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International Business
Bluefield College
April 26, 2010
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Cross-border contractual relationships: Entering a formal agreement
with a foreign distributor, joint venture firm or other partner abroad.
Often involves granting permission to use intellectual property to a
foreign partner.
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Intellectual property: Ideas or works created by firms or individuals,
such as patents, trademarks, and copyrights. Includes such knowledgebased assets of the firm or individuals as industrial designs, trade
secrets, inventions, works of art, literature, and other ‘creations of the
mind’.
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Licensing: an arrangement in which the owner of intellectual property
grants another firm the right to use that property for a specified period
of time in exchange for royalties or other compensation.
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Franchising: an arrangement in which the firm allows another the right
to use an entire business system in exchange for fees, royalties or other
compensation.
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Governed by a contract that provides the focal firm moderate level of
control over the foreign partner. Control refers to the ability of the focal
firm to influence the decisions, operations, and strategic resources of a
foreign venture.
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Typically involve exchange of intangibles (intellectual property) and
services. Examples include technical assistance and know-how.
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Can be pursued independently or in conjunction with other foreign
market entry strategies. Contractual relationships may accompany and
support FDI and exporting.
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Pharmaceutical firms engage in cross-licensing practices in which they
exchange scientific knowledge about producing products and
distribution rights.
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Service firms in retailing, fast food, car rentals, television programming,
and animation rely on licensing and franchising agreements.
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The legal claim through which the proprietary assets of firms
and individuals are protected from unauthorized use by
other parties.
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Provide inventors with a monopoly advantage, for a
specified period of time, so they can exploit their inventions
and create commercial advantage.
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Without legal protection and the assurance of commercial
rewards, most firms and individuals would have little
incentive to invent.
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A patent gives an inventor the right to prevent others from using, selling or
importing an invention for up to 20 years. Covers new products, processes,
machines, or improvements.
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A trademark is a distinctive design, symbol, logo, word, or series of words placed
on a product label, which identifies a product or service as coming from a
common source.
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A copyright protects original works, giving the creator the exclusive right to
reproduce the work, display and perform it publicly, and to authorize others to do
these activities. Can cover works from music, art, literature, films, and software.
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An industrial design refers to the appearance or features of a product.
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A trade secret is confidential know-how or information that has commercial
value. Trade secrets include information such as production methods, business
plans, and customer lists.
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A collective mark is a logo belonging to an association or group whose members
have given firms the right to use the mark to identify the origin of a product or
service.
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Advantages for licensor
 Low investment
 Low involvement
 Low effort, once license is established
 Low-cost initial entry strategy
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Disadvantages for licensor
 Performance depends on the licensee
 Licensor has limited control over its asset(s) abroad
 Risks creating a future competitor.
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Most typical arrangement is business format franchising, in
which franchisor transfers to the franchisee a total business
method -- including production and marketing methods,
sales systems, procedures, training, and the use of its name.
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More comprehensive and generally longer-term than
licensing.
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Master franchiser is an independent company authorized to
establish, develop, and manage the entire franchising
network in its market.
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Franchisor:
 provides vital assets
 has economies of scale, a wealth of intellectual property, and know-
how about its own industry
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Franchisee:
 performs local functions in foreign markets, such as marketing and
distribution, that the franchisor usually cannot perform.
 has entrepreneurial drive, deep knowledge about the local market and
how to run a business there.
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Contractual arrangements
provide only moderate control
over foreign partners.
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Laws that govern contractual
relations are often insufficient
abroad.
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Thus, it is critical to:
 Have a strong contract
 Develop close, trusting
relationships with foreign
partners
 Provide foreign partner
with superior resources and
strong support
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Intellectual property laws are weak in many countries.
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Key international treaties include:
 Paris Convention for the Protection of IP
 Berne Convention for the Protection of Literary and Artistic Works
 Rome Convention for the Protection of Performers and Broadcasting
Organizations
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It is critical for the firm to:
 Understand local IP laws and enforcement procedures
 Avoid countries with weak IP laws
 Register patents, trademarks, copyrights in each country where the firm does
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business
Ensure that licensing and franchising agreements provide for IP oversight
Pursue IP infringers in court
Monitor franchisees, intermediaries and partners for asset infringements
Train employees to protect assets
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Global Marketing Strategy: A plan of action that guides the
international firm in:
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positioning itself and its offerings,
targeting global market segments, and
devising marketing program elements
Global market segment: a group of customers that share common
characteristics across many national markets. Firms target these
buyers with relatively uniform marketing programs. E.g., the
global youth segment who are customers to MTV, Levi’s. The
global segment of jet-setting business executives.
 Global positioning strategy: strategy in which the firm’s offering is
positioned similarly in the minds of buyers worldwide. E.g.,
Starbucks, Volvo, Sony.
