Chapter 8 & Chapter 9 of the TextbookSource Keegan, W. J., & Gr

Chapter 8 & Chapter 9 of the Textbook
Source: Keegan, W. J., & Green, M. C. (2020). Global
marketing (10th ed.). Retrieved from
https://www.vitalsource.com
8-1 Export Selling and Export Marketing: A Comparison
8-1 Compare and contrast export selling and export
marketing.
To better understand importing and exporting, it is important to
distinguish between export -selling and export marketing. First,
export selling does not involve tailoring the product, the price,
or the promotional material to suit the requirements of global
markets. Also, the only marketing mix element that differs is
the “place”—that is, the country where the product is sold. The
export selling approach may work for some products or
services; for unique products with little or no international
competition, such an approach is feasible. Similarly, companies
new to exporting may initially experience success with selling.
Even today, the managerial mind-set in many companies still
favors export selling. However, as companies mature in the
global marketplace or as new competitors enter the picture,
export marketing becomes necessary.
Export marketing targets the customer in the context of the total
market environment. The export marketer does not simply take
the domestic product “as is” and sell it to international
customers. Instead, to the export marketer, the product offered
in the home market represents a starting point. This product is
then modified as needed to meet the preferences of international
target markets; for example, this is the approach the Chinese
have adopted in the U.S. furniture market. Similarly, the export
marketer sets prices to fit the marketing strategy and does not
merely extend home-country pricing to the target market.

Charges incurred in export preparation, transportation, and
financing must be taken into account in determining prices.
Finally, the export marketer adjusts strategies and plans for
communication and distribution to fit the market. In other
words, effective communication about product features or uses
to buyers in different export markets may require creating
brochures with different copy, photographs, or artwork. As the
vice president of sales and marketing of one manufacturer
noted, “We have to approach the international market with
marketing literature as opposed to sales literature.”
Export marketing is the integrated marketing of goods and
services that are destined for customers in international
markets. Export marketing requires:
An understanding of the target market environment
The use of marketing research and identification of market
potential
Decisions concerning product design, pricing, distribution
channels, advertising, and -communications—the marketing mix
After the research effort has zeroed in on potential markets,
there is no substitute for a personal visit to size up the market
firsthand and begin the development of an actual export-
marketing program. A market visit should accomplish several
things. First, it should confirm (or contradict) assumptions and
research regarding market potential. Second, the company
representative should gather the additional data necessary to
reach the final go or no-go decision regarding an export-
marketing program. Certain kinds of informatio n simply cannot
be obtained from secondary sources. For example, an export
manager or international marketing manager may have a list of
potential distributors provided by the U.S. Department of
Commerce. In addition, he or she may have corresponded with

distributors on the list and formed some tentative idea of
whether they meet the company’s international criteria. Even
so, it is difficult to negotiate a suitable arrangement with
international distributors without actually meeting face-to-face
to allow each side to appraise the capabilities and character of
the other party. Third, a visit to the export market should enable
the company representative to develop a marketing plan in
cooperation with the local agent or distributor. This plan should
cover the necessary product modifications, pricing, advertising
and promotion expenditures, and a distribution plan. If the plan
calls for investment, agreement on the allocation of costs must
also be reached.
As shown in Exhibit 8-2, one way to visit a potential market is
through a trade show or a state- or federally sponsored trade
mission. Each year hundreds of trade fairs, usually organized
around a product category or industry, are held in major
markets. By attending these events, company representatives
can conduct market assessment, develop or expand markets, find
distributors or agents, or locate potential end users. Perhaps
most important, attending a trade show enables company
representatives to learn a great deal about competitors’
technology, pricing, and depth of market penetration. For
example, exhibits often offer product literature with
strategically useful technological information. Overall,
company managers or sales personnel should be able to get a
good general impression of competitors in the marketplace as
they try to sell their own company’s product.
Exhibit 8-2
Milan is widely regarded as the design capitol of the world. The
year 2016 marked the 55th anniversary of Salon Internazionale
del Mobile di Milano (“Milan Furniture Fair”), the world’s
largest furniture and home furnishings trade fair. Every April,
some 2,000 vendors and 300,000 visitors from more than 160
countries converge on Milan to share the latest designs. Many

Italian industrial designers are recognizing the necessity of
expanding outside the home market. To do that, exports will be
key.
Source: Courtesy Salone del Mobile.Milano/Photo by Andrea
Mariani.
8-2 Organizational Export Activities
8-2 Identify the stages a company goes through, and the
problems it is likely to encounter, as it gains experience as an
exporter.
Exporting is becoming increasingly important as companies in
all parts of the world step up their efforts to supply and service
markets outside their national boundaries.1 Research has shown
that exporting is essentially a developmental process that can be
divided into the following distinct stages:
The firm is unwilling to export; it will not even fill an
unsolicited export order. This may be due to perceived lack of
time (“too busy to fill the order”) or to apathy or ignorance.
The firm fills unsolicited export orders but does not pursue
unsolicited orders. Such a firm is an export seller.
The firm explores the feasibility of exporting (this stage may
bypass stage 2).
The firm exports to one or more markets on a trial basis.
The firm is an experienced exporter to one or more markets.
After this success, the firm pursues country- or region-
focused marketing based on certain criteria (e.g., all countries
where English is spoken or all countries where it is not

necessary to transport by water).
The firm evaluates global market potential before screening
for the “best” target markets to include in its marketing strategy
and plan. All markets—domestic and international—are
regarded as equally worthy of consideration.
The probability that a firm will advance from one stage to the
next depends on several different factors. Moving from stage 2
to stage 3 depends on management’s attitude toward the
attractiveness of exporting and their confidence in the firm’s
ability to compete internationally. However, commitment is the
most important aspect of a company’s international orientation.
Before a firm can reach stage 4, it must receive and respond to
unsolicited export orders. The quality and dynamism of
management are important factors that can lead to such orders.
Success in stage 4 can lead a firm to stages 5 and 6. A company
that reaches stage 7 is a mature, geocentric enterprise that is
relating global resources to global opportunity. To reach this
stage requires management with vision and commitment.
One study noted that export procedural expertise and sufficient
corporate resources are required for successful exporting.2 An
interesting finding was that even the most experienced exporters
express lack of confidence in their knowledge about shipping
arrangements, payment procedures, and regulations. The same
study also showed that, although profitability is an important
expected benefit of exporting, other advantages include
increased flexibility and resiliency and improved ability to deal
with sales fluctuations in the home market. Although research
generally supports the proposition that the probability of being
an exporter increases with firm size, it is less clear whether
export intensity—that is, the ratio of export sales to total
sales—is positively correlated with firm size. Table 8-1 lists
some of the export-related problems that a company typically
faces.

8-3 National Policies Governing Exports and Imports
8-3 Describe the various national policies that pertain to
exports and imports.
It is hard to overstate the impact of exporting and importing on
the world’s national economies. In 1997, for example, total
imports of goods and services by the United States passed the
$1 -trillion mark for the first time; in 2017, the combined total
was $2.9 trillion. European Union (EU) imports, counting both
intra-EU trade and trade with non-EU partners, totaled more
than $3 -trillion. Trends in both exports and imports reflect
China’s pace-setting economic growth in the Asia-Pacific
region. Exports from China have grown significantly in the
years since China joined the World Trade Organization (WTO).
As shown in Table 8-2, Chinese apparel exports surpass those of
other countries by a wide margin. Historically, China protected
its own producers by imposing double-digit import tariffs, but
these tariffs have been reduced as China has sought to comply
with WTO regulations.
Table 8-2 Top 10 Clothing Exporters 2016 (U.S.$ billions)
Needless to say, representatives of the apparel, footwear,
furniture, and textile industries in many countries are deeply
concerned about the impact that increased trade with China will
have on these sectors. As this example suggests, one word can
summarize national policies toward exports and imports:
contradictory. For centuries, nations have combined two
opposing policy attitudes toward the movement of goods across
national boundaries. On the one hand, nations directly
encourage exports; on the other hand, they generally restrict the
flow of imports.
Government Programs That Support Exports
To see the economic boost that can come from a government-
encouraged export strategy, consider Japan, Singapore, South

Korea, and the so-called Greater China or “China triangle”
market, which includes Taiwan, Hong Kong, and the People’s
Republic of China. After recovering from the destruction of its
economy during World War II, Japan became an economic
superpower as a direct result of export strategies devised by the
Ministry for International Trade and Industry (MITI). The four
tigers—Singapore, South Korea, Taiwan, and Hong Kong—
learned from the Japanese experience and built strong export-
based economies of their own. Although Asia’s “economic
bubble” burst in 1997 as a result of uncontrolled growth, Japan
and the tigers are moving forward in the twenty-first century at
a more moderate rate. China, an economy unto itself, has
attracted increased foreign investment from Daimler AG,
General Motors (GM), Hewlett-Packard, and scores of other
companies that are setting up production facilities to support
local sales, as well as exports to world markets.
Any government concerned with trade deficits or economic
development should focus on educating firms about the
potential gains from exporting. Policymakers should also
remove bureaucratic obstacles that hinder company exports.
This is true at the national, regional, and local government
levels. In India, for example, leaders in the state of Tamil Nadu
gave Hyundai permission to operate its plant around the clock,
making it the first Hyundai operation anywhere in the world to
operate on a 24-hour basis (see Exhibit 8-3).3
Exhibit 8-3
A worker finishes a K-Series engine at the Maruti Suzuki
assembly line in Gurgaon, India. Maruti Suzuki is one of India’s
leading auto manufacturers. However, foreign investment in the
automotive sector is exploding as Ford, Honda, Nissan, Toyota,
and other companies rush to capitalize on growing Indian
demand for passenger cars.
Source: Gurinder Osan/Associated Press.

Governments commonly use four activities to support and
encourage firms that engage in exporting: tax incentives,
subsidies, export assistance, and free trade zones.
Tax incentives treat earnings from export activities
preferentially either by applying a lower tax rate to earnings
from these activities or by refunding taxes already paid on
income associated with exporting. The tax benefits offered by
export-conscious governments include varying degrees of tax
exemption or tax deferral on export income, accelerated
depreciation of export-related assets, and generous tax
treatment of overseas market development activities.
From 1985 until 2000, the major tax incentive for exporters
under U.S. law was the foreign sales corporation (FSC), through
which American exporters could obtain a 15 percent exclusion
on earnings from international sales. Big exporters benefited the
most from the arrangement; -Boeing, for example, saved
approximately $100 million per year, and Eastman Kodak saved
nearly $40 million annually. However, in 2000 the WTO ruled
that any tax break that was contingent on exports amounted to
an illegal subsidy. Accordingly, the U.S. Congress has set about
the task of overhauling the FSC system; failure to do so would
entitle the EU to impose up to $4 billion in retaliatory tariffs.
Potential winners and losers from a change in the FSC law are
lobbying furiously. One proposed version of a new law would
benefit GM, Procter & Gamble, Walmart, and other U.S.
companies with extensive manufacturing or retail operations
overseas. By contrast, Boeing would no longer benefit. As Rudy
de Leon, a Boeing executive in charge of government affairs,
noted, “As we look at the bill, the export of U.S. commercial
aircraft would become considerably more expensive.”4
Governments also support export performance by providing
outright subsidies, which are direct or indirect financial
contributions or incentives that benefit producers. Subsidies can

severely distort trade patterns when less competitive but
subsidized producers displace competitive producers in world
markets. Organisation for Economic Co-operation and
Development (OECD) members spend nearly $400 billion
annually on farm subsidies; currently, total annual farm support
in the EU is estimated at $100 billion. With approximately $40
billion in annual support, the United States has the highest
subsidies of any single nation. Agricultural subsidies are
particularly controversial because, although they protect the
interests of farmers in developed countries, they work to the
detriment of farmers in developing areas such as Africa and
India.
The EU has undertaken an overhaul of its Common Agricultural
Policy (CAP), which critics have called “as egregious a system
of protection as any” and “the single most harmful piece of
protectionism in the world.”5 In May 2002, much to Europe’s
dismay, U.S. President George W. Bush signed a $118 billion
farm bill that actually increased subsidies to American farmers
over a 6-year period. The Bush administration took the position
that, despite the increases, overall U.S. subsidies were still
lower than those in Europe and Japan; Congress voted to extend
the farm bill for another 5 years.
Another means of supporting exporters is by extending
governmental assistance to exporters. Companies can avail
themselves of a great deal of government information
concerning the location of markets and credit risks. Assistance
may also be oriented toward export promotion. Government
agencies at various levels often take the lead in setting up trade
fairs and trade missions designed to promote sales to foreign
customers.
The export–import process often entails red tape and
bureaucratic delays, especially in emerging markets such as
China and India. In an effort to facilitate exports, countries are

designating certain areas as free trade zones (FTZ) or special
economic zones (SEZ). In geographic entities, manufacturers
benefit from simplified customs procedures, operational
flexibility, and a general environment of relaxed regulations.
Governmental Actions to Discourage Imports and Block Market
Access
Measures such as tariffs, import controls, and a host of nontariff
barriers are designed to limit the inward flow of goods. Tariffs
can be thought of as the “three Rs” of global business: rules,
rate schedules (duties), and regulations of individual countries.
(“Tariff” is an ancient trading term derived from the Arabic
word “ta’rif”, which means “information” or “notification.”)6
Duties on individual products or services are listed in the
schedule of rates (see Table 8-3). One expert on global trade
defines duties as “taxes that punish individuals for making
choices of which their governments disapprove.”7
Table 8-3 Examples of Trade Barriers
Country/Region
Tariff Barriers
Nontariff Barriers
European Union
16.5% antidumping tariff on shoes from China, 10% on shoes
from Vietnam
Quotas on Chinese textiles

