Modes of Entering International Business

Objectives
After studying this unit, you should be able to:
 Discuss the Strategic Decisions an International Business makes
while Entering Foreign Markets
 State the Benefits and Limitations
 Explain the concept of Joint Ventures
 Describe Strategic Alliances
 Discuss about Franchising
 Describe the concept of Direct Investment
 Explain Contract Manufacturing
 Identify the Methods of Exporting
Introduction
The market for a number of products tends to saturate or decline in the
advanced countries. This often happens when the market potential has
been almost fully tapped. In the United States, for example, the number
of several consumer durables like cars, TVs etc. is almost equal to the
total number of household. Further the technological advances have
increased the size of the optimum scale of operation substantially in
many industries making it necessary to have foreign market, in addition
to domestic market to take advantage of scale economies. Again when
the domestic market is very small, internationalization is the only way to
achieve significant growth. For example Nestle derives only about 2 per
cent of its total sales from its home market Switzerland. Similarly with
only 8 per cent of the total sales coming from the home market, Holland,
many different national subsidiaries of the Philips have contributed
much larger share of the total revenues than the parent company. In
order to overcome this problem and gain other advantages such as
growth opportunity, increase profits, global recognition and spin off
benefits, businesses enter the international markets.
Different Entry Modes
Mergers and acquisitions (M&A) and corporate restructuring are a big
part of the corporate finance world. Every day, Wall Street investment
bankers arrange M&A transactions, which bring separate companies
together to form larger ones. When they're not creating big companies
from smaller ones, corporate finance deals do the reverse and break up
companies through spinoffs, carve-outs or tracking stocks.
One plus one makes three: this equation is the special alchemy of a
merger or an acquisition. The key principle behind buying a company is
to create shareholder value over and above that of the sum of the two
companies. Two companies together are more valuable than two
separate companies - at least, that's the reasoning behind M&A.
This rationale is particularly alluring to companies when times are
tough. Strong companies will act to buy other companies to create a
more competitive, cost-efficient company. The companies will come
together hoping to gain a greater market share or to achieve greater
efficiency. Because of these potential benefits, target companies will
often agree to be purchased when they know they cannot survive alone.
Types of Merger
From the perspective of business structures, there is a whole host of
different mergers. Here are a few types, distinguished by the relationship
between the two companies that are merging:
 Horizontal merger: Two companies that are in direct competition
and share the same product lines and markets.
 Vertical merger: A customer and company or a supplier and
company. Think of a cone supplier merging with an ice cream
maker.
 Market-extension merger: Two companies that sell the same
products in different markets.
  Product-extension merger: Two companies selling different but
related products in the same market.
 Conglomeration: Two companies that have no common business
areas.
There are two types of mergers that are distinguished by how the merger
is financed. Each has certain implications for the companies involved
and for investors:
 Purchase Mergers: As the name suggests, this kind of merger
occurs when one company purchases another. The purchase is
made with cash or through the issue of some kind of debt
instrument; the sale is taxable.

Acquiring companies often prefer this type of merger because it

can provide them with a tax benefit. Acquired assets can be
written-up to the actual purchase price, and the difference between
the book value and the purchase price of the assets can depreciate
annually, reducing taxes payable by the acquiring company.

 Consolidation Mergers: With this merger, a brand new company is

formed and both companies are bought and combined under the
new entity. The tax terms are the same as those of a purchase
merger.
Acquisitions
As you can see, an acquisition may be only slightly different from a
merger. In fact, it may be different in name only. Like mergers,
acquisitions are actions through which companies seek economies of
scale, efficiencies and enhanced market visibility. Unlike all mergers, all
acquisitions involve one firm purchasing another - there is no exchange
of stock or consolidation as a new company. Acquisitions are often
congenial, and all parties feel satisfied with the deal. Other times,
acquisitions are more hostile.
In an acquisition, as in some of the merger deals we discuss above, a
company can buy another company with cash, stock or a combination of
the two. Another possibility, which is common in smaller deals, is for
one company to acquire all the assets of another company. Company X
buys all of Company Y's assets for cash, which means that Company Y
will have only cash (and debt, if they had debt before). Of course,
Company Y becomes merely a shell and will eventually liquidate or
enter another area of business.
Another type of acquisition is a reverse merger, a deal that enables a
private company to get publicly-listed in a relatively short time period.
A reverse merger occurs when a private company that has strong
prospects and is eager to raise financing buys a publicly-listed shell
company, usually one with no business and limited assets. The private
company reverse merges into the public company, and together they
become an entirely new public corporation with tradable shares.
Regardless of their category or structure, all mergers and acquisitions
have one common goal: they are all meant to create synergy that makes
the value of the combined companies greater than the sum of the two
parts. The success of a merger or acquisition depends on whether this
synergy is achieved.
Difference between Mergers & Acquisitions
Merger and acquisition is often known to be a single terminology
defined as a process of combining two or more companies together. The
fact remains that the so-called single terminologies are different terms
used under different situations. Though there is a thin line difference
between the two but the impact of the kind of completely different in
both the cases.
Merger is considered to be a process when two or more companies come
together to expand their business operations. In such a case the deal gets
finalized on friendly terms and both the companies share equal profits in
the newly created entity.
When one company takes over the other and rules all its business
operations, it is known as acquisitions. In this process of restructuring,
one company overpowers the other company and the decision is mainly
taken during downturns in economy or during declining profit margins.
Among the two, the one that is financially stronger and bigger in all
ways establishes it power. The combined operations then run under the
name of the powerful entity who also takes over the existing stocks of
the other company.
Another difference is, in an acquisition usually two companies of
different sizes come together to combat the challenges of downturn and
in a merger two companies of same size combine to increase their
strength and financial gains along with breaking the trade barriers. A
deal in case of an acquisition is often done in an unfriendly manner, it is
more or less a forceful or a helpless association where the powerful
company either swallows the operation or a company in loss is forced to
sell its entity. In case of a merger there is a friendly association where
both the partners hold the same percentage of ownership and equal profit
share.

