, 100 Courier (FDI+FII) FM radio-coal & lignite services ISP 20%(Captive) Private Commodity banking Basic & Non-news exchange NewspaperAlcohol-distillation (FDI+FII) Cellular channels services Credit NewsHazardous Non- Magazine information channelschemicals, scheduled ISP Journals companyIndustrial air transportexplosives, Drugs Refining& Pharma (PSU)Power Single brandAirports product(Greenfield) retailing (51%)Constructiondevelopmentprojects, SEZsIndustrial parksRefining(private)TelecomequipmentsWholesale trading
NBFCs All Remaining 100% FDI-Automatic, subject to regulations applied viz. PSU reservation etc. B. Foreign Institutional Investments-FIIs This surge in FII investment has led to the cumulative net investments by FII in to Indian equities to total US$ 66.8 billion by the end of 2007, since December 1993, when FIIs were allowed to enter India. This is a clear index of how bullish this category of investors has been on the prospects of the Indian market. Government Initiatives The ceiling for overall investment for FIIs is 24 per cent of the paid-up capital of the Indian company, 20 per cent of the paid-up capital in the case of public sector banks. The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. Allowed foreign individuals, corporates and other investors such as hedge funds to register directly as foreign institutional investors.
SEBI has FII investment limit in government securities and corporate bonds being increased to US$ 8 billion. Institutional investors--including FIIs and their sub-accounts--have been allowed to undertake short selling, lending and borrowing of Indian securities from February 1, 2008. (Temporarily recently banned, Oct 2008) SEBI has simplified the registration norms for FIIs and sub-accounts. it has allowed investment managers, advisors or institutional portfolio managers in the NRI category to be registered as FIIs.GLOBALISATION:Globalization can be traced to times when Buddhism spread from India to China in Istcentury AD. That was when cultural links between both countries were established. By1300 AD, the Song Dynasty in China linked Europe and China by land and sea acrossEurasia and the Indian Ocean. The year 1300 saw the creation of the Ottoman Empirewhich spanned Europe, North Africa, and the Middle East, and connected thedynasties in Central Asia and India.This led to the expansion of trading activities between Europe and Asia. By 1300,networks of trade ran from England to China, France, Italy, across the Mediterraneanto Egypt, and then to Central Asia (the Silk Route). The trade in commoditiescontinued well into the 17th century. By 1800, the Atlantic and Indian Ocean systemswere connected to one another through the flow of commodities and by the operationsof the British, French, and Dutch overseas companies.The economic conditions that prevailed in the eighteenth century continued well into thenineteenth century. With the introduction of railways and steamships, transportationcosts came down significantly, and this created new circuits of capital accumulation. Inthe twentieth century, technological developments were further reducing natural barrierslike geographical distance. The cost of information processing and communication fellsignificantly in the last few decades, accelerating the pace of globalization.Firms go abroad for organizational and environmental reasons. Organizational factorsare internal to the organization, while environmental reasons are external to theorganization. Internal reasons might range from wanting to exploit worldwide marketimperfections to opportunities that arise in different stages of the lifecycle of a firm’sproduct. There are six ways to enter a foreign market. They are: exporting, turnkeyprojects, licensing, franchising, setting up a joint venture with a host country firm, andsetting up a wholly-owned subsidiary in the host country.An organization goes through five stages of evolution: domestic, international,multinational, global, and transnational stages before becoming a metanationalcorporation. The classification is based on the firm’s orientation at each stage. To becompetitive, companies have to constantly innovate and make their own productsobsolete. Competition has transformed the marketplace from a sellers market to abuyers market where the customers focus is on value. Metanational companies see theworld as a place with specialized knowledge pockets: market intelligence, technologyand capabilities, scattered around. These companies sense the untapped potential inthese knowledge pockets, and try to exploit it to the fullest extent.