China
Tariffs as high as 28% on foreign-made auto parts
Expensive, time-consuming procedures for obtaining
pharmaceutical import licenses
As noted in earlier chapters, a major U.S. objective in the
Uruguay Round of General Agreement on Tariffs and Trade
(GATT) negotiations was to improve market access for U.S.
companies with major U.S. trading partners. When the Uruguay
Round ended in December 1993, the United States had secured
reductions or total eliminations of tariffs on 11 categories of
U.S. goods exported to the EU, Japan, five of the European Free
Trade Association (EFTA) nations (Austria, Switzerland,
Sweden, Finland, and Norway), New Zealand, South Korea,
Hong Kong, and Singapore. The categories affected included
equipment for the construction, agricultural, medical, and
scientific industry sectors, as well as steel, beer, brown distilled
spirits, pharmaceuticals, paper, pulp and printed matter,
furniture, and toys. Most of the remaining tariffs were phased
out over a 5-year period. A key goal of the ongoing Doha Round
of WTO trade talks is the reduction in agricultural tariffs, which
currently average 12 percent in the United States, 31 percent in
the EU, and 51 percent in Japan.
Developed under the auspices of the Customs Cooperation
Council (now the World Customs Organization), the
Harmonized Tariff System (HTS) went into effect in January
1989 and has since been adopted by the majority of trading
nations. Under this system, importers and exporters have to
determine the correct classification number for a given product
or service that will cross borders. With the Harmonized Tariff
Schedule B, the export classification number for any exported

item is the same as the import classification number. Also,
exporters must include the Harmonized Tariff Schedule B
number on their export documents to facilitate customs
clearance. Accuracy, especially in the eyes of customs officials,
is essential. The U.S. Census Bureau compiles trade statistics
from the HTS system. Any HTS with a value of less than $2,500
is not counted as a U.S. export. However, all imports, regardless
of value, are counted.
In spite of the progress made in simplifying tariff procedures,
administering a tariff is an enormous burden. People who work
with imports and exports must familiarize themselves with the
different classifications and use them accurately. Even a tariff
schedule of several thousand items cannot clearly describe
every product traded globally. Plus, the introduction of new
products and new materials used in manufacturing processes
creates new problems. Often, determining the duty rate on a
particular article requires assessing how the item is used or
determining its main component material. Two or more
alternative classifications may have to be considered.
A product’s classification can make a substantial difference in
the duty applied. For example, is a Chinese-made X-Men action
figure a doll or a toy? For many years, dolls were subject to a
12 percent duty when imported into the United States; the rate
was 6.8 percent for toys. Moreover, action figures that represent
nonhuman creatures such as monsters or robots were
categorized as toys and, therefore, qualified for lower duties
than human figures that the Customs Service classified as dolls.
Duties on both categories have been eliminated; however, the
Toy Biz subsidiary of Marvel Enterprises spent nearly 6 years
on an action in the U.S. Court of Internatio nal Trade to prove
that its X-Men action figures do not represent humans. Although
the move appalled many fans of the mutant superheroes, Toy
Biz hoped to be reimbursed for overpayment of past duties made
when the U.S. Customs Service had classified imports of

Wolverine and his fellow figures as dolls.8
One of the most controversial aspects of U.S. Donald Trump’s
“America First” policy was his decision to impose tariffs on
imports of steel and aluminum (see Exhibit 8-4). Opponents of
this policy—including trade partners and some U.S. industry
leaders—argue that the tariffs will negatively impact the U.S.
economy and invite retaliation from abroad.
Exhibit 8-4
President Donald Trump’s decision to impose tariffs on steel
and aluminum imports was hailed by some an important step
toward reversing unemployment in America’s Rust Belt.
Source: DAVID HECKER/EPA-EFE/Shutterstock.
A nontariff barrier (NTB) is any measure other than a tariff that
is a deterrent or obstacle to the sale of products in a foreign
market. Also known as hidden trade barriers, NTBs include
quotas, discriminatory procurement policies, restrictive customs
procedures, arbitrary monetary policies, and restrictive
regulations.
A quota is a government-imposed limit or restriction on the
number of units or the total value of a particular product or
product category that can be imported. Generally, quotas are
designed to protect domestic producers. In 2005, for example,
textile producers in Italy and other European countries were
granted quotas on 10 categories of textile imports from China.
The quotas, which were scheduled to run through the end of
2007, were designed to give European producers an opportunity
to prepare for increased competition.9
Discriminatory procurement policies can take the form of
government rules, laws, or administrative regulations requiring
that goods or services be purchased from domestic companies.
For example, the Buy American Act of 1933 stipulates that U.S.

federal agencies and government programs must buy goods
produced in the United States. The act does not apply if
domestically produced goods are not available, if the cost is
unreasonable, or if “buying local” would be inconsistent with
the public interest. Similarly, the Fly American Act states that
U.S. government employees must fly on domestic carriers
whenever possible.
Customs procedures are considered restrictive if they are
administered in a way that makes compliance difficult and
expensive. For example, the U.S. Department of Commerce
might classify a product under a certain harmonized number;
Canadian customs may disagree. The U.S. exporter may have to
attend a hearing with Canadian customs officials to reach an
agreement. Such delays cost time and money for both the
importer and the exporter.
Discriminatory exchange rate policies distort trade in much the
same way as selective import duties and export subsidies. As
noted earlier, some Western policymakers have argued that
China is pursuing policies that ensure an artificially weak
currency. Such a policy has the effect of giving Chinese goods a
competitive price edge in world markets.
Finally, restrictive administrative and technical regulations can
create barriers to trade. These may take the form of antidumping
regulations, product size regulations, and safety and health
regulations. Some of these regulations are intended to keep out
foreign goods; others are directed toward legitimate domestic
objectives. For example, the safety and pollution regulations
being developed in the United States for automobiles are
motivated almost entirely by legitimate concerns about highway
safety and pollution. However, an effect of these regulations has
been to make it so expensive to comply with U.S. safety
requirements that some automakers have withdrawn certain
models from the market. Volkswagen, for example, was forced

to stop selling diesel automobiles in the United States for
several years.
As discussed in earlier chapters, there is a growing trend to
remove all such restrictive trade barriers on a regional basis.
The largest single effort was undertaken by the EU and resulted
in the creation of a single market starting January 1, 1993. The
intent of this agreement was to have one standard for all of
Europe’s industry sectors, including automobile safety, drug
testing and certification, and food and product quality controls.
The introduction of the euro has also facilitated trade and
commerce within the euro zone.
Entrepreneurial Leadership, Creative Thinking, and the Global
Startup
Oscar Farinetti, Eataly
Oscar Farinetti is an entrepreneur. He developed an innovative
retail concept, Eataly, and started a company to market it. By
applying the basic tools and principles of modern global
marketing, Farinetti has achieved remarkable success. As is true
with many entrepreneurs, Farinetti’s idea was based on a crucial
insight about his native country. His hometown is Alba, the
birthplace of the Slow Food movement and the source of world-
famous white truffles. Farinetti also owns two wineries in the
Barolo appellation, which is renowned for its red wines.
Farinetti realized that Italy’s two great resources, its artistic
heritage and its biodiversity, represented an opportunity for
innovation.
Farinetti made a fortune when he sold UniEuro, the appliance
company that evolved from his family’s supermarket, for €500
million. Guided by the principle that it is important to “put a
little poetry” into his personal endeavors, he turned his
attention from washing machines to food. This was a natural
move, considering that the root of Farinetti’s family name is

farina, the Italian word for flour. A turning point for Farinetti
was a visit to Istanbul’s Grand Bazaar, where he was captivated
by the sights, sounds, and smells.
Starting in 2007 with a single location in Turin, Italy, Farinetti
now presides over a far-flung global empire of Eataly
megastores that celebrate all things Italian (see Exhibit 8-5).
Armed with the tagline “Italy is Eataly,” Farinetti has opened
more than 25 stores in major cities such as Chicago, Dubai, and
New York City. In addition to the original store in Turin, there
are now numerous other locations in Italy as well.
Exhibit 8-5
After analyzing the Italian food market, Oscar Farinetti realized
that there were plenty of large stores with wide selections but
low quality and low prices. There were also small stores with
small selections but high quality and high prices. With Eataly,
Farinetti offers consumers the best of both worlds: a wide
selection of high-quality products with reasonable prices.
Source: Piero Oliosi/Polaris/Newscom.
Eataly gourmet supermarkets, and the restaurants tucked inside
them, are helping Italian food producers during Italy’s ongoing
recession. Overall, Italy’s retail sector has pursued very little
international expansion; by contrast, other European
supermarket chains such as Tesco (United Kingdom), Metro
(Germany), and Carrefour (France) took local products and
brands with them as they expanded around the globe.
Some Italian food brands, such as Ferrero (Nutella) and Barilla
(pasta), are well known throughout the world. However, many
of Italy’s food companies, which represent about 15 percent of
the country’s overall economy, lack the money or the
managerial expertise to export. As noted in Chapter 3, Italy
boasts myriad product categories that carry designations such as
Denominazione Origine Controllata e Garantita (DOCG) and

Denominazione Origine Protetta (DOP). Such a designation
means, for example, that cheese marketed as Parmigiano-
Reggiano can only be made from cow’s milk from a certain part
of Italy. Eataly’s success has helped small-scale, artisanal wine,
cheese, and prosciutto producers to reach new customers who
are willing to pay premium prices for Italian quality and
authenticity.
Many observers note that the “Made in Italy” movement got an
additional boost from the 2015 World Expo in Milan. The theme
of the Expo was “Feeding the Planet. Energy for Life.” Perhaps
not surprisingly, the Italian Pavilion showcased Italy’s national
food culture. Needless to say, Eataly was present at the 2015
Expo: Eataly Milan Smeraldo opened months before the Expo
itself.
Farinetti is optimistic about Italy’s future. “We need to double
tourism in Italy, we can double our export of food and
agriculture products, we need to open up other industries of
fashion, design, industrial manufacturing. And if we manage
this we will bring the country to another renaissance,” he says.
Sources: Manuela Mesco, “Corporate News: Prices Pinch
Prosciutto Trade,” The Wall Street Journal (January 2, 2015), p.
B3; Elisabeth Rosenthal, “The Fantasy Italy,” The New York
Times Sunday Review (August 3, 2014), p. 3; Robert Camuto,
“Eataly: A Revolutionary Approach to Italian Food and Wine,”
Wine Spectator (April 30, 2013), pp. 30–33+; Rachel
Sanderson, “Food: The New Frontier for Italian Luxury,”
Financial Times (December 23, 2014), p. 5; Rachel Sanderson,
“Matteo Renzi’s Favourite Deli Man,” Financial Times (May
28, 2014), p. 10.
The Cultural Context
International Education for Chinese Students = Service Exports
for Host Countries

As noted in Chapter 7, newly affluent Chinese parents invest
heavily in their children’s educations, due in large part to the
fact that many of the parents themselves did not go to college.
(In fact, the term “rich redneck” is sometimes applied to this
segment as a put-down.) There is a sense among some families
that they neither command the respect nor have the influence of
China’s super-elite. Anxious for their children to earn respect,
many parents enroll them in private international schools in
China, starting as early as kindergarten. Alternatively, many
students take international classes at public schools. In either
case, wealthy Chinese parents are under enormous social
pressure to ensure that their children get an international
education, starting at the K–12 level.
Of course, international education is expensive. However, since
2000, average household wealth in China has increased 600
percent. As a consequence, more Chinese parents are both
willing and able to invest in their children’s educations.
Many of these same parents aspire to send their children abroad
to attend college (see Exhibit 8-6). Australia, Japan, -Germany,
the United Kingdom, and the United States are favorite
destinations. In the United States alone, 350,755 Chinese
students were enrolled in U.S. higher education institutions in
2017. That figure represents one-third of the total international
student population in the United States and is triple the -number
of a decade ago. The University of Southern -California is
-currently the number 1 destination for students from China.
India, South Korea, Saudi Arabia, and Canada also send tens of
-thousands of students to the United States each year.
Exhibit 8-6
Chinese students study abroad to gain a wider perspective, to
find a better educational environment, and to enrich their
knowledge. Many return to China after receiving their degrees.

These students showed their support for President Xi Jinping
during his visit to Manchester, England, in 2015.
Source: Richard Stonehouse/Getty Images.
One reason that Chinese and other international students are
welcome at colleges and universities around the world is that
they generally pay higher tuition charges, and they frequently
pay those fees in cash. Such students are viewed by educational
institutions as important revenue sources, especially in the
United States where declining enrollments and growing
concerns about student debt are affecting many colleges and
universities. In fact, in any given calendar year, international
students contribute more than $35 billion to the U.S. economy.
One barrier to extending financial aid to Chinese students is the
absence of any mechanism to check the credit scores of the
parents.
Until recently, business schools in North America and Europe
offering MBA programs benefited from an influx of Chinese
students. The reason was simple: Applicants perceived Western
MBA programs to be superior to those available at home.
Indeed, for many years, the majority of Chinese who studied
abroad were graduate students. That situation is changing now,
and the number of undergraduate students has surpassed the
number of graduate students. One reason for this trend: A
growing number of Chinese institutions have received
accreditation, including the China Europe Interna tional
Business School (CEIBS) in Shanghai. As a result, many
Chinese students seeking graduate degrees are opting to “go
local.”
Meanwhile, concern is mounting that Beijing is using “soft
power” to extend its influence in schools and universities by
sponsoring an initiative known as the Confucius Institute. The
Confucius Institute is administered by Hanban, which is
affiliated with China’s education ministry. With a presence in

more than 140 countries, the officially stated mission of the
Confucius Institute is to promote the study of the Chinese
language. The initiative is welcomed on many campuses where
budgets are stretched and language programs have been
curtailed. However, critics say that the Confucius Institutes
allow the Chinese government to present a carefully scripted
picture of China today.
8-4 Tariff Systems
8-4 Explain the structure of the Harmonized Tariff System.
Tariff systems provide either a single rate of duty for each item,
applicable to all countries, or two or more rates, applicable to
different countries or groups of countries. Tariffs are usually
grouped into two classifications.
The single-column tariff is the simplest type of tariff: a
schedule of duties in which the rate applies to imports from all
countries on the same basis. Under the two-column tariff (see
Table 8-4), column 1 includes “general” duties plus “special”
duties indicating reduced rates determined by tariff negotiations
with other countries. Rates agreed upon by “convention” are
extended to all countries that qualify for normal trade relations
(NTR) (formerly most-favored nation [MFN]) status within the
framework of the WTO. Under the WTO, nations agree to apply
their most favorable tariff or lowest tariff rate to all nations —
subject to some exceptions—that are signatories to the WTO.
Column 2 shows rates for countries that do not enjoy NTR
status.
Table 8-4 Sample Rates of Duty for U.S. Imports
Column 1
Column 2

General
Special
Non-NTR
1.5%
Free (A, E, IL, J, MX)
30%
0.4% (CA)
A: Generalized System of Preferences
E: Caribbean Basin Initiative (CBI) Preference
IL: Israel Free Trade Agreement (FTA) Preference
J: Andean Agreement Preference
MX: North American Free Trade Agreement (NAFTA)
Canada Preference
CA: NAFTA Mexico Preference
Table 8-5 shows a detailed entry from Chapter 89 of the
Harmonized Tariff System pertaining to “Ships, Boats, and

Floating Structures” (for explanatory purposes, each column has
been identified with an alphabet letter). Column A contains the
heading-level numbers that uniquely identify each product. For
example, the product entry for heading level 8903 is “Yachts
and other vessels for pleasure or sports; rowboats and canoes.”
Subheading level 8903.10 identifies “Inflatable”; 8903.91
designates “Sailboats with or without auxiliary motor.” These
six-digit numbers are used by more than 100 countries that have
signed on to the HTS. Entries can extend to as many as 10
digits, with the last 4 digits used on a country-specific basis for
each nation’s individual tariff and data collection purposes.
Taken together, columns E and F correspond to column 1 in
Table 8-4, and column G corresponds to column 2 in Table 8-4.
Table 8-5 Chapter 89 of the Harmonized Tariff System
A
B
C
D
E
F
G
8903

Yachts and other vessels for pleasure or sports; rowboats and
canoes
8903.10.00
Inflatable
2.4%
Free
(A, E, IL, J, MX)
0.4% (CA)
Valued over $500
15
With attached rigid hull . . . . . . . .

