foreign marketing selection

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Internatlonal Market election4 8 TERMINAL QUESTlOmnd EntrI. What is the relationship between market segmenthtion, market targeting and product

positioning?

2. Discuss the importance of market.segmentation in marketing decisions and explainthe bases of market segmentation.

3. What are the elem ents that influence in deciding the principles of segmentation andwhat will be the suitable base for marketing of Television in various countries? Alsosuggest the marketing strategies to be followed.

4. what are the different market targeting strategies? Explain them with appropriateexamples.

5Global positioning is m ost effective for product qategories that approAch either endof 'high-touchhigh-tech' continuum . Elaborate.

UNIT FOREIGN MA T SELECTION

Structure

ObjectivesIntroductionScreening International Marketing OpportunitiesCriteria for Selecting Target Countries5.3.1 Market Size and Growth5.3.2 Political Environmen t5.3.3 Legal' Conditions5.3.4 Social and Cultural ConditionsThe ~r o& ss f Market SelectionLet Us Sum UpAnswers to Cheek Your-ProgressTerminal Questions

5 0 OBJECTIVES

After studying this unit, you should be able to:

a discuss the need for a firm to be selective in choosing markets for export

a state the process of export market selection.

explain the criteria to be used in selecting export markets

As you know, the first step in the international market selection process is segm entation,targeting and positioning. This you have already studied in Unit4. The second stepiscollection of relevant data on eac h country (for the selected segment), analyze it, fyt er out.;less promising countries and select the most promising countries. All these aspects arediscussed in this unit.

This unit ha; bee.devcloped to highl ight theneed for a irm to choos&its export marketsjudiciously. The different criteria that maybe used in the location process as we lls llustra-tions of the relevance of the criteria in the relation of marketsare provided in the unit.

5.2 SCREENING INTERNATIONAL MARKETINGOPPORTUNITIES

Global trade in merchandise has grown significantly during the last five decades and during,1999, t was estimated to be more than US$4.5 trillion at current value. As on February2001 there were 140 countries who w ere members of the World Trade OrganizationO;rirlYbesides countries like People's R epublic of China and the Russian Federation which w ere notmembers of WTO. Initially millions of products are tride d across national boundaries ofcountries every year and the number of com panies engaged in foreign trade operations is alsogrowing. This does not, however, mean that all products can be sbld to all countries at alltimes by as ompany. Apart from he factthat it will be practically impossible given theresource constraints a company or country will face in trying to sell more than a limitednumber of products to a limited number of countries. Reliable and up dated data and infor-mation may not be available in respect of a number of countries to enablea firm to arrive atthe right conclusion. It may not also be advisable to fritter away the scg ce resources of afirm on attempts to export an unmanageable number of products andfor. o unman ageablenumber of countries. Taking into account the stfengths and w eakness of afirmand theopportunities and threats in the trading environment, it would be advisable for t he firm to


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~nternatfonalMarket Selectionand Entry

Figure5.1: A Modelfor Selecting Foreign Markets

The Political EnvironmentSocial Structure

Preliminary Oppoltunlties

ejectedCounjrles

Possible pportunities.8

Reliability Information

le Product Acceptance

Probable ~ppor tunl t ie s

Corporate FactorsInfluencing Implementation

ountry Prlorlty Llstlnge

Source: R. Wayne Walcoord,ExportMarket Research, Global Magazine, May1989, p 83

select a limited number of products for export and a manage able number of countries as

export markets and c oncentrate its efforts on achieving the best returns.The foreign market selection process usually begins with a screening process that involvesgathering relevant information on each country and filtering out less promising countries.Amodel for selecting foreign markets is shown in Figure5.1.

The model inclu des a series of four filters to screen out countries. Itis necessary to break theprocess down into a series of steps due to the large number of ma rkets since it is not possibleto coilduct extensive market research studies n each of the more than150 countries of theworld (The World Bank Atlas includes85 countries and territories). The screening processis used to identify prospective countries. Two common errors of country selection arelikely to be (1) ignoring countries with significant potential for the company's products, and(2) spending resources nvestigating tountries that may turn out to be poor prospects. Thescreening process thus allows an international company to quickly focus efforts on athe most promising markets by using published secondary sources .of da%and

available n mos t libraries of international and regional organizations, export service institu- Foreign Market Selectiontions, etc.

Thefirst stage of the selection process uses macro variables to discriminate betweencountries that represent basic opportunities and countries with little or no opportunityor withexcessive risk. Macr o variables describe the total market in tennaof economic, social,geographic, and political information. Fo r instance Inacro econi.,,: ic statistics can indic atethat the country is too small, as evid enced by the gross national ;,rmoductGDP) or populritionsize, or if the gross national product i s largethe personal disposable income per householdmay be too low. Political stability or political rel:ltions between the exporter's country andthe consumer's country can also be used to rcmovl: or select a country from the set ofpossible opportunities. Similarly the geographic distance between the exporter's country andthe target country, the topographical and climate conditions can also influence selection1

rejection of a country.

In thesecond stage of the selection process, variables that indicate the potential market sizeand acceptance of tha product or similar products are used. O ften proxy variables are used inthis screening process.A proxy variable is a sim ilar or related product that indicates ademand for your product. For example, if you are attempting to measure the potential mark etsize and receptivity for satellite television reception equipment, possible proxy variables maybe the number of television sets for household, total sales of VCRs or total sales of m icro-wave ovens. The number of television sets andVCRs indicates the potential for homeentertainment and the sales of microwave ovens indicates the propensity to use advanc edtechnologies in place of traditional appliance technology. The year-to-year growth r ates andthe total sales of similar or proxy products are good indicators of market size and growth.Other factors in the second stage of the selection process can also be used to screen outcountries, such as the stage of economic development, taxes, and duty requirements. If youdo not plan to manufacture locally, a high import duty or quota restrictionmay eliminateacountry from consideration in the second stage of the screening process.

