Tag: Cost Control and Management Accounting Osmania University b.com Notes

International Marketing environment refers to the controllable and uncontrollable forces that influence upon the marketing decision making of a firm globally. International Marketing environment is comprised of those components which shape policies, programmes and strategies of an international marketer. An international firm must resort to systematic study of international marketing environment to collect the inputs of marketing decision making.

To serve the international markets effectively, a firm is in need of understanding international marketing environment properly. The needs, preferences and expectations of buyers in different overseas markets are not necessarily similar. The environmental differences influence the international marketing decisions of a firm.

Such strategic decisions as whether a company should enter a given foreign market or not, what market entry strategy should it employ, what strategy it should adopt in respect of product, promotion, pricing and distribution, etc. are based on two sets of factors, viz., the company related factors and the foreign market related factors. The decision as to whether to go international or not is based, in addition to the above two, on yet another set of factors, viz., the domestic marketing environment.

The company related factors refer to such factors as the company objectives, resources, and international orientation. The domestic marketing environment consist of factors like growth prospects including the competition, government policies etc. The foreign market related factors which are relevant to the international business strategy formulation or which affect the international business are often described as the international business environment.

Two components of international marketing environment:

Internal Environment:

Internal environment refers to the firm related factors. The firm related factors are referred to as controllable variables because the firm has control over them and can (relatively easily) change them as may be thought appropriate as its personnel, physical facilities, organisation and functional means such as marketing mix, to suit the environment.

The internal environment of the company includes all departments, such as management, finance, research and development, purchasing, operations and accounting. Each of these departments has an impact on international marketing decisions. For example, research and development have input as to the features a product can perform and accounting approves the financial side of marketing plans.

The ability of a firm to do international business depends on a number of internal factors like the mission and objectives of the firm; the organisational and management structure and nature; internal relationship between employees, shareholders and Board of Directors, etc.; company image and brand equity; physical assets and facilities; R&D and technological capabilities; personnel factors like skill, quality, morale, commitment, attitude, etc.; marketing factors like the organisation for marketing, quality of the marketing men and distribution network; and financial factors like financial policies, financial position and capital structure.

Let’s look at an example of how the internal environment would impact a company such as Wal-Mart. In this case the immediate local influences which might include its marketing plans, how it implements customer relationship management, the influence of other functions such as strategy from its top management, research and development into new logistics solutions, how it makes sure that it purchases high-quality product at the lowest possible price, that accounting is undertaken efficiently and effectively, and of course its local supply chain management and logistics for which Wal-Mart is famous.

A useful tool for quickly auditing the internal environment is known as the Five Ms which are Men, Money, Machinery, Materials and Markets. Some might include a sixth M, which is minutes, since time is a valuable internal resource. All these factors are company related factors which are fully controllable. All these have to be considered while entering in the international market.

External Environment:

External environment refers to the factors outside the firm. These factors are uncontrollable or we can say that these are beyond the control of a company. The external environmental factors such as the economic factors, socio-cultural factors, government and legal factors, demographic factors, geographical factors etc. are generally regarded as uncontrollable factors.

1. Micro Environment:

The micro environment is made from individuals and organisations that are close to the company and directly impact the customer experience. They can be defined as the actors in the firm’s immediate environment which directly influence the firm’s decisions and operations. These include, suppliers, various market intermediaries and service organisations, competitors, customers, and publics. The micro environment is relatively controllable since the actions of the business may influence such stakeholders.

Wal-Mart’s micro environment would be very much focused on immediate local issues. It would consider how to recruit, retain and extend products and services to customers. It would pay close attention to the actions and reactions of direct competitors. Wal-Mart would build and nurture close relationships with key suppliers. The business would need to communicate and liaise with its publics such as neighbours which are close to its stores, or other road users. There will be other intermediaries as well including advertising agencies and trade unions amongst others.

Macro Economic Environment:

The macro environment of a country can be studied by taking a vast perspective. It includes the study of population, national income, economic advancement of a country and the study of consumption patterns etc. It is pertinent to mention here that a clear cut idea of the economic environment of a particular host country is always useful to form an appropriate marketing strategy in the international business.

Importance

The various components of the international marketing environment are the major determinants of marketing opportunities. As such, it is the responsibility of an international firm to have clear grasp of international marketing environment to formulate effective marketing decisions regarding Marketing Mix variables.

The following points highlight the importance of understanding international marketing environment:

1. International Marketing environment opportunities vary among the nations. Some economies have enormous potentials of growth while other has not. The knowledge of economic environment helps an international marketer to understand which market to select for reaping lasting benefits.
2. Culture is a basic determinant of human behaviour. The cultural norms and values may vary among the countries. That’s why knowledge of cultural environment is utmost important to the international marketer.
3. Political environment has a major influence on creating sound investment climate. The law-and-order situations influence business operations. International marketing operations can be smoothly conducted in a country having political stability and healthy political situation.
4. International marketing is affected by legal environment of a foreign country in which a firm intends to operate. International marketing transactions need compliance with legal provisions. So international marketer should be familiar with the legal environment of foreign countries where marketing efforts will be made.
5. The state of competition prevailing in an international market has great importance upon the strategic plan of the international marketer.
6. Technological changes have also great importance because of its direct impact on product obsolescence issue. Up-to-date knowledge about the state of technological environment is essential for the firms associated with international marketing.

Businesses are affected by legal environments of countries in many ways. Legal environments are not just based on different laws and regulations concerning businesses, these are also defined by the factors like rule of law, access to legal systems by foreigners, litigations systems etc. Variations in legal environments, rule of law, laws, and legal systems affect foreign business firms in a number or areas.

Key areas of business that are affected by legal environments are listed below:

(a) Laws concerning employment and labour affect managing of workforce in international markets.

(b) Different laws in foreign countries regulate financing of operations by foreigners. In some countries foreign firms are restricted access to local deposits/funds.

(c) Various countries around the world have different laws concerning marketing of products, especially food products, pharmaceuticals, hazardous materials and strategic products to a nation.

(d) Countries also control and regulate developing and utilising of technologies through various laws and regulations.

(e) Many countries also have different laws and regulations that affect ownership of businesses by foreigners.

(f) Countries also regulate /restrict remittances to foreign countries and repatriation of profits.

(g) Some countries regulate closing of operations and in some countries, businesses are not allowed to close shop especially when they have sold products that have guarantees and warranties from the foreign firms.

(h) Various countries around the world have implemented different trade and investment regulations.

(i) Countries also have their own taxation requirements, systems and laws.

(j) Countries also differ on the accounting reporting requirements from various categories of firms.

