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VASAVA..
1. INTERNATIONAL MARKETING
Definition:
2. INTERNATIONALIZATION PROCESS
DEFINATION:
The goal of the Internationalization process is to have a pronounced global presence in an attempt to
keep abreast with their competitors, to generate improved profitability and be known as a multinational; a
sure sign of success and credibility. The process typically entails generalizing a product to
counterbalance and efficiently expedite the subsequent localization process. The result is an improved
quality product as well as reduced localization costs and time to market. The internationalization process
may involve the following tasks:
Several theories have been postulated over the years to maintain and enhance the essence of the
process of internationalization. According to the theories of the stage model; the process of
internationalization may be successful if a specific prescribed path is followed. Strategic decisions that the
firms have to face play a vital role in validating the above assumption.
The internationalization process is described as a gradual development taking place in distinct stages
(Melin 1992). The process can be clearly identified under two major schools: (1) the models initially
developed by Johanson and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977), referred to as
the Uppsala models (U-models); and (2) the Innovation-Related Internationalization Models (I-models)
conceptualized by Cavusgil (1980). Both the I-model as well as the U-model emphasizes on firm’s
involvement in foreign market segments. The U-model describes the process as "a gradual acquisition,
integration and use of knowledge about foreign markets and operations and a successively increasing
commitment to foreign markets” (All business, 2000). The strategic choices under the U-model are
influenced by many factors which include certain aspects which either help in or suppress exports,
information requirements and collecting informational data, foreign market selection and entry (including
the effects of cultural distance), expansion, and marketing strategies (Leonidou and Katsikeas 1996).
Due to the various factors involved, it is rather difficult to accurately assess this model. In Cavusgil's I-
model, the involvement of exports is operationalized by the ratio of sales/export, which in turn indicates a
firm’s reliance on foreign markets.
In the process of internationalization; market knowledge is gradually increased and the company gets a
clear picture over time, reducing the involved uncertainties. Different companies gather a different
approach but with a similar objective in mind. If the process of internationalization is relatively slow, it is
primarily because companies either want to avoid risks or are unable to gather relevant or enough
knowledge and information.
3.TRADE THEORIES
1)Mercantilism
2)Absolute Advantage
• views trade as a positive sum game countries will benefit from trade if
they have an absolute advantage in one product
3)Comparative Advantage
• proposed by Ricardo
4)Assumptions Comparative Advantage
• Full employment
• Perfect competition
• Mobility of resources
OR
• Buying and selling of goods and services across national frontiers refers to International
Trade
• Selling of goods to other countries refers to exports, while buying the goods from a
foreign country is imports
• Marketing of such goods and services across between two or more nations, is
International Marketing
• Mercantilist Theory
MERCANTILIST THEORY
• During colonial rule, colony masters imported raw material from colonies and exported
finished goods
• The theory ignores the fact that imports are necessary at times
• If the imports are restricted too much, the country’s population has to do without some of
the commodities
• Believes that every country has an absolute advantage in supplying certain products
• It should import goods from countries, which have an absolute advantage in exporting the
products, and hence get them at a cheaper rate
• Eg. Japan has an advantage in production of high quality steel while India has huge
reserves of iron and coal mines. This advantage can be used to complement each other
• In practicality, it is not possible for only one country to have absolute advantage in terms
of cost or otherwise for a particular product
• It says that the size of the country decides how much and what type of products to trade
in
• Larger countries have varied climates and natural resources
• It makes them self sufficient, due to which they import and export less
• Since transport cost is less in smaller countries (due to less distance in production units
and end markets), they have an advantage in international trade
• When two countries need to consume a product, the country which produces it in lowest
cost/using least resources will have a comparative advantage over the other country
• It says that factors of production that are in abundance are cheaper than those in relative
scarcity
• In capital abundant countries, cost of capital is low, while in labour abundant countries,
manpower is available at a low cost
• Stages in PLC:
• Introduction
• Growth
• Maturity
• Decline
To protect domestic business. The idea is that by taxing imports, and thus raising the price,
consumers will buy domestic products as they are free of this tax and therefore cheaper.
Non-tariff barriers are blocks to trade include quotas, local-content requirements, licenses, and
other types of import restrictions that depend on quantity, not price.
Tariff Barriers
Non-Tariff Barriers
Types of Tariffs
A tariff may be one of the following four kinds:
1. Ad Valorem duty
The kind most commonly used, is one that is calculated as a percentage of the value
of the imported goods - for example, 10, 25 or 35 per cent.
2. A Specific duty
Is a tax of so much local currency per unit of the goods imported (based on weight,
number, length, volume or other unit of measurement. Specific duties are often
levied on foodstuffs and raw materials.
3. An Alternative duty
Is where both an Ad valorem duty and A Specific duty are prescribed for a product,
with the requirement that the more onerous one shall be Ad valorem duty value plus
10 cents per kilo.
4. Compound duties
Are imposed on manufactured goods that contain raw materials that are themselves
subject to import duty. The "specific" part of the compound duty (called
compensatory duty) is levied as protection for the local raw material industry.
OR
TARIFF BARRIERS
It refers to the duties or taxes imposed on internationally traded goods when they cross the
national borders. In other words, it is a custom duty or a tax on products that move across
borders.
• Import Tariff
• Export Tariff
• Protective
• Revenue
• Tariff surcharge
• Countervailing duties
Specific duties
Ad valorem
Combined rates
Single - stage
Value-added
Cascade
Excise
Turnover or equalisation
NON-TARIFF BARRIERS
This refers to the barriers imposed on exporting countries and also to protect the domestic
markets for making them more internationally competitive.
Administrative guidance
Subsidies
Product classification
Product valuation
Documentation
License or permit
Inspection
• Product requirements
Product standards
Product testing
Product specifications
Quotas
Two Types
1) Import quotas
A) Absolute
B) Tariff
2) Export quotas
Financial control
Exchange control
Profit remittance retrictions
Credit restrictions
• Control techniques
• Benchmarking
• Balanced Scorecard
• Report
• As frequently as necessary
• Meetings
• Information Technology
C ONTROL TECHNIQUES
• Others. . . . . .
BENCHMARKING
• Others
BALANCED SCORECARD
– CHALLENGES:
C ONTROL
………………………………………………………………………………....
Political ideology refers to, ‘the body of ideas, theories, aims and means to execute
The ideas adapt the theories and fulfill the aims that constitute a socio-political programme
For action’. Depending on the mix of different ‘ideas, theories, aims and means’, there
Exists Pluralism, Democracy and Totalitarianism as alternative ideologies.
A. PLURALISM involves coexistence of different ‘ideas, theories, aims and means’. Pluralism
may be existing due to lack of convergence because the polity is made of different
interest groups based on ethnicity, language, religion, race and so on and no one group
is dominant enough to overrule the rest.