Measuring globalization:Globalization has had an impact on different cultures around the world.Japanese McDonalds fast food as an evidence of international integration.Looking specifically at economic globalization, demonstrates that it can be measured indifferent ways. These center around the four main economic flows that characterizeglobalization: Goods and services, e.g. exports plus imports as a proportion of national income or per capita of population Labor/people, e.g. net migration rates; inward or outward migration flows, weighted by population Capital, e.g. inward or outward direct investment as a proportion of national income or per head of population Technology, e.g. international research & development flows; proportion of populations (and rates of change thereof) using particular inventions (especially factor-neutral technological advances such as the telephone, motorcar, broadband)As globalization is not only an economic phenomenon, a multivariate approach tomeasuring globalization is the recent index calculated by the Swiss think tank KOF. Theindex measures the three main dimensions of globalization: economic, social, andpolitical. In addition to three indices measuring these dimensions, an overall index ofglobalization and sub-indices referring to actual economic flows, economic restrictions,data on personal contact, data on information flows, and data on cultural proximity iscalculated. Data is available on a yearly basis for 122 countries, as detailed in Dreher,Gaston and Martens (2008). According to the index, the worlds most globalized countryis Belgium, followed by Austria, Sweden, the United Kingdom and the Netherlands. Theleast globalized countries according to the KOF-index are Haiti, Myanmar the CentralAfrican Republic and Burundi.A.T. Kearney and Foreign Policy Magazine jointly publishanother Globalization Index. According to the 2006 index, Singapore, Ireland,Switzerland, the U.S., the Netherlands, Canada and Denmark are the most globalized,while Indonesia, India and Iran are the least globalized among countries listed.Effects of globalizationGlobalization has various aspects which affect the world in several different ways suchas: Industrial - emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. Particularly movement of material and goods between and within national boundaries. Financial - emergence of worldwide financial markets and better access to external financing for borrowers. Simultaneous though not necessarily purely globalist is the emergence of under or un-regulated foreign exchange and speculative markets. Economic - realization of a global common market, based on the freedom of exchange of goods and capital. Political - some use "globalization" to mean the creation of a world government, or cartels of governments (e.g. WTO, World Bank, and IMF) which regulate the relationships among governments and guarantees the rights arising from social and economic globalization.  Politically, the United States has enjoyed a
position of power among the world powers; in part because of its strong and wealthy economy. With the influence of globalization and with the help of The United States’ own economy, the Peoples Republic of China has experienced some tremendous growth within the past decade. If China continues to grow at the rate projected by the trends, then it is very likely that in the next twenty years, there will be a major reallocation of power among the world leaders. China will have enough wealth, industry, and technology to rival the United States for the position of leading world power. Informational - increase in information flows between geographically remote locations. Arguably this is a technological change with the advent of fibre optic communications, satellites, and increased availability of telephony and Internet. Language - the most popular language is English o About 75% of the worlds mail, telexes, and cables are in English. o Approximately 60% of the worlds radio programs are in English. o About 90% of all Internet traffic is using English. Competition - Survival in the new global business market calls for improved productivity and increased competition. Due to the market became worldwide not specific area, there are many industries around the world. Industries have to upgrade their products and use technology skillfully for facing the competition and increasing their competitive. Cultural - growth of cross-cultural contacts; advent of new categories of consciousness and identities which embodies cultural diffusion, the desire to increase ones standard of living and enjoy foreign products and ideas, adopt new technology and practices, and participate in a "world culture". Some bemoan the resulting consumerism and loss of languages. Also see Transformation of culture. Ecological- the advent of global environmental challenges that might be solved with international cooperation, such as climate change, cross-boundary water and air pollution, over-fishing of the ocean, and the spread of invasive species. Since many factories are built in developing countries with less environmental regulation, globalism and free trade may increase pollution. On the other hand, economic development historically required a "dirty" industrial stage, and it is argued that developing countries should not, via regulation, be prohibited from increasing their standard of living. Social (International cultural exchange) - increased circulation by people of all nations with fewer restrictions. o Spreading of multiculturalism, and better individual access to cultural diversity (e.g. through the export of Hollywood and Bollywood movies). Some consider such "imported" culture a danger, since it may supplant the local culture, causing reduction in diversity or even assimilation. Others consider multiculturalism to promote peace and understanding between peoples. o Greater international travel and tourism o Greater immigration, including illegal immigration o Spread of local consumer products (e.g. food) to other countries (often adapted to their culture). o Worldwide fads and pop culture such as Pokémon, Sudoku, Numa Numa, Origami, Idol series, YouTube, Orkut, Facebook, and MySpace. Accessible to those who have Internet or Television, leaving out a substantial segment of the Earths population.