(k) Countries around the world have also actively implemented environmental regulations that affect businesses.

Legal Systems (Common Law, Civil Law, Theocratic Law)

Common Law

The basis for common law is tradition, past practices, and legal precedents set by the courts through interpretations of statutes, legal legislation, and past rulings. Common law seeks “interpretation through the past decisions of higher courts which interpret the same statutes or apply established and customary principles of law to a similar set of facts”.

Common law refers to law developed by judges through decisions of courts and similar tribunals (called case law), rather than through legislative statutes or executive action, and to corresponding legal systems that rely on precedential case law.

The body of precedent is called “common law” and it binds future decisions. In future cases, when parties disagree on what the law is, an idealized common law court looks to past precedential decisions of relevant courts. If a similar dispute has been resolved in the past, the court is bound to follow the reasoning used in the prior decision (this principle is known as stare decisis). If however, the court finds that the current dispute is fundamentally distinct from all previous cases (called a “matter of first impression”), judges have the authority and duty to make law by creating precedent. Thereafter, the new decision becomes precedent, and will bind future courts.

Civil Law

Civil law is based on an explicit written codification of what is permissible, and what is not. Laws are documented in criminal, civil and commercial codes which can be used to settle disputes. The precise wording of legal codes means the system is less adversarial than common law.

Theocratic Law

This system is based on religious teachings, as they are enshrined in the religious scriptures. Islamic law, Shari at, is the most widely practiced religious legal system in today’s world. It is based on morality rather than commercial requirement of human behaviour in all aspects of a person’s self and social life. Islamic law is based on the Holy book of Islam, the Quran and on interpretation of the practices and sayings of Prophet Mohammad.

It also follows the writings of scholars and teachers of Islamic scholarship, who derived rules by analogy from the principles established in the holy Quran. The basic foundations of Islamic law remain unaltered even after many centuries because they have been derived from the holy book and are acceptable to all devout Muslims.

Even though Islamic jurists and scholars constantly debate the application of Islamic law to the modern world, their debates are only scholastic deliberations. However, to keep pace with the advancement of life, many Muslim countries have a blend of Common law and Civil law system along with the Sharia law.

Legal Differences

• Local domestic laws. These are all different. The only way to find a route through the legal maze in overseas markets is to use experts on the separate legal systems and laws pertaining in each market targeted
• International law. There are a number of international laws that can affect the organisation’s activity. Some are international laws covering piracy and hijacking, others are more international conventions and agreements and cover items such as the International Monetary Fund (IMF) and World Trade Organisation (WTO) treaties, patents and trademarks legislation and harmonisation of legal systems within regional economic groupings, e.g. the European Union.
• Domestic laws in the home country. The organisation’s domestic (home market) legal system is important for two reasons. First, there are often export controls which limit the free export of certain goods and services to particular marketplaces, and second, there is the duty of the organisation to act and abide by its national laws in all its activities, whether domestic or international.

Anti-Dumping Law and Import License

Anti-dumping duty is a measure by the government to rectify the situation arising out of dumping. It is an instrument to restore fair competition. Despite being perceived as a protectionist measure, anti-dumping is essentially meant to provide relief to the domestic industries from the harm caused by dumping. These measures are meant to prevent foreign exporters from using predatory pricing to undermine domestic businesses. In furtherance of the same, the governments levy anti-dumping duties on the businesses not exceeding the margin of dumping in reference to any commodity.

It has been debated whether this practice is right or wrong over the years. The World Trade Centre does not take the high ground in declaring the validity of this practice but instead sets out the dos and don’ts of anti-dumping. Article VI of General Agreement on Tariffs and Trade, 1994 (hereinafter “GATT”) lays down the rules governing the practice of anti-dumping.

Anti-dumping duty is a measure by the government to rectify the situation arising out of dumping. It is an instrument to restore fair competition. Despite being perceived as a protectionist measure, anti-dumping is essentially meant to provide relief to the domestic industries from the harm caused by dumping. These measures are meant to prevent foreign exporters from using predatory pricing to undermine domestic businesses. In furtherance of the same, the governments levy anti-dumping duties on the businesses not exceeding the margin of dumping in reference to any commodity.

It has been debated whether this practice is right or wrong over the years. The World Trade Centre does not take the high ground in declaring the validity of this practice but instead sets out the dos and don’ts of anti-dumping. Article VI of General Agreement on Tariffs and Trade, 1994 (hereinafter “GATT”) lays down the rules governing the practice of anti-dumping.

Different Laws:

Customs Tariff Act, 1975- Sec 9A, 9B, 9C (as amended in 1995)

Customs Tariff (Identification, Assessment, and Collection of Anti-dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995

Significance of Anti-Dumping Laws

The anti-dumping laws and regulations are meant to further the idea of fair trade between buyers and sellers in the international market. While the freedom of trade is essential, it is also important that the countries protect domestic industries from harm caused by discriminatory trade practices. Discriminatory means under the garb of free trade can lead to exploitation and can cause harm to develop economies.

The practice of dumping is not wrong per se depending upon the market conditions and the freedom of traders to fix the desired price. This is why WTO does not condemn dumping or anti-dumping. The practice of dumping might not harm the domestic industries in all cases and hence the domestic legislations allow the country to impose anti-dumping duties only when a causal link is established between the dumping practices and the injury caused.

The Social/Cultural environment consists of the influence of religious, family, educational, and social systems in the marketing system. Marketers who intend to market their products overseas may be very sensitive to foreign cultures. While the differences between home country and those of foreign nations may seem small, marketers who ignore these differences risk failure in implementing marketing programmes. Failure to consider cultural differences is one of the primary reasons for marketing failures overseas.

This task is not as easy as it sounds as various features of a culture can create an illusion of similarity. Even a common language does not guarantee similarity of interpretation. For example, in the US customers purchase “cans” of various grocery products, but the Britishers purchase “tins”. A number of cultural differences can cause marketers problems in attempting to market their products overseas.

These include:

(a) Language

(b) Colour

(c) Customs and taboos

(d) Values

(e) Aesthetics

(f) Time

(g) Business norms

(h) Religion

(i) Social structures

Each is discussed in the following sections:

(a) Language:

The importance of language differences cannot be overemphasised, as there are almost 3,000 languages in the world. Language differences cause many problems for marketers in designing advertising campaigns and product labels. Language problems become even more serious once the people of a country speak several languages. For example, in Canada, labels must be in both English and French. In India, there are over 200 different dialects, and a similar situation exists in China.