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Adaptation: company efforts to modify elements of the
international marketing program to accommodate specific
customer requirements in a particular market.
 Adaptation is costly. May require substantial changes to products,
manufacturing operations, (lower) pricing, distribution, and marketing
communications.
 Costs add up across many national markets.
 Firms may pursue a regional strategy, where marketing program
elements are formulated to exploit commonalities across a geographic
region, instead of across the world.
Standardization: company efforts to make the marketing program
elements uniform, with a view to targeting entire regions of
countries, or even the global marketplace, with a similar product
or service.
 Management tries to strike some ideal balance between global
integration and local responsiveness
 Firms Prefer Standardization
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Well-known global brands include: Hollywood movies, pop stars,
sports stars, personal care products, toys, credit cards, food,
beverages, furniture, and electronics
 A strong global brand
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enhances the efficiency and effectiveness of marketing programs,
facilitates the ability to charge premium prices,
increases the firm’s leverage with resellers,
stimulates brand loyalty,
inspires trust and confidence in the product.
Designing Global Products with Global Teams
 Until 1990s, product development and design was a sequential process,
usually based in a single country.
 Today, many more firms develop global products intended for world
markets from the outset.
 Product designers work in virtual global teams, experts drawn from
subsidiaries across the globe
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Nature of the product or industry. A specialized or highly
advanced product, or an industry with few competitors, can
facilitate charging a higher price.
Location of the production facility. Locating manufacturing
near customers or in countries with low-cost labor facilitates
lower prices.
Type of distribution system. Channels in some countries are
very complex. Some distributors mark up prices
substantially.
Foreign market considerations. Local purchasing power and
distribution infrastructure are big factors.
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Pricing Strategies
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Rigid cost-plus pricing. Set a fixed
price for all export markets, by
adding a flat percentage to the
domestic price to compensate for
the added costs of doing business
abroad.
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Flexible cost-plus pricing. Set price
to accommodate local market and
competitive conditions, such as
customer purchasing power,
demand, and competitor prices.
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Incremental pricing. Set price to
cover only variable costs, not fixed
costs. Firm assumes that fixed costs
are already paid from sales in the
firm’s home country, or other
countries.
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Shorten the distribution channel. That is, bypass some
intermediaries in the channel.
Redesign product to remove costly features. E.g., Whirlpool
developed a no-frills, simplified washing machine for sale in
developing economies.
Ship products unassembled, as parts and components, qualifying
for lower import tariffs. Do final assembly in the foreign market,
often using low-cost labor; or assemble in Foreign Trade Zones.
Have product re-classified using a different tariff classification to
qualify for lower tariffs. Imported goods often fit more than one
product category.
Move production or sourcing to another country to take
advantage of lower labor costs or favorable currency rates.
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The pricing of intermediate or finished products exchanged
among the subsidiaries and affiliates of the same corporate
family located in different countries.
May be used to repatriate profits from countries that restrict
MNEs from taking their earnings out of the country.
May be used to shift profits out of a high corporate tax
county into a low corporate tax one, thereby increasing
company-wide profits.
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The favored subsidiary
is likely to be in a
country with:
 Lower corporate
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income-tax rates
High tariffs for the
product in question
Favorable accounting
rules for calculating
income
Political stability
Little or no restrictions
on profit repatriation
Strategic importance
to the MNE
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Legal importation of genuine products into a country by
other than authorized intermediaries.
Gray marketers buy the product at a low price in one country,
import it into another country, and sell it there at a higher
price.
Causes:
 Large difference in pricing of same product between two countries,
often the result of company strategy.
 Exchange rate differences of products priced in two different
currencies.
Risk of tarnished image when customers realize the product is
available at a lower price through alternative channels.
 Strained manufacturer-distributor relations as authorized
distributors lose sales.
 May disrupt regional sales forecasting, pricing strategies,
merchandising plans, and other marketing efforts.
 Strategies to Cope with Gray Markets
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 Standardize pricing across the firm’s markets within the same region.
 Pursue illicit intermediaries; Fire intermediaries who break the rules.
 Reduce flow of products into markets where gray market brokers procure
the product.
 Differentiate products in individual countries. Design products with
exclusive features in each market.
 Publicize the limitations of products obtained from gray market channels
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Servicing a key global customer in a consistent and
standardized manner, regardless of where in the world it
operates.
Wal-Mart is a key global account for P&G. Wal-Mart expects
consistent service including uniform prices for the same
product from P&G regardless of where in the world they are
delivered.
Emphasizes the use of cross-functional teams, specialized
coordination activities for specific accounts, and formalized
structures and processes.
Each customer is assigned a global account manager, or
team, which provides a coordinated marketing support and
service worldwide.