No
45
Other . . . . . . . . . . . . . . . . . . . . . .
No
60
Other . . . . . . . . . . . . . . . . . . . . . .
No
8903.91.00
Other:
1.5%
Free

Sailboats, with or without auxiliary motors
(A, E, IL, J, MX)
0.3% (CA)
A: Generalized System of Preferences
E: Caribbean Basin Initiative (CBI) Preference
IL: Israel Free Trade Agreement (FTA) Preference
J: Andean Agreement Preference
MX: North American Free Trade Agreement (NAFTA)
Canada Preference
CA: NAFTA Mexico Preference
The United States has given NTR status to some 180 countries
around the world, so the name is really a misnomer. Only North
Korea, Iran, Cuba, and Libya are excluded, showing that NTR is
really a political tool more than an economic one. In the past,
China had been threatened with the loss of NTR status because
of alleged human rights violations. The landed prices of its
exports—the cost after the goods have been delivered to a port,
unloaded, and passed through customs—would have risen
significantly had this threat been carried through. Thus, many
Chinese products would have been priced out of the U.S.
market. However, the U.S. Congress granted China permanent
NTR as a precursor to its joining the WTO in 2001. Table 8-6
illustrates what a loss of NTR status would have meant to
China.

Table 8-6 Tariff Rates for China, NTR versus Non-NTR
Source: U.S. Customs Service.
NTR
Non-NTR
Gold jewelry, such as plated neck chains
6.5%
80%
Screws, lock washers, misc. iron/steel parts
5.8%
35%
Steel products
0–5%
66%
Rubber footwear

0
66%
Women’s overcoats
19%
35%
A preferential tariff is a reduced tariff rate applied to imports
from certain countries. GATT prohibits the use of preferential
tariffs, with three major exceptions. First are historical
preference arrangements such as the British Commonwealth
preferences and similar arrangements that existed before GATT.
Second, preference schemes that are part of a formal economic
integration treaty, such as free trade areas or common markets,
are excluded. Third, industrial countries are permitted to grant
preferential market access to companies based in less-developed
countries.
The United States is now a signatory to the GATT customs
valuation code, and U.S. customs value law was amended in
1980 to conform to the GATT valuation standards. Under the
code, the primary basis of customs valuation is “transaction
value.” As the term implies, transaction value is defined as the
actual individual transaction price paid by the buyer to the
seller of the goods being valued. In instances where the buyer
and the seller are related parties (e.g., when Honda’s U.S.
manufacturing subsidiaries purchase parts from Japan), customs
authorities have the right to scrutinize the transfer price to make
sure it is a fair reflection of market value. If there is no

established transaction value for the good, alternative methods
that are used to compute the customs value sometimes result in
increased values and, consequently, increased duties. In the late
1980s, the U.S. Treasury Department began a major
investigation into the transfer prices charged by the Japanese
automakers to their U.S. subsidiaries. It contended that the
Japanese paid virtually no U.S. income taxes because of their
“losses” on the millions of cars they imported into the United
States each year.
During the Uruguay Round of GATT negotiations, the United
States successfully sought a number of amendments to the
Agreement on Customs Valuations. Most important, the United
States wanted clarification of the rights and obligati ons of
importing and exporting countries in cases where fraud was
suspected. Two overall categories of products were frequently
targeted for investigation. The first included exports of textiles,
cosmetics, and consumer durables; the second included
entertainment software such as videotapes, audiotapes, and
compact discs. Such amendments improve the ability of U.S.
exporters to defend their interests if charged with fraudulent
practices. The amendments were also designed to encourage
nonsignatories, especially developing countries, to become
parties to the agreement.
Customs Duties
Customs duties are divided into categories based on how they
are calculated: as a percentage of the value of the goods (ad
valorem duty), as a specific amount per unit (specific duty), or
as a combination of both of these methods. Before World War
II, specific duties were widely used and the tariffs of many
countries, particularly those in Europe and Latin America, were
extremely complex. During the past half-century, the trend has
been toward the conversion to ad valorem duties.
As noted, an ad valorem duty is expressed as a percentage of the

value of goods. The definition of customs value varies from
country to country. An exporter is well advised to secure
information about the valuation practices applied to his or her
product in the country of destination, so that the exporter can
price that product to be competitive with local producers. In
countries adhering to GATT conventions on customs valuation,
the customs value is the value of cost, insurance, and freight
(CIF) at the port of importation. This figure should reflect the
arm’s-length price of the goods at the time the duty becomes
payable.
A specific duty is expressed as a specific amount of currency
per unit of weight, volume, length, or other unit of
measurement—for example, “50 cents U.S. per pound,” “$1.00
U.S. per pair,” or “25 cents U.S. per square yard.” Specific
duties are usually expressed in the currency of the importing
country, but there are exceptions, particularly in countries that
have experienced sustained inflation.
Both ad valorem and specific duties are occasionally set out in
the customs tariff for a given product. Usually, the applicable
rate is the one that yields the higher amount of duty, although
sometimes the lower amount is specified. Compound or mixed
duties provide for specific, plus ad valorem, rates to be levied
on the same articles.
Other Duties and Import Charges
Dumping, which is the sale of merchandise in export markets at
unfair prices, is discussed in detail in Chapter 11. To offset the
impact of dumping and to penalize guilty companies, most
countries have introduced legislation providing for the
imposition of antidumping duties if injury is caused to domestic
producers; such duties take the form of special additional
import charges equal to the dumping margin. Antidumping
duties are almost invariably applied to products that are also
manufactured or grown in the importing country. In the United

States, antidumping duties are assessed after the U.S.
Commerce Department finds a foreign company guilty of
dumping and the International Trade Commission (ITC) rules
that the dumped products injured American companies.
Countervailing duties (CVDs) are additional duties levied to
offset subsidies granted in the exporting country. In the United
States, CVD legislation and procedures are very similar to those
pertaining to dumping. The U.S. Commerce Department and the
ITC jointly administer both the CVD and antidumping laws
under provisions of the Trade and Tariff Act of 1984. Subsidies
and countervailing measures received a great deal of attention
during the Uruguay Round of GATT negotiations. In 2001, the
ITC and the U.S. Commerce Department imposed both
countervailing and antidumping duties on Canadian lumber
producers. The CVDs were intended to offset subsidies to
Canadian sawmills in the form of low fees for cutting trees in
forests owned by the Canadian government. The antidumping
duties on imports of softwood lumber, flooring, and siding were
applied in response to complaints by U.S. producers that the
Canadians were exporting lumber at prices below their
production cost.
Several countries, including Sweden and some other members of
the EU, apply a system of variable import levies to certain
categories of imported agricultural products. If the prices of
imported products would undercut the prices of domestic
products, these levies raise the price of imported products to the
domestic price level. Temporary surcharges have also been
introduced from time to time by certain countries, such as the
United Kingdom and the United States, to provide additional
protection for local industries and, in particular, in response to
balance of payments deficits.
8-5 Key Export Participants
8-5 Describe the various -organizations that participate in the

export process.
Anyone with responsibilities for exporting should be familiar
with some of the entities that can assist with various export-
related tasks. Some of these entities, including foreign
purchasing agents, export brokers, and export merchants, have
no assignment of responsibility from the client. Others,
including export management companies, manufacturers’ export
representatives, export distributors, and freight forwarders, are
formally assigned responsibilities by the exporter.
Foreign purchasing agents are variously referred to as the buyer
for export, export commission house, or export confirming
house. These agents operate on behalf of, and are compensated
by, an overseas customer known as a principal. They generally
seek out a manufacturer whose price and quality match the
specifications of their principal. Foreign purchasing agents
often represent governments, utilities, railroads, and other large
users of materials. These agents do not offer the manufacturer
or exporter a stable volume of business, except when long-term
supply contracts are agreed upon. Purchases may be completed
as domestic transactions, with the purchasing agent handling all
export packing and shipping details, or the agent may rely on
the manufacturer to handle the shipping arrangements.
The export broker receives a fee for bringing together the seller
and the overseas buyer. Although this fee is usually paid by the
seller, sometimes the buyer pays it. The broker takes no title to
the goods and assumes no financial responsibility. A broker
usually specializes in a specific commodity, such as grain or
cotton, and is less frequently involved in the export of
manufactured goods.
Export merchants are sometimes referred to as jobbers. These
marketing intermediaries identify market opportunities in one
country or region and make purchases in other countries to fill

these needs. An export merchant typically buys unbranded
products directly from the producer or manufacturer, then
brands the goods and performs all other marketing activities for
them, including distribution. For example, an export merchant
might identify a good source of women’s boots in a factory in
China. The merchant might then purchase a large quantity of the
boots and market them in, for example, the EU or the United
States.
An export management company (EMC) is an independent
marketing intermediary that acts as the export department for
two or more manufacturers (principals) whose product lines do
not compete with each other. Although the EMC usually
operates in the name of its principals for export markets, it may
also operate in its own name. This company may act as an
independent distributor, purchasing and reselling goods at an
established price or profit margin. Alternatively, it may act as a
commissioned representative, taking no title and bearing no
financial risks in the sale. According to one survey of U.S.-
based EMCs, the most important activities for export success
are gathering marketing information, communicating with
markets, setting prices, and ensuring parts availability. The
same survey ranked export activities in terms of degree of
difficulty; analyzing political risk, sales force management,
setting pricing, and obtaining financial information were found
to be the most difficult to accomplish. One of the study’s
conclusions was that the U.S. government should do a better job
of helping EMCs and their clients analyze the political risk
associated with foreign markets.10
Another type of intermediary is the manufacturer’s export agent
(MEA). Much like an EMC, the MEA can act as an export
distributor or as an export commission representative. However,
the MEA does not perform the functions of an export
department, and the scope of its market activities is usually
limited to a few countries.

An export distributor does assume financial risk as part of the
export process. Because this party usually represents several
manufacturers, it is sometimes known as a combination export
manager. The export distributor usually has the exclusive right
to sell a manufacturer’s products in all or some markets outside
the country of origin. The distributor pays for the goods and
assumes all financial risks associated with the foreign sale; it
also handles all shipping details. The agent ordinarily sells at
the manufacturer’s list price abroad; compensation comes in the
form of an agreed percentage of the list price. The distributor
may operate in its own name or in the manufacturer’s name.
Unlike an export distributor, the export commission
representative assumes no financial risk. The manufacturer
assigns some or all foreign markets to the commission
representative. The manufacturer carries all accounts, although
the representative often provides credit checks and arranges
financing. Like the export distributor, the export commission
representative handles several accounts; hence, it is also known
as a combination export management company.
The cooperative exporter, sometimes called a mother hen, a
piggyback exporter, or an export vendor, is an export
organization of a manufacturing company retained by other
independent manufacturers to sell their products in foreign
markets. Cooperative exporters usually operate as export
distributors for other manufacturers, but in special cases they
operate as export commission representatives. They are
regarded as a form of export management company.
Freight forwarders are licensed specialists in traffic operations,
customs clearance, and shipping tariffs and schedules; simply
put, they can be thought of as travel agents for freight.
Minnesota-based C. H. Robinson Worldwide is one such
company. Freight forwarders seek out the best routing and the

best prices for transporting freight; they also assist exporters in
determining and paying fees and insurance charges. When
necessary, forwarders may do export packing as well. They
usually handle freight from the port of export to the overseas
port of import. In addition, they may move inland freight from
the factory to the port of export and, through affiliates abroad,
handle freight from the port of import to the customer.
Moreover, freight forwarders perform consolidation services for
land, air, and ocean freight. Because they contract for large
blocks of space on a ship or airplane, they can resell that space
to various shippers at a rate lower than is generally available to
individual shippers dealing directly with the export carrier.
A licensed forwarder receives brokerage fees or rebates from
shipping companies for booked space. Some companies and
manufacturers engage in freight forwarding or some portion of
it on their own, but they may not, under law, receive brokerage
from shipping lines.
8-6 Organizing for Exporting in the Manufacturer’s Country
8-6 Identify home-country export organization
considerations.
Home-country issues involve deciding whether to assign export
responsibility inside the company or to work with an external
organization specializing in a product or geographic area. Most
companies handle export operations within their own in-house
export organization. Depending on the company’s size,
responsibilities for this function may be incorporated into an
employee’s domestic job description. Alternatively, these
responsibilities may be handled as part of a separate divis ion or
organizational structure. The possible arrangements for
handling exports include the following:
As a part-time activity performed by domestic employees.