(b) Colours:

Colours also have different meanings in different cultures. For example, in Egypt, the country’s national colour of green is considered unacceptable for packaging, because religious leaders once wore it. In Japan, black and white are colours of mourning and should not be used on a product’s package. Similarly, purple is unacceptable in Hispanic nations because it is associated with death.

(c) Values:

An individual’s values arise from his/her moral or religious beliefs and are learned through experiences. For example, in America people place a very high value on material well-being, and are much more likely to purchase status symbols than people in India.

Similarly, in India, the Hindu religion forbids the consumption of beef, and fast-food restaurants such as McDonald’s and Burger King would encounter tremendous difficulties without product modification. Americans spend large amounts of money on soap, deodorant, and mouthwash because of the value placed on personal cleanliness. In Italy, salespeople call on women only if their husbands are at home.

(d) Aesthetics:

The term aesthetics is used to refer to the concepts of beauty and good taste. The phrase, “Beauty is in the eye of the beholder” is a very appropriate description for the differences in aesthetics that exist between cultures. For example, Americans believe that suntans are attractive, youthful, and healthy. However, the Japanese do not.

(e) Time:

Americans seem to be fanatical about time when compared to other cultures. Punctuality and deadlines are routine business practices in the US. However, salespeople who set definite appointments for sales calls in the Middle East and Latin America will have a lot of time on their hands, as business people from both of these cultures are far less bound by time constraints. To many of these cultures, setting a deadline such as “I have to know next week” is considered pushy and rude.

(f) Business Norms:

The norms of conducting business also vary from one country to the next.

Here are several examples of foreign business behaviour that differ from Indian business behaviour:

(1) In France, wholesalers do not like to promote products. They are mainly interested in supplying retailers with the products they need.

(2) In Russia, plans of any kind must be approved by a seemingly endless string of committees. As a result, business negotiations may take years.

(3) In Japan, businesspeople have mastered the tactic of silence in negotiations.

(g) Religious Beliefs:

A person’s religious beliefs can affect shopping patterns and products purchased in addition to his/her values. In the United States and other Christian nations, Christmas time is a major sales period. But for other religions, religious holidays do not serve as popular times for purchasing products. Women do not participate in household buying decisions in countries in which religion serves as opposition to women’s rights movements.

Every culture has a social structure, but some seem less widely defined than others. That is, it is more difficult to move upward in a social structure that is rigid. For example, in the US, the two-wage earner family has led to the development of a more affluent set of consumers. But in other cultures, it is considered unacceptable for women to work outside the home.

HOFSTEDE’s Six Dimension of Culture

Hofstede’s cultural dimensions theory is a framework for cross-cultural communication, developed by Geert Hofstede. It shows the effects of a society’s culture on the values of its members, and how these values relate to behaviour, using a structure derived from factor analysis.

Hofstede developed his original model as a result of using factor analysis to examine the results of a worldwide survey of employee values by IBM between 1967 and 1973. It has been refined since. The original theory proposed four dimensions along which cultural values could be analyzed individualism collectivism; uncertainty avoidance; power distance (strength of social hierarchy) and masculinity-femininity (task-orientation versus person-orientation). Independent research in Hong Kong led Hofstede to add a fifth dimension, long-term orientation, to cover aspects of values not discussed in the original paradigm. In 2010, Hofstede added a sixth dimension, indulgence versus self-restraint.

Hofstede’s work established a major research tradition in cross-cultural psychology and has also been drawn upon by researchers and consultants in many fields relating to international business and communication. The theory has been widely used in several fields as a paradigm for research, particularly in cross-cultural psychology, international management, and cross-cultural communication. It continues to be a major resource in cross-cultural fields. It has inspired a number of other major cross-cultural studies of values, as well as research on other aspects of culture, such as social beliefs.

Dimensions of national cultures

Power distance index (PDI): The power distance index is defined as “the extent to which the less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally”. In this dimension, inequality and power is perceived from the followers, or the lower strata. A higher degree of the Index indicates that hierarchy is clearly established and executed in society, without doubt or reason. A lower degree of the Index signifies that people question authority and attempt to distribute power.

Individualism vs. collectivism (IDV): This index explores the “degree to which people in a society are integrated into groups”. Individualistic societies have loose ties that often only relate an individual to his/her immediate family. They emphasize the “I” versus the “we”. Its counterpart, collectivism, describes a society in which tightly-integrated relationships tie extended families and others into in-groups. These in-groups are laced with undoubted loyalty and support each other when a conflict arises with another in-group.

Uncertainty avoidance (UAI): The uncertainty avoidance index is defined as “a society’s tolerance for ambiguity”, in which people embrace or avert an event of something unexpected, unknown, or away from the status quo. Societies that score a high degree in this index opt for stiff codes of behavior, guidelines, laws, and generally rely on absolute truth, or the belief that one lone truth dictates everything and people know what it is. A lower degree in this index shows more acceptance of differing thoughts or ideas. Society tends to impose fewer regulations, ambiguity is more accustomed to, and the environment is more free-flowing.

Masculinity vs. femininity (MAS): In this dimension, masculinity is defined as “a preference in society for achievement, heroism, assertiveness and material rewards for success”. Its counterpart represents “a preference for cooperation, modesty, caring for the weak and quality of life”. Women in the respective societies tend to display different values. In feminine societies, they share modest and caring views equally with men. In more masculine societies, women are somewhat assertive and competitive, but notably less than men. In other words, they still recognize a gap between male and female values. This dimension is frequently viewed as taboo in highly masculine societies.

Long-term orientation vs. short-term orientation (LTO): This dimension associates the connection of the past with the current and future actions/challenges. A lower degree of this index (short-term) indicates that traditions are honored and kept, while steadfastness is valued. Societies with a high degree in this index (long-term) view adaptation and circumstantial, pragmatic problem-solving as a necessity. A poor country that is short-term oriented usually has little to no economic development, while long-term oriented countries continue to develop to a level of prosperity.

Indulgence vs. Restraint (IND): This dimension refers to the degree of freedom that societal norms give to citizens in fulfilling their human desires. Indulgence is defined as “a society that allows relatively free gratification of basic and natural human desires related to enjoying life and having fun”. Its counterpart is defined as “a society that controls gratification of needs and regulates it by means of strict social norms”.

Organizational level

Within and across countries, individuals are also parts of organizations such as companies. Hofstede acknowledges that “the dimensions of national cultures are not relevant for comparing organizations within the same country”. In contrast with national cultures embedded in values, organizational cultures are embedded in practices.