B. TOTALITARIANISM involves, ‘only one idea, theory, aim and means’. No alternative
ideology is allowed to co-exist. There is lack of tolerance. The best example is China.
Former USSR was an example. But there used to be the tendency to break away.
And that happened with the USSR breaking up into present Russia and over dozen
countries. Of course, countries do unite even under totalitarian system do as it happened
with Taiwan, Singapore and Hong Kong getting attached to mainland China late 1990s.
China could ensure economic growth, but USSR couldn’t. people want development
ultimately.
There are different forms of political system. Capitalism, Crony capitalism, Welfare
capitalism, Socialism, Communism and Mixed economy are the different systems. A brief
summary of each of the forms is presented below.
C APITALISM
SOCIALISM
C OMMUNISM
A communist political system is nothing but 100% state control of all human activities.
It is also known as state capitalism. Production, exchange, consumption and distribution
are all state controlled. The difference between socialism and communism is that in
communism, consumption is also state controlled. Businesses are run almost like government
departments. The dominant environment of business is, truly, the government factor.
MIXED ECONOMY
Mixed economy is said to be the ‘golden mean’ of capitalism and socialism. Side
by side public and private ownership exist. This system is in vogue in India. The features of
capitalism and socialism are jointly present in this system.
Private initiative, freedom of enterprise, consumer sovereignty, individual saving
and investment, profit orientation and market mechanism are all there. But it is not entirely
free of government control. State initiative, state enterprise, state investment, social objectives
like equal distribution, balanced development of all regions, concessions and privileges for
the less privileged, reservations for the benefit of weaker sections, etc are found.
Political Risks are of different types. There are micro and macro political risks.
Micro political risk is the one that affects a particular firm or class of firms. Usually firms
owned by one class of businessmen, say, the foreigners from certain country, a particular
business family or region/state. Micro risk can be hedged. This happens even today.
Macro political risk affects all. There is no sparring of any business, any nationality, any
trade or industry. Cuba took-over all foreign property without exception by nationality or
industry or past behavior. Macro risk cannot be hedged, but it is bit rare now
POLITICAL RISK IS A FUNCTION OF:
(i) Probability that a given political event will affect a particular business unit or its particular
project and
(ii) The magnitude of impact.of the event. A political demand, say, to halt FDI or a project or to
confiscate a business or nationalize a business unit, is the event that causes political risk. What is
the probability that all parties will jointly assemble and protest? What is the likely impact of this
on the project or a business unit? Answers to these questions answer the relevance of political
risk.
Even if all parties show solidarity,the Govt. in power can contain their
rebellion using constitutional and legal measures. It must have the power and
willingness to do.
To deal with political risk, at pre-investment level, a business concern can think of Avoidance,
Insurance, Negotiate the environment, Structure the investment and Patenting.
After investment is made, through operating policies, political risk can be managed.
The alternatives are: Short term profit maximization, Changing the BCR of
expropriation, Developing local stake holders and Adaptation.
In the post-expropriation phase, damage control and benefit harvesting exercises need to be
pursued. Negotiation, Power leveraging, Legal recourse and Surrender are the options.
2. C ULTURAL FACTORS
Elements of Culture
Culture includes all facets of life. In order to obtain a total picture of a culture it is necessary to
investigate every possible side of it. For facilitating an accurate study of culture, the anthropologists
have evolved a ―cultural scheme which embodies all the various elements of culture. The main
elements included within the meaning of the term ‗culture‘are:
1. Material Culture
Technology
Economics
2. Social Institutions
Social organization
Education
Political structures
Belief systems
4. Aesthetics
Folklore
5. Language
C ULTURAL FACTORS
THE NATION
A nation as such may mean a particular culture. India for long time was seen as a
country of ‘proletarian, yes-men and snake-charmers’. This has now changed into a country
of ‘professionals, yeomen doers and strategic thinkers’. Indians are now regarded as English-
speaking soft-mannered high achievers with professional and business acumen.
Aggressiveness can often be interpreted as a sign of disrespect in India and may lead to a
complete lack of communication and motivation on the part of the Indians. One needs to
take the time to get to know them as individuals in order to develop professional trust.
Indians are good hosts and indulge in personal talk often.
RELIGION
REGION
India is fairly a big country, though only one time zone is followed. The northern
states reel under cold and hot for 6 months while the south used to have normal temperature.
This variation speaks that the country is not small, though only 2.4% of world land mass it has.
There are different regions. There variations in regional developments as well. The
central, central east, north east and extreme north-west are less developed. Political factors,
insurgency problems, lack of opportunities for education, poor infrastructure because of
the terrain features, etc combine to make these regions less developed. Lesser the
development, more are the exploitation of the proletarian and weaker the governance. In
the way fellow human are treated, particularly women, cultural richness differs. The index
of safety to person and to modesty of women is not that high in the insurgent inflicted
regions of the country.
LANGUAGE
Languages abound. There are really too many languages and too many cultural
patterns too. The demarcation of states other than those in the Hindi-belt, are language
based. It is sacred cow and a local politician can simply pump in / blow hot venomous
passions on language veil should he want to score something over someone, by simply
linking some frivolous issue to the language. You have to be very careful as much as I am
when I make the statement in your lesson Language has lot of business implications.
Should information brochures and advertisement messages be in as many languages or
simply a few or just one.
3. LEGAL FACTORS
ISLAMIC LAW:
Pakistan, Iran, Arab Countries, and other Islamic States follow this
System, also called the Shari’ah Law. It is based on interpretation
of the Koran. It encompasses religious duties as well as secular
aspects of Law. It prescribes specific patterns of social and
economic behaviour of all individuals. How do individuals tackle
“interest” on loans given out – such interest is forbidden by
Koran!
SOCIALIST LAW:
COMMON LAW:
Derived from English Law, and prevalent in the USA, UK, Canada,
and the British Commonwealth, this is based on Tradition, Past
Practices, and Legal Precedence set by courts through
interpretation of Statutes, Legislations and Past Rulings.
CODE LAW:
Code Law, where the Legal System is generally divided into three
separate Codes - Commercial, Civil, and Criminal, is based on
an all inclusive system of written rules (Codes) of Law.
LEGAL DISPUTES
4)TECHNOLOGICAL FACTORS
Technological Factors.
Technology is vital for competitive advantage, and is a major driver of globalization. Consider
the following points:
1. Does technology allow for products and services to be made more cheaply and to a better
standard of quality?
2.Do the technologies offer consumers and businesses more innovative products and services
such as Internet banking, new generation mobile telephones, etc?
3.How is distribution changed by new technologies e.g. books via the Internet, flight tickets,
auctions, etc?
4.Does technology offer companies a new way to communicate with consumers e.g. banners,
Customer Relationship Management (CRM), etc?