o Worldwide sporting events such as FIFA World Cup and the Olympic Games. o Incorporation of multinational corporations in to new media. As the sponsors of the All-Blacks rugby team, Adidas had created a parallel website with a downloadable interactive rugby game for its fans to play and compete. Technical o Development of a global telecommunications infrastructure and greater transborder data flow, using such technologies as the Internet, communication satellites, submarine fiber optic cable, and wireless telephones o Increase in the number of standards applied globally; e.g. copyright laws, patents and world trade agreements. Legal/Ethical o The creation of the international criminal court and international justice movements. o Crime importation and raising awareness of global crime-fighting efforts and cooperation.Whilst it is all too easy to look at the positive aspects of Globalization and the greatbenefits that are apparent everywhere, there are also several negative occurrences thatcan only be the result of or major motivating factors that inspire some corporations toglobalize. Globalization – the growing integration of economies and societies around theworld – has been one of the most hotly-debated topics in international economics overthe past few years. Rapid growth and poverty reduction in China, India, and othercountries that were poor 20 years ago, has been a positive aspect of globalization. Butglobalization has also generated significant international opposition over concerns that ithas increased inequality and environmental degradation. PUSH VS PULL FACTORS
ADVANTAGES & LIMITATIONS OF MNCSMultinational Corporations:Though there is no universally acceptable definition of MNCs they may begenerally defined as companies that operate in more than one country andinvest directly in operations instead of being involved in licensing, franchising,etc. The operations are not just confined to sales but also involvemanufacturing and R&D. MNCs tend to be oligopolistic and dynamic in sensingand exploiting local opportunities.The various subsidiaries of an MNC enjoy substantial autonomy in decisionmaking, except in some critical areas, which are handled by the parent firm.MNCs can be vertically or horizontally integrated. They can also take the formof conglomerates, joint ventures, or strategic alliances. The growth of MNCs inthe last few decades may be attributed to the revolution in informationtechnology and the removal of restrictions on capital flows by several countriesaround the globe. Many theories have been framed to explain the evolution ofMNCs.Advantages: • New investment and New technology • Innovative and competitive practices • Contributions of taxation • Foreign exchange/Export • Integrating Economies • Economy buildingDisadvantages: • High competitive advantages over local firms • Operate polices that may create distortion in local market • Misuse the environment and resources • Avoid tax by practicing transfer pricing • Political PressureMultinational Corporations:Though there is no universally acceptable definition of MNCs they may be
generally defined as companies that operate in more than one country andinvest directly in operations instead of being involved in licensing, franchising,etc. The operations are not just confined to sales but also involvemanufacturing and R&D. MNCs tend to be oligopolistic and dynamic in sensingand exploiting local opportunities.The various subsidiaries of an MNC enjoy substantial autonomy in decisionmaking, except in some critical areas, which are handled by the parent firm.MNCs can be vertically or horizontally integrated. They can also take the formof conglomerates, joint ventures, or strategic alliances. The growth of MNCs inthe last few decades may be attributed to the revolution in informationtechnology and the removal of restrictions on capital flows by several countriesaround the globe. Many theories have been framed to explain the evolution ofMNCs.Organizational Structure of MNCsOrganizational structure is a representation of the formal reporting relationships withinan organization. Span of control refers to the maximum number of subordinates amanager can effectively supervise. A narrow span of control means fewer number ofpeople reporting to a manager and a wide span means more subordinates reporting toone manager.While a narrow span of control creates a tall organization with many managers andcentralized decision making, wide span creates a flat organization with fewer managersand more delegation of authority. The degree to which authority is delegated determinescentralization and decentralization.Though centralization helps avoid conflict of interest that could arise in a decentralizedenvironment, it generally leads to slower, ineffective and inefficient decision-making.Horizontal differentiation is concerned with how the departments in an organizationfunction together. An organization based on functions is the traditional and