From 1985 to 1987, Hofstede’s institute IRIC (Institute for Research on Intercultural Cooperation) has conducted a separate research project in order to study organizational culture. Including 20 organizational units in two countries (Denmark and the Netherlands), six different dimensions of practices, or communities of practice have been identified:

• Process-Oriented vs. Results-Oriented
• Employee-Oriented vs. Job-Oriented
• Parochial vs. Professional
• Open System vs. Closed System
• Loose Control vs. Tight Control
• Pragmatic vs. Normative

Cultural Values (Individualism v/s Collectivism)

Individualism

Individualism is a value or political view which focuses on human independence and freedom. It is generally against external interferences regarding personal choices. Research on decision-making concluded that those with higher levels of individualism tend to be more rational than those with higher levels of collectivism. Societies with individualist cultures view people as autonomous and prioritize uniqueness. Individualism disagrees that religion and tradition can dictate individuals’ limitations. It contradicts the views of collectivism which gives prime importance to interdependence and conventionality. The term was reportedly first used as a pejorative term, largely in the sense of political individualism which theorizes that the government should merely take a defensive role by shielding the individual’s liberty to act as how he wants to as long as he also respects the other individual’s freedom.

It was observed that there is an increasing pattern of individualism across the globe and that it is likely associated with a similarly increasing socioeconomic development which is evidenced by higher household income, education levels, and proportion of white-collar occupations. However, it was noted that China is an exception to the pattern since their individualistic culture was found out to decrease despite their economic growth. This may be due to their complex socioeconomic history.

Collectivism

Collectivism is the principle or practice of prioritizing group cohesion over individual pursuits. It views long-term relationships as essential since it promotes group goals. The people in a collectivist society can easily sacrifice their individual benefits for the sake of the whole society’s progress. As a matter of fact, an individual with a collectivist attitude may even feel embarrassed if he or she is singled out to be commended. A study on decision-making reported that those with higher levels of collectivism tend to be more dependent and are less likely to betray members of the central ingroups. Collectivism is a cultural pattern commonly observed among traditional communities like those in Asia, Africa, and Latin America. It is the opposite of individualism which is common in North America, Western Europe, New Zealand, and Australia.

Collectivism is also a political theory which is related with communism since it proposes that power should be placed in the hands of the citizens as a whole instead of in the hands of only several individuals such as those in the upper class. Hence, it is beneficial to construct a system which facilitates shared goals. However, this ideal is difficult to actualize as evidenced by the Soviet communism’s attempted collectivist society.

Tariff Barriers

When two countries trade in the goods, a certain amount is charged as a fee by the country, in which goods are entered, so as to provide revenue to the government as well as raise the price of foreign goods, so that the domestic companies can easily compete with the foreign items. This fee is in the form of tax or duty, which is called a tariff barrier.

The amount of tax or duty charged as tariff is added to the cost of the import, which makes the foreign goods more expensive, whose price is ultimately borne by the consumer of the products. The tariff is paid to the customs authority of the country in which goods are sent. It includes:

• Import Duties: It is the custom duty imposed by the importing country i.e. the tax imposed on goods imported. It is levied to raise revenue and protect domestic industries.
• Export Duties: It is the duty imposed on goods by the exporting country on its exports. Generally certain mineral and agricultural products are taxed.
• Transit Duties: It is levied on commodities that originate in one country, cross another and are consigned to another. Transit duties are levied by the country through which the goods pass. It results in increased cost of products and reduction in amount of commodities traded.
• Ad-valorem Duties: It is levied on commodities that originate in one country, cross another and are consigned to another. Transit duties are levied by the country through which the goods pass. It results in increased cost of products and reduction in amount of commodities traded.
• Specific Duties: It is levied on commodities that originate in one country, cross another and are consigned to another. Transit duties are levied by the country through which the goods pass. It results in increased cost of products and reduction in amount of commodities traded.
• Compound Duties: It is a combination of specific duty and ad valorem duty on a single product. It is partly based on quantity and partly on the value of goods.
• Protective Tariffs
• Revenue Tariffs
• Countervailing and Anti-dumping Duties
• Single column Tariff
• Double column Tariff

As we have discussed, tariff barriers have two-fold objective on the one hand, it helps in increasing government revenue and on the other hand, it provides protection and support to the local industries and companies against foreign competition.

Non-Tariff Barriers

Non-tariff barriers to trade (NTBs; also called non-tariff measures, NTMs) are trade barriers that restrict imports or exports of goods or services through mechanisms other than the simple imposition of tariffs.

The Southern African Development Community (SADC) defines a non-tariff barrier as “any obstacle to international trade that is not an import or export duty. They may take the form of import quotas, subsidies, customs delays, technical barriers, or other systems preventing or impeding trade”. According to the World Trade Organization, non-tariff barriers to trade include import licensing, rules for valuation of goods at customs, pre-shipment inspections, rules of origin (‘made in’), and trade prepared investment measures. A 2019 UNCTAD report concluded that trade costs associated with non-tariff measures were more than double those of traditional tariffs.

Non-tariff barriers refer to non-tax measures used by the country’s government to restrict imports from foreign countries. It covers those restrictions which lead to prohibition, formalities or conditions, making the import of goods difficult and decrease market opportunities for foreign items.

These are quantitative and exchange control that affects the trade volume or prices, or both.

It can be in the form of laws, policies, practices, conditions, requirements, etc., which are specified by the government to restrict import. Hence it encompasses popular trade-distorting practices such as:

• Import quotas: It is a numerical limit on the quantity of goods that can be imported or exported during a specified time period. The quantity may be stated in the license of the firm. If the importer imports more than specified amount, he has to pay a penalty or fine.
• VERs, i.e. Voluntary Export Restraints: It is a quota on exports fixed by the exporting country on the request of the importing country. The exporting country fixes a quota regarding the maximum amount of quantity that will be exported to the concerned nation.
• Subsidiaries: It is the payment made by the government to the domestic producer so that they can compete against foreign goods. It can be a cash grant, subsidized input prices, tax holiday, government equity participation etc. It helps a local firm to reduce costs and gain control over the market.
• Import licensing
• Technical and administrative regulations
• Price control
• Foreign exchange regulations
• Canalization of imports
• Consular Formalities
• Quantity Restrictions
• Pre-shipment inspection
• Rules of origin

(a) Huge foreign indebtness (May lead to unstability of political environment and may lead to nationalisation or limits on profit)

(b) Unstable Government

(c) Foreign exchange problems

(d) Foreign Government entry requirements and bureaucracy

(e) Tariffs and other trade barriers

(f) Corruption

(g) Technological pirating

(h) High cost of production and communication adaptation

1. Tariff Barriers:

Tariff barriers indicate taxes and duties imposed on imports. Marketers of guest countries find it difficult to earn adequate profits while selling products in the host countries. Sometimes, to prevent foreign products and/or promote domestic products, strategically tariff policies are formulated that restricts international marketing activities. Frequent change in tariff rates and variable tariff rates for various categories of products create uncertainty for traders to trade internationally. Antidumping duties levied on imports and defensive strategies create difficulty for exporters.