ECONOMIES
AFRICA
ECONOMIC COOPERATION(BIMST-EC)
• INDO-SRI LANKA FREE TRADE AGREEMENT
• BANGKOK AGREEMENT
• FRAMEWORK AGREEMENT FOR ESTABLISHING FREE TRADE
BETWEENINDIA AND THAILAND
• SAARC PREFERENTIAL TRADING AGREEMENT (SAPTA)
SOUTH ASIAN FREE TRADE AGREEMENT (SAFTA)
Although firms marketing abroad face many of the same challenges as firms marketing
domestically, international environments present added uncertainties which must be accurately
interpreted. Indeed, there are a host of factors that need to be researched and evaluated when
preparing an international marketing strategy. Key aspects of any potential foreign market
include: demographic and physical environment; political environment; economic environment;
social and cultural environment; and legal environment.
…………………………………………………………………………………..
1. CONSUMER BEHAVIOR
Need to understand:
Consumer Buying Behavior refers to the buying behavior of the ultimate consumer.
A firm needs to analyze buying behavior for:
o chinese food
o indian food
o burger king
o klondike kates etc
• Personal risk
• Social risk
• Economic risk
The purchase of the same product does not always elicit the same Buying Behavior.
Product can shift from one category to the next.
For example:
Going out for dinner for one person may be extensive decision making (for someone
that does not go out often at all), but limited decision making for someone else. The
reason for the dinner, whether it is an anniversary celebration, or a meal with a
couple of friends will also determine the extent of the decision making.
2. PSYCHOLOGICAL AND SOCIAL ASPECTS
Psychological factors
Psychological factors include:
Motives--
o Physiological
o Safety
o Love and Belonging
o Esteem
o Self Actualization
Need to determine what level of the hierarchy the consumers are apt to
determine what motivates their purchases.
Handout...Nutrament Debunked...
Perception--
What do you see?? Perception is the process of selecting, organizing and
interpreting information inputs to produce meaning. IE we chose what info we
pay attention to, organize it and interpret it.
Information inputs are the sensations received through sight, taste, hearing,
smell and touch.
Advertisers that use comparative advertisements (pitching one product against another),
have to be very careful that consumers do not distort the facts and perceive that the
advertisement was for the competitor. A current example...MCI and AT&T...do you ever
get confused?
Selective Retention-Remember inputs that support beliefs, forgets those that don't.
Average supermarket shopper is exposed to 17,000 products in a shopping visit lasting 30
minutes-60% of purchases are unplanned. Exposed to 1,500 advertisement per day. Can't
be expected to be aware of all these inputs, and certainly will not retain many.
South Africa...open bottle of wine and pour it!! Also educate american consumers about
changes in SA. Need to sell a whole new country.
Inexperience buyers often use prices as an indicator of quality more than those who have
knowledge of a product.
Non-alcoholic Beer example: consumers chose the most expensive six-pack, because
they assume that the greater price indicates greater quality.
Learning is the process through which a relatively permanent change in behavior results
from the consequences of past behavior.
Attitudes--
Individual learns attitudes through experience and interaction with other people.
Consumer attitudes toward a firm and its products greatly influence the success or failure
of the firm's marketing strategy.
Handout...Oldsmobile.....
Exxon Valdez-nearly 20,000 credit cards were returned or cut-up after the tragic oil spill.
Honda "You meet the nicest people on a Honda", dispel the unsavory image of a
motorbike rider, late 1950s. Changing market of the 1990s, baby boomers aging, Hondas
market returning to hard core. To change this they have a new slogan "Come ride with
us".
Attitudes and attitude change are influenced by consumers personality and lifestyle.
Consumers screen information that conflicts with their attitudes. Distort information to
make it consistent and selectively retain information that reinforces our attitudes. IE
brand loyalty.
Personality--
All the internal traits and behaviors that make a person unique, uniqueness
arrives from a person's heredity and personal experience. Examples include:
o Workaholism
o Compulsiveness
o Self confidence
o Friendliness
o Adaptability
o Ambitiousness
o Dogmatism
o Authoritarianism
o Introversion
o Extroversion
o Aggressiveness
o Competitiveness.
Traits affect the way people behave. Marketers try to match the store image
to the perceived image of their customers.
There is a weak association between personality and Buying Behavior, this may be due to
unreliable measures. Nike ads. Consumers buy products that are consistent with their self
concept.
Lifestyles--
EXAMPLE healthy foods for a healthy lifestyle. Sun tan not considered fashionable in
US until 1920's. Now an assault by the American Academy of Dermatology.
3. SOCIAL ASPECTS
Social Factors
Consumer wants, learning, motives etc. are influenced by opinion leaders, person's
family, reference groups, social class and culture.
Opinion leaders--
Family is the most basic group a person belongs to. Marketers must understand:
The Family life cycle: families go through stages; each stage creates
different consumer demands:
Because 2 income families are becoming more common, the decision maker
within the family unit is changing...also, family has less time for children, and
therefore tends to let them influence purchase decisions in order to alleviate
some of the guilt. (Children influence about $130 billion of goods in a year)
Children also have more money to spend themselves.
Reference Groups--
Individual identifies with the group to the extent that he takes on many of the
values, attitudes or behaviors of the group members.
The degree to which a reference group will affect a purchase decision depends on an
individuals susceptibility to reference group influence and the strength of his/her
involvement with the group.
Social Class--
Social class influences many aspects of our lives. IE upper middle class Americans prefer
luxury cars Mercedes.
Lower class people tend to stay close to home when shopping, do not engage in much
pre-purchase information gathering.
Stores project definite class images.
Family, reference groups and social classes are all social influences on consumer
behavior. All operate within a larger culture.
Culture and Sub-culture--
Culture refers to the set of values, ideas, and attitudes that are accepted by a
homogenous group of people and transmitted to the next generation.
Culture also determines what is acceptable with product advertising. Culture determines
what people wear, eat, reside and travel. Cultural values in the US are good health,
education, individualism and freedom. In american culture time scarcity is a growing
problem. IE change in meals. Big impact on international marketing.
o geographic regions
o Human characteristics such as age and ethnic background.
Culture effects what people buy, how they buy and when they buy.
1.SOURCES OF INFORMATION
+ Internal source
+ External source
Observation research:
Fresh data can be gathered by observing the relevant actors and
settings.
Contact methods:
+ The mail questionnaire
+ Telephone interviewing
+ Personal interviewing
The challenges:
+ Comparability of data
+ Willingness of potential respondent
+ Ability of the respondent to understand and communicate.
Some problems:
+ Sampling
+ Language
+ Respondent cooperation
Problem formulation
Research method and design
Data collection techniques
Sample
Data collection
Analysis and interpretation
reporting results
+ Chapter1.
Introduction
Problem statement
Objectives of study
Scope and research method
Structure of study
+ Chapter 2.
Literature review
+ Chapter 3.
Introduction of the company or Sector of…
+ Chapter 4.
Research design
+ Chapter 5.
Presentation and critical discussion of results
+ Chapter 6.