Licensing
There is no nationally recognized license specifically for merger and
acquisition ("M&A") or business broker services. Accordingly, most
practitioners have relied upon state real estate broker licenses for their
transaction activities. Most states require a realty license to sell a
business property, and some states stipulate that a broker must hold a
realty license to sell a business. Therefore, over time, the real estate
broker license became the defacto license for this niche service.
Reliance upon a real estate license, alone, has been problematic for some
dealmakers for certain transactions. For instance, there are cases where a
business broker sells a business that has locations or stores in multiple
states where the broker may not be licensed. In those instances, they
would either co-broker or forgo the fee for those properties. Additional
confusion arose when a buyer was located from a different state from
which the seller and broker were located. Issues like these were handled
on a case-by-case basis between the principals involved and their
attorneys, and in some cases the courts.
Another area of concern arose when the buyer purchased the stock of the
small business versus the assets. Was this a sale of securities or not?
Section 15(a)(1) of the Securities Exchange Act of 1934 makes it
unlawful for any person or entity to "effect any transactions in, or to
induce or attempt to induce the purchase or sale of, any security" unless
such person or entity is registered as a broker or dealer with the
Securities and Exchange Commission ("SEC"). Section 3(a)(4)(A)
defines a broker as any person engaged in the business of effecting
transactions in securities for the account of others. State securities
boards have adopted similar rules.
The SEC has issued several no-action letters regarding the registration
requirements for people or entities that act as business brokers or
finders. It is beyond the scope of this article to delve into each of these
letters; however, this patchwork of no-action letters has formed the
guidance for determining whether a small business stock sale qualifies
as a security, thereby requiring registration for the professional and firm
involved.
Establishing a joint venture with a foreign firm has long been popular
mode for entering a new market. The most typical joint venture is a
50/50 venture, in which there are two parties, each of which holds a 50
percent ownership stake and contributes a team of managers to share
operating control.
It can also occur between two small businesses that believe partnering
will help them successfully fight their bigger competitors. While
forming a joint venture, a company should keep in mind the following:
 Before a company forms a joint venture, they will need to look for
partners to join them.
 When a company has its partner(s) chosen, agree on the terms of
partnership such as who takes on what tasks, what they both earn
from the business, solutions to conflicts that may arise, including if
one, both, or all of them want to exit the business.
 Every partner will have to agree on the type of structure that the
business is to have.