The third stage of the screening process focuses on micro-level considerations such ascompetitors, ease of entry, cost of eutry, and profit potential. Micro-level factors influ encethe success or failure of specific product in market. At this stage of the screening process,you may only be considering a limited number of countries; hence, is feasible to get moredetailed, reliable and updated information from the various gover~~mentalgencies, banksand other such institutions and from other co~ npan ies urrently in operation in that country.In India, many expor t service institutions such as Export Promotion Cou ncils have branchoffices overseas, who can provide information and contacts in many markets. Customsbrokers and freightjforwarders can also help at this stage of the process. Beside s,a majorsource of information at this stage is the Indian Embassys and High Commissions in overseascountries. They not only provide Indian firm with relevant data and information but alsorender other types of assistance including fixing up appo intments for the represen tativeofIndian firm during a visit to the country of accreditation, adv ice on the do's and don'ts ofdoing business within the country, advice on the standing ofa local party, etc.

The focus of the screening prbcess switches from mark et size to profitability. For examp le,based on the current and potential competitors, how much would you need to invest to gainaparticular market share? Given the prices currently charged in the market, what rffargin canyour company expect? Given the cost of entry and the expected sales, what is the likelyprofit'? This stage of the analysis focuses on the quantitative profit expected. Many su bjec-tive judgements have to be mad e to arrive at many decisions. For example, an Israeli manu-facture of pipe insulation found that the market price in the United Kingdom was $10 perkilogram while its actual cost was less than5 per kilogram. This indicated a good profitpotential if the company couldgain access to theU market,

The fourthstage of the scrkening process is an evaluation and rankingof the potential targetcountries based on oorporatq resoqrces, objectives and strategies, For example, altho ughSouth Africa may have the.same expected potential is Venezuela, the later may have bee ngiven a higher priorityby one irm ince successful entry into Venezuela can later pave theway for en t j nto neighbouring countries like Colombia and Bolivia. Alternatively, anotherfirm may opt for South Africa on account of the country's historical and cultural linkswith


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International Market Selection India, familiarity with English language and presence of a large populatio n of people ofand Entry Indian origin.

heck Your Progress A

Exam ine the rationale behind export market selection process. What ar e the variablesthat can be used by afirm to screen overseas countries to prioritise them?

I

5.3 CRITERIA FOR SELE TING TARGETCOUNTRIES

hep processof selecting target countries through the screening process requires that th ecompan ies identify the criteria to be used to differentiate one coun try from an other. Researchon internation al business has shown that the following four critical factors influence marketselection:

Market size

Political environment

Legal environment

Social and Cubural environment

In the following section pf the chapter we will explaine ch of these factors and their uses inthe market selection process.

3 Market Size and Growth

It is obvious that the potentid market size h d rowth wouldbe an important factor inselecting markets. The larger the potential demand for a product in a country, the more

-attractive it will be to a company.

Measures of market size and growthcan be on both macro ahd micro basis. On a macrobasis, it may be determined that the country needs a minimum set of potential resou rces tobe worth further consideration. Table5.1 shows a summary of po tential macro indicators ofmarket size. There are a variety of readily available statitkical data that are macro indicatorsof market size. If you are screening countries fora firm that sells microwave ovens, you maydecide not to consider any country with a personal disposable income per household incomeis less th n 10,000 per year, The logic of this criterion s that if the averag e household ofless than 10,000 the potential for a luxury item likea microwave oven will qot be great,However, a single statistic can sometimes be deceptive. For example, a coun try may have anaverage household income of 8,000, but thee may be one million householdsw income

of over 10,000. These one million households wilI be potential buyers of microwaves.I Similarly, a com@my hat desires to sell footwear or testiles migh t like to have desired area

wise, a g h s e , ncom e wise data. Another firm which wants to tap the market for items likeI rain coats, umbrellas, woo len blankets, refriget~ators, ir condition ers, carpets, etc. mu stI necessarily collect information on the climatic conditions in the main regions of the country.

h b b 5.1: Macro Indicatorsof Market Size

Geographic Indicators

Size of the country in terms of geographic area

Climatic conditions

Topographical ch aracteristics

Demograph ic Characteristics

Total population

Population growth rate

Distribution of the popu lation age-wise, gender-wise, income-wise,rural-urban wise, etc.

Population density

Economlc Characteristics

Total gross national product

Per capita income (also income growth rate)

Personal or household disposable ncome

Income distributionIndustrial, mineral, agricultural infrastructure and development plans

Balance of paym entnra de position

Import size and growth

Commercial Policy instruments

Nature and exwrt of restrictions and incentives

Trade agreements with othercountries

Data i d nformation relating to the stage of industrial development of the country and thenumber and type of industries and the futureindustrial development plans of the country willindicate he potential for expo rts of machinery, raw materials, components operating su ppliesand know-how to the country. For instance, if a country has a number of textile mills andisplanning to expand the textile sector, it means that there is scope for exports of textilemachinery and components and raw materials like cotton, wool, jute and synthetic fibre tothe country besides know how. This, of course, has tobe mhtched with the local p roductionof the concerned items. Similarly, the present status and the future plans relating to theagriculture and mineral sectors are good indicators for the supply of products relevant tothese sectors such as seeds, agricultural machinery, fertilizers, mining equipment, etc., thesame study can be extended to the other sectors including fisheries, dairy, forestry etc. andphysical infrastructure like roads, rail and power.