the mostlogical.But a firm offering many product lines, will find this structure less successful. In a productdivision based organizational structure, product heads are responsible for all functionsrelating to a product. This enables the managers to gain expertise of various functionsrelating to the product. Marketing plans can vary among product groups and need not betied up with the overall organizational marketing plan.Most MNCs in their initial stages of globalization employed an international divisioncovering certain regions of the world to supervise the functions in those regions. Butconflicts could arise between the functional heads and the heads of the internationaldivision. WorldWide Area Structure and Strategic Business Units (SBU) are morepopular forms of organizational structure in big corporations. SBUs function asindependent organizations with a separate income statement and balance sheet. But thechallenge of globalization and the growth in technology have brought about morecomplex organizational structures like the Matrix structure and the managementnetworks. Matrix organizations are a hybrid of the functional and divisional structures.Normally, this results in a subordinate having to report to two bosses. But matrixstructures can prove very effective without any conflict in the reporting relationships, ifthey are well chalked out. Network or virtual organizations use technology to collect anddisseminate information. They identify customer requirements and deliver products andservices through a network of specialists.Ex: MatrixWipro has an advantage. What they are doing now is that putting SBU heads there. Sothe healthcare head is based in Boston, energy and utilities head is based in London.
The manufacturing head is based now in California. All these units are roughly a littleunder billion dollars. So if you look at size of our operations, roughly this will represent40% of our revenues. And if you take the aggregate, I would say about half our businessis based overseas. It’s not a bad idea (having one CEO based overseas).In the present era of globalization, many firms do not confine themselves to theirdomestic market but choose to enter international markets at some point. There are twomodes for entry into international markets. These are: low or shared and the high or fullcontrol modes. Firms entering international markets should make a careful study of thepros and cons of each entry mode.Firms which are large, and have ambitious objectives, and those which are willing totake risks, prefer to have greater control over their operations in international markets.So, they either acquire firms in international markets or start their own operations, bothof which are high control modes. High control modes of entry also offer high returns. Butfirms which do not take risk or cannot commit resources opt for a shared/low controlmode. This can be in the form of exporting, contracts, joint ventures or strategicalliances. The returns are moderate in the low control mode.The choice of the entry mode depends on a set of internal and external factors relatingto the firm. The social ties of a firm also affect the choice of entry mode choice for thefirms. Firms which interact with different groups, get information very easily. Firms oftenprefer to do business with acquaintances in foreign markets or with parties who areintroduced by their common friends. After choosing the entry mode, the right timing forentry into the international markets is critical.The factors that are specific to a firm, industry and to the host country will have acombined influence on the timing of the firms entry. Japanese firms usually take a longterm perspective when entering foreign markets. They prefer a high control mode ofentry. The stake of the firm, risk factors, resource commitment, need for localcontribution, and government regulations are the five important factors that influence theentry mode decision of a Japanese firm. In general, all high-tech start-up companiesprefer a low entry mode.Only in rare cases do they opt for a high control mode. Firms, which sell customizedproducts, usually adopt a direct exporting strategy whereas firms that sell standardizedproducts prefer to have intermediaries. In countries where the risk factor is high, firmsadopt a low control entry mode and in economies where the risk factor is low, a highcontrol entry mode is preferred. The entry strategies of pharma companies can take fiveforms - exporting, licensing, joint venture, mergers and acquisitions, and establishing asubsidiary of their own. The decision regarding the mode of entry in the pharma industryis basically guided by the objectives of the firms concerned. Exporting Turnkey Projects Licensing Franchising Joint Ventures M&A Wholly owned SubsidiariesThe advantage of exporting is that it facilitates realization of experience curveeconomies and prevents cost of setting up manufacturing operations in another country.