Strategic Alliances
A strategic alliance is when two or more businesses join together for a
set period of time. The businesses, usually, are not in direct competition,
but have similar products or services that are directed toward the same
target audience.
In the new economy, strategic alliances enable business to gain
competitive advantage through access to a partner’s resources, including
markets, technologies, capital and people.
Teaming up with others adds complementary resources and capabilities,
enabling participants to grow and expand more quickly and efficiently.
The goal of alliances is to minimize risk while maximizing your
leverage and profit. Alliances are often confused with mergers,
acquisitions, and outsourcing.
Franchising
Franchising is basically a specialized form of licensing in which the
franchiser not only sells intangible property to the franchisee, but also
insists that the franchisee agree to abide by strict rules as how it does
business. The franchiser will also often assist the franchisee to run the
business on an ongoing basis.
While licensing works well for manufacturers, franchising is often suited
to the global expansion efforts of service and retailing.
Example: McDonald’s, Tricon Global Restaurants (the parent of Pizza
Hut, Kentucky Fried Chicken, and Taco Bell), and Hilton Hotels have
all used franchising to build a presence in foreign markets.
Different Types of Franchising
Product Franchise
With this the manufacturer uses the franchise agreement to determine
how the product is distributed by the person buying the franchise.
Manufacturing Franchise
The franchisee is permitted to manufacture the products under license
and sell them using the originator’s trademark and name.
Business Franchise Venture
The franchisee purchases and distributes the products for the franchise
owner. A client base is provided by the product owner for the franchisee
to maintain.
A Business Format Franchise
This opportunity is very popular, and involves providing the franchisee a
proven business model using a recognized product and brand. Training
is provided by the franchise owner and assistance in setting up the
business. Supplies are purchased from the franchisor and the franchisee
pays a royalty fee.
Social Franchising
In recent years, the idea of franchising has been picked up by the social
enterprise sector, which hopes to simplify and expedite the process of
setting up new businesses. A number of business ideas, such as soap
making, whole food retailing, aquarium maintenance, and hotel
operation, have been identified as suitable for adoption by social firms
employing disabled and disadvantaged people. Social franchising also
refers to a technique used by governments and aid donors to provide
essential clinical health services in the developing world.
Event Franchising
Event franchising is the duplication of public events in other
geographical areas, while retaining the original brand (logo), mission,
concept and format of the event.
Benefits of Franchising
There are several benefits of franchising. The major benefits include:
Branding
The first thing Franchises offer franchisees is a strategic identity that is
not only effective, it has cumulative market impact. Corporate Brand
Identities are proven.
Advertising
Advertising can be one of the biggest expenses for any new business and
for good reason. You can’t survive without effective advertising and
effective advertising is expensive.
Name Recognition
People today want guarantees like never before and name/menu/brand
recognition gives them that assurance. You get to take advantage of the
fact that a family from out-of-state, for instance, who has previously
enjoyed your franchise’s products and services, will think nothing of
visiting your facility because of their past positive experiences.
Reputation
The reputation of the franchise is important enough, it is what breeds
positive expectations that keep patrons loyal, but this benefit coupled
with a built-in umbrella of legal protection is an incredible bonus and
one you cannot get as an independent.
Support
Franchisors want you to be successful and they make themselves
available every step of the way. After all, they want to keep selling
franchises and high success ratios keep potential franchisees coming.
Limitations
The disadvantages/limitations of franchises are:
Loss/Lack of Control
Independent franchises often have to follow the guidelines set forth by
the franchise including what kinds of tables to use, wallpapers and more.
If you don’t want to give up that control, this won’t be the business for
you.
Less Long-term Profits
Franchises are a big business but making it rich isn’t always there.
You’ll earn a decent income but nothing like Microsoft or any other
Fortune 500 company.
Hard to Sell
When you have a franchise, it’s harder to get out from underneath it
especially if it seems the parent company is having problems.
Possibility of Parent Company Going Out of Business
It doesn’t matter if your business is doing well or not; if the parent
company goes under, so will you. Make sure you choose a company
that’s been doing well, both in good times and in bad.
Possibility of Getting a Bad Name
When a franchise fails to do well, you could be indirectly affected by it.
Your reputation will be tarnished just because of the name.