Foreign k r k e t Seleetlon

MoBt often a country impo ses restrictions on imports if it faces constant an d hug ebalance of payments and lor balance of trade deficit. Hence, at the macro level, ananalysis of the payments and trade positions of the country becdmes relevant.In theshortlisting of countries, it is better to identify and give less priority to co untries withconsistent and chronic balance of paymehts and/or balance-.of-trade deficits.

Once countries are short listed on the b asis of the above criterion, the non stop sho uldbe togo through the import commoditymjx of the countries witha fine tooth-cpmb. If imports ofthe country are growing at a reasonable rate, t hh itself is a general indication that there is . 3


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International ~ n r k i l election scope for exploring the market further. The commodity mix of imports will indicate whichnd Entry commodities/commodity groups offer he maximum potential as evide nced by their size and

growth rates. This information has to be counterchecked with the earlier yardstick that waspropo sed, i.e. the industrial, agricultural, mineral, physical infrastructure and the futureplans in regard to these. For instance, in the case of a country, past trend may ind icatereasonable growth in the imports of jute bags, but the c ou h y may have plans ibprow jute ora substitute crop in the ne ar future or produce synthetic bags.ID --.uch an eventuality, com-plete dependence on past import trends may mislead afirm into exporting u te bags to thatcountry. In fact, such a developme nt had occurred in India s export history .

After it has become fairly clear that the growth in ilnports of a particular commodity is likelyto continue in the immediate future, a close lookat the import policy of the country includingany special type of trade relationship that the country may have w ith another country o r someother countries will indicate the extent of market access that the company can hope for. It isquite likely that imports of a particular item may be growing, but the ite m mayface highimport duty an dfor low tariff~barriersike quota restrictions in the country. In som e cases,imports from India may be subjected to duty higher than those from some other countrieswith which the importing country has special trade relations or imports from India may besubjected to quota restrictions while those from some other countries ma y not be. This isspecially true in respect of items like textiles today. There are quota and non quota countriesfor textiles exports and there are some countries like Nepal whose expo rts of textiles are notsubject to any quota restrictions even in quota countries.On the one han d, this type ofanalysis may help an export firm to zero in on non quota, low import duty cou ntries, whileon the other this is also useful to firm to formulate alternate strategies, other than exporting,to enter a quota or high import duty market. For example, there are instances wh ere Indiantextile export firms have set up textile units in Nepal to beat the quota restrictions. Simi-larly, a high import duty on Indian textiles can be countermanded by setting up a textilemanufa cturing unit in the importing country itself or in another country whic h imposes lessrestrictions on expo rts of textiles from its borders.

-The m acro indicators of market potential and growth are usually analyzed in the first stageof the screening process, because the data are normally readily available and can be used toquickly eliminate countries with little or no potential. The macro indicators focus on the totalpotential demand (population) and ability to afford a product (per capita inco me). However,because the macro indicators of market size are too general, they do not necessarily indicatea perceived need for the product. In the third stage of the screening process it is hence,recommended thatmicro indicators of market potential be analyzed. Micro indicators usuall)indicate actual consumption of the product that airm wants to sell or a similar productwhich is a measure of the perceived need.

hble 5 2: Micro Indicators of MarketSize

Radios Hotel beds

Television sets Telephones

Cinema seats e Tourist arrivals

Scientistsand engineers o Passenger cars

Hospitals o Civil airline pnssengers

Hospitalbeds e Steel production

Physicians o Rice production

Alcoholic liquor cbnsumption e Number of farms

Coffee consumption Land under cultivadon

PetroYdiesel consumption @ Electricity consumption

Micro indicators can be used to estimate market size, Table5.2 presents the list of microindicators. The numbero househo lds with television sets indicates the p otentia l mrii7ket sizefor television sets,if eveiry household purchased a television set. Based onthe life of theaverage televisionset n dse, pne can estimate the annual demand. Although t he actual

consumption statistics may not be av ailable for a certain product categdry, often the con-sumption of similar or substitute products are used as proxy variabl es. f i rexample, interming the market size for surgical sutures, marketers may use the n umber of hospital bedsas a proxy variable. The number of farms may indicate the potential demand for items liketractors, fertilizers, seeds, pump sets, etc.

The macro and m icro indicators of market size allow the marketer to estimate or infer thepotential market size. The marketer should now evaluate the risk associated with each marketopportunity.

heck Your rogress B

Illustrate with appropriate exam ples, the different indicators that may be used by airm toreach at a reasonably valid estimate of the size of an overseas inarket.

5 3 2 Political nvironment

The impact of a host country s political environment on market selection is obvious. Thoughpolitical risk tends to be more subjective than the quantitative indicators of market size, itmust be realized that it isa major factor influencing inarket selection. For example, theinvasion of K uwait in 1990 resulted in the exposure of millions of dollars ofU S ssets inthe Middle East.

Every company will be hurtby political risk, from limitations on the number of foreigncompany officials, limits on the amoun t of profits or dividends repatriation to the parentcompany, or ban on impo rts froma particular company or country, threat of outright take-overs. There are a num ber of indicators that can be used to assess political risk. Table5 3

-shows some indicators of political risk that may be used in co untry selection.

Table 5 3: Indica tols of Political isk

Probability of nationalization @ Percent of membersof the Commu nist Party

Bureaucratic delays @ Restrictions on capital movement

Number of expropriations @ Government intervention

Number of riots or assassination s @ Limits on foreign ownership

Political executions @ Soldierlcivilan ratio

While selecting the foreign market, the firm must properly analyze the prevailing political,conditions in the host country. Th e following checklist can guide this process.

