Question

1. “The whole universe is a potential market for your products”. Discuss the various market entry strategies that need to be evolved to exploit this potential.
2. What are the barriers to international trade? List and explain all the types of barriers to international trade.
3. Explain the functions of WTO. Describe the dispute resolution mechanism of WTO.
4. Write short notes on the following :

• Asian Development Bank (ADB)
• Globalization
• Cultural Risk in International Business.

Answer 1

Market Entry Strategies:

There are a variety of ways in which a company can enter a foreign market. No one market entry strategy works for all international markets. Direct exporting may be the most appropriate strategy in one market while in another you may need to set up a joint venture and in another you may well license your manufacturing. There will be a number of factors that will influence your choice of strategy, including, but not limited to, tariff rates, the degree of adaptation of your product required, marketing and transportation costs. While these factors may well increase your costs it is expected the increase in sales will offset these costs. The following strategies are the main entry options open to you.

Direct Exporting

Direct exporting is selling directly into the market you have chosen using in the first instance you own resources. Many companies, once they have established a sales program turn to agents and/or distributors to represent them further in that market. Agents and distributors work closely with you in representing your interests. They become the face of your company and thus it is important that your choice of agents and distributors is handled in much the same way you would hire a key staff person.

Licensing

Licensing is a relatively sophisticated arrangement where a firm transfers the rights to the use of a product or service to another firm. It is a particularly useful strategy if the purchaser of the license has a relatively large market share in the market you want to enter. Licenses can be for marketing or production. licensing).

Franchising

Franchising is a typical North American process for rapid market expansion but it is gaining traction in other parts of the world. Franchising works well for firms that have a repeatable business model (eg. food outlets) that can be easily transferred into other markets. Two caveats are required when considering using the franchise model. The first is that your business model should either be very unique or have strong brand recognition that can be utilized internationally and secondly you may be creating your future competition in your franchisee.

Partnering

Partnering is almost a necessity when entering foreign markets and in some parts of the world (e.g. Asia) it may be required. Partnering can take a variety of forms from a simple co-marketing arrangement to a sophisticated strategic alliance for manufacturing. Partnering is a particularly useful strategy in those markets where the culture, both business and social, is substantively different than your own as local partners bring local market knowledge, contacts and if chosen wisely customers.

Joint Ventures

Joint ventures are a particular form of partnership that involves the creation of a third independently managed company. It is the 1+1=3 process. Two companies agree to work together in a particular market, either geographic or product, and create a third company to undertake this. Risks and profits are normally shared equally. The best example of a joint venture is Sony/Ericsson Cell Phone.

Buying a Company

In some markets buying an existing local company may be the most appropriate entry strategy. This may be because the company has substantial market share, are a direct competitor to you or due to government regulations this is the only option for your firm to enter the market. It is certainly the most costly and determining the true value of a firm in a foreign market will require substantial due diligence. On the plus side this entry strategy will immediately provide you the status of being a local company and you will receive the benefits of local market knowledge, an established customer base and be treated by the local government as a local firm.

Piggybacking

Piggybacking is a particularly unique way of entering the international arena. If you have a particularly interesting and unique product or service that you sell to large domestic firms that are currently involved in foreign markets you may want to approach them to see if your product or service can be included in their inventory for international markets. This reduces your risk and costs because you are essentially selling domestically and the larger firm is marketing your product or service for you internationally.

Turnkey Projects

Turnkey projects are particular to companies that provide services such as environmental consulting, architecture, construction and engineering. A turnkey project is where the facility is built from the ground up and turned over to the client ready to go – turn the key and the plant is operational. This is a very good way to enter foreign markets as the client is normally a government and often the project is being financed by an international financial agency such as the World Bank so the risk of not being paid is eliminated.

Greenfield Investments

Greenfield investments require the greatest involvement in international business. A greenfield investment is where you buy the land, build the facility and operate the business on an ongoing basis in a foreign market. It is certainly the most costly and holds the highest risk but some markets may require you to undertake the cost and risk due to government regulations, transportation costs, and the ability to access technology or skilled labour.

Barriers to International Trade:

1. Voluntary Export Restraints (VERs)

They are agreements between an exporting and an importing country that limits the quantity businesses can export during a period. Even though the term says the agreement is voluntary, it is usually not. By reducing the quantity exported, the exporting country can increase prices and total revenue.