Disadvantages include high transport costs, trade barriers and problems with localmarketing agents. Turnkey projects allow firms to export their process technology whereFDI is not permitted.The disadvantage is that the firm may create competitors in the process. The mainadvantage of licensing is that the licensee bears the cost and risk of opening a foreignmarket. The disadvantages include the risk of losing technological know-how to thelicensee.The advantage of franchising is similar to that of licensing and the disadvantage is thatthe franchiser has to keep strict control over the franchisee. The advantage of jointventures is the partners share the costs and risk of opening a foreign market and ofgaining knowledge and political influence. The disadvantage is the risk of losing controlover technology.The advantages of wholly owned subsidiary include tight control over operations andtechnology. However, the firm has to bear all the costs and risks of opening a foreignmarket. We have also seen that the multiple measures of risk should be taken intoconsideration while selecting an entry mode. We also discussed strategic alliances andits advantages and disadvantages.The advantage of strategic alliance is that it facilitates entry into foreign market andenables partners to share the fixed costs and risks associated with new products andprocesses. The disadvantage is that firms may sometimes have to give awaytechnological know-how and market access to the alliance partner.To make the alliance work, factors to be taken into consideration are selection ofpartner, structure of the alliance and management of the alliance. The key issuesinvolved in managing alliances are building trust and learning from each other. Continuum of Internationalization:International –Multinational/Transnational-Global Entry strategies:Export-Licensing-Franchising-Turnkey projects-subsidiary-Joint ventures Organizational structure:International division-Functional-Geographic-Product-Matrix-Network ****************** International Business Entry Strategies (Modes/Channels):Entry strategiesThere are a variety of ways in which organisations can enter foreign markets. The threemain ways are by direct or indirect export or production in a foreign countryExporting
Exporting is the most traditional and well established form of operating in foreignmarkets. Exporting can be defined as the marketing of goods produced in one countryinto another. Whilst no direct manufacturing is required in an overseas country,significant investments in marketing are required. The tendency may be not to obtain asmuch detailed marketing information as compared to manufacturing in marketingcountry; however, this does not negate the need for a detailed marketing strategy.The advantages of exporting are:The disadvantage is mainly that one can be at the "mercy" of overseas agents and sothe lack of control has to be weighed against the advantages. For example, in theexporting of African horticultural products, the agents and Dutch flower auctions are in aposition to dictate to producers.A distinction has to be drawn between passive and aggressive exporting. A passiveexporter awaits orders or comes across them by chance; an aggressive exporterdevelops marketing strategies which provide a broad and clear picture of what the firmintends to do in the foreign market. Pavord and Bogart2 (1975) found significantdifferences with regard to the severity of exporting problems in motivating pressuresbetween seekers and non-seekers of export opportunities. They distinguished betweenfirms whose marketing efforts were characterized by no activity, minor activity andaggressive activity.Those firms who are aggressive have clearly defined plans and strategy, includingproduct, price, promotion, distribution and research elements. Passiveness versusaggressiveness depends on the motivation to export. In countries like Tanzania andZambia, which have embarked on structural adjustment programmes, organisations arebeing encouraged to export, motivated by foreign exchange earnings potential, saturateddomestic markets, growth and expansion objectives, and the need to repay debtsincurred by the borrowings to finance the programmes. The type of export response isdependent on how the pressures are perceived by the decision maker. Piercy (1982) 3highlights the fact that the degree of involvement in foreign operations depends on"endogenous versus exogenous" motivating factors, that is, whether the motivationswere as a result of active or aggressive behaviour based on the firms internal situation(endogenous) or as a result of reactive environmental changes (exogenous).If the firm achieves initial success at exporting quickly all to the good, but the risks offailure in the early stages are high. The "learning effect" in exporting is usually veryquick. The key is to learn how to minimise risks associated with the initial stages ofmarket entry and commitment - this process of incremental involvement is called"creeping commitment"Exporting methods include direct or indirect export. In direct exporting the organisationmay use an agent, distributor, or overseas subsidiary, or act via a Government agency.In effect, the Grain Marketing Board in Zimbabwe, being commercialised but still havingGovernment control, is a Government agency. The Government, via the Board, are the