Foreign Market Selection


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International Markct Selection ChccWLt for analyzingo country's political environmentand ntry

1 What is the country's political structure?

2 How d o citizens, political parties and special-interest groups participate in politicaldecision making?

3. What is the current government's philosophy? How is it implemented?

4. What are the philosophies of opposing political forces?, .

5 What role do es the current government see for foreign business?

6 Is foreign business treated differently from local firms in public policy? If so how ?

7. What is the country's history in dealing wit11 different types of foreignbusinesses

8 What is the process whereby changes in public policy are m ade?

9 What is the current and foreseeable trends in relationships between g overnme nt inthe foreign country and home country?

10 What general role does government see for private business in that coun try'seconomic life?

11. What restrictions on international transfer of resources will affect your firm'soperations in that country?

12. What are the major trends in the regulatory environment?

13. What incentives does the government give to private business and foreign investors?

14. What are the trigger points for increased nationalistic and foreign investors?

15 How does the government assert its economic sovereignty?

16 What are the specific risks of loss of ownership or control of assets?17. What are the chances of political harassment and what forms is it likely to take?

18. What tools can be used to build a mutually beneficial relationship with thatcountry's government?

19 What re the possibilities of government or p olitical instability?

20 Is your firm, your industry and/or your products likely to be politically vu lnerable?

21. What is the basis of the foreign country's legal system?

22 Will your firm's activities violate any of the home or host country's extra-territoriallaws?

23 What aspects of your marketing strategy will be affected by the ho st country's legalenvironment?

An important aspect of a country's political environment is its political structure and deci-sion-making processes. The basic political structure is determined by the roles of citizens,political parties, and special interest groups in the power structure and political decisions. Indemocracies, all these groups have comparatively high participation in decision making. Inrnonwchies and dictatorships, hese groups play minimal roles. Except for the military, whichas a special interesi group may be important in selecting a dictator otherwise, the rulingroyal family or he dictators family decide everything. n com munist political structures,thepolitical party is central to decision making, while citizens and other interest g roups are lessimportant. Yet some communist gover'nrnents have evolved greater decentralization of policyand decisions on business activities, Ubgoslavia has for the past two decades encourageddecentralized decision making by employee groups and small capital at the small businesslevel. In recent years, under Den Xiaoping, China has been evolving and even en couragingcapitalism alongside government owned enterprise o encourage h d asten economicdevelopment. In todays China, it is okay to get rich. It is helpful then t?, know who partici-pates in decisions'about political structure and policy, I

As important as knowledge of a country's political structure is an understanding of thesignificant political philosophies that guide policy. Conservativegovcrdments usuallypromote a broad role for private business in the country's econom ic life with a rniniinum ofrestrictions on its activities. Leftist governments, on the other han d, may enc ourage pu blicownership of business and a more comprehensive and restrictive regulatory environment. It.is important to understand the philosophy of the governmentin power as well as thosephilosophies that guide opposing political parties and other significant political forces in thecountry. A change in political pow& c an dramatically change accepted political philosc~phy.France, which had nationalized a number of major industries during the past decade unlder asocialist government, is now in the process of denationalizing many of those sam e industries.Sectors for denationalization include banking, telecomn~unications, nsurance, chem icals,

packaging, glass, aluminium, and aerospace.

International firms are often viewed differently from local brisinesses in a countly.A govern-ment that encourages private investment in general may discourage imports or foreignownership of local business'es. For example, in the 1960s and 1970s. Canadians becameconcerned about the significant share of overseas firms in their oil, forestry, and rnanufactur-ing industries. Both the L abour and C onservative parties developed platforms that called forstrict rules for foreign firms wishink to operate in their country. In some countries theprevailing philosophy rnby be that imports are to be discouraged but foreign investment findsgovernment support. The international marketer must discover what the perceived role is forforeign business in a country.

Establishing a Positive Political Business Interface

The surest long term strategy for minimizing political risk isto acknowledge the imporlanceof positive interfaces with ho st governments. Some firms inlplement this by remindingpersonnel that they are guests in the foreign markets and c ontinued permission to operateis

contingent on sho wing the benefits of resource transfer, balance of payments, employm ent,income distribution and social/cultural benefits.

International firms usea variety of techniques to institutionalize their efforts to haveasupportive political environment. One of these is the development of a balance sheetshowing benefits and costsof the firm's activities in a specific country. Table5.4 shows achecklist that can be followed by any international business firm to prepare internationalbusiness social balance sheet. It is particularly helpful wlrena firm has some history ofoperations n a country.

5 3 3 Legal Conditions

Law is the ordering of activity, it spells out the rules of the garne. In different countries notonly are the rules for business different, but the ways they are appliedalso vary. NewtonMinnow, former ECC Chairman, commented that in Germany, under law everything isprohibited except that which is permitted. In France,unber the law everythingis permitted .except that which is prohibited. In the Soviet Union, everything is peh itte d, including thatwhich is permitted. And in Italy under the law everything is permitted, especially that whichis prohibited. This variation presents an ex ceedingly difficult cnvironment for internationalmarketers because they mu st understand complex legalities in each and eveiy n ationalenvironment before determining an appropriate marketing strategy.