Contract Manufacturing
Contract manufacturing is a process that established a working
agreement between two companies. As part of the agreement, one
company will custom produce parts or other materials on behalf of their
client. In most cases, the manufacturer will also handle the ordering and
shipment processes for the client. As a result, the client does not have to
maintain manufacturing facilities, purchase raw materials, or hire labor
in order to produce the finished goods.
The basic working model used by contract manufacturers translates well
into many different industries. Since the process is essentially
outsourcing production to a partner who will privately brand the end
product, there are a number of different business ventures that can make
use of a contract manufacturing arrangement. There are a number of
examples of pharmaceutical contract manufacturing currently
functioning today, as well as similar arrangements in food
manufacturing, the creation of computer components and other forms of
electronic contract manufacturing. Even industries like personal care and
hygiene products, automotive parts, and medical supplies are often
created under the terms of a contract manufacture agreement.
Benefits and Limitations of Contract Manufacturing
When working with contract manufacturing there are advantages and
disadvantages. The advantages are lower costs, flexibility, access to
outside expertise in selling the product, and lower capital requirements,
since there is no need to produce anything. Contract manufacturing
works if the company gets involved with the right company. If the
company were to get involved in the wrong company, the whole process
will not work. Or, the company engaging in the contract with the
manufacturer may assume too much or make the wrong assumptions.
For one thing, it is hard to track prices when the market changes,
because the emphasis may be placed on the wrong company. Another
problem that can occur is the company may need to deal with suppliers
for the products they are selling. However, the supplier may only want
to do deal with the original manufacturer. This may limit the company
from obtaining supplies.
In order to gain the benefits of using contract manufacturing, it is best to
take a strategic approach. Here are the areas you can focus on that will
help you better prepare manage contract manufacturing:
Timing and reason: In order for contract manufacturing to work, the
timing has to be right. Is it the right time to get involved in contract
manufacturing? What is the reason for getting involved with contract
manufacturing? Did you analyze your position and see the need to get
into outsourcing? Does the company you want to get involved with offer
a product that is well received?
Right mindset: In order to enter into a contract manufacturing deal, the
company that wants to get involved must have the right mindset. They
may want to look at the deal as if it is really an in-house arrangement.
The basic precise here is the company wants to have a certain amount of
control with the product. They want products that are known to sell and
can be predicted as to what areas or territories the products will sell well
at, so as to engage in affective marketing.
Effective organization: To handle contract manufacturing, the business
has to be developed and be effective in selling the product that he is
contracted to sell. This is very important or the whole process will not
work. There has to be stability in place along with the ability to keep
grow and expand as the need arises.
Exporting
The term “export” is derived from the conceptual meaning as to ship the
goods and services out of the port of a country. The seller of such goods
and services is referred to as an “exporter” who is based in the country
of export whereas the overseas based buyer is referred to as an
“importer”. In International Trade, “exports” refers to selling goods and
services produced in home country to other markets.
There are a number of factors were important in contributing to
successful exporting:
 commitment of the firms’ management
 an exporting approach in the firm which emphasized the
importance of augmenting and maintaining skills
 a good marketing information and communication system
 sufficient production capacity and capability, product superiority
and competitive pricing
 effective market research to reduce the psychic distance between
the home country and target country market given that it is
knowledge that generates business opportunities and drives the
international process
 an effective national export policy which provides support at an
individual firm level, and emphasizes the need for knowledge-
based programs which prioritize market information about foreign
market opportunities.
Selection of Exporting Method
The choice of the specific individual markets for exporting was
discussed in the first section of this book, but it is important to re-
emphasise that the more subjective factors, such as a senior executive’s
existing formal or informal links, particular knowledge of culture or
language and perceived attractiveness of markets, may well influence an
individual firm’s decision.
Once individual markets have been selected and the responsibilities for
exporting have been allocated, the decision needs to be taken about
precisely how the firm should be represented in the new market.
In a large market, particularly if a high level of market knowledge and
customer contact is needed, it may be necessary to have a member of the
firm’s staff resident in or close to the market. This cannot be justified if
the market is small or levels of customer contact need not be so high.
Alternatively a home-based sales force may be used to make periodic
sales trips in conjunction with follow-up communications by telephone,
fax and e-mail.
Many other factors will affect the cost/benefit analysis of maintaining
the company’s own staff in foreign markets, such as whether the market
is likely to be attractive in the long term as well as the short term and
whether the high cost of installing a member of the firm’s own staff will
be offset by the improvements in the quality of contacts, market
expertise and communications. The alternative, and usually the first
stage in exporting, is to appoint an agent or distributor.
Agents
Agents provide the most common form of low cost direct involvement in
foreign markets and are independent individuals or firms who are
contracted to act on behalf of exporters to obtain orders on a commission
basis. They typically represent a number of manufacturers and will
handle non-competitive ranges. As part of their contract they would be
expected to agree sales targets and contribute substantially to the
preparation of forecasts, development of strategies and tactics using their
knowledge of the local market.
The selection of suitable agents or distributors can be a problematic
process. The selection criteria might include:
 The financial strength of the agents.
 Their contacts with potential customers.
 The nature and extent of their responsibilities to other
organizations.
 Their premises, equipment and resources, including sales
representatives.
Clearly, the nature of the agreement between the firm and its agent is
crucial in ensuring the success of the arrangement, particularly in terms
of clarifying what is expected of each parry, setting out the basis for the
relationships that will be built up and ensuring that adequate feedback on
the market and product development is provided. There are various
sources for finding a suitable agent at low cost to the exporter:
 Asking potential customers to suggest a suitable agent.
 Obtaining recommendations from institutions such as trade
associations, chambers of commerce and government trade
departments.
 Using commercial agencies.
 Using agents for non-competing products.
 Poaching a competitor’s agent.
 Advertising in suitable trade papers.

Distributors
Agents do not take ownership of the goods but work instead on
commission, sometimes as low as 2-3 per cent on large volume and
orders. Distributors buy the product from the manufacturer and so take
the market risk on unsold products as well as the profit. For this reason,
they usually expect to take a higher percentage to cover their costs and
risk.
Distributors usually seek exclusive rights for a specific sales territory
and generally represent the manufacturer in all aspects of sales and
servicing in that area. The exclusivity, therefore, is in return for the
substantial capital investment that may be required in handling and
selling the products. The capital investment can be particularly high if
the product requires special handling equipment or transport and storage
equipment in the case of perishable goods, chemicals, materials or
components.
The issue of agreeing territories is becoming increasingly important, as
in many markets, distributors are becoming fewer in number, larger in
size and sometimes more specialized in their activity. The trend to
regionalization is leading distributors increasingly to extend their
territories through organic growth, mergers and acquisitions. Also within
regional trading blocs competition laws are used to avoid exclusive
distribution being set up for individual territories.