Conclusions and recommendations, further research
+ References
+ Appendix
Foreign consumers
Foreign government
+ Measurability
+ Accessibility
+ Profitability
+ Actionability
2) Base of segmentation
+ Invest/grow countries
+ Harvest/divest/license/combine countries
+ Dominant/divest countries
+ selective countries
Country attractiveness
Competitive strength
-Market share
-Marketing ability and capacity
-Product fit
-Contribution margin
-Image
-Technology position
-Product quality
-Market support
-Quality of distributions and service
2.MARKET ENTRYSTRATEGIES
Market entry strategies include licensing, joint ventures, contract manufacture, ownership and
participation in export processing zones or free trade zones.
LICENSING: Licensing is defined as "the method of foreign operation whereby a firm in one
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 of licensing. In
Zimbabwe, United Bottlers have the licence to make Coke.
Licensing involves little expense and involvement. The only cost is signing the agreement and
policing its implementation.
LICENSING GIVES THE FOLLOWING ADVANTAGES:
• Good way to start in foreign operations and open the door to low risk
manufacturing relationships
• Linkage of parent and receiving partner interests means both get most out of
marketing effort
• Capital not tied up in foreign operation and
• Options to buy into partner exist or provision to take royalties in stock.
Those who decide to license ought to keep the options open for extending market participation.
This can be done through joint ventures with the licensee.
JOINT VENTURES
Joint ventures can be defined as "an enterprise in which two or more investors share ownership
and control over property rights and operation".
Joint ventures are a more extensive form of participation than either exporting or licensing. In
Zimbabwe, Olivine industries have a joint venture agreement with HJ Heinz in food processing.
• sharing of risk and ability to combine the local in-depth knowledge with a foreign
partner with know-how in technology or process
If the partners carefully map out in advance what they expect to achieve and how, then many
problems can be overcome.
OWNERSHIP: The most extensive form of participation is 100% ownership and this involves the
greatest commitment in capital and managerial effort. The ability to communicate and control
100% may outweigh any of the disadvantages of joint ventures and licensing. However, as
mentioned earlier, repatriation of earnings and capital has to be carefully monitored. The more
unstable the environment the less likely is the ownership pathway an option.
Once in a market, companies have to decide on a strategy for expansion. One may be to
concentrate on a few segments in a few countries - typical are cashew nuts from Tanzania and
horticultural exports from Zimbabwe and Kenya - or concentrate on one country and diversify
into segments. Other activities include country and market segment concentration - typical of
Coca Cola or Gerber baby foods, and finally country and segment diversification. Another way
of looking at it is by identifying three basic business strategies: stage one - international, stage
two - multinational (strategies correspond to ethnocentric and polycentric orientations
respectively) and stage three - global strategy (corresponds with geocentric orientation). The
basic philosophy behind stage one is extension of programmes and products, behind stage two is
decentralization as far as possible to local operators and behind stage three is an integration
which seeks to synthesize inputs from world and regional headquarters and the country
organization. Whilst most developing countries are hardly in stage one, they have within them
organizations which are in stage three. This has often led to a "rebellion" against the operations
of multinationals, often unfounded.
OR
1.ENTRY AS STRATEGY
Target market
Product
Availability of marketing organization
Company considerations
Government policies
+ Export merchants
+ Trading company
+ Export commission house
+ Resident buyer
+ Broker
+ Export management company
+ Manufacturer’s export agent
+ Cooperative organization:
Piggyback marketing; exporting combination
3.2.Direct export
1) Built-in department
2) Separate export department
3) Export sales subsidiary
FEASIBILITY
IMPLEMENTATION
Licensing
Franchising
Assembly operations
Contract manufacturing
Joint venture
Wholly owned plant
Management contracting
5.
Naive rule
Pragmatic rule
The strategy rule
SELECTING THE ENTRY MODE
……………………………………………………………………………………….
1..PRODUCT STRATEGIES
• A FIRM HAS TO CARRY OUT PRELIMINARY SCREENING FOR MARKETS AND PRODUCTS BY CONDUCTING
MARKET RESEARCH POORLY CONCEIVED PRODUCT OFTEN LEADS TO MARKETING FAILURES
• ETHNOCENTRIC APPROACH
• POLYCENTRIC APPROACH
• REGIOCENTRIC APPROACH
• GEOCENTRIC APPROACH
PRODUCT STANDARDIZATION
• BENEFITS
IN INTERNATIONAL MARKETS
PRODUCT ADAPTATION
• BENEFITS
MANDATORY FACTORS
• GOVERNMENT REGULATIONS
• STANDARDS FOR ELECTRIC CURRENT
• OPERATING SYSTEMS
• MEASUREMENT SYSTEMS
• PACKAGING AND LABELLING REGULATIONS
VOLUNTARY
• CONSUMER DEMOGRAPHICS
• CULTURE
• LOCAL CUSTOMS AND TRADITIONS
• CONDITION OF USE
• PRICE
DO NOT CHANGE
PROMOTION STRAIGHT
ADAPTATION PRODUCT
ADAPTATION COMMUNICATION
ADAPTATION DUAL
ADAPTATION PRODUCT
INVENTION
DO NOT CHANGE
Private Brand
Local Brands
Brand
better identification
better awareness
better chance for product
differentiation
better chance for repeat sales
possible premium pricing (i.e.,
removal from price com
petition)
possibility of making demand
more price inelastic
Manufacturer's Brand
Worldwide Brand
Eighth and perhaps the most compelling reason for creating new
local brands is because local firms may have already used the
names that multinational firms have been using elsewhere.
In such a case, to buy the right to use the name from a local
business can prove expensive. Unilever markets sure
antiperspirant in the United Kingdom but had to test market the
product under the Trust name in the United States, where Sure is
Procter & Gamble’s deodorant trademark. In an interesting case,
Anheuser-Busch bought the American rights to the Budweiser
name and recipe from the brewer of Budweis in Czechoslovakia;
Budejovicky Budvar Narodni Podnik, the Czech brewer,
holds the rights in Europe. Operating from the town of Ceske
Budejovice, known as Budweis before World War this brewer
claims exclusive rights to the Budweiser name in the United
Kingdom, France and several European countries. Courts have
ruled that both companies have the right to sell in the United
Kingdom, but Anheuser-Busch has to use the Busch name in
France and the corporate name in other parts of Europe.