Through an export partner affiliated with the domestic
marketing structure that takes possession of the goods before
they leave the country.
Through an export department that is independent of the
domestic marketing structure.
Through an export department within an international
division.
For multidivisional companies, each of the preceding options
is available.
A company that assigns a sufficiently high priority to its export
business will establish an in-house organization. It then faces
the question of how to organize this function effectively. The
most appropriate approach depends on two things: the
company’s appraisal of the opportunities in export marketing
and its strategy for allocating resources to markets on a global
basis. It may be possible for a company to make export
responsibility part of a domestic employee’s job description.
The advantage of this arrangement is obvious: It is a low -cost
arrangement requiring no additional personnel. However, this
approach can work only under two conditions: (1) The domestic
employee assigned to the task must be thoroughly competent in
terms of product and customer knowledge and (2) that
competence must be applicable to the target international
market(s). The key issue underlying the second condition is the
extent to which the target export market is -different from the
domestic market. If customer circumstances and characteristics
are similar, the requirements for specialized regional knowledge
are reduced.
The company that chooses not to perform its own marketing and
promotion in-house has numerous external export service
providers from which to choose. As described previously, these

options include EMCs, export merchants, export brokers,
combination export managers, manufacturers’ export
representatives or commission agents, and export distributors.
Because these terms and labels may be used inconsistently, we
urge the reader to check and confirm the specific services
performed by a particular independent export organization.
8-7 Organizing for Exporting in the Market Country
8-7 Identify market--country export organization
considerations.
In addition to deciding whether to rely on in-house or external
export specialists in the home country, a company must make
arrangements to distribute its products in the target market
country. Every exporting organization faces one basic decision:
To what extent do we rely on direct market representation as
opposed to representation by independent intermediaries?
The two major advantages to direct representation in a market
are control and communications. Direct market representation
enables decisions concerning program development, resource
allocation, or price changes to be implemented unilaterally.
Moreover, when a product is not yet established in a market,
special efforts are necessary to achieve sales. The advantage of
direct representation is that the marketer’s investment ensures
that these special efforts will be undertaken. In contrast, with
indirect or independent representation, such efforts and
investment are often not forthcoming; in many cases, there is
simply not enough incentive for independents to invest
significant time and money in representing a product. The other
great advantage of direct representation is that the possibilities
for feedback and information from the market are much greater.
This information can vastly improve export-marketing decisions
concerning product, price, communications, and distribution.
Note that direct representation does not mean that the exporter

is selling directly to the consumer or customer. In most cases,
direct representation involves selling to wholesalers or retailers.
For example, the major automobile exporters in Germany and
Japan rely upon direct representation in the U.S. market in the
form of their distributing agencies, which are owned and
controlled by the manufacturing organization. The distributing
agencies then sell products to franchised dealers.
In smaller markets, it is usually not feasible to establish direct
representation because the low sales volume does not justify the
cost. Even in larger markets, a small manufactur er usually lacks
adequate sales volume to justify the cost of direct
representation. Whenever sales volume is small, use of an
independent distributor is an effective method of sales
distribution. Finding “good” distributors can be the key to
export success.
8-8 Trade Financing and Methods of Payment11
8-8 Discuss the various payment methods that are typically
used in trade financing.
The need for a company to be paid for its export sales should be
obvious. Yet, many who are new to international trade consider
this issue only as an afterthought. Experienced exporters and
importers (sellers and buyers) consider the financial and
shipping terms of a transaction to be a normal part of any
negotiation. In fact, settling the details of a transaction is a
valuable act of discipline for all parties to limit future
misunderstandings or conflicts. The credit and collection
functions are both art and science and require ongoing senior
management oversight. There is no “one size fits all” approach
to trade finance. Naturally, from a marketing perspective, a firm
needs to ensure its terms of sale are competitive.
Selling across borders is inherently riskier than selling within
one’s home country. Managers may have only limited

understanding of topics covered in previous chapters of this
book, including language, cultural differences, and foreign
political environments. Another reality is that, outside of the
OECD economies, a firm will have no effective legal recourse if
difficulties arise. Those engaging in international trade must
manage the central risks of “nonpayment” and
“nonperformance” by their business partners—situations where
the exporter might not receive payment for its goods or where
the importer might not receive what had been promised.
Fortunately, the international banking system plays a critical
role in enabling successful international commerce by reducing
these transaction risks. Before taking up a discussion of
banking’s role, however, we need to highlight two basic
methods of payment: cash with order and open account.
Cash with order (CWO) presents the least transaction risk to the
exporter. In this payment arrangement, the exporter sends the
importer a pro-forma invoice [a Latin term meaning "before the
fact" or "for the sake of form"] with the details and costs of a
future shipment. The financial figures and other information are
nonbinding, but will be reflected in the future actual invoice.
After receiving this "proforma," the importer then sends its
purchase order with prepayment (CWO) to the exporter. While
beneficial to the exporter, this presents risks for the importer:
Although the importing firm has sent funds to the exporter, it
has no assurance of shipment.
Open account payment presents the greatest transaction risk to
the exporter. In this arrangement, the importer sends a purchase
order to the exporter, which then produces, ships, and
subsequently invoices the importer for the shipment. The
importer then remits payment to the exporter via wire transfer.
While beneficial to the importer, this scheme is risky for the
exporter because, even though it has made the requested
shipment, there is no assurance of payment.
Letters of Credit

While the CWO and open account payment methods both carry
risks, they may be used when two companies have a
longstanding, mutually beneficial relationship with each other.
However, for most firms entering cross-border business with a
new commercial partner, the risks of nonpayment or
nonperformance are simply too great, and failure could put their
companies at risk.
This is where the banking system helps manage the risk via a
key document called the letter of credit (L/C) (also known as a
documentary credit). An L/C substitutes a bank’s
creditworthiness for that of the importer. From the exporter’s
perspective, if it ships and “performs” under an L/C, it can rely
on the full faith and credit of that bank for payment—not the
creditworthiness of the buyer. At the same time, the importer is
not obligated to pay for the shipment unless and until the
exporter has performed under the terms specified in the L/C.
Performance is demonstrated when the exporter provides the
buyer’s bank with a documentary package. This agreed-upon set
of documents, which are listed in the L/C, collectively
demonstrates that the exporter has performed as agreed.
The importer’s bank is known as the “issuing” or “opening”
bank. At the request of the buyer, it “opens” an L/C “in favor
of” the exporter, which is thereafter referred to as the
“beneficiary.” In some instances, the opening bank may require
the importer to deposit funds or provide collateral against the
L/C because the bank is, in essence, extending its own credit on
behalf of the importer. However, if there is an established
relationship between the bank and the importer, this
requirement may be waived. The now-opened L/C is sent to the
exporter’s bank, which then advises the exporter that an L/C has
been opened in its favor. The exporter’s bank is referred to as
the “negotiating” or “advising” bank.

The most common type of L/C is an irrevocable letter of credit.
As the name implies, the bank issuing the L/C cannot cancel
(“revoke”) or modify the L/C terms without obtaining approval
from both the exporter and the importer. The key point, from
the exporter’s perspective, is that even if the importer
subsequently cancels the order or fails to pay for the
merchandise, the opening bank remains obligated to pay the
exporter so long as the exporter has fulfilled the terms given in
the L/C.
If the exporter desires (at its prerogative), it can secure an extra
layer of protection (for a fee) by asking its advising bank to
confirm the L/C of the opening bank. Such a confirmation adds
the full faith and credit of the exporter’s bank on top of the
existing pledge by the importer’s bank. If the buyer’s opening
bank ultimately does not or cannot pay—due, for example, to
government-imposed currency controls—the exporter is still
guaranteed payment by its own bank. In this scenario, the
exporter is said to be operating under a confirmed irrevocable
letter of credit. Bank fees for opening an L/C vary by country
and commercial risk, but can range from ⅛% to 1% of the total
credit. Banks charge similar fees for confirming an L/C.
After being satisfied that it can perform under the L/C terms,
the exporter will produce and ship the product to the importer.
The exporter then assembles the group of documents listed in
the L/C. As noted earlier, the L/C includes an agreed-upon (by
buyer and seller) list of documents that will be considered
evidence of the seller’s performance. This documentary package
often includes commercial invoices, drafts, packing lists,
certificates of insurance, certificates of origin, and ocean bills
of lading (which represent title to the shipment). The
documentary package and the L/C are sent via the advising (or
now confirming) bank and “presented” to the buyer’s opening
bank. The buyer’s bank reviews the documentary package and,
if all is in order, will “honor” the credit.

If the transaction is conducted under a sight draft, the bank will
promptly transfer payment to the beneficiary. If the exporter
had agreed to extended credit terms, the draft in the
documentary package would be a time draft and the bank would
remit payment after that agreed-upon period. At this point, for
the importer to take possession of the shipment, the opening
bank will arrange for the buyer to make its payment, either at
sight or at the later time given in the time draft. Upon the
importer paying the opening bank or signing a promissory note
(pledging to make the future payment), the bank will release the
documentary package to the buyer. This package includes the
ocean bills of lading (and thus title to the goods), enabling the
importer to take possession of those goods from the freight
carrier. In this process, it is important to note that banks operate
only against documents—not on handshakes, contracts, or the
shipment’s physical move.
9-1 Licensing
9-1 Explain the advantages and disadvantages of using
licensing as a market-entry strategy.
Licensing is a contractual arrangement whereby one company
(the licensor) makes a legally protected asset available to
another company (the licensee) in exchange for royalties,
license fees, or some other form of compensation.2 The licensed
asset may be a brand name, company name, patent, trade secret,
or product formulation. Licensing is widely used in the fashion
industry. For example, the namesake companies associated with
Giorgio Armani, Hugo Boss, and other global design icons
typically generate more revenue from licensing deals for jeans,
fragrances, and watches than from their high-priced couture
lines. Organizations as diverse as Disney, Caterpillar Inc., the
National Basketball Association, and Coca-Cola also make
extensive use of licensing. Even though none is an apparel
manufacturer, licensing agreements allow them to leverage their

brand names and generate substantial revenue streams. As these
examples suggest, licensing is a global market-entry and
expansion strategy with considerable appeal. It can offer an
attractive return on investment for the life of the agreement,
provided that the necessary performance clauses are included in
the contract. The only cost is signing the agreement and
policing its implementation.
“That [Presidential Seal] t-shirt was like having a huge
international hit record. Everyone knows it. And if we hadn’t
done it, the bootleggers would have done it for us. A licensing
deal gets done and it’s all passive income promoting the
band.”3
Marky Ramone, drummer for punk icons The Ramones, on the
importance of merchandise licensing deals for recording artists
Two key advantages are associated with licensing as a market-
entry mode. First, because the licensee is typically a local
business that will produce and market the goods on a local or
regional basis, licensing enables companies to circumvent
tariffs, quotas, or similar export barriers discussed in Chapter 8.
Second, when appropriate, licensees are granted considerable
autonomy and are free to adapt the licensed goods to local
tastes.
Disney’s success with licensing is a case in point. Disney
licenses its trademarked cartoon characters, names, and logos to
producers of clothing, toys, and watches for sale throughout the
world. This practice allows Disney to create synergies based on
its core theme park, motion picture, and television businesses.
Its licensees are allowed considerable leeway to adapt colors,
materials, or other design elements to local tastes.
According to the international Licensing Industry
Merchandisers Association (LIMA), worldwide sales of licensed

goods totaled $263 billion in 2016. LIMA also has reported that
the United States and Canada account for approximately 60
percent of licensed goods sales.4 For example, yearly
worldwide sales of licensed Caterpillar merchandise now
approach $2.1 billion, as consumers make a fashion statement
by donning boots, jeans, and handbags bearing the distinctive
black-and-yellow Cat label (see Exhibit 9-2). Stephen Palmer
was the chief executive of U.K.-based Overland Ltd., which
held the worldwide license for Cat-branded apparel in the
2000s. He noted, “Even if people here don’t know the brand,
they have a feeling that they know it. They have seen
Caterpillar tractors from an early age. It’s subliminal, and that’s
why it’s working.”5
Exhibit 9-2
Cat's flagship store in the City Center Mall, Isfahan, Iran. Top-
selling merchandise includes footwear and clothing.
Source: Eric Lafforgue/Art in All of Us/Corbis/Getty Images.
Licensing is also associated with several disadvantages and
opportunity costs. First, licensing agreements offer limited
market control. Because the licensor typically does not become
involved in the licensee’s marketing program, potential returns
from marketing may be lost. The second disadvantage is that the
agreement may have a short life if the licensee develops its own
know-how and begins to innovate in the licensed product or
technology area. In a worst-case scenario (from the licensor’s
point of view), licensees—especially those working with
process technologies—can develop into strong competitors in
the local market and, eventually, into industry leaders. Indeed,
licensing, by its very nature, enables a company to “borrow”—
that is, leverage and exploit—another company’s resources. A
case in point is Pilkington, which saw its leadership position in
the glass industry erode in the 1990s as Glaverbel, Saint-
Gobain, PPG, and other competitors achieved higher levels of
production efficiency and lower costs. In 2006, Pilkington was

acquired by Japan’s Nippon Sheet Glass.6
Perhaps the most famous example of the opportunity costs
associated with licensing dates back to the mid-1950s, when
Sony cofounder Masaru Ibuka obtained a licensing agreement
for the transistor from AT&T’s Bell Laboratories. Ibuka
dreamed of using transistors to make small, battery-powered
radios. However, the Bell engineers with whom he spoke
insisted that it was impossible to manufacture transistors that
could handle the high frequencies required for a radio; they
advised him to try making hearing aids instead. Undeterred,
Ibuka presented the challenge to his Japanese engineers, who
then spent many months improving high-frequency output. Sony
was not the first company to unveil a transistor radio; a U.S.-
built product, the Regency, featured transistors from Texas
Instruments and sported a colorful plastic case. It was Sony’s
high-quality, distinctive approach to styling and marketing
savvy, though, that ultimately translated into worldwide
success.
When the licensee applies the lessons learned from the licensor
to its own advantage in this way, companies may find that the
upfront easy money obtained from licensing turns out to be a
very expensive source of revenue. To prevent a licensor -
competitor from gaining a unilateral benefit, licensing
agreements should provide for a cross-technology exchange
among all parties. At the absolute minimum, any company that
plans to remain in business must ensure that its license
agreements include a provision for full cross-licensing (i.e., the
licensee must share its developments with the licensor).
Overall, the licensing strategy must be designed to ensure
ongoing competitive advantage for the licensor. For example,
license arrangements can create export market opportunities and
open the door to low-risk manufacturing relationships. They can
also speed diffusion of new products or technologies.

Special Licensing Arrangements
Companies that use contract manufacturing provide technical
specifications to a subcontractor or local manufacturer. The
subcontractor then oversees production. Such arrangements
offer several advantages. First, the licensing firm can specialize
in product design and marketing, while transferring
responsibility for ownership of manufacturing facilities to
contractors and subcontractors. Other advantages include
limited commitment of financial and managerial resources and
quick entry into target countries, especially when the target
market is too small to justify significant investment.7 One
disadvantage is that companies may open themselves to public
scrutiny and criticism if workers in contract factories are poorly
paid or labor in inhumane circumstances. To circumvent such
problems with their public image, Timberland and other
companies that source in low-wage countries are using image
advertising to communicate their corporate policies on
sustainable business practices.
Franchising is another variation of licensing strategy. A
franchise is a contract between a parent company/franchiser and
a franchisee that allows the franchisee to operate a business
developed by the franchiser in return for a fee and adherence to
franchise-wide policies and practices. For example, South
Africa-based Nando’s is a casual dining chain specializing in
Portuguese-style chicken served with spicy peri-peri sauce (see
Exhibit 9-3).
Exhibit 9-3
This Nando’s store in London’s Soho neighborhood
incorporated Pride colors in the brand’s logo that features Barci
the chicken. The company uses franchising as a global market-
entry strategy.
Source: DrimaFilm/Shutterstock.