2. Regulatory Barriers

Any “legal” barriers that try to restrict imports. These include things like safety standard, pollution standards, product standards that specify that the product should meet or exceed standards set by the local government. Ex: Car manufacturers often have to pass certain safety ratings to sell the car in the importing country.

3. Anti-Dumping Duties

Dumping happens when the exporting producer sells goods below cost. The government then can impose a duty on the good till the World Trade Organization decides the issue. However, firms often claim that the good is produced below cost to buy more time for themselves. It is often difficult to determine the actual costs of the firm.

1. Subsidies

Government offer subsidies to help make firms more competitive by lowering their cost.

5. Tariffs

A tariff is a type of trade barrier that acts as a tax on imports. The tariff may be in the form of a specific or ad valorem tax. Tariffs raise the price of the imported good to lowers its consumption. This price increase encourages consumers to pick the local option.

6. Quotas

A quota, a type of trade barrier, is a restriction on the quantity that can import into a country. Quotas and Tariffs are effectively the same except that governments collect revenue from tariffs while exporting firms can collect extra revenue from quotas . This increases the firm’s export revenues.

Functions of the World Trade Organisation:

At the heart of the Organisation are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations. The goal is to help producers of goods and services, exporters, and importers conduct their business. The WTO’s overriding objective is to help trade flow smoothly, frets, fairly, and predictably.

With these objectives in mind, we can state the following six specific functions:

i. It shall facilitate the implementation, administration and operation of the WTO trade agreements, such as multilateral trade agreements, plurilateral trade agreements.

ii. It shall provide forum for negotiations among its members concerning their multilateral trade relations.

iii. It shall administer the ‘Understanding on Rules and Procedures’ so as to handle trade disputes.

iv. It shall monitor national trade policies.

v. It shall provide technical assistance and training for members of the developing countries.

vi. It shall cooperate with various international organisations like the IMF and the WB with the aim of achieving greater coherence in global economic policy-making.

The WTO was founded on certain guiding principles—non-discrimination, free trade, open, fair and undistorted competition, etc. In addition, it has special concern for developing countries.

Dispute Settlement Mechanism under the WTO

The WTO’s procedure is a mechanism which is used to settle trade dispute under the Dispute Settlement Understanding. A dispute arises when a member government believes that another member government is violating an agreement which has been made in the WTO. However, these agreements are consequential to dialogues between the member States and hence they are the writers of such agreement. In case any dispute arises, the ultimate duty to settle it lies in the hands of member government through Dispute Settlement Body. This system already achieved a great deal and providing some of the necessary attributes of security and predictability which trader and other market participants need and which is called for in the Dispute Settlement Understanding under Article 3.

The WTO’s Dispute Settlement Understanding (DSU) advanced out of the ineffective means used under the GATT for settling disagreements among members. Under the GATT, procedures for settling disputes were ineffective and time consuming since a single nation, including the nation whose actions was the subject of complaint could effectively block or delay every stage of the dispute resolution process. It remains to be seen whether countries will comply with the new WTO dispute settlement mechanism, but thus far the process has met with relative success.

During the phase of 1980’s many new interest groups were fascinated by the GATT’s procedures which were held as model, and it was used by them for the purpose of accomplishing their goals. However, service sectors and intellectual property sectors who wanted to engage in multilateral agreements through GATT’s Uruguay round conference were influenced due to the success dispute settlement procedures and in role in augmenting the treaty rule compliance.

The DSU was designed to deal with the difficulty of reducing and eliminating non-tariff barriers to trade. A non-tariff trade barrier can be almost any government policy or regulation that has the effect of making it more difficult or costly for foreign competitors to do business in a country. In the early years of the GATT, most of the progress in reducing trade barriers focused on trade in goods and in reducing or eliminating the tariff levels on those goods. More recently, tariffs have been all but eliminated in a wide variety of sectors. This has meant that non-tariff trade barriers have become more important since, in the absence of tariffs, only such barriers significantly distort the overall pattern of trade-liberalization. Frequently, such non-tariff trade barriers are the inadvertent consequence of well-meaning attempts to regulate to ensure safety or protection for the environment, or other public policy goals. In other cases, countries have been suspected of deliberately creating such regulations under the guise of regulatory intent, but which have the effect of protecting domestic industries from open international competition, to the detriment of the international free-trade regime.