Ninth, a local brand may have to be introduced because of price
control. This problem is especially acute in countries with
inflationary pressures. Price control is also one reason for the
growth of these called gray marketers, as the phenomenon
contributes to price variations among countries for the same
product. Thus instead of buying a locally produced product or one
from an authorized distributor/ importer, a local retailer can buy
exactly the same brand from wholesalers in countries where
prices are significantly lower. A manufacturer will have a hard
time prohibiting importation of gray market goods, especially in
EU countries where products are supposed to be able to move
freely. Parallel trading can be minimized by having different
national brands rather than just a worldwide brand
OR
BENEFITS OF BRANDING
• DOMINATES THE DOMESTIC MARKET, WHICH GENERATES CASH FLOW TO ENTER NEW MARKETS
• MEETS A UNIVERSAL CONSUMER NEED
• DEMONSTRATES BALANCED COUNTRY- MARKET COVERAGE
• REFLECTS A CONSISTENT POSITIONING WORLDWIDE
• BENEFITS FROM POSITIVE COUNTRY OF ORIGIN EFFECT
• FOCUS IS ON THE PRODUCT CATEGORY
BRANDING ISSUES
Branding decisions
(2) Slogan
(3) Colors
EX: Yellow is also the corporate color of Kodak firm.
IBM uses blue in its publications
VIEW
V- VISIBILITY
I- INFORMATIVE
E- EMOTIONAL IMPACT
W- WORKABILITY
3.PRICING STRATEGIES
Although pricing practices appear to be no different internationally than nationally, in some respects
there is wide divergence. These differences occur in the areas of transfer pricing, dumping, and
governmental influence over price.
Transfer Pricing. Transfer prices are the prices placed on products as they are transferred
between units belonging to the same company. Transfer prices can be used to mitigate the effects of
government regulation.
• COST
• COMPETITION
• IRREGULAR OR UNACCOUNTED PAYMENTS IN EXPORTSIMPORTS
• PURCHASING POWER OF CUSTOMERS
• BUYERS ’ BEHAVIOUR
• FOREIGN EXCHANGE FLUCTUATIONS
• ADVANCE PAYMENT
• OPEN ACCOUNT
• CONSIGNMENT
• DOCUMENTARY CREDIT
• DOCUMENTARY CREDIT WITHOUT LETTER OF CREDIT
- SIGHT DRAFT (DOCUMENTS AGAINST PAYMENT)
- USANCE OR TIME DRAFT (DOCUMENTS AGAINST ACCEPTANCE)
- REVOCABLE
- CONFIRMED
- UNCONFIRMED
TYPES OF CREDIT
• SIGHT
• TERM CREDITS
- ACCEPTANCE CREDIT
- DEFERRED PAYMENT CREDIT
• REVOLVING
• BACK TO BACK
DUMPING
• TYPES OF DUMPING
- SPORADIC DUMPING
- PREDATORY DUMPING
- PERSISTENT DUMPING
C OUNTER TRADE
PRICE SETTING AND TRADE FINANCING ARE TIED TOGETHER IN ONE TRANSACTION INVOLVING
RECIPROCAL COMMITMENTS OTHER THAN CASH PAYMENTS
BARTER
• SIMPLE BARTER
• CLEARING ARRANGEMENT
• SWITCH T RADING
• COUNTER P URCHASED
• BUY- BACK ( COMPENSATION)
• OFFSET
TRANSFER PRICING
• Difficult to revert to currency trading - so quality may decline further and therefore product is
harder to market.
How ever, the media typically receive far more press releases and
other PR materials than they can use. Generally speaking, a
company has little control over when, or if, a news story runs. The
company cannot directly control the “spin,” slant, or tone
of the story. In addition to the examples discussed later, Table
summarizes several recent instances of global publicity involving
well-known firms.
PERSONAL SELLING
SALES PROMOTION
DIRECT MARKETING
SPONSORSHIP PROMOTION
ENVIRONMENTAL INFLUENCES:
COMPANY INFLUENCES:
. Annual Sales.
. Number of Customers.
. Customers' Concentration.
. Product Complexity.
. Trade Show Budget.
. Trade Show Cumulative Experience.
. The Value of Continuation to the Exhibiting Company.
. The Geographical Emphasis of the Company.
. Width and Length of Available Product Lines.
1.Introduction
1. Promotion -mix
2. Communication barriers
3. Export marketing promotion and communication decisions
1. PROMOTION-MIX
Advertising
Sales promotion
Publicity
Personal selling
2. Communication barriers
+ Language differences
+ Government regulations
+ Media availability
+ Economic differences
+ Tastes and attitudes
+ Buying process
2.SALES PROMOTION
+ Foreign catalogs
+ Samples
+ House organ and company-published magazines
+ Films, slides, and personal computers
+ Trade fairs and exhibitions
+ Point-of-purchase materials
+ Consumer promotion materials
1. PR
4. INTERNATIONAL ADVERTISING
1. Advertising involves making decisions on the five Ms
+ Mission
+ Message
+ Media
+ Money
+ Measurement
4.PERSONAL SELLING
One of the most expensive marketing communication tools is the
company’s sales force, especially when out in the field, traveling
a lot, and
Spending considerable time hunting for prospects and keeping
existing customers satisfied.
The salesperson sees the customer and can take him to lunch,
gauge his interest, answer questions and objections, and close
the sale. The more
Complex the product or service, the more necessary it is to use
salespeople.
1.CHANNEL STRUCTURE
1. Indirect export
2. Direct export
1) Built-in department
2) Separate export department
3) Export sales subsidiary
Financial incentives
Annual conferences
Help to the management of distributorship
Special programs
+ Piggybacking
+ Joint ventures
+ Original equipment manufacturers (OEMs)
+ Acquisitions
+ Starting your ventures
4. GLOBAL TRENDS IN DISTRIBUTION SYSTEM
Export restrictions
Foreign market import restrictions
Export documentation
The foreign freight forwarder
Export packing
INTERNATIONAL LOGISTICS AND DISTRIBUTION
INTERNATIONAL LOGISTICS
• COMPONENTS
- MATERIALS MANAGEMENT
- PHYSICAL DISTRIBUTION
• AGENTS
- MERCHANT EXPORTER
- INTERNATIONAL TRADING COMPANIES
- EXPORT / TRADING HOUSE
- PHYSICAL DISTANCE
- DIFFERENCES IN LOGISTICS SYSTEMS
- COMPATIBILITY OF LOGISTICS SYSTEMS
- DIFFERENCES IN LEGAL SYSTEMS
- NUMBER OF INTERMEDIARIES INVOLVED
• WAREHOUSING
• INVENTORY
• PACKING AND UNITISATION
• INFORMATION AND COMMUNICATION TECHNOLOGY
• TRANSPORTATION
TRANSPORTATION
• MODES OF TRANSPORT
- AIR TRANSPORTATION
- ROAD TRANSPORTATION
- RAIL TRANSPORTATION
- OCEAN TRANSPORTATION
OCEAN TRANSPORTATION
- HANDY- SIZE
- HANDY- MAX
- PANAMAX
- CAPE- SIZE
- TANKERS
- BULK CARRIERS
- NEO - BULK CARRIERS
- GENERAL CARGO VESSELS
- BARGES
- COMBINATION CARRIERS
C HARTER SHIPPING
• CHARTER VESSELS DO NOT HAVE ANY FIXED ITINERARY OR FIXED SAILING SCHEDULE
• THESE CAN BE HIRED OR ENGAGED TO SHIP A FIRM ’ S CARGO ON CHARTER BASIS AS PER THE TERMS
AND CONDITIONS OF THE CHARTER PARTY
• THE CONTRACT MADE BETWEEN THE CHARTERER AND THE SHIP OWNER IS KNOWN AS CHARTER
PARTY THAT CONTAINS DETAILS OF THE SHIP , ROUTES , MET HODS OF CARGO HANDLING , PORT OF
CALL
FORMS OF CHARTERING
• VOYAGE CHARTER
• TIME CHARTER
• BARE BOAT CHARTER
• BACK- TO- BACK CHARTER
• TRIP TIME CHARTER
• CONTRACT OF AFFREIGHTMENT CONTRACT TERMS USED IN VESSEL CHARTERING
• GROSS TERMS: THE SHIP OWNER IS RESPONSIBLE FOR THE COST OF LOADING, STOWING ,
TRIMMING , AND UNLOADING OF THE VESSEL
• NET TERMS: THE SHIP OWNER IS NOT RESPONSIBLE FOR COST OF LOADING AND DISCHARGE
• FREE IN AND OUT : THE CHARTERER HAS TO ARRANGE THE STEVEDORES AND TO LOAD/DISCHARGE
THE CARGO ON HIS OWN ACCOUNT
• LINER SHIPPING : REGULAR SCHEDULED VESSEL SERVICES BETWEEN TWO PORTS
• CONTAINER: TRANSPORT EQUIPMENT TO FACILITATE HANDLING AND
CARRIAGE OF GOODS BY ONE OR MORE MODES OF TRANSPORT
IMPORT PROCEDURES
EXPORT PROCEDURES
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WHAT IS ECGC?