only permitted maize exporters. Bodies like the Horticultural Crops DevelopmentAuthority (HCDA) in Kenya may be merely a promotional body, dealing with advertising,information flows and so on, or it may be active in exporting itself, particularly givingapproval (like HCDA does) to all export documents. In direct exporting the majorproblem is that of market information. The exporters task is to choose a market, find arepresentative or agent, set up the physical distribution and documentation, promote andprice the product. Control, or the lack of it, is a major problem which often results indecisions on pricing, certification and promotion being in the hands of others. Certainly,the phytosanitary requirements in Europe for horticultural produce sourced in Africa aregetting very demanding. Similarly, exporters are price takers as produce is sourced alsofrom the Caribbean and Eastern countries. In the months June to September, Europe is"on season" because it can grow its own produce, so prices are low. As such, producersare better supplying to local food processors. In the European winter prices are muchbetter, but product competition remains.According to Collett4 (1991)) exporting requires a partnership between exporter,importer, government and transport. Without these four coordinating activities the risk offailure is increased. Contracts between buyer and seller are a must. Forwarders andagents can play a vital role in the logistics procedures such as booking air space andarranging documentation. A typical coordinated marketing channel for the export ofKenyan horticultural produce is given in figure below.In this case the exporters can also be growers and in the low season both these andother exporters may send produce to food processors which is also exported.The export marketing channel for Kenyan horticultural products.Exporting can be very lucrative, especially if it is of high value added produce. Forexample in 1992/93 Zimbabwe exported 5 338,38 tonnes of flowers, 4 678,18 tonnes ofhorticultural produce and 12 000 tonnes of citrus at a total value of about US$ 22 016,56million. In some cases a mixture of direct and indirect exporting may be achieved withmixed results. For example, the Grain Marketing Board of Zimbabwe may export graindirectly to Zambia, or may sell it to a relief agency like the United Nations, for feeding the
Mozambican refugees in Malawi. Payment arrangements may be different for the twotransactions. Nali products of Malawi gives an interesting example of a "passive toactive" exporting mode.CASE 7.1 Nali Producers - MalawiNali group, has, since the early 1970s, been engaged in the growing and exporting ofspices. Spices are also used in the production of a variety of sauces for both the localand export market. Its major success has been the growing and exporting of Birdseyechilies. In the early days knowledge of the market was scanty and thus the company wasobtaining ridiculously low prices. Towards the end of 1978 Nali chilies were in greatdemand, yet still the company, in its passive mode, did not fully appreciate thecompetitive implications of the business until a number of firms, including Lonrho andPress Farming, started to grow and export.Again, due to the lack of information, a product of its passivity, the firm did not realisethat Uganda, with their superior product, and Papua New Guinea were major exporters,However, the full potential of these countries was hampered by internal difficulties. Naliwas able to grow into a successful commercial enterprise. However, with the end of theinternal problems, Uganda in particular, began an aggressive exporting policy, usingtheir overseas legations as commercial propagandists. Nali had to respond with a moreformal and active marketing operation. However it is being now hampered by a numberof important "exogenous" factors.The entry of a number of new Malawian growers, with inferior products, has damagedthe Malawian chili reputation, so has the lack of a clear Government policy and the lackof financing for traders, growers and exporters.The latter only serves to emphasise the point made by Collett, not only do organisationsneed to be aggressive, they also need to enlist the support of Government andimporters.It is interesting to note that Korey (1986) warns that direct modes of market entry may beless and less available in the future. Growing trading blocs like the EU or EFTA meansthat the establishing of subsidiaries may be one of the only means forward in future.It is interesting to note that Korey5 1986 warned that direct modes of market entry maybe less and less available in the future. Growing trading blocks like the EU or EFTAmeans that the establishment of subsidiaries may be one of the only ways forward infuture. Indirect methods of exporting include the use of trading companies (very muchused for commodities like cotton, soya, cocoa), export management companies,piggybacking and countertrade.Indirect methods offer a number of advantages including: - in the operating market or worldwide ce takes burden from manufacturer.