International business is seriously hampered by the absence of an international court of legalsystems. Just as political institutions remain national in scop e, courts and laws regulatingbusiness activity have only national jurisdiction. While in the case of s o y ountries bilateraltreaties seek tq overcome this problem, there is no international agency which can enforcedecisidns across countries, and hence expo rters and importers must abide by the local lawsregulatihg their operations in each n ational harket,

Foreign Markc t ~e l e i t i on


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Table 5 4: Social Balance-Sheet Checklist for an International Firm

CAPITAL CONTRIBUTIONS OTH R CONTRIBUTIONS NEGATIVE FACTORS

I. Original capitdi, ioans from parent, 1.I and reinyested profit added to local

capital accumulation, speeddevelopment, Streiigthen the localbalance of payments. 2

2 Trademarks, patents, and know-howbring in years of research anddevelopment.

3 Local loans channel savings into 3

wealth-producing projects,stimulate savings.

Local equity capital channels 4savings into wealth-producingoperations, strengthens the stockmarket.

5

New idcas represent inputs of technology,new products, marketing organization,business experience detrac t from balance ofpayments.

People trained locally. Both local managersand technicians, as well as skilled workers,are developed creating stable middle class,speeding economic development.

1. Remittance of dividends, royalitiesfees, interest, and other paymentsdetract from balance ofpayme nts.

Output. A new venture supplies goods, 3

otherwise unavailable or available at greaterexpense and/or n small quantities, developedlocal resources.Import savings displace foreign exchangelosses otherwise incurred to bring in finished 4goods.

Exports contribute to country's foreignexchange earnings, provide world hdcmarketing network.

2 Materials and components imported,while cutting import till for finishedproducts, generally increase overallbills as more semi-manufacturersandraw materials are required.

Taxes paid finance government anddevelopment.

Damper on local investors.Fear of

big and powerful foreign investorssometimes creates antagonism in localmanufacturers who worry about theircompetitive position.

Lack of local understanding. Foreignsubsidiaries generally are managed inworld-wide terms rather than in theinterest of any one country (butforeign firms know that success oflocal operations depends on thestability and strengthof the localmarket).

7 Wages and salaries raise employment andliving sta~idards,reate purchasing power, addtax revenue.

8 Purchases from ancillary industries spur localindustry development diversified localsuppliers in turn raising incomes, tax revenues

and development.9 Other local expenditures stimulate all types of

service industries from insurance and bankingto shipping and advertising, raising incomes,tax revenues, and development.

10. Local dividends paid strengthen purchasingpower savings.

11. Stimulus to other foreign investors, Capitalinflow shows confidence in country andencourages further inflow or shows capitalflight,

12. Sti~iluluso local investor.A foreign ventureenlarges the local market provides skilledmanagers technicians and workers throughtransfers among companies oflen setsefficiency model, creates confidence in theeconomy.

13 Contributions to charities, education boostsocial infrastructure.

14 Working conditions. Foreign-owned plantsusually set standards for worker facilities,plant improvement.

15 Standard of Living. Foreign ventures makemore and better products at lowest cost.

If a foreign owned firm has a conflict with private or public parties ina foreign market, i tmust solve it in the court system of that country Zi t wants to ensure enforcement. ~n d- ye t,the foreign firm s often at a disadvantage in suing another country's le gal system , ifit wants

1

't o ensure enforcement. It may find public opinion hostile or even experience discrimin ation2

in judgement because it is alien . The following phrase summarizes the internationalmarketer's precarious position: Engaging in business transactions in a Fountry other thanone's own is a privilege and not a right . The foreign fin11 may have the option of settling aninternational dispute within its h ome country legal system, but enforcement of the decisionwill then be a problem.

One of the key issues in international disputes is determining urisdiction in the absence ofinternational commer cial law. The following three bases are used in deciding which country'slaws have jurisdiction over the dispute.

Jurisdictional clauses in business contracts

Country where the contra ct was negotiated

e Country where the provisions of a contract were performed.

Unfortunately, these bases do not always lead to clear decision about jurisdiction becausethe contract could have been negotiated in one country, but exonerated in another. In fact,the clearest rule is when the original contract itself spells out jurisdiction.

While laws and legal systemsare national in scope, there arc som e situations in whichnations supply these laws to activities outside their borders. This concept is called theextraterri torial applic ations of law. It holds, for example, that even if an American busi-ness is operating outside the territorial jprisdiction of the US courts, those courts still havejurisdiction if t he operations produce eifects within the United States.

One area where the concept of extraterritoriality applies is trade with enemies of the homecountry. For example , wholly owned subsidiaries of the US firms were building natural gaspipelines in Russia during1982,The US government threatened sanctions against the parentcompanies because it believed that this technology could be used for military purposes an dthus the sale wasa violation of the Trading ith he nemy Act The United States is not theonly country with laws that forbid aidin g and abetting an enemy countly. An internationalfirm may find itself in violation of these laws as world alliances and hostilities constantlychange.

Host governments find it difficult to treat a foreignfirm like a local one, especially when thatfirm must adhere to its home country's foreign policies, and thus appears to be an arm of itshome country's governmen t and a threat to the host country's economic sovereignty. AFrench subsidiary of the American Fruehauf Corporatio n faced this situation prior to1971The French subsidiary signe d a contract to sell equipment to the People's Republic of China.The US parent forbade the subsidiary to fulfill the contract since it was a violation of the USTrading With the Enemy Act. In response, the French governm ent seized the subsidiary,forced compliance with the contract, and then returned to its French owners.

Another dilemma faced by international firms is the extent of home government protectionthey want. Under the Hickenlooper Amendment, the US law requires cutting off foreignaidto a country where the US-owned assets of personnel are seized without restitutioil, While itmay protect American firms from political risks, it presents its own problems. For example,American tuna boats were seized by Ecuado r andPeru for violating their200 mile interna-tional boundaries. The Uni ted States recognized onlya 12 mile international boundary, so theHickenlooper Amendment was invoked against the two countries. And yet, the Americanfisherman had clearly violated Peruvian and Ecuadorian laws.