2. Administrative Policies:

Bureaucratic rules or administrative procedures; both in guest countries and host countries make international (export and/or import) marketing harder. Some countries have too lengthy formalities that exporters and importers have to clear. Unjust dealings to get the formalities/ matters cleared create many problems to some international players. International marketers have to accustom with legal formalities of several courtiers where they wants to operate.

3. Considerable Diversities:

Different countries have their own unique civilization and culture. They pose special problems for international marketers. Global customers exhibit considerable cultural and social diversities in term of needs, preferences, habits, languages, expectations, buying capacities, buying and consumption patterns, and so forth. Social and personal characteristics of customers of different nationalities are real challenges to understand and incorporate. Compared to local and domestic markets, it is more difficult to understand behaviour of customers of other countries.

In the same way, as against domestic markets, to design and modify marketing mix over time for international markets seem more difficult. Market segmentation, product design, pricing, and distribution need more information and efforts. Promoting products in international markets is a formidable task. Message preparation and execution in suitable media in international markets is not easy game to play.

Language and religious diversities are the real challenge for international business players. There are 6000 languages in the world. China (20%) is the largest in term of native speakers, followed by English (6%), and followed by Hindi (5%). Yet English is recognized as global business language.

English speaking countries can contribute the largest share (40%) in global business. Religious diversities seem difficult to cope with as they determine needs and wants of people. At present Christianity is the largest in the world (1.7 billion), followed by Islam (1.0 billion), followed by Hinduism (750 millions), and followed by Buddhism (350 millions).

4. Political Instability or Environment:

Different political systems (democracy or dictatorship), different economics systems (market economy, command economy, and mixed economy), and political instability are some of real challenges that international markers have to face. Political atmosphere in different courtiers offer opportunities or pose challenges to international marketers.

Governments in different nations have their priorities, philosophies, and approaches to the international trades. They may adopt restrictive (protectionist) or liberal approach to international business operations. Especially, political approaches of dominant nations have more influence in international marketing activities.

Long-term trend of global political environment is unpredictable and uncertain. Economic policies of different nations (industrial policies, fiscal policies, agricultural policies, export-import policies, etc.,) do have direct impact on international trade. Drastic change in these policies creates endless difficulties to international traders. While dealing with international markets, international political and legal environment needs a special attention.

5. Place Constraints (Diverse Geography):

Trade in foreign countries of far distance itself practically difficult. In case of perishable products, it is a real challenge. Exporting and importing products via sea route and making arrangements for effective selling involves more time as well risks. Segmenting and selecting international markets require the marketers to be more careful.

6. Variations in Exchange Rates:

Every nation has its currency that is to be exchanged with currencies of other nations. Currencies are traded every day and rates are subject to change. Indian Rupee, European Dollar, US Dollar, Japanese Yen, etc., are appreciated or discounted at national and international markets against other currencies. In case of extraordinary and unexpected moves (ups and downs) in currency/exchange rates between two courtiers create serious settlement problems.

7. Norms and Ethics Challenges:

Ethics refers to moral principles, standards, and norms of conduct governing individual and firm’s behaviour. They are deeply reflected in formal laws and regulations. In different parts of the world, different codes of conduct are specified that every international business player has to observe. However, globalization process has emphasized some common ethics worldwide. Corruption is another issue relating to business ethics.

8. Terrorism and Racism:

Terrorism is a global issue, a worldwide problem. People of the world are living under constant fear of terrorists attracts anywhere in the world. To trade internationally is not economically risky, but there is the threat to life. Racism also restricts international trade activities.

Licensing is a business arrangement in which one company gives another company permission to manufacture its product for a specified payment.

Licensing generally involves allowing another company to use patents, trademarks, copyrights, designs, and other intellectual in exchange for a percentage of revenue or a fee. It’s a fast way to generate income and grow a business, as there is no manufacturing or sales involved. Instead, licensing usually means taking advantage of an existing company’s pipeline and infrastructure in exchange for a small percentage of revenue.

As in this mode of entry the transference of knowledge between the parental company and the licensee is strongly present, the decision of making an international license agreement depend on the respect the host government shows for intellectual property and on the ability of the licensor to choose the right partners and avoid having them compete in each other’s market. Licensing is a relatively flexible work agreement that can be customized to fit the needs and interests of both licensor and licensee. The following are the main advantages and reasons to use an international licensing for expanding internationally:

• Reach new markets not accessible by export from existing facilities.
• Quickly expand without much risk and large capital investment.
• Obtain extra income for technical know-how and services.
• Pave the way for future investments in the market.
• Retain established markets closed by trade restrictions.
• Political risk is minimized as the licensee is usually 100% locally owned.

Benefits and Limitations

In licensing, the licensor gets the advantage of entering the international market at little risk. However, the licensor has little to no control over the licensee, in terms of production, distribution and sales of the product. In addition to this, if the licensee gets success, the firm has given up profits, and whenever the licensing agreement expires, the firm might find that it has given birth to a competitor.

As a prevention measure, there are certain proprietary product components supplied by the licensor itself. Although, innovation is considered as the appropriate strategy so that the licensee will have to depend on the licensor.

On the other hand, the licensee acquires expertise in production or a renowned brand name. It expects that the arrangement will increase the overall sales, which might open the doors to the new market and help in achieving the business objectives. However, it requires a considerable capital investment, to start the operations, as well as the developmental cost is also borne by the licensee.

Reasons

There are many reasons for an intellectual property (IP) owner to grant a license. The most obvious one is to generate revenue from the guarantee and royalty payments. But licensing also can serve a number of other purposes. In some cases, those “other” reasons to license might actually be more important to the licensor than the sheer dollars (or euros, pounds, pesos, won, rupees) that are earned. Among them:

Marketing support for the core business. For a television show, movie, children’s book or sports franchise, the retail display and proliferation of licensed products doesn’t only generate product sales, but it also promotes the core property. An array of toys or apparel tied to a movie, sitting on a store shelf, also helps to promote the movie itself. A sports fan wears a sweatshirt with the logo of her favourite team expresses her enthusiasm about the team, but also subtly promotes the sports, the league and the team to anyone who passes her by on the street. The same goes for a beer brand. Seeing a store display of glassware carrying a well-known beer logo, or walking into a neighbor’s home and seeing the glasses on his bar reinforces the brand image, supporting the brands overall marketing efforts.