Export Credit Guarantee Corporation of India Limited was
established in the year 1957 by the Government of India to
strengthen the export promotion drive by covering the risk of
exporting on credit.
• Provides a range of credit risk insurance covers to exporters against loss in export
of goods and services
Payment
•Coup or an insurrection
•Balance of payment problems
•Insolvency or protracted default of buyers
Even before the Second World War ended, monetary experts in the U.S.A. and the
U.K. began planning to solve the monetary problems likely to be faced after the
war. Known after their authors as the Keynes Plan and the White Plan, both sets of
proposals were subjected to intensive discussion and furnished the basis for the
Bretton Woods Conference, which decided to set up the two organizations, the
IMF and the IBRD. The creation of the Fund represents a major effort at
international monetary co-operation. Its main objectives are:
IMF has 180 members, with Brunei Darussalam being the latest.
Membership in the IMF is open to any nation that controls its own
foreign relations and is will-ing and able to fulfill the obligations of
membership. Each member has a quota based on its subscription
contribution to the fund. This quota determines the member’s vot-
ing power and access to the IMF’s financial resources. The-IMF
employs a system of
weighted voting power that combines a basic allotment with a
variable allotment.
To recognize the sovereign equality of nations, each member has
a basic allotment of 250 votes. To protect the interest of
members with a greater magnitude of inter-national trade and
financial transactions as well as to account for the differences in
subscriptions, variable allotment is used as well, resulting in one
vote for each part of the member’s quota that is equivalent to a
special drawing right (SDR) of 100,000. The United States
accounts for some 19 percent of the total.
Functions of IMF
1.To lay down ground rules for the conduct of international finance.
2. To provide short and medium-term assistance for overcoming short-term balance of payments
deficits.
3. Creation and distribution of reserves in the form of SDRs.
The fund has 182 member-countries, accounting for about 80 per cent of the
total world production and 90 per cent of the world trade. Members‘ quotas in
the Fund amount to approximately SDR 212 billion (April, 1999).
Quotas are used to determine (i) the voting power of members, (ii) their
contribution to the Fund‘s resources, (iii) their access to these resources, and
(iv) their share in the allocation of SDRs. India‘s quota in the Fund is SDR
4,158.2 million.
1. Par value system: The exchange value of a member‘s currency was fixed in terms of gold. Since
the price of gold was officially fixed at U.S. $ 35 per ounce, it also meant that par values were fixed
in terms of dollar. Dollar was used as the intervention currency as at that time dollar was as good as
gold. In fact, members preferred to keep dollars in reserve, in as much as dollars earned interest
while gold reserves did not.
2. Change in par value: In order to achieve short-term balance of payments equilibrium, members
could borrow funds from the international Monetary Fund. If the IMF help did not serve the purpose,
the IMF was required. If the proposed change was greater than 10 per cent, it could be allowed
provided (i) there was a fundamental disequilibrium, and (ii) devaluation would be
the right remedy for solving the fundamental disequilibrium. Fundamental disequilibrium was
nowhere defined, but experience has shown that severe depression abroad with prolonged
unemployment at home and cases of structural disequilibrium could be taken as cases of fundamental
disequilibrium.
4.Exchange control was not permitted on current transactions except (i) when a member‘s currency
was under massive attack, and (ii) when the Fund declared some currency as scarce. Members could
use exchange control so far as the use of that currency was concerned.
The World Trade Organization (WTO) was established on 1‖ January 1995. Governments had
concluded the Uruguay Round negotiations on 15th December 1993 and ministers had given their
political backing to the results by signing the Final Act at a meeting in Marrakech, Morocco, in April
1994. The ‗Marrakech Declaration‘ of 15th April 1994, affirmed that the results of the Uruguay
Round would strengthen the world economy and lead to more trade, investment, employment and
income growth throughout the world. The WTO is the embodiment of the Uruguay Round results
and the successor to the General Agreement on Tariffs and Trade (GATT). The WTO has a larger
membership than GATT (145 by the end of March 2002). India is one of the founder members of the
WTO.
WTO, contrary to popular belief, is not a ―free trade‖ institution. It permits tariffs and other forms
of protection but only in limited circumstances. It is a system of rules dedicated to open, fair and
undistorted competition.
Objectives of WTO
In its preamble, the agreement establishing the World Trade Organization reiterates the objectives of
GATT. These are: raising standards of living and incomes, ensuring full employment, expanding
production and trade and optimal use of the world‘s resources. The preamble extends these objectives
to services and makes them more precise.
It introduces the idea of ―sustainable development ‖ in relation to the optimal use of the world‘s
resources, and the need to protect and preserve the environment in a manner consistent with various
levels of national economic development.
• It recognizes that there is a need for positive efforts to ensure that developing countries, and
especially the least developed among them, secure a better share of the growth in international trade.
Functions of WTO
The agreement establishing WTO provides that it should perform the following four functions:
First, it shall facilitate the implementation, administration and operation of the Uruguay Round
legal instruments and of any new agreements that may be negotiated in the future.