Franchising has great appeal to local entrepreneurs who are
anxious to learn and apply Western-style marketing techniques.
Franchising consultant William Le Sante suggests that would-be
franchisers ask the following questions before expanding
overseas:
Will local consumers buy your product?
How tough is the local competition?
Does the government respect trademark and franchiser
rights?
Can your profits be easily repatriated?
Can you buy all the supplies you need locally?
Is commercial space available and are rents affordable?
Are your local partners financially sound and do they
understand the basics of franchising?9
By addressing these issues, franchisers can gain a more realistic
understanding of global opportunities. In China, for example,
regulations require foreign franchisers to directly own two or
more stores for a minimum of 1 year before franchisees can take
over the business. Intellectual property protection is also a
concern in China; U.S. President Donald Trump has made this
issue a key element in trade negotiations with Beijing.
The specialty retailing industry favors franchising as a market-
entry mode. The U.K.-based Body Shop has more than 3,200
stores in 66 countries; franchisees operate the majority of them.
(In 2017, the Brazil’s Natura Cosméticos acquired The Body
Shop from L’Oréal.) Franchising is also a cornerstone of global
growth in the fast-food industry; McDonald’s reliance on

franchising to expand globally is a case in point. The fast-food
giant has a well-known global brand name and a business
system that can be easily replicated in multiple country markets.
As a crucial part of its success, McDonald’s headquarters has
learned the wisdom of leveraging local market knowledge by
granting franchisees considerable leeway to tailor restaurant
interior designs and menu offerings to suit country-specific
preferences and tastes (see Case 1-2). Generally speaking,
however, franchising is a market-entry strategy that is typically
executed with less localization than is licensing.
When companies do decide to license, they should sign
agreements that anticipate more extensive market participation
in the future. Insofar as is possible, a company should keep its
options and paths open for other forms of market participation.
Many of these forms require investment and give the investing
company more control than is possible with licensing.
9-2 Investment
9-2 Compare and contrast the different forms that a
company’s foreign investments can take.
After companies gain experience outside the home country via
exporting or licensing, the time often comes when executives
desire a more extensive form of participation. In particular, the
desire to have partial or full ownership of operations outside the
home country can drive the decision to invest. Foreign direct
investment (FDI) figures reflect investment flows out of the
home country as companies invest in or acquire plants,
equipment, or other assets. FDI allows companies to produce,
sell, and compete locally in key markets. Examples of FDI
abound: Honda built a $550 million assembly plant in
Greensburg, Indiana; Hyundai invested $1 billion in a plant in
Montgomery, Alabama; IKEA has spent nearly $2 billion to
open stores in Russia; and South Korea’s LG Electronics
purchased a 58 percent stake in Zenith Electronics (see Exhibit

9-4). Each of these arrangements represents FDI.
Exhibit 9-4
Fiskars, based in Finland, is famous for premium-quality
cutlery. The company is perhaps best known for its scissors
with the iconic orange handles. Fiskars has expanded its brand
portfolio via investment; its 2015 acquisition of WWRD
included Waterford and Wedgewood.
Source: Fiskars Brand, Inc.
The final years of the twentieth century were a boom time for
cross-border mergers and acquisitions. The trend continues
today: Worldwide FDI totaled $1.9 trillion in 2016. The United
States is the number 1 destination for direct investment;
acquisitions alone accounted for $366 billion of FDI in 2016.
Canada is the source of the largest share of U.S.-bound FDI,
followed by the United Kingdom, Ireland, and Switzerland.
Investment in emerging and fast-growing regions has also
expanded rapidly in the past few decades. For example, as noted
in earlier chapters, investment interest in the BRICS (Brazil,
Russia, India, China, and South Africa) nations is increasing,
especially in the automobile industry and other sectors critical
to the countries’ economic development.
Foreign investments may take the form of minority or majority
shares in joint ventures, minority or majority equity stakes in
another company, or outright acquisition. A company may also
choose to use a combination of these entry strategies by
acquiring one company, buying an equity stake in another, and
operating a joint venture with a third. For example, in recent
years, United Parcel Service (UPS) has made numerous
investments and acquisitions that have focused on logistics,
trucking, and e-commerce companies.
Joint Ventures
A joint venture with a local partner represents a more extensive

form of participation in foreign markets than either exporting or
licensing. Strictly speaking, a joint venture is an entry strategy
for a single target country in which the partners share
ownership of a newly created business entity.10 This strategy is
attractive for several reasons. First and foremost is the sharing
of risk. By pursuing a joint venture entry strategy, a company
can limit its financial risk as well as its exposure to political
uncertainty. Second, a company can use the joint-venture
experience to learn about a new market environment. If it
succeeds in becoming an insider, it may later increase the level
of commitment and exposure. Third, joint ventures allow
partners to achieve synergy by combining different value-chain
strengths. For example, one company might have in-depth
knowledge of a local market, an extensive distribution system,
or access to low-cost labor or raw materials. Such a company
might link up with a foreign partner possessing well-known
brands or cutting-edge technology, manufacturing know-how, or
advanced process applications. Alternatively, a company that
lacks sufficient capital resources might seek partners to jointly
finance a project. Finally, a joint venture may be the only way
to enter a country or region if government bid award practices
routinely favor local companies, if import tariffs are high, or if
laws prohibit foreign control but permit joint ventures.
The disadvantages of joint venturing can be significant. The
partners in the joint venture must share both rewards and risks.
The main disadvantage associated with joint ventures is that a
company incurs very significant control and coordination cost
issues when working with a partner. (However, in some
instances, country-specific restrictions limit the share of capital
that can be injected by foreign companies.)
A second disadvantage is the potential for conflict between
partners. These disagreements often arise out of cultural
differences, as was the case in a failed $130 million joint
venture between Corning Glass and Vitro, Mexico’s largest

industrial manufacturer. The venture’s Mexican managers
sometimes viewed the Americans as being too direct and
aggressive; the Americans believed their partners took too much
time to make important decisions.11 Such conflicts can multiply
when the venture is formed among several different partners.
Disagreements about third-country markets where partners view
each other as actual or potential competitors can lead to
“divorce.” To avoid this unhappy outcome, it is essential to
work out a plan for approaching third-country markets as part of
the venture agreement.
A third issue, also noted in the discussion of licensing, is that a
dynamic joint-venture partner can evolve into a stronger
competitor. Many developing countries are very forthright about
their desire to pursue this goal. As Yuan Sutai, a member of
China’s Ministry of Electronics Industry, told The Wall Street
Journal more than 20 years ago, “The purpose of any joint
venture, or even a wholly-owned investment, is to allow
Chinese companies to learn from foreign companies. We want
them to bring their technology to the soil of the People’s
Republic of China.”12 General Motors (GM) and South Korea’s
Daewoo Group formed a joint venture in 1978 to produce cars
for the Korean market. By the mid-1990s, GM had helped
Daewoo improve its competitiveness as an auto producer, but
Daewoo chairman Kim Woo-Choong terminated the venture
because its provisions prevented the export of cars bearing the
Daewoo name.13
As one global marketing expert warns, “In an alliance you have
to learn skills of the partner, rather than just see it as a way to
get a product to sell while avoiding a big investment.” Yet,
compared with U.S. and European firms, Japanese and Korean
firms seem to excel in their abilities to leverage new knowledge
that comes out of a joint venture. For example, Toyota learned
many new things from its partnership with GM—about U.S.
supply and transportation and managing American workers—

that Toyota subsequently applied at its Camry plant in
Kentucky. Conversely, some American managers involved in the
venture complained that the manufacturing expertise that
Toyota brought to the table was not applied broadly throughout
GM.
Investment via Equity Stake or Full Ownership
The most extensive form of participation in global markets is
investment that results in either an equity stake or full
ownership. An equity stake is simply an investment. If the
investor owns fewer than 50 percent of the shares, it is a
minority stake; ownership of more than half the shares makes it
a majority. Full ownership, as the name implies, means the
investor has 100 percent control. This may be achieved by a
startup of new operations, known as greenfield investment, or
by merger or acquisition of an existing enterprise.
In 2016, one of the largest merger and acquisition (M&A) deals
was the proposed acquisition of American agricultural giant
Monsanto by Germany-based Bayer for $66 billion. In March
2018, the EU gave its approval; the following month, the U.S.
Justice Department did the same. Prior to the global financial
crisis in the late 2000s, the media and telecommunications
industry sectors were among the busiest for M&A worldwide.
As illustrated by these and many other deals, ownership
requires the greatest commitment of capital and managerial
effort and offers the fullest means of participating in a market.
Companies may move from licensing or joint venture strategies
to ownership in attempt to achieve faster expansion in a market,
greater control, and/or higher profits. A quarter-century ago,
Ralston Purina ended a 20-year joint venture with a Japanese
company to start its own pet food subsidiary. Home Depot used
acquisition to expand in China; in 2006, the home improvement
giant acquired the HomeWay chain—only to discover that
Chinese consumers did not embrace the big-box, do-it-yourself

model. By the end of 2012, Home Depot had closed the last of
its big-box stores in China; its two remaining Chinese retail
locations are a paint-and-flooring specialty store and an interior
design store.
If government restrictions prevent 100 percent ownership by
foreign companies, the investing company will have to settle for
a majority or minority equity stake. In China, the government
usually restricts foreign ownership in joint ventures to a 51
percent majority stake. However, a minority equity stake may
suit a company’s business interests. For example, Samsung was
content to purchase a 40 percent stake in computer maker AST.
As Samsung manager Michael Yang noted, “We thought 100
percent would be very risky, because any time you have a
switch of ownership, that creates a lot of uncertainty among the
employees.”14
In other instances, the investing company may start with a
minority stake and then increase its share. In 1991, Volkswagen
AG made its first investment in the Czech auto industry by
purchasing a 31 percent share in Skoda. By 1995, Volkswagen
had increased its equity stake to 70 percent, with the
government of the Czech Republic owning the rest. Volkswagen
acquired full ownership in 2000. By 2011, when Skoda
celebrated the twentieth anniversary of its relationship with
VW, the Czech automaker had evolved from a regional company
to a global one, selling more than 750,000 vehicles in 100
countries.15 Similarly, during the economic downturn of the
late 2000s, Italy’s Fiat acquired a 20 percent stake in Chrysler
when the U.S. automaker was in bankruptcy proceedings. Fiat
CEO Sergio Marchionne returned Chrysler to profitability and
upped his company’s stake first to 53.5 percent and then to 58.5
percent. Finally, in 2013, Fiat was set to acquire the remaining
41.5 percent and complete the full acquisition of Chrysler.16
Large-scale direct expansion by means of establishing new

facilities can be expensive and require a major commitment of
managerial time and energy. However, political or other
environmental factors sometimes dictate this approach. For
example, Japan’s Fuji Photo Film Company invested hundreds
of millions of dollars in the United States after the U.S.
government ruled that Fuji was guilty of dumping (i.e., selling
photographic paper at substantially lower prices than in Japan).
As an alternative to greenfield investment in new facilities,
acquisition is an instantaneous —and sometimes less
expensive—approach to market entry or expansion. Although
full ownership can yield the additional advantage of avoiding
communication and conflict-of-interest problems that may arise
with a joint venture or coproduction partner, acquisitions still
present the demanding and challenging task of integrating the
acquired company into the worldwide organization and
coordinating activities.
Emerging Markets Briefing Book
Auto Industry Joint Ventures in Russia
Russia represents a huge, barely tapped market for a variety of
industries, and the number of joint ventures being formed there
is increasing. In 1997, GM became the first Western automaker
to begin assembling vehicles in Russia. To avoid hefty tariffs
that would have pushed the street price of an imported Blazer to
$65,000 or more, GM invested in a 25–75 joint venture with the
government of the autonomous Tatarstan republic. That
partnership, known as Elaz-GM, assembled Blazer sport-utility
vehicles (SUVs) from imported components until the end of
2000. Young Russian professionals were expected to snap up
the vehicles as long as the price was less than $30,000.
However, after only 15,000 vehicles had been sold, market
demand evaporated. At the end of 2001, GM terminated the
joint venture. Some other recent joint venture alliances are
outlined in Table 9-1.
Table 9-1 Market Entry and Expansion by Joint Venture

Source: Compiled by authors.
Companies Involved
Purpose of Joint Venture
GM (USA), Toyota (Japan)
NUMMI, a jointly operated plant in Freemont, California
(venture was terminated in 2009).
GM (USA), Shanghai Automotive Industry (China)
A 50–50 joint venture to build an assembly plant to produce
100,000 mid-sized sedans for the Chinese market beginning in
1997 (total investment of $1 billion).
GM (USA), Hindustan Motors (India)
A joint venture to build as many as 20,000 Opel Astras annually
(GM’s investment was $100 million).
GM (USA), governments of Russia and Tatarstan
A 25–75 joint venture to assemble Blazers from imported parts
and, by 1998, to build a full assembly line for 45,000 vehicles
(total investment of $250 million).
Ford (USA), Mazda (Japan)

AutoAlliance International 50–50 joint operation of a plant in
Flat Rock, Michigan.
Ford (USA), Mahindra & Mahindra Ltd. (India)
A 50–50 joint venture to build Ford Fiestas in the Indian state
of Tamil Nadu (total investment of $800 million).
Chrysler (USA), BMW (Germany)
A 50–50 joint venture to build a plant in South America to
produce small-displacement, 4-cylinder engines (total
investment of $500 million).
GM achieved better results with a joint venture with AvtoVAZ,
the largest car maker in Russia (see Exhibit 9-5). Founded in
1966 in Togliatti, a city on the Volga River, AvtoVAZ is home
to Russia’s top technical design center and also has access to
low-cost Russian titanium and other materials. In the past, the
company was best known for being inefficient and for
producing the outdated, boxy Lada, whose origins date back to
the Soviet era. GM originally intended to assemble a stripped-
down, reengineered car based on its Opel model. But market
research revealed that a “Made in Russia” car would be
acceptable only if it sported a very low sticker price; the same
research pointed GM toward an opportunity to put the Chevrolet
nameplate on a redesigned domestic model.
Exhibit 9-5
In the past, Russia was known as “the land of the Lada,” a
reference to a Soviet-era car of dubious distinction. Until
recently, Russia was on track to surpass Germany as Europe’s
largest car market. Despite the current sales slump, GM is

standing by its $100 million joint venture bet with AvtoVAZ.
Source: Evg Zhul/Shutterstock.
Developed with $100 million in funding from GM, the
Chevrolet Niva was launched in fall 2002. Within a few years,
however, the joint venture was struggling as AvtoVAZ installed
a new management team that had the personal approval of then
President Vladimir Putin. The Russian government owns 25
percent of AvtoVAZ; in 2008, Renault paid $1 billion for a 25
percent stake. Renault’s contribution consisted of technology
transfer—specifically, its “B-Zero” auto platform—and
production equipment. That same year, Russians bought a
record 2.56 million vehicles. When Russian auto sales collapsed
as the global economic crisis deepened, however, AvtoVAZ was
pushed close to bankruptcy. More than 40,000 workers were
laid off, and Moscow was forced to inject $900 million into the
company.
In 2009, an American, Jeffrey Glover, was sent from GM’s
Adam Opel division in Germany to run the Russian joint
venture. By 2011, when AvtoVAZ celebrated its 45th
anniversary, Russian automobile sales had rebounded. In 2012,
annual sales reached pre-crisis levels of 3 million vehicles.
Indeed, industry analysts predicted that Russia would surpass
Germany as Europe’s top auto market by 2014. And the Niva?
More than 500,000 have been sold since 2002. As Jim Bovenzi,
president of GM Russia explains, “Ten years ago, this was a
difficult decision for GM. It was the first time in the 100-year
history of the company that we would produce a fully locally
designed and produced product, but when we look back now, it
was the right decision.”
More recent events in Russia have put a damper on GM’s
outlook. By 2016, the volume of car sales had dropped to half
of the 2012 level. As a result, Russia is no longer on track to
surpass Germany as Europe’s top car market. New car sales in