Antitrust laws are also applied extraterritorial. When subsidiaries of the US firms engage inmergers in other countries, they may fi nd US Justice Department ruling them illegal. Gillettewas disallowed purchase of a German firm that held Robson patents in the United States.IBM had been prosecuted for violating a ntitrust laws of the European Union, Th e majorproblem with extraterritorial application of antitrust laws is that they judge t he effects oncompetition. Suc h activities may increase world-level competition, but havea negative effectin-one market. Again it seems that international firms are unduly hampered by the nationa lscope of laws regarding their activities.

Forelgn Mnrket Selcctlon


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International Market Selectlooand Entry

Majo r world legal systems: Two major structures have guided the develo pment of legalsystems in most countries of the world. Common L aw is the basis of law in co untries thathave been at some time, under British influence. Common law countries do not attemp t toanticipate all contingencies n the application of a law and have provision s within it to coverevery foreseeable situation. Instead, cases in Common Law co untries are decid ed on thebasis of tradition, common practice, and interpretation of statutes. Civil or Co de Lawcountries have as their promise the writing of codes of law that a re inclusive o f all foresee-able applications of law. Codes of law are then developed for commercial, civil, an dpi mip a]applications of law. Precedents are important in understanding comm on law as it is or hasbeen interpreted. The laws themselves are the important factors in un derstanding the legalenvironment in Civil or C ode Law countries.

Even in Common Law countries there are often codes of law. The Un iform Com mercialCode in the United States is a good example of code of law govern ing busin ess activity.However, Common Law does not differentiate among civil, criminal, and commercial .

activities, and thus a business may be liable under any o f these laws. In commo n law cou n-tries, ownership of industrial property rights comes from u se; in Co de of C ivil Law countries,ownership comes from registration. The implications of this difference are obvio us: acompany may find itself in litigation in a Cod e Law country to gain the rights to use its ownname, transfer logos, and it may not win

There are many other ways in which Code or Common Law system s can affect the function-ing of afirm: some of these afe liability of the irm for product damages, requirements of acontract, and implications of nonqompliance with a contract. Suffice it to say that good legalc~unse ls an essential component of effective marketing in toreign markets.

Legal perspectives of marketin g activities: The legal environm ent that influences market-ing activities is so bmad that we cannot hope to cover all areas for all coun tries in the space.However, we can point out some instances of the way marke ting strategy in som e countriesis affected because of the difference in legal environment. For exam ple, w e have'alreadydiscussed antitrust laws as they affect o ining ventures, mergers, and licensing as marketentry strategies, AntitrusLlaws can also stand in the way of growing dealers exclusiv eterritories. Exclusive territory provisions in the US con tracts are not enforceable, but they areallowable under most conditions in Latin American countries. Other d istribution activitiessuch as tying contracts, resale restrictions on dealers, reciprocity, full-line forcing, functionaldiscounts, franchising,or other forms of vertical integration are prohibited in some countriesand permissible in others. Similarly the amount of commission to be paid to an o verseasagent may be governed by local laws; the company may n ot have the free dom to p ostik ownpower as an agent in lame; countries the laws may require associatio n of a lo calthe agency.

Pricing by the international irm is likely to be affected in variety of w ays by the legalenvironment in different countries. Price maintenance laws may prevent the firm from suing :r

discount sh es or from offering quantity discounts or other price concessions. S ome coun-tries have minimum price laws and othe rs may require licenses for price increases. P ricing

may have to be pegged to inflation n dexes in some situations; in others thefirm

may beprevented from raising prices ina highly inflationary environment, and thus will face declin-ing profitability. The anti-dumping aws in most countries limit the freedom o f the overseasfirms to change price beyond a point.

Promotion is the area of marketing strategy where the imp act of varying legal rules isparticularly obvious. In Germany, for example, advertisements cannot claim that a firm'sproducts are the "best" since that is interpreted as violating a law that forb ids disparagin gcompetitors. Comparative advertising messages (direct comparisons with co mpetin g prod-ucts) may not be permitted. Promoting products suchas alcohol and cigarettes through thepress or electronic media is not allowed in som e countries. In so me others, m edical d rugs cannot be promoted without clearance from the medical profession. So me advertisemen ts whichafe considered obscene by some couhtries are allowed freely in som e other countries. Salespromotion tools such as push monie;, consumer giveaways, satipling co;lpons, contests,

trading stamps, etc. are illegal in m any countries; in o thers, these practices are strictlyregulated. Taxes may be levied on store windows or displays.

5 3 4 Social and ultural onditions

A culture, to some extent, determines its members' needs and expectations. Norwegiancitizens may place a high priority on job an d social security guarantees (cradle-to-graveprotection), while South African s may expect their society to provide only the opportunity tomake their own future.At the same time, a black South African may have the same ambitionsbut will have fewer op portunities than the white. Values and attitudes also vary widely fromculture to culture. A citizen of China places high value on contribution to the State, honestyand the rights, an d has a laissez-faire attitude about the rights of others. Judeo-Christiansare likely to be much more strongly oriented toward improvement of personal economic ,conditions compared with Hindus w ho tend to accept their lot as it is. .