Second, it shall provide a forum for further negotiations among member countries on matters
covered by the agreements as-well as on new issues falling within its mandate.
Third, it shall be responsible for the settlement of differences and disputes among its member
countries.
Fourth, it shall be responsible for carrying out periodic reviews of the trade policies of its member
countries.
Its highest authority–the Ministerial Conference— dominates the structure of the WTO. This body is
composed of representatives of all WTO members. It meets at least every two years and is
empowered to make decisions on all matters under any of the multilateral trade agreements.
The day-to-day work of the WTO is entrusted to a number of subsidiary bodies, principally, the
General Council, also composed of all WTO members, which is required to report to the Ministerial
Conference. The General Council also convenes in two particular forms- as the Dispute Settlement
Body and the Trade Policy Review Body. The former overseas the dispute settlement procedure and
the latter conduct regular reviews of trade policies of individual WTO members.
The General Council delegates‘responsibility to three other bodies, namely the Councils for Trade in
Goods; Trade in Services and Trade-Related Aspects of Intellectual Property Rights (TRIPS). The
Council of Goods overseas the implementation and functioning of all the agreements covering trade
in goods, though many such agreements have their own specific overseeing bodies. The latter two
Councils have responsibility for their respective WTO agreements and may establish their own
subsidiary bodies as necessary.
There are 28 agreements that had been signed in the Uruguay Round of the GATT, 1994. The details
of these agreements are given below:
A. Trade in Goods
General Agreement on Tariffs and Trade 1994 (GATT, 1994) Associate Agreements
B. Trade in Services
5. WORLD BANK
Although the IDA shares the World Bank’s staff, the IFC has its
own operating and legal staff. Unlike the bank and the IDA, which
have many operating aspects in com-mon, the IFC works closely
with private investors. In addition to providing convert-ible
debentures, underwriting, and standby commitments, the IFC
invests in com-mercial enterprises within developing countries
and is able to take equity positions. By functioning in this area,
the IFC complements the work of the Word Bank by providing
assistance in business areas that are impractical for the bank to
operate. As of 1996, the IFC’s total membership has become 165
countries.
Since the advent of generalized floating in 1973, the currency rates in the Foreign
Exchange Market are determined by the forces of demand and supply under the
present arrangement. This courses a tremendous variability in the exchange rates of
major currencies on day-to-day basis. This enhanced variability has proved to be
major problem both for the policy-markers at national level as well as the corporate
manager.
A great deal of time has to be devoted in managing foreign currency risks, and the
cost of buying a cover to protect against foreign currency fluctuations has to be
incorporated in normally international business transactions. On the other hand,
however, however, variability in exchange rates has opened up profit opportunities
for the speculators who take positions in a currency as well as the arbiters who take
advantage of the differences in rates in various markets at a given point of time. An
arbiter buys a particular currency ina market where it is cheaper and sells the same
currency (same amount) in another market where the rate is slightly higher and
makes the profit in the process: This has forced the foreign exchange markets
continuously buy and sell different currencies with a view to make profit. The
developments in information technology have also helped the spatially dispersed
markets to come closer. The foreign exchange market happens to be the largest
market where transactions worth $500-700 billion take place every day.
I INTER-BANK MARKET:
Dealings between banks who are authorized dealers in foreign exchange Used to
be large in size. About 700 banks worldwide act as market makers in Foreign
exchange. Non-bank dealers account for about 20% of the market.
Dealings between authorized dealers and others such as business entities. This is
generally retail market or client market, as it is alternatively called.
III WHOLESALE MARKET:
Large scale foreign exchange dealings especially interbank deals and some deals
involving large corporations.
IV RETAIL MARKET:
In over the counter the dealers or parties directly settle accounts. No clearing house
is involved.
VI EXCHANGE MARKET :
Foreign exchange dealings are done in an exchange and settlements are through the
clearing house of the exchange.
Foreign exchange deals that are done to cover risk of exposure in currencies
IX SPECULATION:
Opendeals that involve taking position in the exchange to make profit when
expected price movement materializes.
X SPOT MARKET:
Spot market is market for delivery normally two days after the deal. Suppose on 2-
1-2008 you buy $100,000 in the spot market. It is to be delivered on 4-1-2008. If 4-
1-2008 happens to be a banking holiday, you will get delivery the next day, that is
5-1-2008. You don’t prefer this. Then
you should book the contract on ‘tom’ basis on 2-1-2008 so that you can take
delivery on 3-1-2008 itself.
XI FORWARD MARKET:
Forward market is a market for future delivery, but rate or price is predetermined.
Forward market is used by importers to buy forward forex needed in future and by
exporters to sell forward the forex receivable in future. Speculators use forward
market to speculate. If speculators expect a particular currency to depreciate they
will sell forward that currency. If their
expectation is appreciation of a currency, they will buy forward the currency.
Exchange Rate: Exchange Rate is the value of one currency expressed in terms of
another. The exchange rate (a.k.a the foreign-exchange rate, forex rate or FX rate)
between two currencies specifies how much one currency is worth in terms of the
other. For example an exchange rate of 39 Indian rupees (INR) to the United States
dollar (USD) means that a sum of Rs 39 is worth the same as USD 1.
Pegging means fixing. Under currency pegging, the external value of a currency is
fixed, that is pegged at certain values adopting one standard or other. Gold
standard, purchasing power parity and IMF pegging system or other forms of
currency pegging. The pegged rates remain fixed for
a time, until refixed or repegged.
Currency Pegging Under the IMF Charter with USD: After the Gold standard
and purchasing power standard, currency under the IMF charter resulted which
required every member-country to fix and maintain the par value of its currency in
terms of gold or dollar. This system of fixed exchange came to be known as
pegged exchange rates or par values. The schemes provided that:
Each member country should declare the external value of its currency in terms
of gold and US dollar. This was known as the ‘par value’ of the currency price.
The value of US dollars is fixed at USD 35 per ounce of the gold. The USA
committed itself to convert dollars into gold at the above official price.
Each country agreed to maintain the market value of its currency within a
margin of 1% of the par value. Where the variation in the market was more than
the permitted level, the country should take steps to devalue the currency to correct
the position.
Members were free to devalue their currencies. But, if the evaluation exceeded
10% of the par value, approval of the IMF should be obtained. The IMF might
approve it or advise a lower rate. However, it had no power to reject the proposal.
The IMF granted short-term financial assistance to its members to tide over
their temporary balance of payments problems. For chronic problems the members
were expected to use permanent solutions like devaluation. This system was
known as adjustable pegged exchange rate with a band of 2%. The system worked
till 1971.
In the on-going search for a truly international currency, Special Drawing Rights,
(SDRs) the currency of IMF emerged pushing down both gold and the greenback,
i.e., the dollar in the late 1970s.