Direct Marketing
Direct marketing is concerned with marketing and selling activities
which do not depend for success on direct face-to-face contact and
include mail order, telephone marketing, television marketing, media
marketing, direct mail and electronic commerce using the Internet. There
is considerable growth in all these areas largely encouraged by the
development of information and communication technology, the
changing lifestyles and purchasing behavior of consumers and the
increasing cost of more traditional methods of entering new markets.
The critical success factors for direct marketing are in the
standardization of the product coupled with the personalization of the
communication. Whilst technical data about the product might be
available in one language, often English, the recipients of the direct
marketing in international markets expect to receive accurate
communications in their domestic language. International direct
marketing, therefore, poses considerable challenges, such as the need to
build and maintain up to-date databases, use sophisticated multilingual
data processing and personalization software programs, develop reliable
credit control and secure payment systems.
However, it also offers advantages, Whereas American firms have had
trouble breaking into the Japanese market, catalogue firms have been
highly successful as they are positioned as good value for money for
well-known clothing brands compared to Japanese catalogues which are
priced higher for similar quality items.
Direct marketing techniques can also be used to support traditional
methods of marketing by providing sales leads, maintaining contact or
simply providing improved customer service through international call
centers. Where multiple channels are used for market entry, especially e-
commerce, it is the integration of channels through Customer
Relationship Management that is essential to ensure customer
satisfaction.
 Globalization
Objectives
After studying this unit, you should be able to:
 Realize the trends in the emerging global economy
 Identify the drivers of globalization
 Describe the concept of ‘globalization of markets’
 Discuss the policy issues in globalization
Introduction
A fundamental shift is occurring in the World economy. We are rapidly
moving from a world in which national economies were relatively self-
contained entities, isolated from each other by barriers to cross border
trade and investment; by distance, time zones, and language and by
national differences in Govt., regulation, culture and business systems –
And we are moving towards a world in which barriers to cross- border
trade and investment are tumbling, perceived distance is shrinking due to
advances in transportation and telecommunication technology, material
culture is starting to look similar the world over and national economies
are merging into an inter dependent global economic system. The
process by which this is happening is currently reported as globalization.
International Monetary Fund defines Globalization as “the growing
interdependence of countries worldwide through increasing volume and
variety of cross border transactions in goods and services and of
international capital flows and also through the more rapid and wide
spread diffusion of technology”.
Charles U.L. Hill defines globalization as “The shift towards a more
integrated and interdependent World Economy. Globalization has two
main components-the globalization of markets and Globalization of
production.”
Interdependence and integration of individual countries of the World
may be called as Globalization. Thus, globalization integrates not only
economies but also societies.

Emerging Global Economy

The decades of the 1980s and 1990s brought transitions in the political,
economic, technological, and environmental arenas. Some of these
changes continue to reshape our work and non-work lives, much as the
early Industrial Revolution did during the mid-1800s. This revolution is
fuelling increased globalisation. Globalisation has made a big world
smaller.
Globalization affects trade, finance, production, communications, and
technological change. When we look at the world map, we need to think
about how this global community of people and nations is being
systematically drawn closer together.
Example: At Distributed Service Systems, a small full-service computer
company located in Reading, Pennsylvania, a technical consultant sits at
a terminal and solves assembly line production problems at Carpenter
Technology steel plants in India, China, Mexico, and Taiwan. At the
same time, a major U.S. global manufacturer in Green Bay, Wisconsin,
has a small staff of foreign currency traders working twenty-four hours a
day to manage the firm’s global financial needs and resources.
Since 1980, world exports (goods leaving a country) have increased 194
per cent, and U.S. imports (goods coming into the country) have more
than tripled. In 1980, total U.S. trade equalled 9 per cent of Gross
Domestic Product (GDP), and Gross National Product (GNP), both of
which measure the annual output of goods and services; in 2004, it
amounted to 26 per cent. Nations have found it cheaper and more
efficient to trade more with each other than to produce all their products
at home.
The last quarter of century has seen rapid changes in the global
economy. Barriers to the free flow of goods, services, and capital have
been coming down. The volume of cross-border trade and investment
has been growing more rapidly than global output, indicating that
national economies are becoming more closely integrated into a single,
interdependent, global economic system.
The move toward a global economy has been further strengthened by the
widespread adoption of liberal economic policies by countries that for
two generations or more were firmly opposed to them. Country after
country, we are seeing state-owned businesses privatized, widespread
deregulation, markets being opened to more competition, and increased
commitment to removing barriers to cross-border trade and investment.
BRICS
BRICS is the title of an association of leading emerging economies,
arising out of the inclusion of South Africa into the BRIC group in 2010.
As of 2012, the group's five members are Brazil, Russia, India, China
and South Africa. With the possible exception of Russia, the BRICS
members are all developing or newly industrialized countries, but they
are distinguished by their large, fast-growing economies and significant
influence on regional and global affairs. As of 2012, the five BRICS
countries represent almost 3 billion people, with a combined nominal
GDP of US$13.7 trillion, and an estimated US$4 trillion in combined
foreign reserves. Presently, India holds the chair of the BRICS group.
President of the People's Republic of China Hu Jintao has described the
BRICS countries as defenders and promoters of developing countries
and a force for world peace. However, some analysts have highlighted
potential divisions and weaknesses in the grouping, such as India and
China's disagreements over Tibetan and border issues, the failure of the
BRICS to establish a World Bank-analogue development agency, and
disputes between the members over UN Security Council reform.
The grouping has held annual summits since 2009, with member
countries taking turns to host. Prior to South Africa's admission, two
BRIC summits were held, in 2009 and 2010. The first five member
BRICS summit was held in 2011. The most recent summit took place in
New Delhi, India, on March 29, 2012.