Russia have dropped significantly. The ruble’s decline in value
and Russia’s military incursions in Crimea and Ukraine
prompted GM to slash production and cut jobs. Despite the
turmoil, GM is maintaining the AvtoVAZ joint venture. And, to
cut costs and take advantage of the weak ruble, GM is sourcing
more components from local suppliers.
Prior to the crisis, the Russian market for imported premium
vehicles was also growing as the number of households that
could afford luxury products exhibited rapid growth. Porsche (a
division of Volkswagen) and BMW both expanded the number
of their dealerships in Russia. Rolls-Royce (owned by BMW)
now has two dealerships in Moscow; the only other city in the
world with two dealerships is New York City. In addition,
Nissan is assembling the Infiniti FX SUV in St. Petersburg.
Even so, the weak ruble means that imports are much more
expensive than in the past.
By 2017, as the country emerged from recession, there were
signs that sales were recovering. AvtoVAZ returned to
profitability. Some plants that had been shuttered, including a
Mitsubishi Motors plant in Kaluga, were brought back online.
Sources: Henry Foy and Peter Campbell, “Carmakers Gear up
for Recovery in Russia,” Financial Times (September 29, 2017),
p. 20; Jason Chow and James Marson, “Renault Tries to Fix
Russian Misadventure,” The Wall Street Journal (April 11,
2016), pp. A1, A10; James Marson, “CEO under Fire at Russian
Car Giant,” The Wall Street Journal (March 5–6, 2016), pp. B1,
B4; William Boston and Sarah Sloat, “GM Slices Jobs and
Output in Russia,” The Wall Street Journal (September 14,
2014), p. B6; Anatoly Temkin, “The Land of the Lada Eyes
Upscale Rides,” Bloomberg Businessweek (September 17,
2012), pp. 28–30; Luca I. Alpert, “Russia’s Auto Market
Shines,” The Wall Street Journal (August 30, 2012), p. B3; John
Reed, “AvtoVAZ Takes Stock of 45 Years of Ladas,” Financial

Times (July 22, 2011), p. 17; David Pearson and Sebastian
Moffett, “Renault to Assist AvtoVAZ,” The Wall Street Journal
(November 28, 2009), p. A5; Guy Chazan, “Kremlin Capitalism:
Russian Car Maker Comes under Sway of Old Pal of Putin,” The
Wall Street Journal (May 19, 2006), p. A1; Keith Naughton,
“How GM Got the Inside Track in China,” BusinessWeek
(November 6, 1995), pp. 56–57; Gregory L. White, “Off Road:
How the Chevy Name Landed on SUV Using Russian
Technology,” The Wall Street Journal (February 20, 2001), pp.
A1, A8.
Table 9-2, Table 9-3, and Table 9-4 provide a sense of how
companies in the automotive industry utilize a variety of
market-entry options discussed previously, including equity
stakes, investments to establish new operations, and acquisition.
Table 9-2 shows that GM historically favored minority stakes in
non-U.S. automakers; from 1998 through 2000, the company
spent $4.7 billion on such deals, whereas Ford spent twice as
much on acquisitions. Despite the fact that GM losses from the
deals resulted in substantial write-offs, the strategy reflects
management’s skepticism about big mergers actually working.
As former GM chairman and CEO Rick Wagoner said, “We
could have bought 100 percent of somebody, but that probably
wouldn’t have been a good use of capital.” Meanwhile, the
company’s investments in minority stakes have paid off: The
company enjoys scale-related savings in purchasing, it has
gained access to diesel technology, and Saab produced a new
model in record time with the help of Subaru.17 Following its
bankruptcy filing in 2009, GM divested itself of several noncore
businesses and brands, including Saab. By the early 2010s, Saab
Automobile itself had gone out of business.
Table 9-2 Investment in Equity Stake
Investing Company (Home Country)

Investment (Share, Amount, Date)
Fiat (Italy)
Chrysler (United States, initial 20% stake, 2009; Fiat took
Chrysler out of bankruptcy)
General Motors (USA)
Fuji Heavy Industries (Japan, 20% stake, $1.4 billion, 1999);
Saab Automobiles AB (Sweden, 50% stake, $500 million, 1990;
remaining 50%, 2000; following bankruptcy filing, sold Saab to
Swedish consortium in 2009)
Volkswagen AG (Germany)
Skoda (Czech Republic, 31% stake, $6 billion, 1991; increased
to 50.5%, 1994; currently owns 70% stake)
Ford (USA)
Mazda Motor Corp. (Japan, 25% stake, 1979; increased to
33.4%, $408 million, 1996; decreased stake to 13%, 2008;
reduced to 3.5%, 2010)
Renault SA (France)
AvtoVAZ (Russia, 25% stake, $1.3 billion, 2008); Nissan
Motors (Japan, 35% stake, $5 billion, 2000)
Table 9-3 Investment to Establish New Operations

Investing Company (Headquarters Country)
Investment (Location, Date)
Honda Motor (Japan)
$550 million auto-assembly plant (Indiana, United States, 2006)
Hyundai (South Korea)
$1.1 billion auto-assembly and manufacturing facility producing
Sonata and Santa Fe models (Georgia, United States, 2005)
Bayerische Motoren Werke AG (Germany)
$400 million auto-assembly plant (South Carolina, United
States, 1995)
Mercedes-Benz AG (Germany)
$300 million auto-assembly plant (Alabama, United States,
1993)
Toyota (Japan)
$3.4 billion manufacturing plant producing Camry, Avalon, and
minivan models (Kentucky, United States); $400 million engine
plant (West Virginia, United States)
Table 9-4 Market Entry and Expansion by Acquisition

Acquiring Company
Target (Country, Amount, Date)
Anheuser-Busch InBev (Belgium)
SABMiller (United Kingdom; $101 billion; 2016)
Tata Motors (India)
Jaguar Land Rover (United Kingdom, $2.3 billion, 2008)
Volkswagen AG (Germany)
Sociedad Española de Automóviles de Turismo (SEAT, Spain,
$600 million, purchase completed in 1990)
Zhejiang Geely (China)
Volvo car unit (Sweden, $1.3 billion, 2010)
What is the driving force behind many of these acquisitions?
Globalization. In companies like Anheuser-Busch management
realizes that the path to globalization cannot be undertaken
independently. Two decades ago, management at Helene Curtis
Industries came to a similar realization and agreed to be
acquired by Unilever. Ronald J. Gidwitz, president and CEO,
said, “It was very clear to us that Helene Curtis did not have the
capacity to project itself in emerging markets around the world.
As markets get larger, that forces the smaller players to take
action.”18 Still, management’s decision to invest abroad

sometimes clashes with investors’ short-term profitability
goals—or with the wishes of members of the target organization
(see Exhibit 9-6).
Exhibit 9-6
As we have seen in previous chapters, China’s growing
economic clout has contributed to increased anti-globalization
sentiment in various parts of the world. China offsets its huge
trade surplus with the United States by investing in American
securities and companies. As this cartoon implies, business
schools may be next!
Source: Cartoon Features Syndicate.
Several of the advantages of joint ventures also apply to
ownership, including access to markets and avoidance of tariff
and quota barriers. Like joint ventures, ownership permits
important technology experience transfers and provides a
company with access to new manufacturing techniques and
intellectual property.
The alternatives discussed here—licensing, joint ventures,
minority or majority equity stake, and ownership—are all points
along a continuum of alternative strategies for global market
entry and expansion. The overall design of a company’s global
strategy may call for combinations of exporting–importing,
licensing, joint ventures, and ownership among different
operating units. As an example, Avon Products uses both
acquisition and joint ventures to enter developing markets. A
company’s strategy preference may also change over time. For
example, Borden Inc. ended licensing and joint venture
arrangements for branded food products in Japan and set up its
own production, distribution, and marketing capabilities for
dairy products. Meanwhile, in nonfood products, Borden has
maintained joint-venture relationships with Japanese partners in
flexible packaging and foundry materials.

Competitors within a given industry may pursue different
strategies. Cummins Engine and Caterpillar both face very high
costs—in the $300 to $400 million range—for developing new
diesel engines suited to new applications, but the two
companies vary in their strategic approaches to the world
market for engines.
Cummins management looks favorably on collaboration; also,
the company’s relatively modest $6 billion in annual revenues
presents financial limitations to engaging in acquisitions and
some other approaches. Thus, Cummins prefers joint ventures.
One of the biggest joint ventures between an American company
and a Russian company linked Cummins with the KamAZ truck
company in Tatarstan. The joint venture allowed the Russians to
implement new manufacturing technologies while providing
Cummins with access to the Russian market. Cummins also has
joint ventures in Japan, Finland, and Italy.
Management at Caterpillar, by contrast, prefers the higher
degree of control that comes with full ownership. The company
has spent more than $2 billion on purchases of Germany’s MaK,
British engine maker Perkins, Electro-Motive Diesel, and
others. Caterpillar’s management believes that it is often less
expensive to buy existing firms than to develop new
applications independently. Also, Caterpillar is concerned about
safeguarding proprietary knowledge that is basic to
manufacturing in its core construction equipment business.19
9-3 Global Strategic Partnerships
9-3 Discuss the factors that contribute to the successful
launch of a global strategic partnership.
In Chapter 8 and the first half of this chapter, we surveyed the
range of options—exporting, licensing, joint ventures, and
ownership—traditionally used by companies wishing either to
enter global markets for the first time or to expand their

activities beyond present levels. However, recent changes in the
political, economic, sociocultural, and technological
environments of the global firm have combined to change the
relative importance of those strategies. Trade barriers have
fallen, markets have globalized, consumer needs and w ants have
converged, product life cycles have contracted, and new
communications technologies and trends have emerged.
Although these developments provide unprecedented marketing
opportunities, they also have strong strategic implications for
the global organization and new challenges for the global
marketer. Such strategies will undoubtedly incorporate—or may
even be structured around—a variety of collaborations. Once
thought of only as joint ventures, with the more dominant party
reaping most of the benefits (or losses) of the partnership,
cross-border alliances are taking on surprising new
configurations and even more surprising players.
Why would any firm—global or otherwise—seek to collaborate
with another firm, be it local or foreign? Today’s competi tive
environment is characterized by unprecedented degrees of
turbulence, dynamism, and unpredictability; thus global firms
must respond and adapt to changing market conditions very
quickly. To succeed in global markets, firms can no longer rely
exclusively on the technological superiority or core competence
that brought them past success. The disruption that is evident
across a variety of industry sectors—from transportation to
retailing to media to telecommunications —requires new vision
and new approaches.
In the twenty-first century, firms must look toward new
strategies that will enhance environmental responsiveness. In
particular, they must pursue “entrepreneurial globalization” by
developing flexible organizational capabilities, innovating
continuously, and revising global strategies accordingly.20 In
the second half of this chapter, we will focus on global strategic

partnerships. In addition, we will examine the Japanese keiretsu
and various other types of cooperation strategies that global
firms are using today.
The Nature of Global Strategic Partnerships
The terminology used to describe the new forms of cooperation
strategies varies widely. The terms strategic alliances, strategic
international alliances, and global strategic partnerships (GSPs)
are frequently used to refer to linkages among companies from
different countries to jointly pursue a common goal. This
terminology can cover a broad spectrum of interfirm
agreements, including joint ventures. Notably, the strategic
alliances discussed here all share three characteristics (see
Figure 9-2):21
Figure 9-2 Three Characteristics of Strategic Alliances
The participants remain independent subsequent to the
formation of the alliance.
The participants share the benefits of the alliance as well as
control over the performance of assigned tasks.
The participants make ongoing contributions in technology,
products, and other key strategic areas.
The number of strategic alliances has been growing at an
estimated rate of 20 to 30 percent since the mid-1980s. This
upward trend for GSPs comes, in part, at the expense of
traditional cross-border mergers and acquisitions. Since the
mid-1990s, a key force driving partnership formation has been
the realization that globalization and the Internet will require
new, intercorporate configurations (see Exhibit 9-7). Table 9-5
lists some examples of GSPs.
Exhibit 9-7
Oneworld is a global network that brings together American
Airlines and other carriers in a number of different countries.