II MANAGED FLOATS:
In April 1978, second Amendment to the IMF’s Articles of Agreement came into
effect and with that member countries were free to choose own exchange rate
system. But member countries should ensure order and stability in exchange rate
system. IMF has surveillance or watchdog role over the exchange rate policies of
countries, but are subject to regulations to keep the movements within limits.
Under the system, some currencies are pegged to certain currency, some are
pegged to the SDR, some are pegged to a basket of currencies and some are subject
to mutual
intervention and some are partially floating and partially pegged (i.e., dual
exchange rate system).
USD, Yen and PS became free floating since 1978. Under free floating exchange
rates are determined by demand and supply. Central banks do intervene, but at
market determined rates only. Rupee has become a free floating currency partially
in 1992 and near-fully on current account in 1993. In a freely floating rate system
market forces decide the rate. Most nations now adopt this system now. There is no
undervaluation or overvaluation. Exporters and importers get and pay, as the case
may be, the market value and the system is equally poised in respect of both,
unlike fixed ERS where with overvaluation of domestic currency exporters benefit
and with
undervaluation the importers benefit. Floating ERS is an open-door policy and this
attracts more flow of foreign capital and that domestic economy is poised for
growth. Floating ERS does not strain domestic economy or fiscal policies much as
the exchange rate gets suitably altered. The Government does not feel the pressure
of maintaining an unsustainable overvalued / undervalued position of domestic
currency. But fluctuations in rates will be there every time. The market may go
haphazardly volatile abetted by speculation, capital flight at will, currency
contagion effect and so on.
8.SOURCES OF FINANCE
OR
Ordinary shares
preference shares
debentures
bank loans
grants
leasing
retained earnings.
Eurobonds
mortgages
convertible loan stock
OR
OR
Banks
Finance Companies
o Receivables factoring and invoice discounting are two ways finance companies
provide short term financing. When they factor your receivables, they buy your
invoices at a fairly steep discount and conduct any collection activities needed.
This is an expensive manner of obtaining funding because the finance company is
taking on the risk of collection, and many companies factor only their slow paying
invoices. Invoice discounting involves using your invoices as collateral for short
term borrowing. Your company maintains ownership of the invoice assets and
must replace any pledged invoices that are paying slowly, but this financing
method preserves the balance sheet asset value and is less expensive than
factoring because the finance company doesn't assume the same degree of risk. A
good relationship with a finance company is beneficial when it comes time to
lease equipment or vehicles; but since your company does not maintain any
deposit accounts with a finance company, maintaining a good payment record is
vital.
Trade Credit
o The best way to finance inventories is through trade credit, which is the number
of days your vendor will allow before payment is due on your invoices. For a new
customer, most vendors will require cash-on-delivery. As trust develops, the
vendor will allow 30, 60 or 90 days to pay invoices, which may be enough time
for your company to sell the inventory and collect payment. Trade credit normally
does not cost anything because the vendors offer it to their best customers as an
inducement to continue doing business.
Competition
o The better and more dependable your short term sources of financing, the more
competitive your company will be in your industry. Short term financing allows
you to take advantage of sudden opportunities to make additional revenues or
capture business ahead of your competition. Good short term funding sources give
a company flexibility and versatility.
OR
Especially in the current economic climate, external financial sources may be required by
organizations both in the short and long-term. Short-term financial sources are usually used to
fund day to day business operations or 'working capital' while long-term external finances may
typically be necessary to purchase or maintain fixed assets such as machinery and the workplace
building itself. A major difference between the two is that short-term loans will require
repayment within the time frame of one year and long-term loans include those lasting for more
than a year.
Fearns (2003) identifies several sources for acquiring short-term external finance which include
the following: bank overdrafts, bank loans, debt factoring, trade credit and leasing. Bank
overdrafts are one of the most commonly used sources and involve the bank allowing one to
withdraw money beyond one's bank balance up to an agreed limit. However, as most students
past and current will know this is not always the best solution although it is certainly less
expensive than taking out a loan.
Trade credit is particularly helpful for smaller organisations as it can be used to purchase various
goods and services in advance of payment. This involves suppliers offering the business a time
frame of credit of anywhere between 30 to 90 days by which time full payment is required.
Another means of understanding the difference between short-term and long-term external
financial sources is that short-term finance is used to alleviate temporary problems while long-
term finance is used for capital investment.
As highlighted by Brindley (2008) the main sources of long-term finance include loans, hire
purchase agreements, leasing and mortgages. Loans are a formal type of agreement which
require repaying within a time-frame including interest. Hire purchase involves paying a deposit
on an asset and then repaying regular installments until the asset is no longer owned by the
finance house. Leasing is the same as renting; equipment is borrowed from a leasing company
until the end of the lease when it is returned.
Mortgages are usually very long-term (as most home-owners know only too well!) loans which
are used in order to purchase property. It is well worth finding out more about different offers
available with various banks and building societies so as to get the best rates possible.
As highlighted above, external finance sources are either short or long-term and may be obtained
in a number of different ways such as through bank overdrafts, trade credit, leasing and hire
purchase agreements. It is crucial, however, that any risk to a business is first calculated,
regardless of the type of external finance being sought.
OR
Sources of Finance The Long-Term Finance may be Raised by the Companies from the
following Sources:-
Capital Market
Capital market denotes an arrangement whereby transactions involving the procurement and
supply of long-term funds take place among individuals and various organisations. In the capital
market, the companies raise funds by issuing shares and debentures of different types. When
long-term capital is initially raised by new companies or by existing companies by issuing
additional shares or debentures, the transactions are said to take place in the market for new
capital called, as 'New Issue Market'. But, buying and selling of shares and debentures already
issued by companies takes place in another type of market called as 'the Stock market'
Special Financial Institutions
A large number of financial institutions have been established in India for providing long-term
financial assistance to industrial enterprises. There are many all-India institutions like Industrial
Finance Corporation of India (IFCI); Industrial Credit and Investment Corporation of India
(ICICI); Industrial Development Bank of India(IDBI), etc. At the State level, there are State
Financial Corporation’s (SFCs) and State Industrial Development Corporations (SIDCs). These
national and state level institutions are known as 'Development Banks'. Besides the development
banks, there are several other institutions called as 'Investment Companies' or 'Investment Trusts'
which subscribe to the shares and debentures offered to the public by companies. These include
the Life Insurance Corporation of India (LIC); General Insurance Corporation of India (GIC);
Unit Trust of India (UTI), etc.
Leasing Companies
Manufacturing companies can secure long-term funds from leasing companies. For this purpose
a lease agreement is made whereby plant, machinery and fixed assets may be purchased by the
leasing company and allowed to be used by the manufacturing concern for a specified period on
payment of an annual rental. At the end of the period the manufacturing company may have the
option of purchasing the asset at a reduced price. The lease rent includes an element of interest
besides expenses and profits of the leasing company.
Foreign Sources
Funds can also be collected from foreign sources, which usually consists of:-
…………………………………………………THANK YOU……………………………………………………