Drivers of Globalization
Two macro factors seem to underlie the trend toward greater
globalization. The first is the decline in barriers to the free flow of
goods, services, and capital that has occurred since the end of World
War II. The second factor is technological change, particularly the
dramatic developments in recent years in communication, information
processing, and transportation technologies.
Declining trade and investment barriers: During the 1920s and 30s,
many of the nation-states of the world erected formidable barriers to
international trade and foreign direct investment. International trade
occurs when a firm exports goods or services to consumers in another
country. Foreign direct investment occurs when a firm invests resources
in business activities outside its home country. Many of the barriers to
international trade took the form of high tariffs on imports of
manufactured goods. The typical aim of such tariffs was to protect
domestic industries from foreign competition.
Having learnt from this experience, the advanced industrial nations of
the West committed themselves after World War II to removing barriers
to the free flow of goods, services and capital between nations. This goal
was enshrined in the treaty known as the General Agreement on Tariffs
and Trade (GATT). It started out in 1947 as a set of rules to ensure non-
discrimination, transparent procedures, the settlement of disputes and the
participation of the lesser-developed countries in international trade.
The latest GATT negotiations, called the Uruguay Round, were initiated
in 1987. Even though tariffs still were addressed in these negotiations,
their importance has been greatly diminished due to the success of
earlier agreements. The main thrust of negotiations had become the
sharpening of dispute-settlement rules and the integration of the trade
and investment areas that were outside of the GATT. After many years
of often-contentious negotiations, a new accord was finally ratified in
early 1995. The GATT was supplanted by a new institution, the World
Trade Organization (WTO), which now administers international trade
and investment accords.
The role of technological change: Microprocessors and
Telecommunications: Perhaps the single most important innovation has
been development of the microprocessor, which enabled the explosive
growth of high-power, low-cost computing, vastly increasing the amount
of information that can be processed by individuals and firms. The
microprocessor also underlies many recent advances in
telecommunications technology.
The Internet and the World Wide Web: The phenomenal growth of
the Internet and the associated World Wide Web is the latest expression
of this development.
Transportation technology: In addition to developments in
communication technology, several major innovations in transportation
technology have occurred since World War II. In economic terms, the
most important are probably the development of commercial jet aircraft
and super freighters and the introduction of containerization, which
simplifies transshipment from one mode of transport to another. The
advent of commercial jet travel, by reducing the time needed to get from
one location to another, has effectively shrunk the globe.
Globalization of Markets
The globalization of markets refers to the merging of historically distinct
and separate national markets into one huge global marketplace. Falling
barriers to cross-border trade have made it easier to sell internationally.
It has been argued for some time that the tastes and preferences of
consumers in different nations are beginning to converge on some global
norm, thereby helping to create a global market.
Example: Consumer products such as Citicorp credit cards, Coca-Cola
soft drinks, Sony play station, and Mc Donald’s hamburgers are
frequently held up as prototypical example of this trend; they are also
facilitators of it. By offering a standardized product worldwide, they
help to create a global market.
Despite the global prevalence of Citicorp credit cards and McDonald’s
hamburgers, it is important not to push too far the view that national
markets are giving way to the global market. Very significant
differences still exist between national markets along many relevant
dimensions, including consumer tastes and preferences, distribution
channels, culturally embedded value systems and the like. For example,
automobile companies will promote different car models depending on a
range of factors such as local fuel costs, income levels, traffic
congestion, and cultural values.
The most global markets are not markets for consumer products – where
national differences in tastes and preferences are still often important
enough to act as a brake on globalization – but markets for industrial
goods and materials that serve a universal need the world over. These
include the markets for commodities such as aluminum, oil and wheat;
the markets for industrial products such as microprocessors, computer
memory chips and commercial jet aircraft. In many global markets, the
same firms frequently confront each other as competitors in nation after
nation.
Example: Coca-Cola’s rivalry with Pepsi is a global one, as are the
rivalries between Ford and Toyota, Boeing and Airbus, Caterpillar and
Komatsu.
If one firm moves into a nation that is not currently served by its rivals,
those rivals are sure to follow to prevent their competitor from gaining
an advantage.