Passengers booking a ticket on any network member can easily
connect with other carriers for smooth travel around the globe.
A further benefit for travelers is the fact that AAdvantage
frequent-flyer miles earned can be redeemed with any member
of the network.
Source: First Class Photography/Shutterstock.
Like traditional joint ventures, GSPs have some disadvantages.
Partners share control over assigned tasks, a situation that
creates management challenges. Also, strengthening a
competitor from another country can present a number of risks.
However, there are compelling reasons for pursuing a strategic
alliance. First, high product development costs in the face of
resource constraints may force a company to seek one or more
partners; this was part of the rationale for Sony’s partnership
with Samsung to produce flat-panel TV screens. Second, the
technology requirements of many contemporary products mean
that an individual company may lack the skills, capital, or
know-how to go it alone.22 This helps explain why Britain's
iconic Aston-Martin has formed partnerships with Mercedes-
Benz. The German company provides high-performance
engines, cabin electronics, and infotainment systems. This
means that Aston-Martin's engineers can focus on other design
issues.23 Third, partnerships may be the best means of securing
access to national and regional markets. Fourth, partnerships
provide important learning opportunities; in fact, one expert
regards GSPs as a “race to learn.” Professor Gary Hamel of the
London Business School has observed that the partner that
proves to be the fastest learner can ultimately dominate the
relationship.
As noted earlier, GSPs differ significantly from the market-
entry modes discussed in the first half of the chapter. Because
licensing agreements do not call for continuous transfer of
technology or skills among partners, such agreements are not
strategic alliances.24 Traditional joint ventures are basically

alliances focusing on a single national market or a specific
problem. The Chinese joint venture mentioned previously
between GM and Shanghai Automotive fits this description; the
basic goal is to make cars for the Chinese market. A true global
strategic partnership, however, is different and is distinguished
by five attributes.25 S-LCD, Sony’s strategic alliance with
Samsung, offers a good illustration of each attribute.26
Two or more companies develop a joint long-term strategy
aimed at achieving world leadership by pursuing cost
leadership, differentiation, or a combination of the two.
Samsung and Sony are jockeying with each other for leadership
in the global television market. One key to profitability in the
flat-panel TV market is being the cost leader in panel
production. S-LCD is a $2 billion joint venture that produces
60,000 panels per month.
The relationship is reciprocal. Each partner possesses
specific strengths that it shares with the other; learning must
take place on both sides. Samsung is a leader in the
manufacturing technologies used to create flat-panel TVs. Sony
excels at parlaying advanced technology into world-class
consumer products; its engineers specialize in optimizing TV
picture quality. Jang Insik, Samsung’s chief executive, says, “If
we learn from Sony, it will help us in advancing our
technology.”27
The partners’ vision and efforts are truly global, extending
beyond their home countries and home regions to the rest of the
world. Sony and Samsung are both global companies that
market global brands throughout the world.
The relationship is organized along horizontal, not vertical,
lines. Continual transfer of resources laterally between partners
is required, with technology sharing and resource pooling
representing norms. Jang and Sony’s Hiroshi Murayama speak

by telephone on a daily basis; they also meet face-to-face each
month to discuss panel making.
When competing in markets excluded from the partnership,
the participants retain their national and ideological identities.
Samsung developed a line of high-definition televisions that use
digital light processing (DLP) technology; Sony does not
produce DLP sets. When drawing up plans for a DVD player
and home theater sound system to match the TV, a Samsung
team headed by head TV designer Yunje Kang worked closely
with the audio/video division. At Samsung, managers w ith
responsibility for consumer electronics and computer products
report to digital media chief Gee-sung Choi. All the designers
worked side by side on open floors. According to a company
profile, “the walls between business units are literally
nonexistent.”28 By contrast, in recent years Sony has been
plagued by a time-consuming, consensus-driven communication
approach among divisions that have operated largely
autonomously.
Success Factors
Assuming that a proposed alliance has these five attributes, it i s
necessary to consider six basic factors deemed to have
significant impact on the success of GSPs: mission, strategy,
governance, culture, organization, and management:29
Mission. Successful GSPs create win–win situations, in
which participants pursue objectives on the basis of mutual need
or advantage.
Strategy. A company may establish separate GSPs with
different partners; strategy must be thought out upfront to avoid
conflicts.
Governance. Discussion and consensus must be the norms.
Partners must be viewed as equals.

Culture. Personal chemistry is important, as is the successful
development of a shared set of values. The failure of a
partnership between Great Britain’s General Electric Company
and Siemens AG was blamed in part on the fact that the former
was run by finance-oriented executives, the latter by engineers.
Organization. Innovative structures and designs may be
needed to offset the complexity of multicountry management.
Management. GSPs invariably involve a different type of
decision making. Potentially divisive issues must be identified
in advance and clear, unitary lines of authority established that
will result in commitment by all partners.
Companies forming GSPs must keep these factors in mind.
Moreover, four principles can be applied to guide successful
collaborations. First, despite the fact that partners are pursuing
mutual goals in some areas, partners must remember that they
are competitors in others. Second, harmony is not the most
important measure of success—some conflict is to be expected.
Third, all employees, engineers, and managers must understand
where cooperation ends and competitive compromise begins.
Finally, as noted earlier, learning from partners is critically
important.30
The issue of learning deserves special attention. As one team of
researchers notes,
The challenge is to share enough skills to create advantage
vis-à-vis companies outside the alliance while preventing a
wholesale transfer of core skills to the partner. This is a very
thin line to walk. Companies must carefully select what skills
and technologies they pass to their partners. They must develop
safeguards against unintended, informal transfers of
information. The goal is to limit the transparency of their

operations.31
Alliances with Asian Competitors
Western companies may find themselves at a disadvantage in
GSPs with an Asian competitor, especially if the latter’s
manufacturing skills are the attractive quality in the
partnership. Unfortunately for Western companies,
manufacturing excellence represents a multifaceted competence
that is not easily transferred. Non-Asian managers and
engineers must also learn to be more receptive and attentive—
they must overcome the “not invented here” syndrome and begin
to think of themselves as students, not teachers. At the same
time, they must learn to be less eager to show off proprietary
lab and engineering successes.
To limit transparency, some companies involved in GSPs
establish a “collaboration section.” Much like a corporate
communications department, this department is designed to
serve as a gatekeeper through which requests for access to
people and information must be channeled. Such gatekeeping
serves an important control function in guarding against
unintended transfers.
A 1991 report by McKinsey and Company shed additional light
on the specific problems of alliances between Western and
Japanese firms.32 Oftentimes, problems between partners have
less to do with objective levels of performance than with a
feeling of mutual disillusionment and missed opportunity. The
study identified four common problem areas in alliances gone
wrong. The first type of problem arises when each partner has a
“different dream”: The Japanese partner sees itself emerging
from the alliance as a leader in its business or entering new
sectors and building a new basis for the future; the Western
partner seeks relatively quick and risk-free financial returns.
Said one Japanese manager, “Our partner came in looking for a
return. They got it. Now they complain that they didn’t build a

business. But that isn’t what they set out to create.”
A second area of concern is the balance between partners. Each
must contribute to the alliance, and each must depend on the
other to a degree that justifies participation in the alliance. The
most attractive partner in the short run is likely to be a company
that is already established and competent in the business but
with the need to master, say, some new technological skills. The
best long-term partner, however, is likely to be a less competent
player or even one from outside the industry.
A third common cause of problems is “frictional loss” caused by
differences in management philosophy, expectations, and
approaches. All functions within the alliance may be affected,
and performance is likely to suffer as a consequence. Speaking
of his Japanese counterpart, a Western businessperson said,
“Our partner just wanted to go ahead and invest without
considering whether there would be a return or not.” The
Japanese partner stated, “The foreign partner took so long to
decide on obvious points that we were always too slow.” Such
differences often lead to frustration and time-consuming debates
that can stifle decision making.
Last, the study found that short-term goals can result in the
foreign partner limiting the number of people allocated to the
joint venture. Sometimes, those involved in the venture may
work on only two- or three-year assignments. The result is
“corporate amnesia”—that is, little or no corporate memory is
built up on how to compete in Japan. The original goals of the
venture will be lost as each new group of managers takes their
turn. When taken collectively, these four problems will almost
always ensure that the Japanese partner will be the only one in
it for the long haul.
CFM International, GE, and Snecma: A Success Story
Commercial Fan Moteur (CFM) International, a partnership

between GE’s jet engine division and Snecma, a government-
owned French aerospace company, is a frequently cited example
of a successful GSP. GE was motivated to form this alliance, in
part, by its desire to gain access to the European market so it
could sell engines to Airbus Industrie; also, the $800 -million in
development costs was more than GE could risk on its own.
While GE focused on system design and high-tech work, the
French side handled fans, boosters, and other components. In
2004, the French government sold a 35 percent stake in Snecma;
in 2005, Sagem, an electronics maker, acquired Snecma. The
new business entity, known as Safran, had more than €13
-billion ($18.7 billion) in 2016 revenues; slightly more than half
was generated by the aerospace propulsion unit.33
The alliance got off to a strong start because of the personal
chemistry between two top executives, GE’s Gerhard Neumann
and the late General René Ravaud of Snecma. The partnership
continues to thrive despite each side’s differing views regarding
governance, management, and organization. Brian Rowe, senior
vice president of GE’s engine group, has noted that the French
like to bring in senior executives from outside the industry,
whereas GE prefers to bring in experienced people from within
the organization. Also, the French prefer to approach problem
solving with copious amounts of data, while Americans may
take a more intuitive approach. Despite these philosophical
differences, senior executives from both sides of the partnership
have been delegated substantial responsibility.
Boeing and Japan: A Controversy
In some circles, GSPs have been the target of criticism. Cr itics
warn that employees of a company that becomes reliant on
outside suppliers for critical components will lose expertise and
experience erosion of its engineering skills. Such criticism is
often directed at GSPs involving U.S. and Japanese firms. For
example, a proposed alliance between Boeing and a Japanese
consortium to build a new fuel-efficient airliner, the 7J7,

generated a great deal of controversy. The project’s $4 billion
price tag was too high for Boeing to shoulder alone. The
Japanese were to contribute between $1 billion and $2 billion;
in return, they would get a chance to learn manufacturing and
marketing techniques from Boeing. Although the 7J7 project
was shelved in 1988, a new wide-body aircraft, the 777, was
developed with approximately 20 percent of the work
subcontracted out to Mitsubishi, Fuji, and Kawasaki.34
Critics envision a scenario in which the Japanese use what they
learn to build their own aircraft and compete directly with
Boeing in the future—a disturbing thought considering that
Boeing is a major exporter to world markets. One team of
researchers developed a framework outlining the stages that a
company can go through as it becomes increasingly dependent
on partnerships:35
Outsourcing of assembly for inexpensive labor
Outsourcing of low-value components to reduce product price
Growing levels of value-added components move abroad
Manufacturing skills, designs, and functionally related
technologies move abroad
Disciplines related to quality, precision manufacturing,
testing, and future avenues of product derivatives move abroad
Core skills surrounding components, miniaturization, and
complex systems integration move abroad
Competitor learns the entire spectrum of skills related to the
underlying core competence
Yoshino and Rangan have described the interaction and

evolution of the various market-entry strategies in terms of
cross-market dependencies.36 Many firms start with an export-
based approach, as described in Chapter 8. Historically, the
success of Japanese firms in the automobile and consumer
electronics industries can be traced back to such an export
drive. Nissan, Toyota, and Honda initially concentrated
production in Japan, thereby achieving economies of scale.
Eventually, an export-driven strategy gives way to an affiliate-
based one. The various types of investment strategies—equity
stake, investment to establish new operations, acquisitions, and
joint ventures—create operational interdependence within the
firm. By operating in different markets, firms have the
opportunity to transfer production from place to place in
response to fluctuating exchange rates, resource costs, or other
considerations. Although at some companies foreign affiliates
operate as autonomous fiefdoms (the prototypical multinational
business with a polycentric orientation), other companies
realize the benefits that operational flexibility can bring.
The third and most complex stage in the evolution of a global
strategy comes with management’s realization that full
integration and a network of shared knowledge from different
country markets can greatly enhance the firm’s overall
competitive position. As company personnel opt to pursue
increasingly complex strategies, they must simultaneously
manage each new interdependency as well as the existing ones.
The stages described here are reflected in the evolution of South
Korea’s Samsung Group, as described in Case 1-3.
9-4 International Partnerships in Developing Countries
9-4 Identify some of the challenges associated with
partnerships in developing countries.
Central and Eastern Europe, Asia, India, and Mexico offer
exciting opportunities for firms that seek to enter gigantic and

largely untapped markets. An obvious strategic choice for
entering these markets is the strategic alliance. Like the early
joint ventures between U.S. and Japanese firms, potential
partners will trade market access for know-how. Other entry
strategies are also possible. In 1996, for example, Chrysler and
BMW agreed to invest $500 million in a joint-venture plant in
Latin America capable of producing 400,000 small engines
annually. Although then Chrysler chairman Robert Eaton was
skeptical of strategic partnerships, he believed that limited
forms of cooperation such as joint ventures make sense in some
situations. Eaton knew that, outside of the domestic market,
most car engines were smaller than 2.0 liters—a design in which
Chrysler had little experience. As Eaton explained, “In the
international market, there’s no question that in many cases
such as this, the economies of scale suggest you really ought to
have a partner.”37
Assuming that risks can be minimized and problems overcome,
joint ventures in the transition economies of Central and Eastern
Europe could evolve at a more accelerated pace than past joint
ventures with Asian partners. On the one hand, a number of
factors combine to make Russia an excellent location for an
alliance: It has a well-educated workforce, and quality is very
important to Russian consumers. On the other hand, several
problems are frequently cited in connection with joint ventures
in Russia—namely, organized crime, supply shortages, and
outdated regulatory and legal systems in a constant state of
flux. Despite the risks, the number of joint ventures in Russia is
growing, particularly in the service and manufacturing sectors.
In the early post-Soviet era, most of the manufacturing ventures
were limited to assembly work, but higher value-added
activities such as component manufacture are now being
performed.
A Central European market with interesting potential is
Hungary. Hungary already has the most liberal financial and

commercial systems in the region. It has also provided
investment incentives to Westerners, especially in high-tech
industries. Like Russia, this former Communist economy does
have its share of problems. Digital’s recent joint-venture
agreement with the Hungarian Research Institute for Physics
and the state-supervised computer systems design firm Szamalk
offers a case in point. Although the venture was formed so
Digital would be able to sell and service its equipment in
Hungary, the underlying impetus of the venture was to stop the
cloning of Digital’s computers by Central European firms.
9-5 Cooperative Strategies in Asia
9-5 Describe the special forms of cooperative strategies
found in Asia.
As we have seen in earlier chapters, Asian cultures exhibit
collectivist social values; cooperation and harmony are highly
valued in both personal life and the business world in Asia.
Therefore, it is not surprising that some of Asia’s biggest
companies—including Mitsubishi, Hyundai, and LG—pursue
cooperation strategies.
Cooperative Strategies in Japan: Keiretsu
Japan’s keiretsu represent a special category of cooperative
strategy. A keiretsu is an interbusiness alliance or enterprise
group that, in the words of one observer, “resembles a fighting
clan in which business families join together to vie for market
share.”38 The keiretsu were formed in the early 1950s as
regroupings of four large conglomerates —zaibatsu—that had
dominated the Japanese economy until 1945. Zaibatsu were
dissolved after the U.S. occupational forces undertook antitrust
actions as part of the reconstruction following World War II.
Today, Japan’s Fair Trade Commission appears to favor
harmony rather than pursuing anticompetitive behavior. As a
result, the U.S. Federal Trade Commission has launched several