An international marketer is exp ected to be familiar with the various elements of culture ofthe country in which h e wan ts to operate. The follow ing are the main elements of culture:

Material culture

Language

a Esthetics

oreign Market ~ilectlon

a Education

e Religion

Material cultu re willbe considered as the tools, artifacts, and technology of a society. It isconcerned with techniques and with physical things, but only those made or fashioned byman, as opposed to thos: found in n ature. For example, a tree per se is not a part of theculture but the Christmas tree is, and so is an orchard. Materialqultu re includes economic

considerations, hat is, the way the society organizes its economib,activities. When we speakof a "technology gap" between India and USA, for instance, we ar~rb ferringo differences nthe material culture of the two areas.

Lang uage is the most obv ious difference between cultures. Inextricably inked,With all otheraspects of culture, languag e reflects the nature and values of the culture. For example, theEnglish language has a rich vocabulary for commercial and industrial activities,hflecting thenature of the English and American so cieties. Many countries with less industrial andcommercial activities may have richer vo cabularies than the English language, but formatters important to their cultut'e and not n ecessarily for industrial and commercial activities,

Esthetic s refers to a community 's ideas concernin g beauty and good faste, as expressed inthe fine arts (music, art drama, and dan cing) and the particular appreciation of color andform.,There are important intern ational differences in esthetics, but they tend to be regionalrather than national: For example, Kab uki theatre is exclusively Japanese, but the Westerncommunity is its audience.

.Mus 1 tastes too ten d to be regional rather than national. In the West, a great number ofhou tie s enjoy the same dlassical and populaimusic, In fact, music may become trulyintetnational. Nevertheless, there are ob vious differences between Western music and that ofthe Middle East, Africa, or India. Likew ise the dance styles of the African tribal groups ofthe Balinese are quitely removed from W estern dance styles. The beauty of India's Taj Mahalis different from tha t of the N otre Dam in Paris or the Level Bu ilding on Park Avenue in NewYork.

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Eddcation, in the simple sense, usually m eans formal training received in school.A well-eddcated person, for example, i@ne who has had mjlny years of such training. In this normalsense , the abodgines in ~ u ~ t r a d ar the Pygmies in Africa are not educated; hat is, they havenever been to school. Hoyaver, this~formal efinition of education is too restrictive. Educa-tion includes the process of F ansrnitting sk ills, ideas, and attitudes, as well training inparticular disciplines. Even primitive peo ples have been educated in this broader sense. For

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example, the Bushmen of South Africa are well educated in the restricted culture in whichthey live. One function of educa tion is the transmission of the existing cultu re and traditionsto the new generation. This is as true among the people of America as among the aboriginesof Australia. However, education can also be used for cultural change. Russia and MainlandChina are notable exam ples, but this again is an aspect of education in m ost nation s of theworld. For example, in India educational campaigns are carried on to improve agriculture orto quell the population explosion. In Western Europe, educatiol~aleform is undertaken tobridge the technology gap.

Internatipnal ~ e r k e t clectlonand Enhy

It must also be mentioned here that n international marketing the process of segmentationinvolves two levels viz. (a) country market level and (b) customer market level.

~ o r e i ~ narket Selection

Step : Determining tile Marke ts

The next step in the process is usually to know which market to build, which to divest andwhich to abandon in order to optimize their return on investment. In other words they mustdefine he direction of growth. For this purpose most companies use the co untry attractive-ness/competitive strength matrix as shown in Figure5.2 below.he material culture, language, and esthetics are, in effect, outward manifestations or

observable physical b ehaviour of a culture. Ifw e are to get full undersund ing of a culture,however, we m ust gain a familiarity with the internal, psychic, o r mental beha.viour that givesrise to the external manifestations. Generally, it is hereligion beliefs,and attitude s of agroup of people that provide the best insights into their behaviour. T herefo re, although aninternational company should be primarily interestedin knowing how people behave asconsulners or workers, its task will be aided by an understan ding of why peo ple behav e asthey do. Even in Am erica, studies of worker and consumer motivation are used e xtensively.

Figure 5 2: Expo rt Market Selection: Strategies and Assessment

High

5 4 THE PROCESS OF MARKET SELECTION

Every company is forced to address the question of which market to enter. Even afterentering the marketsa company must answer questions ike, should it bu ild, divest or aban-don the mark et it has entered; how many such mark ets should it hold so as to maximiz e itseconomic benefits; how best to exportto the chosen market. To answer such questions everycompany must formulate procedures, policies and adopt strategies which allow it to keep thefocus on both country marker factors and company factors.

Since the process of market selection begins with an attempt to match the market requirementwith the company s ability, the first step involves defining the market and the company sability, the secondstep involves identifying the section of the market to be captured ormarket segmentation and the final step involves determining the number of markets to beheld. Let us discuss these thre e steps in detail.

tep 1: Marke t DefinitionLow

High Competitive Streng ths Lowhen a company is facing with a heterogeneous international market, it becomes imperativefor the company to define the market. Market definition is usually one dimensional i.e. acompany can definethe market in terms of country characteristics or in te rm of productcharacteristics. Sucha definition must also include a time frame and a reference to competi-tion. The time frame is essential not only from the point of performance measurement andcontrol but also for giving direction. Thus, a short term market definition would involveatactical concern. Similarly, defining the competition would help in knowing precisely howthe market is not being served, thus, it would pave way for the co mpany s positioning. Sincemarket definition precedes segmentation it becomes necessary for it to be specific. Marketdefinition must encompass both served the unscrved m arkets.All this makes it necessary fora company to undertake the mechanical exerciseof market definition.

Such amatrix helps in identifying invest/grow coun tries against Harvest/Divest countries.

However, before using such a m atrix the compa~;ymust ensure that

contributing factors are identified

their relationship and direction have been established

weights have been allotted to such factors.