Transition from Domestic to International to Global Markets

After a company decides to go international, it must decide the degree of
marketing involvement and commitment it is prepared to make.
Generally, a domestic company enters emerge as an international
company through the following stages:
1. No direct foreign marketing: A company in this stage does not
actively cultivate customers outside national boundaries; however,
this company’s products may reach foreign marketing. Sales may
be made to trading companies as well as foreign customers who
come directly to the firm. Or products may reach foreign markets
via domestic wholesalers or distributors who sell aboard without
explicit encouragement or even knowledge of the producer. As
companies develop websites on the Internet, many receive orders
from international web surfers.

2. Infrequent foreign marketing: Temporary surpluses caused by

variations in production levels or demand may result in infrequent
marketing overseas. The surpluses are characterized by their
temporary nature; therefore, sales to foreign markets are made as
 goods are available, with little or no intention of maintaining
continuous market representation.

3. Regular foreign marketing: At this level, the firm has permanent

productive capacity devoted to the production of goods to be
marketed in foreign markets. A firm may employ foreign or
domestic overseas middlemen to it may have its own sales force or
sales subsidiaries in important foreign markets. The primary focus
of operations and production is to service domestic market needs.
However, as overseas demand grows, production is allocated for
foreign markets.

4. International marketing: Companies in this stage are fully

committed and involved in international marketing activities. Such
companies seek markets all over the world and sell products that
are a result of planned production for markets in various countries.
This generally entails not only the marketing but also the
production of goods outside the home market. At this point, a
company becomes an international or multinational marketing
firm.