OUTLINE OF THE DISPUTE SETTLEMENT UNDERSTANDING

The Dispute Settlement Understanding (DSU) officially known on rules and procedure Governing the Settlement of Disputes, establishes rules and procedures that manage various disputes arising under the Covered Agreements of the Final Act of the Uruguay Round. There had been total 314 complaints brought by the member of WTO. All WTO member nation-states are subject to it and are the only legal entities that may bring and file cases to the WTO. The DSU created the Dispute Settlement Body (DSB), consisting of all WTO members, which administers dispute settlement procedures.

It provides strict time frames for the dispute settlement process and establishes an appeals system to standardize the interpretation of specific clauses of the agreements. It also provides for the automatic establishment of a panel and automatic adoption of a panel report to prevent nations from stopping action by simply ignoring complaints. Strengthened rules and procedures with strict time limits for the dispute settlement process aim at providing “security and predictability to the multilateral trading system” and achieving “[a] solution mutually acceptable to the parties to a dispute and consistent with the covered agreements.” The basic stages of dispute resolution covered in the understanding include consultation, good offices, conciliation and mediation, a panel phase, Appellate Body review, and remedies

What Is the Asian Development Bank?

Founded in 1966, the Asian Development Bank's (ADB) headquarters are in Manila, Philippines. The Asian Development Bank's primary mission is to foster growth and cooperation among countries in the Asia-Pacific Region.

It has been responsible for a number of major projects in the region and raises capital through the international bond markets. The ADB also relies on member contributions, retained earnings from lending, and the repayment of loans for funding of the organization.

The two largest shareholders of the Asian Development Bank are the United States and Japan.

How the Asian Development Bank Works

The Asian Development Bank provides assistance to its developing member countries, the private sector, and public-private partnerships through grants, loans, technical assistance, and equity investments to promote development. The ADB regularly facilitates policy dialogues and provides advisory services. They also use co-financing operations that tap a number of official, commercial, and export credit sources while providing assistance.The Asian Development Bank's primary mission is to foster growth and cooperation among countries in the Asia-Pacific Region. The majority of the ADB’s members are from the Asia-Pacific region.The ADB provides assistance to its developing member countries, the private sector, and public-private partnerships through grants, loans, technical assistance, and equity investments to promote development.

Shareholders of the Asian Development Bank

The two largest shareholders of the Asian Development Bank are the United States and Japan. Although the majority of the Bank's members are from the Asia-Pacific region, the industrialized nations are also well-represented. Regional development banks usually work in harmony with both the International Monetary Fund (IMF) and the World Bank in their activities.

What Is Globalization?

Globalization is the spread of products, technology, information, and jobs across national borders and cultures. In economic terms, it describes an interdependence of nations around the globe fostered through free trade.

On the upside, it can raise the standard of living in poor and less developed countries by providing job opportunity, modernization, and improved access to goods and services. On the downside, it can destroy job opportunities in more developed and high-wage countries as the production of goods moves across borders.

Globalization motives are idealistic, as well as opportunistic, but the development of a global free market has benefited large corporations based in the Western world. Its impact remains mixed for workers, cultures, and small businesses around the globe, in both developed and emerging nations.

Globalization

Globalization Explained

Corporations gain a competitive advantage on multiple fronts through globalization. They can reduce operating costs by manufacturing abroad. They can buy raw materials more cheaply because of the reduction or removal of tariffs. Most of all, they gain access to millions of new consumers.

Globalization is a social, cultural, political, and legal phenomenon.

• Socially, it leads to greater interaction among various populations.
• Culturally, globalization represents the exchange of ideas, values, and artistic expression among cultures.
• Globalization also represents a trend toward the development of single world culture.
• Politically, globalization has shifted attention to intergovernmental organizations like the United Nations (UN) and the World Trade Organization(WTO).
• Legally, globalization has altered how international law is created and enforced.

• Globalization has sped up to an unprecedented pace since the 1990s, with public policy changes and communications technology innovations cited as the two main driving factors.
• China and India are among the foremost examples of nations that have benefited from globalization.
• One clear result of globalization is that an economic downturn in one country can create a domino effect through its trade partners.

The History of Globalization

Globalization is not a new concept. Traders traveled vast distances in ancient times to buy commodities that were rare and expensive for sale in their homelands. The Industrial Revolution brought advances in transportation and communication in the 19th century that eased trade across borders.