It must also realize that such an analysis does not take into accountStep 2: Market Segmentationthe risk of international operation

Having defined the market it becomes necessary for the company to idcntify the relevantsegment. This is known as market segmentation. The process of segmentation must clearlylay down the niche in terms of measurability, accessability, profitab ility and action ability(This is discussed in detnil in unit of this course)

he rocess of segmentation is the most crucial stepfor the survival of the firm, It is herethat the company s resources are matched wlth the identified segment. Wrong choices mayl e d t o the decline of tt company.Thisstep is more or less in line with the stop on marketdefinition.If the definition is based on product characteristics hen the segments are identi-fied using product indicators else the segments ace identified using general market indicators.

cost of entry into v arious countries and markets

shared costs in international marketing.

Keeping these facts in mind it becomes simple fora companyto identify the market on thebasis of growth, divesture. The various countries that can be identifiddon such a matrixwould fall under any one of the following heads.

InvesUgrow countfies: Such countries call for a high level marketing commitment. Theyrepresent a large market size w hich can be tapped through investment in people and capital.Here it becomes nece ssary to match the prod ucts with the marketing requirements.


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International Market Selectionand Entry

Hnrtest/divesfflicence/combine ountries: They represent the direct opposite of invest/grow countries. Because the country attractiveness s low and com petitive skength is alsolow, such a country must be harvested. A growth of market share in such a market w oulddemand an equal increase in marketing effort wiping out the gain s if any. Th erefore, in suchcountries it makes more sense to sell out, to maintain a close w atch of ca sh flow and tofollow a pricing which will minimize the in~es tmen tn such coun tries till the ope ra-tions are abandoned.

Domin ant/dlvest countries: Such countries rank high on country attractiveness but low oncompetitive strengths. Therefore, he choice rest in either of the alternatives, to sell out o r todevelop competitive strength to reap the opportunities offered by such market. If one w antsto reap such benefits hen one must analyze the msrket more closely in te n s of cash requiredto build the strength and the potential profits. In such a decision, time fram e and cor porateprofitability become important issues.

Selectivity countries: Such countries fall in the center of the matrix representing the fa ct.that thev are neither highly attractive countries nor highly unattractive. Th ey also represen t in- -company terms, a position that can be built or broken. In such situation the comp any ca neither unite the market or build the market by introducing new p roduct.features, throu ghtechnological upgradations.

Such an analysis helps a company competing in the glob al scene to use its limited reso urcesmore effectively. It knows which markets to divest and which to hold. E ven within m arkets ltanswers questions regarding which segments to build. In the ab sence of such an analysis thecorporate profitability would fall because of inclusion of losers in the market po rtfolio an dthe company's survival itself may come into question.

5 5 LET US SUM UP

A careful exercise to sho rtlist overseas markets becomes n ecessnry si'nce all products canno tbe sold by all firms to all countries at all times. It is also not advisable to fritter afirm senergy away by spreading the net too far and wide. It is better to exert maximum pressure ona minimum area to achieve the best results.

Analysis of overseas markets must, as in geological survey of minerals, be done stag ebystage. Commencing from macro factors like the political en vironmen t, population, geo-graphic distance, climatic and topographical conditions, industrial, agricu ltural, mineral,

. fisheries, dairy, forestry and physical infrastructure, he company sh ould zero in onmorespecific information and data relating to m arket analysis which indicate the market p otentiallike balance of paymentsibalance of trade position, import growth and import co mmod itymix. The next stage would be to look at the market access factors such as tariff and now tariffbarriers facing to exports of the selected products and the relative position of the co mpanyin the export of the products vis-8-vis competing firms rom other countries, which mayenjoy the benefit of special trade relationship of their countries with the imposing co untry.

the politico-legalenvironment of the country is an impo rtant factor in mark et analysis. Theexporting firm should be firmly familiar with the political structure and philosophy oftheruling party of the importing country since generally overseas firms are not given the sa metreatment as local firms in many countries. Since laws and courts in all co untries have on lynational jurisdiction. It is highly important that a firm inten ding to enter export bu sinessfamiliarities tself with the legal systems of the countries where it wants to operate becausethere are laws in many countries relating to product, pricing, pr o~n otio n nd d istribution.Finally, understanding the socio cultural conditions of the coun try is very im portant since,ultimately, it is the consumer who is to be influenced to accept a firm's offer,

The process of international market selection involves*three asic steps: 1) defining themarket and thepmpany's ability, 2) market segmentation and(3) determining themarketsto be held. These three steps are discussed in detail,

5 6 ANSWERS TO CHECK YOUR PROGHSSA. Since every country and every firm has its own strengths and weaknesses, in terms

of geographical location, resources, objectives etc. it is not possible nor desirablefor a country or company to try to export every product to every country. Hence thedesirability of selecting the most potential markets. Variables given in Figure5 1should be listed here.

B. The indicators that are given in Table5.1 should be listed here and explained withappropriate exail~ples.

INAL QUESTIONS1 An Indian firm intendin g to export agricultural tractors desires to undertake

analysis of global m arkets for its product so that it can select the most promisingmarkets. What are the factors on which it should collect data and information toshortlist the priority markets ? Explain in detail.

2. Explain various steps involved in the process of international market selection.

3. Identify various indicators which can help the marketer in.estimating the size of theoverseas market. Explain how you estimate the market size by using sq b.hd icator s.

4 Explain how various political, social and cultural conditions influencdmarket selection.

5 'Analysis of legal conditions are a very critical component in selecting foreignmarkets'. Do you agree. Explain how they influence matket selection.

Foreign Market Selection

foreign marketing selection

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