5. Global marketing: At the global marketing level, the most

profound change is the orientation of the company toward markets
and associated planning activities. At this stage, companies treat
the world, including their home market, as one market. Market
segmentation decisions are no longer focused on national borders.
Instead, market segments are defined by income levels, usage
patterns, or other factors that often span countries and regions.
Often, this transition from international marketing to global
marketing is catalyzed by a company’s crossing the threshold of
more than half its sales revenues coming from aboard.
Policy Issues
The key problems of the major institutions of global governance is that
of unilateralism led by hegemons and lack of democracy in the workings
and operations of these institutions - voting and representation is heavily
skewed towards the hegemons. Secondly, these institutions have
continued to foster policies in the old spirit and using the same methods,
without taking into account the dynamizing impact of the logic of
globalization which has implication for time and space compression and
mobility of capital and markets.
These processes have further intensified the poverty in the global south
and increased income inequalities in the global North. In particular,
there has been so much arbitrariness in the operation of the World Bank
and IMF and so much tele-guiding of the activities of the UN and its
agencies - the result of which is the Gulf crisis. All these organizations
and agencies need reform in their Charters and Conventions to bring
them up to date with the demands of current thinking and the democracy
current gripping the world. In particular, the WTO has in many ways
made it impossible for smaller countries to have leverage for their
internal development with its clause on the principle of “Reciprocity”.
Its pronouncement on Agricultural development and indeed Third World
Development has been most pernicious since the Doha Rounds, over
which the major economic powers have foot dragged.
Over the years, the roles and responsibilities of international
organizations have been affected seriously by national, regional and
global events, as well as the defining and changing features of
globalization. On the one hand, their roles in international affairs first,
after the Second World War in the 1940s and secondly after the cold war
in the 1990s have increased significantly as globalization and
governance issues raise the bar for global problems and challenges. They
however, would be best described at this time as anachronisms, organs
that are more or less in danger of living out their relevance.
Presently, international organizations, particularly the multilateral
organization s, such as the United Nations Organization, the World
Bank, the International Monetary Fund and the World Trade
Organization, among others, carry with them fundamental structural
deformities. They, thus face compelling operational challenges.
These challenges are essentially derived from some of the following:
 At inauguration: The global circumstances which gave birth to
the constitutive rules and consequently gave international
institutions their structure of operations have changed significantly
particularly since the end of the Cold War. The extant structures,
therefore cannot serve effectively the present global system of
organization. At the minimum, the structures would have to be
reviewed and revised to take into cognizance, the present
configurations of national and regional balances and imbalances.
 Democratic Deficits: Engagements within international
organizations can hardly be described as democratic, as issues
bordering on the transparency in the decision making processes are
constant. Developing countries are hard pressed to pursue their
positions conclusively, as they lack the resources/capacity to do so
at the expense of dominant states, which have the capacity. In the
United Nations for example, the presence of a permanent Security
Council with veto powers to vet decisions at the General
Assembly, constitute a block of the “almighty” in an assembly of
equal states. The UN operates like a huge bureaucracy, affecting its
response and carrying capacity, and ultimately its output. There is
disproportionate structuring of the UN such that the carrying
capacity of some of its agencies, groups and individuals is more
than that of others. Indeed, some offices end up carrying out the
responsibility and schedule of other agencies or departments. The
efficiency of the UN system is measured more by paper work than
 operation and real work. Proposed reforms of such should not be
delayed, but pursued to their logical conclusions.
 Global response to regional problems: The response of
international organizations to developing regions like Africa and
their most pressing problems has in many cases not been adequate,
and most times, it is untimely. Early warning signals are either
disregarded or totally ignored in a somewhat mindless manner. The
way and manner international organizations such as the IMF,
World Bank and even the United Nations address national or
regional problems in some of the continents are more of a wait for-
something-to-happen-before-we-move engagement. International
mechanisms for protecting basic human rights, or even preventing
wide-scale atrocities, are weak and inadequate and used sometimes
arbitrary (i.e. the haste to save Kuwaitis under Iraqi occupation and
the lack of enthusiasm to prevent the Rwandan Genocide or the
lukewarm approach to Darfur). Therefore, what is needed, are
responsive global governance institutions that meet the needs of
everyone in a balance between the rights of the citizens,
sovereignty of states and legitimacy of mandate.
 Legitimacy issues: Legitimacy is mostly linked to perception, and
the issue of legitimacy is at the heart of the challenge facing many
international organizations. Their failure to rise to meet certain
global challenges, particularly in distraught humanitarian cases (for
example Rwanda and Darfur), leads to constant suspicion and
calls, questioning the very basis of their existence and their
corporate legitimacy.
 Issues of accountability and transparency: The case of
accountability is worsened by the perceived lack of transparency in
international organizations. This is made important as they assume
more and more global tasks and responsibilities that go beyond the
mission for which they were originally created. They thus have a
greater impact on the lives of peoples and states, in ways that were
 not possible 20 years ago. They however, are hardly accountable to
any independent institution acting on behalf of the generality of
nations they represent or on whose behalf they act.
 Enforcement of Mandates: Enforcement powers of international
organisations are severely limited, as their mandates are subject to
the availability of resources to be provided by the patronizing or
member states as well as their authorization. The concentration of
powers in centralized distant bureaucracies with little sympathy for
local cultural norms has the potential to counteract the concept of
“division of powers” and the benefits of adapting methods of
government to localities.
International organizations are generally prone to the duplication of
projects and mission objectives. This can lead to an over concentration
efforts on a single subject or agenda, at the expense of other critical
areas. Environment problems are an instance of this. Perhaps more
important is the fact that the current relentless push for some form of
uniformity under the rubric of an imposed single market. This in turn has
created a situation wherein there is increasing political, social and
cultural fragmentation. In essence the world is today witnessing
factionalization which in turn breeds complex frictions. From all
indications, the Doha process of the WTO is more or less comatose, the
IMF and the World Bank cannot be said to be at their imperial best and
may become irrelevant once the Asian powers consolidate their growth
and grip. Current prognosis suggests that only the United Nations might
maintain any form of serious strategic relevance.
Globalization is not based on any ethical or moral guidelines. Most of
the rules and regulations guiding the global processes have been made
by the developed or the heavily developed countries. They have the
resources as well as control the international institutions or mechanisms
of globalization. Developing countries are therefore kowtowed into
globalization without choices.
Globalization’s Free Trade and its concomitants as promoted through
international organizations like the WTO, work to the disadvantage of
developing market economies. Free Trade seeks the removal of
protective measures and tariffs, put in place by developing economies to
protect indigenous entrepreneurs, who are not likely to survive the influx
of heavily subsidized products from developed nations if they remove
protective measures.
Globalization’s features have exposed inherent weaknesses by
internationalizing crime and battlefields. Resources used to process
globalization may also be deployed to perpetrate crimes. Ideological
conflict agendas are being reinterpreted to include anywhere and
everywhere. For instance, terrorists battling America, have no
compulsion bombing American Embassies in Kenya and Tanzania,
developing countries without the resources to deal with global terrorism.
Globalization has facilitated an increasing growth trend for urbane
centers. The attendant pressure on the existing inadequate recreational
and development infrastructures adds to the environmental security and
heightens the challenges to the provision of water and energy resources
to the growing population. The consequence is a natural increase on
violent crimes, conflicts hotspots and dysfunctional cities. These
problems are magnified when the developed centers lure away
professionals from poor nations to the richer nations. Globalization
facilitates this by the inequality that is accentuated in remunerations and
incomes for professionals.
Globalization promotes competitions, sometimes violent competitions
and conflicts, among nations, thereby putting in place motives for
regional insecurities. It also promotes emergence of global oligopolies as
typified by the rash of Mergers and Acquisitions (M&A) especially in
banking and extractive industries.