The think tank, Peterson Institute for International Economics (PIIE), states globalization stalled after World War I and nations' movements toward protectionism as they launched import taxes to more closely guard their industries in the aftermath of the conflict. This trend continued through the Great Depression and World War II until the U.S. took on an instrumental role in reviving international trade.

Globalization has since sped up to an unprecedented pace, with public policy changes and communications technology innovations cited as the two main driving factors.

One of the critical steps in the path to globalization came with the North American Free Trade Agreement (NAFTA), signed in 1993. One of NAFTA's many effects was to give American auto manufacturers the incentive to relocate a portion of their manufacturing to Mexico where they could save on the costs of labor. As of February 2019, the NAFTA agreement was due to be terminated, and a new trade agreement negotiated by the U.S., Mexico, and Canada was pending approval by the U.S. Congress.

Governments worldwide have integrated a free market economic system through fiscal policies and trade agreements over the last 20 years. The core of most trade agreements is the removal or reduction of tariffs.

This evolution of economic systems has increased industrialization and financial opportunities in many nations. Governments now focus on removing barriers to trade and promoting international commerce.

Globalization Advantages

Proponents of globalization believe it allows developing countries to catch up to industrialized nations through increased manufacturing, diversification, economic expansion, and improvements in standards of living.

Outsourcing by companies brings jobs and technology to developing countries. Trade initiatives increase cross-border trading by removing supply-side and trade-related constraints.

Globalization has advanced social justice on an international scale, and advocates report that it has focused attention on human rights worldwide.

Disadvantages of Globalization

One clear result of globalization is that an economic downturn in one country can create a domino effect through its trade partners. For example, the 2008 financial crisis had a severe impact on Portugal, Ireland, Greece, and Spain. All these countries were members of the European Union, which had to step in to bail out debt-laden nations, which were thereafter known by the acronym PIGS.

Globalization detractors argue that it has created a concentration of wealth and power in the hands of a small corporate elite which can gobble up smaller competitors around the globe.

Globalization has become a polarizing issue in the U.S. with the disappearance of entire industries to new locations abroad. It's seen as a major factor in the economic squeeze on the middle class.

For better and worse, globalization has also increased homogenization. Starbucks, Nike, and Gap Inc. dominate commercial space in many nations. The sheer size and reach of the U.S. have made the cultural exchange among nations largely a one-sided affair.

Real World Examples of Globalization

A car manufacturer based in Japan can manufacture auto parts in several developing countries, ship the parts to another country for assembly, then sell the finished cars to any nation.

China and India are among the foremost examples of nations that have benefited from globalization, but there are many smaller players and newer entrants. Indonesia, Cambodia, and Vietnam are among fast-growing global players in Asia.

Ghana and Ethiopia had the fastest-growing African economies in the world in 2018, according to a World Bank report.

• Cultural Risk in International Business.

The main cultural risks facing global businesses include:

1. Failing to adapt global business models to the local market

Consumer attitudes and behaviours are highly influenced by culture. When a company moves into a new market, business models should be modified to reflect local preferences, customs, and habits. For example, changes should be made to product and service offerings, pricing, and marketing. Unless local cultures drive business models, foreign businesses have a high risk of failure. The costs associated with failure in a foreign market can be significant: on average, international retailers absorb seven years of losses before they shut down or sell their operations to a local competitor.

The “one-size-fits-all” approach to international business is flawed. International success requires a glocal mindset. Glocalisation refers to the interface of globalisation and localisation. Whereas globalisation involves standardised worldwide processes, products, and services, localisation involves processes and product offerings tailored to meet specific local markets. The hybrid of standardisation and adaptation is glocalisation, which involves the integration of local features and global ideas, products, or processes. Glocalisation recognises that economic synergies are limited by deeply ingrained cultural systems resistant to change.

2. Failing to identify regional and subculture differences

Cultural barriers may be just as relevant intranationally as internationally. Within emerging markets, there are significant regional variations in consumer preferences and market conditions, yet within-country differences are often overlooked—four-fifths of multinationals report that their offshore decision-making occurs at the country rather than the city level.

Subcultures are not limited to regional or ethnic variations. For example, consider the different consumer profiles of males and females in the United States. Although females account for 88 percent of retail purchases, marketing campaigns often overlook differences in male and female consumer behaviour and thinking. Moreover, female consumer habits and preferences vary across generational, ethnic, and occupational groups.

Companies that fail to recognise the cultural diversity of their markets risk missing important consumer segments.