Extending a corporate brand into new categories, areas of a store, or into new stores overall. Licensing represents a way to move a brand into new businesses without making a major investment in new manufacturing processes, machinery or facilities. In a well-run licensing program, the property owner maintains control over the brand image and how it’s portrayed (via the approvals process and other contractual strictures), but eventually reaps the benefit in additional revenue (royalties), but also in exposure in new channels or store aisles.

Trying out potential new businesses or geographical markets with relatively small upfront risk. By licensing its brand to a third-party manufacturer, a property owner can try new businesses, or move itself into new countries with a smaller upfront investment than by building and staffing its own operations.

Maintaining control over an original creation. Licensing represents a way for artists and designers to profit from their creative efforts, while maintaining control over how they are used. For brand owners (particularly those doing business in the global marketplace), licensing and registering the brands in multiple markets is a way to protect the brand from being used by others without authorization.

International marketing though it has certain distinct characteristics, is similar to domestic marketing in terms of certain technical attributes. Marketing can be concerned as an internal part of two processes, viz. technical and social. International marketing and Domestic marketing are identic.al, so far as technical process is concerned.

It includes non-human factors such as product, price, cost, brands etc. The basic principles regarding these variables are of universal applicability. But the social aspects of marketing are unique in any given stratum, because it involves human elements, namely, the behaviour pattern of customers and the given characteristics of a society, such as consumers attitude, values etc. It is obvious that marketing, to the extent it is visualized as a social process, will be different from domestic marketing.

Kotler has defined marketing as, “Marketing is the analysis, planning, implementation and control of programmes designed to bring about desired exchanges with target audiences for the purpose of mutual or personal gain. It relies heavily on the adoption and co­ordination of product, price, promotion and place for achieving effective response.”

There are two sets of variables in this definition. One is markets and other one is human needs and wants and a process or techniques to convert potential exchanges into realized exchanges. The techniques involved are more or less similar in both domestic and international marketing. But the variables involved are totally different in case of International Marketing.

Major dimensions to the spills of international marketing:

1. Competence in marketing, with a sound grasp of marketing concepts, tools and techniques.
2. Ability to perceive patterns of consumer behaviour in different countries and the ability to evaluate the essential differences and similarities between markets.
3. Management skill to organise, plan, co-ordinate and control an operation of considerably greater complexity particularly in its human relationships than that involved in the home market.

Features of International Marketing

1. Different Legal System:

Every Country has its own legal system. Some of the countries follow English Common Law while others follow the civil law. Some of the European countries are having their own legal system. This difference in the legal system among different countries increases the difficulties of businessmen.

It is not sure for the businessmen that which legal system will be applicable to their business transactions. There must be uniform legal system. However some of the agencies are trying to make it uniform for all countries. The United Nations Commission on International Trade Law is also supporting the opinion of uniformity and is doing, its efforts to bring uniformity in International trade Law.

2. Market Characteristics:

The Market Characteristics of every Country is different due to the environmental factors, demand patterns, Government Controls etc. In some countries like India and USA the market characteristics are found different from state to state. It is because of all above factors responsible for the market characteristics.

3. Monetary System:

The monetary system of each country is decided by the government of that country and the exchange value of country’s currency is being determined by the forces of supply and demand.

4. Procedure and Documentation:

Every country has its own procedure of documentation requirements for the purpose of experts. Every business house has to comply with these rules and regulation for the purposes of export and imports.

Need and Drivers of International Marketing

1. Survival:

Most of the countries in the world are lacking of market size, resources and opportunities. Therefore, it is their compulsion to trade with other countries for their survival. Since the European Countries are small in size therefore without overseas markets their firms would not have sufficient economies of scale to be competitive with U.S. based firms. It is pertinent to mention here that international competition may not be a matter of choice when the survival is at stake.

Will Mitchell, J. Myles Shaver and Yeung Bernard conducted a study on “Performance following changes in International Presence in Domestic and Transition Industries. In a study of five pharma-sector industries, he found that international expansion is necessary when overseas firms enter a domestic market. He revealed that the firms having substantial market share and international experience expanded their business activities successfully. And all those firms disappeared that retrenched after an international expansion.”

2. Growth of International Market:

Despite having numerous problems like economic and marketing problems, the developing nations are considered be an excellent market to do business. The vast potential of international markets can never be ignored. According to one survey total world market is four time longer in comparison to U.S. Market.

A slow growth of U.S. population and changing life style viewed the growth of other markets with a critical eye. It is evident that Russian smokers show no concern about the health risks. And International giants Philip Moris Co, R.J. Reynolds, Tobacco International SA and British-American Tobacco Co. have entered the market very aggressively.

3. Sales and Profits:

It is clear that there is a large potential to sell the products in the international market. The International Market constitutes a large amount of share of the total business of many firms. Further it is evident that many large U.S. based companies have performed very well in the overseas market. IBM and Compaq are the best examples in this regard.

Both of them have maximized their sales in abroad in comparison to their domestic market. In case of Cocacola it is important to mention here that 80 percent of the total operating profit is contributed by the international sales account of the company. Thus, market is on saturation level, where as there is still a great potential for its future growth in other countries. Thus, it can be concluded that international market provides huge potential to increase sales value and profits of the firms.

4. Benefit from Diversification:

The investors can be benefited from global diversification. It is evident that the demand of certain products is affected by cyclical factors like recession and seasonal factors like climatic change. The sale of such products fluctuates adversely due to all these variables. It is the only solution for such kind of risks, to diversify a company’s risk and to consider foreign market as only solution to overcome with variable demand.

Such markets can provide outlets for excess production capacity and can easily counter such fluctuations. Seasonal factors, for instance, may affect consumption level of soft drinks. And keeping in mind such limitation, the soft drink industries are spreading their marketing activities throughout the global market. It has been observed that global selling has enabled the company to carry on with production throughout the year and help the companies to stabilize their business.

5. Inflation and Price Modernization:

The benefits of international trade are readily self-evident. Exports are always considered beneficial to a country. On the other hand, imports can also be highly beneficial to a country. Because there is not any incentive for domestic firms to moderate these prices. The lack of alternatives in imported products may compel consumers to pay more for the products to local firms, resulting in inflation and excess profits for local firms.

It is evident that in Europe, when the prices of orange Juice were jumped up, their customers switched over to other alternative drinks. Finally, it took ten years for citrus industry to win back these consumers. The U.S. orange growers finally compromised to live with import as they found that alternative juice is able to keep consumers by minimizing the price increases.