PiggybackingPiggybacking is an interesting development. The method means that organisations withlittle exporting skill may use the services of one that has. Another form is theconsolidation of orders by a number of companies in order to take advantage of bulkbuying. Normally these would be geographically adjacent or able to be served, say, onan air route. The fertilizer manufacturers of Zimbabwe, for example, could piggybackwith the South Africans who both import potassium from outside their respectivecountries.CountertradeBy far the largest indirect method of exporting is countertrade. Competitive intensitymeans more and more investment in marketing. In this situation the organisation mayexpand operations by operating in markets where competition is less intense butcurrency based exchange is not possible. Also, countries may wish to trade in spite ofthe degree of competition, but currency again is a problem. Countertrade can also beused to stimulate home industries or where raw materials are in short supply. It can,also, give a basis for reciprocal trade.Estimates vary, but countertrade accounts for about 20-30% of world trade, involvingsome 90 nations and between US $100-150 billion in value. The UN definescountertrade as "commercial transactions in which provisions are made, in one of aseries of related contracts, for payment by deliveries of goods and/or services in additionto, or in place of, financial settlement".Countertrade is the modem form of barter, except contracts are not legal and it is notcovered by GATT. It can be used to circumvent import quotas.Countertrade can take many forms. Basically two separate contracts are involved, onefor the delivery of and payment for the goods supplied and the other for the purchase ofand payment for the goods imported. The performance of one contract is not contingenton the other although the seller is in effect accepting products and services from theimporting country in partial or total settlement for his exports. There is a broadagreement that countertrade can take various forms of exchange like barter, counterpurchase, switch trading and compensation (buyback). For example, in 1986 Albaniabegan offering items like spring water, tomato juice and chrome ore in exchange for acontract to build a US $60 million fertilizer and methanol complex. Information onpotential exchange can be obtained from embassies, trade missions or the EU tradingdesks.Foreign productionBesides exporting, other market entry strategies include licensing, joint ventures,contract manufacture, ownership and participation in export processing zones or freetrade zones.Licensing: Licensing is defined as "the method of foreign operation whereby a firm inone country agrees to permit a company in another country to use the manufacturing,processing, trademark, know-how or some other skill provided by the licensor".
It is quite similar to the "franchise" operation. Coca Cola is an excellent example oflicensing. In Zimbabwe, United Bottlers have the licence to make Coke.Licensing involves little expense and involvement. The only cost is signing theagreement and policing its implementation.Licensing gives the following advantages: ns and open the door to low risk manufacturingrelationshipsmarketing effort take royalties in stock.The disadvantages are: - to length of agreement, specific product, process ortrademark -how and so licence is short - overcome by having cross technology transfer dealsandThose who decide to license ought to keep the options open for extending marketparticipation. This can be done through joint ventures with the licensee.Joint venturesJoint ventures can be defined as "an enterprise in which two or more investors shareownership and control over property rights and operation".Joint ventures are a more extensive form of participation than either exporting orlicensing. In Zimbabwe, Olivine industries has a joint venture agreement with HJ Heinzin food processing.Joint ventures give the following advantages: -depth knowledge with a foreignpartner with know-how in technology or processThey also have disadvantages:
If the partners carefully map out in advance what they expect to achieve and how, thenmany problems can be overcome.Ownership: The most extensive form of participation is 100% ownership and thisinvolves the greatest commitment in capital and managerial effort. The ability tocommunicate and control 100% may outweigh any of the disadvantages of joint venturesand licensing. However, as mentioned earlier, repatriation of earnings and capital has tobe carefully monitored. The more unstable the environment the less likely is theownership pathway an option.These forms of participation: exporting, licensing, joint ventures or ownership, are on acontinuum rather than discrete and can take many formats. Anderson and Coughlan8(1987) summarise the entry mode as a choice between company owned or controlledmethods - "integrated" channels - or "independent" channels. Integrated channels offerthe advantages of planning and control of resources, flow of information, and fastermarket penetration, and are a visible sign of commitment. The disadvantages are thatthey incur many costs (especially marketing), the risks are high, some may be moreeffective than others (due to culture) and in some cases their credibility amongst localsmay be lower than that of controlled independents. Independent channels offer lowerperformance costs, risks, less capital, high local knowledge and credibility.Disadvantages include less market information flow, greater coordinating and controldifficulties and motivational difficulties. In addition they may not be willing to spendmoney on market development and selection of good intermediaries may be difficult asgood ones are usually taken up anyway.Once in a market, companies have to decide on a strategy for expansion. One may be toconcentrate on a few segments in a few countries - typical are cashewnuts fromTanzania and horticultural exports from Zimbabwe and Kenya - or concentrate on onecountry and diversify into segments. Other activities include country and market segmentconcentration - typical of Coca Cola or Gerber baby foods, and finally country andsegment diversification. Another way of looking at it is by identifying three basic businessstrategies: stage one - international, stage two - multinational (strategies correspond toethnocentric and polycentric orientations respectively) and stage three - global strategy(corresponds with geocentric orientation). The basic philosophy behind stage one isextension of programmes and products, behind stage two is decentralisation as far aspossible to local operators and behind stage three is an integration which seeks tosynthesize inputs from world and regional headquarters and the country organisation.Whilst most developing countries are hardly in stage one, they have within themorganisations which are in stage three. This has often led to a "rebellion" against theoperations of multinationals, often unfounded.Export processing zones (EPZ)Whilst not strictly speaking an entry-strategy, EPZs serve as an "entry" into a market.They are primarily an investment incentive for would be investors but can also provide
employment for the host country and the transfer of skills as well as provide a base forthe flow of goods in and out of the country. One of the best examples is the MauritianEPZ12, founded in the 1970s.CASE 7.2 The Mauritian Export Processing ZoneSince its inception over 400 firms have established themselves in sectors as diverse astextiles, food, watches. And plastics. In job employment the results have been startling,as at 1987, 78,000 were employed in the EPZ. Export earnings have tripled from 1981 to1986 and the added value has been significant- The roots of success can be seen onthe supply, demand and institutional sides. On the supply side the most critical factorhas been the generous financial and other incentives, on the demand side, access to theEU, France, India and Hong Kong was very tempting to investors. On the institutionalside positive schemes were put in place, including finance from the Development Bankand the cutting of red tape. In setting up the export processing zone the Mauritiangovernment displayed a number of characteristics which in hindsight, were crucial to itssuccess.troublerather than maintaining the status quoand characteristics.Organisations are faced with a number of strategy alternatives when deciding to enterforeign markets. Each one has to be carefully weighed in order to make the mostappropriate choice. Every approach requires careful attention to marketing, risk, mattersof control and management. A systematic assessment of the different entry methods canbe achieved through the use of a matrix (see table 7.2).Table 7.2 Matrix for comparing alternative methods of market entryEntry modeEvaluation Indirect Direct Marketing Counter Licensing Joint Wholly EPZcriteria export export subsidiary trade venture owned operationa) Companygoals
b) Size ofcompanyc) Resourcesd) Producte) Remittancef) Competitiong) Middlemencharacteristicsh)Environmentalcharacteristicsi) Number ofmarketsj) Marketk) Marketfeedbackl) Internationalmarketlearningm) Controln) Marketingcostso) Profitsp) Investmentq)Administrationpersonnelr) Foreignproblemss) Flexibilityt) Risk INTERNATIONAL TRADE THEOROES