Cultural barriers are amplified within a national context because they are assumed to be irrelevant: research on mergers and acquisitions shows that social integration is more problematic in domestic contexts than in international contexts.

3. Failing to understand local business practices

Cultural barriers don’t only occur at the customer interface. International business success also requires an in-depth understanding of local business customs. Without a full appreciation of how business is done in a foreign market—including economic, political, regulatory, and cultural influences—new entrants can quickly find themselves on the back foot with stakeholders.

4. Failing to adapt management practices across cultures

Most, if not all, management theories, models, and practices are laden with culture-specific assumptions. No organisational theory is universal, yet the cultural assumptions underlying management practices are often unacknowledged. Ideas are transferred to other cultural environments without consideration of cultural variations. But when practices are translated across cultures without adjustment for cultural differences they can fail—and may even lead to losses.

5. Failing to identify new opportunities

Cultural barriers may result in missed opportunities. There are examples of well-established North American or European companies that have overlooked the potential of certain developing markets, failing to establish an early market presence and leaving them unable to catch up to other foreign companies or local competitors. Other companies have withdrawn from emerging markets prematurely, damaging relationships and leaving a legacy of weak commitment in the process.

6. Failing to understand local legal and ethical issues

Global companies face a complex web of legal and ethical issues. In 2012, Hermès lost a trademark case in China after a fifteen-year battle with a local firm Foshan. In 1995, Foshan had registered a Chinese-character trademark with similar pronunciation but a slightly different written form than the Hermès name in Chinese.

Another example from China is the custom of guanxi: the establishment of long-term reciprocal relationships via the giving of gifts. Guanxi is critical for establishing the trust that underpins successful business in China, but home-country laws (for example, the U.S. Foreign Corrupt Practices Act or the U.K. Bribery Act) may prohibit global organisations from engaging in this practice. When this is the case, foreign companies must seek alternative means of fostering trust.

7. Failing to adapt human resource management to local markets

Cultural ignorance may threaten a firm’s ability to attract, retain, and leverage its pool of global talent. When foreign companies employ local staff, human resource policies need to be adapted to reflect the cultural profile of local employees. Factors that influence employee motivation, job satisfaction, and organisational commitment vary across cultures. In addition, conflict resolution and giving and receiving feedback differ widely across cultures, with significant implications for performance-appraisal.

8. Ineffective diversity management

Research shows that diversity is a double-edged sword. Diverse teams may either improve or detract from performance.

On the positive side, the successful integration of diverse perspectives fosters innovation and creativity, inclusive workplaces attract and energise top global talent, a diverse workforce can better understand and respond to the needs of varied customers, and employee diversity can increase access to new suppliers and other stakeholders.

But unless carefully managed, diverse workgroups may experience greater conflict and less trust and cohesion than homogenous teams. Companies need to effectively manage cultural conflicts, bias, and discrimination. Those that do not address those internal tensions will fail to leverage the advantages of a diverse workforce and may face costly discrimination claims.

Diversity issues vary from one country to the next and they are often more complex outside the United States. Global diversity programs must accommodate for variations in historical, social, political, cultural and legal contexts. Adaptations may be required to diversity program content, rationale, language, and methods.

9. Stakeholder conflict

Diversity increases the complexity of our exchanges. It enhances the potential for language and other communication barriers and it heightens the risk of ambiguity, value conflicts, and reasoning and decision-making differences. In addition, stereotypes and other forms of bias can threaten rapport and stifle the exchange of information and ideas.

10. Assignment failures

Expatriate research indicates failure rates of between 15 and 25 percent, and even up to 70 percent in some regions.

It is estimated that the total direct costs of a four-year expatriate posting may be as high as USD2 million. In addition, expatriate failures may lead to relationship or reputational damage in the host country.

At an individual level, expatriate failure may lessen self-confidence. It can also increase stress on the expatriate and family and contribute to marriage strain or break-ups. Plus assignment failure has negative implications for job performance and career advancement.

Most expatriate failures are not due to technical or professional incompetence. The main causal factors involve difficulties with cultural adaptation: culture shock, spousal adjustment, communication barriers, interpersonal conflicts, lifestyle changes, local business practices, and isolation.

Shorter-term global talent mobility solutions include virtual assignments, cross-functional teams, short-term business travel, or external partnering. With less time for establishing relationships, cultural skills may be more critical on these assignments.