6. International Marketing and Standard of Living:

International marketing helps the countries and their citizens to increase their standard of living. On the other hand, without trade, there may be product shortage and which may force people to pay more or less. International trade makes easy for industries to get specialization and gain access to raw materials.

And at the same time, it fosters competition and efficiency. In overall it leads to the conclusion that international trade is helpful to provide their citizen higher standard of living.

International marketing is the application of marketing principles by industries in one or more than one country. It is possible for companies to conduct business in almost any country around the world, thanks to the advances in international marketing.

Marketing your brand at a global level is a complicated thing to do since you have to take care of a lot of things. Every business firm wants to develop a successful international marketing process. However it is totally a different thing to do so as compared to local marketing where you understand the audience very well.

In simple words, international marketing is trading of goods and services among different countries. The procedure of planning and executing the rates, promotion and distribution of products and services is the same worldwide.

Process of International Marketing

1. Motivation for International Marketing: For an organisation the motivation for entering international market can be any or all of the following:

• Growth
• Profitability
• Economies of Scale
• Risk Spread

4. Research and Analysis: Market research is done to Analyse the organization’s strength and weakness, opportunities available in international markets, and threats in international markets.
5. Decision to Enter International Markets: After identification of potential opportunities in international market decisions are taken to enter international market. Such decisions include identification of potential buyers in international markets, demand measurement and forecasting, market segmentation, market targeting and market positioning.
6. International Marketing Mix: At this step international marketing mix is developed. Marketing mix identifies four key areas; Product, Price, Place, and Promotion for developing a well coordinated marketing strategy.
7. Consolidate Marketing Efforts: Developing a good marketing program is not enough a marketing organisation need to manage the international marketing effort properly. Marketing organisations also need proper analysis, planning, implementation and control of their marketing efforts.

Phases of International Marketing

Deciding to Internationalize

The first decision is whether the firm should take up international marketing or not. This decision is based on number of important factors:

• Present and future overseas opportunities
• Present and future domestic opportunities
• Resources of the company
• Company objectives

International marketing offers a number of advantages. At the same time, international marketing is subject to a number of risks. The decision to internationalize requires the evaluation of international strengths, weaknesses, opportunities and threats. This is done by SWOT analysis. If the SWOT analysis is favourable to the firm, the firm should decide to venture into the foreign market.

Market Selection

Once it has been decided to internationalize, the next important step is the selection of most appropriate market i.e., identifying the target customers. For this purpose, a thorough analysis of the potentials of the various overseas markets and their respective marketing environments is essential. A careful exercise to shortlist overseas markets becomes necessary since all products cannot be sold by the firm to all countries at all times. It is considered better to exert maximum pressure on a minimum area to achieve the best results.

Important criteria which may be used in the market selection:

Geographical proximity: The first criterion of market selection is the geographical proximity. Geographical proximity facilitates a firm to reach the product fast to a nearby country and service the market quickly and more effectively. Besides, there will be low transportation cost leading to lesser price of the product.

Market potential of the country: A company may select its target markets on the basis of market potential of the country. Market potential of the country can be assessed by the prosperity of the country, the size and growth of its imports, etc.

Market Access: Another yardstick that a country may use in market selection relates to the market access. A country’s import policy is an important factor, because it may be biased in favour of some items and/or some countries. It is advisable for a company to select countries which do not discriminate against the country of the firm and whose import policy is not restrictive.

It would be highly beneficial for a company if it selects countries having good political and economic relationships with home country or having some preferential trading arrangement also or having least restrictions on imports.

Market characteristics: Another factor to be considered in the selection of the market is the market characteristics of the country. A company would like a market having similar cultural factors, trade practices and customs.

Product Selection

Once the market selection decision has been made, the next important task is to determine the products for export. Following are some important criteria which may be used in the product selection:

Elasticity of supply: A company would not face any supply constraint in exporting the products having elastic supply. Elastic supply is the result of natural resource endowment or acquired skills and assets. A company may also select a product because the product is unique i.e., it has developed it by research and development and it is likely to take some time before competitors come out with a suitable substitute. A company should not prefer exports of the products which are heavily dependent on imported inputs.

Demand of the Products: A company should identify the products that are in demand and likely to continue to be in demand in an overseas country. For this the company has to make the analysis of a country’s imports and production of various commodities including substitutes and the likely future policies and plans regarding such commodities.

Selection of Entry Mode

After the selection of market and product, the next important decision is to determine the appropriate mode of entering the foreign market. At one extreme a company may decide to produce the product domestically and export it to the foreign market. In this case, the company need not make any investment overseas.

On the other extreme, the company may establish manufacturing facilities in, the foreign country to sell the product there. This policy requires direct foreign investment by the company. In between these two extremes, there are several options each of which demand different levels of foreign investment.

Following are various entry modes in the foreign markets:

Exporting: Exporting means sale of domestically produced goods in other country without any marketing or production or organization overseas. Exporting may be of two types: Direct exporting and Indirect exporting. Direct exporting means sale of goods abroad without involving middlemen. In case of indirect exporting, a firm sells its products abroad through middlemen.

Licensing: Under licensing an international business firm (licensor) allows a foreign company (licensee) to manufacture its product for sale in the licensee’s country and sometimes in other specified markets.

Franchising: Franchising is a special form of licensing in which an international business company (franchiser) grants another independent company (franchisee) right to do its (franchiser’s) business in a prescribed manner. Franchiser makes a total marketing programme available to the franchisee.

Contract Manufacturing: Under contract manufacturing, an international marketing company enters into contract with a local enterprise abroad to manufacture its product and undertakes the marketing responsibility on its own.

Joint Venture: An international joint venture is an enterprise formed abroad by the international business company sharing ownership and control with a local company in that foreign country.

Strategic Alliance: Under strategic alliance, two or more competing firms pool their resources in a collaboration to leverage their critical capabilities for common gain. Although a new entity may be formed, it is not an essential requirement.

Assembly: Under assembly an international business firm produces most of the components or ingredients in one or more countries and carries out the labour-intensive assembling in the foreign country where labour is cheap and abundant.

Mergers and Acquisitions: Under merger an international business firm absorbs one or more enterprises abroad by purchasing the assets and taking over liabilities of those enterprises on payment of an agreed amount. Under acquisition, an international business enterprise takes over the management of an existing company abroad by taking the controlling stake in the equity of that company at a predetermined price.

Each of these strategies has certain advantages and disadvantages. Each of these strategies require different levels of investment ranging from no additional investment to full investment in manufacturing facilities abroad, and the risks also increase with increase in the investment level Similarly, control over the market may be higher if the company involves itself directly in manufacturing by investments in production facilities.

Various entry strategies must be analysed in following respects:

• Expected sales
• Costs of operations in a foreign country
• Assets
• Profitability
• Risk factors

The selection of a company’s best method of entry into foreign markets depends on following factors:

• Number of markets covered
• Level of penetration within markets
• Degree of feedback available
• Possibility of sales volume over a period of time

Selection of Marketing Strategy or Marketing Mix Decision

The foreign market is characterized by a number of uncontrollable variable Marketing mix consists of internal factors which are controllable. The success of the international marketing therefore, depends to a large extent on the appropriateness of the marketing mix.

Following are the elements of the marketing mix:

Product strategy: In the present day competitive global market environment marketing begins with customer and ends with the customer. The importers will import only those items which are in demand from the customers.

The exporters have to, therefore, identify what the consumers in the overseas markets require. It is imperative that the product selected for exports should be unique, creative and innovative in comparison to the similar item being offered by the competitors. As the, consumer preferences, tastes and regulations governing product, quality, safety, health, environment protection, packaging and packing vary from one market to another, same item cannot be offered in all the markets.

An analysis should be made of any modifications required in the products, packaging changes needed, labelling requirements, brand name and after-sales services expected.

Many products must undergo significant modifications if they are to satisfy consumer and market requirements abroad. Other products require changes at the discretion of the producer only to enhance their appeal on export markets. Products may be modified in respect of quality, size, shape, colour, material etc. Product strategy includes packaging, branding and product service.

Pricing strategy: Pricing decision is one of the basic marketing decisions. Most importers would decide to buy the product finally on the basis of comparison of price of competing products. Pricing, strategy is closely linked to the cost of the product and other factors influencing the cost. In setting the export price, the business firm should consider additional costs that do not enter into pricing for the domestic market.

These include such items as international freight, insurance charges, product adaptation costs, import duties, commissions for import agents and foreign exchange risk coverage. A company should decide whether it should charge the same net price for a particular product in all its markets or different prices in different markets.

Export pricing analysis should begin with these questions: What value does the target market segment place on the business firm’s product? How do differences in the product add to, or to detract from its market value? In practice, these are difficult questions to research but analyzing the prices and product characteristics of existing competitive products may reveal critical information.

In practice, it is not the cost that determines the product’s price but the customer’s perception of that value. A firm may not have much choice in export pricing beyond a point because it has to match competitor’s price. Extension of credit is part of the pricing strategy.

Distribution strategy: A company should work out its distribution strategy very carefully so that its product reaches the consumer at the right place and right time with reasonable cost. The potential exporter should consider the following distribution on options:

• Exporting through a domestic exporting firm that will take over full responsibility for finding sales outlets abroad.
• Setting up its own export organization.
• Selling through representatives abroad.
• Using warehouses abroad.
• Establishing a subsidiary.

The choice of distribution channel will depend on the firm’s export strategy and export market. A company should be very clear about the division of risks, responsibilities and privileges between it and the distributors and the cost of distribution. Part of the distribution strategy relates to agency arrangements in overseas countries.

When it is intended to create greater awareness of the product, it is better to appoint an agent who does not handle many products and can allocate the time needed to promote that product.

Promotion strategy: The company should decide on the optimum promotion mix i.e., advertisement, personal selling and sales promotion. The export marketing plan should provide details on the following aspects of the promotional strategy:

• Publicity methods
• Advertising (who will be responsible for it and how much the firm can allocate to it)
• Trade missions
• Buyer’s visits
• Local export assistance

Promotion strategy to be adopted by the exporter should be in tune with the environmental rules and regulations of the host country. Further, promotion strategy should take into account the culture of the target segment in terms of its practices, beliefs, likes and dislikes, religion etc.

International Organization Decision

The last step involved in the international marketing process involves decision regarding the international organization. There are different organizational structures for doing international business.

The Structure is determined by the following factors:

• Extent of commitment of the organization to the international business.
• Nature of international orientation.
• Size of international business and expansion plans.
• Number and consistency of product lines
• Characteristics of the foreign markets.

A firm may organize its international marketing operations in three ways:

• Creation of export department
• Setting up an international division
• Development of a global organization

The export department is the simplest form of export organization and easiest to establish. A separate export department is established to take effective care of all the activities connected with the export business. The internal organizational structure of the export department may be based upon functions, territory, product or a combination of these. A separate export department may be located at the most suitable place which may not be the headquarters of the company.

A wholly owned subsidiary is a company whose common stock is 100% owned by another company, the parent company. Whereas a company can become a wholly owned subsidiary through an acquisition by the parent company or having been spun off from the parent company, a regular subsidiary is 51% to 99% owned by the parent company.

When lower costs and risks are desirable or when it is not possible to obtain complete or majority control the parent company might introduce an affiliate, associate, or associate company in which it would own a minority stake.

A wholly owned subsidiary is a business operation in a foreign country that a firm fully owns. A firm can develop a wholly owned subsidiary through a greenfield venture, meaning that the firm creates the entire operation itself. Another possibility is purchasing an existing operation from a local company or another foreign operator.

Regardless of whether a firm builds a wholly owned subsidiary “from scratch” or purchases an existing operation, having a wholly owned subsidiary can be attractive because the firm maintains complete control over the operation and gets to keep all of the profits (or losses) that the operation makes. A wholly owned subsidiary can be quite risky, however, because the firm must pay all of the expenses required to set it up and operate it.

Advantages

• Easy to manage as the strategic decision-making lies with the parent company.
• Due to 100% control, it is easier to follow the parent company policies and procedures thus helping the group to achieve synergies.
• The subsidiary company gets a tag of the parent group since it is merged in the group fully due to the 100% acquisition.
• Results are been grouped under the parent company at each balance sheet date.
• It increases the valuation of the subsidiary company since now it is under the umbrella of the parent group which is a big brand in the market.
• The subsidiary company gets a good brand name by getting acquired by the top brand thus increasing the valuation and the market share of the parent company by acquiring an established player in the market.
• Building relations with customers and investors become easy if the parent has strong connections in the market.

Disadvantages

• Identification of M&A opportunities in the industry is a tough task.
• Establishing relationships among vendors, regulators, bankers, investors, lenders take a lot of time since they are unaware of the functioning of the subsidiary.
• Acquiring a new company or an existing company requires a lot of time working on the diligence process and finally closing the transaction.
• Company operations and cultural differences can be a major concern.
• In the case of a cross border acquisition, there are many regulatory laws that affect the functioning of the subsidiary. eg: In the parent company, a particular project might be permissible however in the subsidiary company, the local laws in the country may not permit it.