investigations of price-fixing, price discrimination, and
exclusive supply arrangements. Hitachi, Canon, and other
Japanese companies have also been accused of restricting the
availability of high-tech products in the U.S. market. The
Justice Department has considered prosecuting the U.S.
subsidiaries of Japanese companies if the parent company is
found guilty of unfair trade practices in the Japanese market.39
Keiretsu exist in a broad spectrum of markets, including the
capital, primary goods, and component parts markets.40
Keiretsu relationships are often cemented by bank ownership of
large blocks of stock and by cross-ownership of stock between a
company and its buyers and nonfinancial suppliers. Further,
keiretsu executives can legally sit on one another’s boards,
share information, and coordinate prices in closed-door
meetings of “presidents’ councils.” Thus, keiretsu are
essentially cartels that have the government’s blessing.
Although not a market-entry strategy per se, keiretsu have
played an integral role in the international success of Japanese
companies as they sought new markets.
Some observers have disputed charges that keiretsu have an
impact on market relationships in Japan and claim instead that
the groups primarily serve a social function. Others
acknowledge the past significance of preferential trading
patterns associated with keiretsu but assert that these alliances’
influence is now weakening. Although it is beyond the scope of
this chapter to address these issues in detail, there can be no
doubt that, for companies competing with Japanese companies
or wishing to enter the Japanese market, a general
understanding of keiretsu is crucial. Imagine, for example, what
it would mean in the United States if an automaker (e.g., GM),
an electrical products company (e.g., GE), a steelmaker (e.g.,
USX), and a computer firm (e.g., IBM) were interconnected,
rather than separate, firms. Global competition in the era of
keiretsu means that competition exists not only among products,

but also among different systems of corporate governance and
industrial organization.41
As the hypothetical example from the United States suggests,
some of Japan’s biggest and best-known companies are at the
center of keiretsu. Several large companies with common ties to
a bank are at the center of the Mitsui Group and the Mitsubishi
Group. These and the Sumitomo, Fuyo, Sanwa, and DKB groups
together make up the “big six” keiretsu (in Japanese, roku dai
kigyo shudan, or “six big industrial groups”). The big six strive
for a strong position in each major sector of the Japanese
economy. Because intragroup relationships often involve shared
stock holdings and trading relations, the big six are sometimes
known as horizontal keiretsu.42 Annual revenues in each group
are in the hundreds of billions of dollars. In absolute terms,
keiretsu represent only a small percentage of all Japanese
companies. However, these alliances can effectively block
foreign suppliers from entering the market and result in higher
prices to Japanese consumers, while at the same time resulting
in corporate stability, risk sharing, and long-term employment.
In addition to the big six, several other keiretsu have formed,
bringing new configurations to the basic forms previously
described. Vertical (i.e., supply and distribution) keiretsu are
hierarchical alliances between manufacturers and retailers. For
example, Matsushita controls a chain of National stores in Japan
through which it sells its Panasonic, Technics, and Quasar
brands. Approximately half of Matsushita’s domestic sales is
generated through the National chain, 50 to 80 percent of whose
inventory consists of Matsushita’s brands. Japan’s other major
consumer electronics manufacturers, including Toshiba and
Hitachi, have similar alliances. (Sony’s chain of stores is much
smaller and weaker by comparison.) All are fierce competitors
in the Japanese market.43
Another type of manufacturing keiretsu consists of vertical

hierarchical alliances between automakers and suppliers and
component manufacturers. Intergroup operations and systems
are closely integrated, with suppliers receiving long-term
contracts. Toyota has a network of about 175 primary suppliers
and several thousand secondary suppliers. One such supplier is
Koito; Toyota owns about one-fifth of Koito’s shares and buys
about half of its production. The net result of this arrangement
is that Toyota produces approximately 25 percent of the sales
value of its cars, compared with 50 percent for GM. The
manufacturing keiretsu demonstrate the gains that, in theory,
can result from an optimal balance of supplier and buyer power.
Because Toyota buys a given component from several suppliers
(some are in the keiretsu, some are independent), discipline is
imposed down the network. Also, because Toyota’s suppliers do
not work exclusively for Toyota, they have an incentive to be
flexible and adaptable.44
The keiretsu system ensures that high-quality parts are
delivered on a just-in-time basis, a key factor in the high quality
for which Japan’s auto industry is renowned. However, as U.S.
and European automakers have closed the quality gap, larger
Western parts makers have begun building economies of scale
that enable them to operate at lower costs than small Japanese
parts makers. Moreover, the stock holdings that Toyota, Nissan,
and others have in their supplier networks tie up capital that
could be used for product development and other purposes.
After Renault took a controlling stake in Nissan, for example, a
new management team from France headed by Carlos Ghosn
began divesting the company’s 1,300 keiretsu investments.
Nissan shifted to an open-source bidding process for parts
suppliers, some of which were not based in Japan.45 Eventually,
Honda and Toyota adopted a similar approach and began
seeking bids from non-keiretsu component suppliers. That, in
turn, led to collusion among auto-parts makers that saw an
opportunity to set higher prices. Recent antitrust charges

brought by the U.S. Department of Justice resulted in fines
totaling approximately $1 billion for the colluding partners.
Several Japanese auto-parts suppliers admitted that they had
collaborated, and the Justice Department alleged that American
car buyers paid higher prices for vehicles as a result.
Despite the sometimes problematic nature of the keiretsu,
change comes slowly in Japan. As Mitsuhisa Kato, vice
president for R&D at Toyota, said, “We feel a duty to protect
our keiretsu. We are trying to incorporate more outside
suppliers, but won’t give up on our own way of doing business
in Japan.”46
How Keiretsu Affect American Business: Two Examples
Clyde Prestowitz provides the following example to show how
keiretsu relationships have a potential impact on U.S.
businesses. In the early 1980s, Nissan was in the market for a
supercomputer to use in car design. Two vendors under
consideration were Cray, the worldwide leader in
supercomputers at the time, and Hitachi, which had no
functional product to offer. When it appeared that the purchase
of a Cray computer was pending, Hitachi executives called for
solidarity; both Nissan and Hitachi are members of the same big
six keiretsu, the Fuyo group. Hitachi essentially mandated that
Nissan show preference to Hitachi, a situation that rankled U.S.
trade officials. Meanwhile, a coalition within Nissan was
pushing for a Cray computer; ultimately, thanks to U.S.
pressure on both Nissan and the Japanese government, the
business went to Cray.
Prestowitz describes the Japanese attitude toward this type of
business practice:47
It respects mutual obligation by providing a cushion against
shocks. Today Nissan may buy a Hitachi computer. Tomorrow it
may ask Hitachi to take some of its redundant workers. The

slightly lesser performance it may get from the Hitachi
computer is balanced against the broader considerations.
Moreover, because the decision to buy Hitachi would be a favor,
it would bind Hitachi closer and guarantee slavish service and
future Hitachi loyalty to Nissan products . . . . This attitude of
sticking together is what the Japanese mean by the long-term
view; it is what enables them to withstand shocks and to survive
over the long term.48
Because keiretsu relationships are crossing the Pacific and
directly affecting the American market, U.S. companies have
reason to be concerned with keiretsu outside the Japanese
market as well. According to data compiled by Dodwell
Marketing Consultants, in California alone keiretsu own more
than half of the Japanese-affiliated manufacturing facilities. But
the impact of keiretsu extends beyond the West Coast. Illinois -
based Tenneco Automotive, a maker of shock absorbers and
exhaust systems, does a great deal of worldwide business with
the Toyota keiretsu. In 1990, however, Mazda dropped Tenneco
as a supplier to its U.S. plant in Kentucky. Part of the business
was shifted to Tokico Manufacturing, a Japanese transplant and
a member of the Mazda keiretsu; a non-keiretsu Japanese
company, KYB Industries, was also made a vendor. A Japanese
auto executive explained the rationale behind the change: “First
choice is a keiretsu company, second choice is a Japanese
supplier, third is a local company.”49
Cooperative Strategies in South Korea: Chaebol
South Korea has its own type of corporate alliance groups,
known as chaebol. Like the Japanese keiretsu, chaebol are
composed of dozens of companies, centered on a central bank or
holding company, and dominated by a founding family.
Compared to keiretsu, however, chaebol are a more recent
phenomenon: It was only in the early 1960s that Korea’s
military dictator granted government subsidies and export
credits to a select group of companies in the auto, shipbuilding,

steel, and electronics sectors. In the 1950s, for example,
Samsung was best known as a woolen mill. By the 1980s,
Samsung had evolved into a leading producer of low -cost
consumer electronics products. Today, Samsung Electronics’
Android-powered Galaxy smartphone line is a worldwide best
seller.
The chaebol were a driving force behind South Korea’s
economic miracle; gross national product (GNP) increased from
$1.9 billion in 1960 to $238 billion in 1990. After the economic
crisis of 1997–1998, however, South Korean President Kim Dae
Jung pressured chaebol leaders to initiate reform. Prior to the
crisis, the chaebol had become bloated and heavily in debt;
within a few years, the chaebol were being transformed.
Samsung diversified into pharmaceuticals and green energy, and
LG Electronics moved into wastewater treatment. Samsung, LG,
Hyundai, and other chaebol built their brands by developing
high-value-added branded products supported by sophisticated
advertising.50
Recently, questions about corporate governance have arisen
after some chaebol leaders were accused of various offenses
including colluding with politicians and corruption. In 2017, for
example, a Korean court convicted Samsung heir Lee Jae-yong
of bribing then-president Park Geun-hye. In an ironic twist,
Park was elected in part on the basis of campaign pledges to
rein in chaebol excesses. Observers hope that reform can
increase transparency and corporate oversight and reduce the
amount of economic power wielded by the chaebol. If that
happens, it is hoped that Korea’s millions of small- and mid-
sized enterprises will be better positioned to boost employment
and generate long-term economic growth.51
9-6 Twenty-First-Century Cooperative Strategies
9-6 Explain the evolution of cooperative strategies in the
twenty-first century.

One U.S. technology alliance, Sematech, is unique in that it is
the direct result of government industrial policy. The U.S.
government, concerned that key companies in the domestic
semiconductor industry were having difficulty competing with
Japan, agreed to subsidize a consortium of 14 technology
companies beginning in 1987. Sematech originally had 700
employees, some permanent and some on loan from IBM,
AT&T, Advanced Micro Devices, Intel, and other companies.
The task facing the consortium was to save the U.S. chip-
making equipment industry, in which manufacturers were
rapidly losing market share in the face of intense competition
from Japan. Although initially plagued by attitudinal and
cultural differences among the different factions, Sematech
eventually helped chip makers try new approaches with their
equipment vendors. By 1991, the Sematech initiative, along
with other factors such as the economic downturn in Japan, had
reversed the market share slide of the U.S. semiconductor
equipment industry.52
Sematech’s creation heralded a new era in cooperation among
technology companies. As the company has expanded
internationally, its membership roster has likewise grown to
include Advanced Micro Devices, Hewlett-Packard, IBM,
Infineon, Intel, Panasonic, Qualcomm, Samsung, and
STMicroelectronics. Companies in a variety of industries are
pursuing similar types of alliances.
The “relationship enterprise” is another possible stage of
evolution of the strategic alliance. In a relationship enterprise,
groupings of firms in different industries and countries are held
together by common goals that encourage them to act as a single
firm. Cyrus Freidheim, former vice chairman of the Booz Allen
Hamilton consulting firm, outlined an alliance that, in his
opinion, might be representative of an early relationship
enterprise. He suggests that within the next few decades,

Boeing, British Airways, Siemens, TNT, and Snecma might
jointly build several new airports in China. As part of the
package, British Airways and TNT would be granted
preferential routes and landing slots, the Chinese government
would contract to buy all its aircraft from Boeing/Snecma, and
Siemens would provide air traffic control systems for all 10
airports.53
More than the simple strategic alliances we know today,
relationship enterprises will be super-alliances among global
giants, with revenues approaching $1 trillion. They will be able
to draw on extensive cash resources; circumvent antitrust
barriers; and, with home bases in all major markets, enjoy the
political advantage of being a “local” firm almost anywhere.
This type of alliance is not driven simply by technological
change, but rather reflects the political necessity of having
multiple home bases.
Another perspective on the future of cooperative strategies
correctly predicted the emergence of the virtual corporation. As
described in a BusinessWeek cover story in the early 1990s, the
virtual corporation “will seem to be a single entity with vast
capabilities but will really be the result of numerous
collaborations assembled only when they’re needed.”54 On a
global level, the virtual corporation could combine the twin
competencies of cost-effectiveness and responsiveness; thus, it
could pursue the “think globally, act locally” philosophy with
ease. This approach, with its emphasis on just-in-time alliances,
reflects the trend toward “mass customization.” The same forces
that are driving the formation of the digital keiretsu—high-
speed communication networks, for example—are embodied in
the virtual corporation. As noted by William Davidow and
Michael Malone in their book The Virtual Corporation, “The
success of a virtual corporation will depend on its ability to
gather and integrate a massive flow of information throughout
its organizational components and intelligently act upon that

information.”55
Why did the virtual corporation burst onto the scene in the early
1990s? Previously, firms lacked the technology needed to
facilitate this type of data management. Today’s distributed
databases, networks, and open systems make possible the kinds
of data flow required for the virtual corporation. In particular,
these data flows permit superior supply-chain management.
Ford provides an interesting example of how technology is
improving information flows among the far-flung operations of
a single company. Ford’s $6 billion “world car”—known as the
Mercury Mystique and Ford Contour in the United States and
the Mondeo in Europe—was developed using an international
communications network linking computer workstations of
designers and engineers on three continents.56
9-7 Market Expansion Strategies
9-7 Use the market expansion strategies matrix to explain the
strategies used by the world’s biggest global companies.
Companies must decide whether to expand by seeking new
markets in their existing countries of operation or, alternatively,
by seeking new country markets for already identified and
served market segments.57 These two dimensions in
combination produce four market expansion strategy options, as
shown in Table 9-6.
Table 9-6 Market Expansion Strategies
Market
Concentration
Diversification

Country
Concentration
1. Narrow focus
2. Country focus
Diversification
3. Country diversification
4. Global diversification
Strategy 1, country and market concentration, involves targeting
a limited number of customer segments in a few countries. This
is typically a starting point for most companies. It matches
company resources and market investment needs. Unless a
company is large and endowed with ample resources, this
strategy may be the only realistic way to begin.
In strategy 2, country concentration and market diversification,
a company serves many markets in a few countries. This
strategy was implemented by many European companies that
remained in Europe and sought growth by expanding into new
markets. It is also the approach of the American companies that
decide to diversify in the U.S. market as opposed to going
international with existing products or creating new, global
products. According to the U.S. Department of Commerce, the
majority of U.S. companies that export limit their sales to five

or fewer markets. This means that U.S. companies typically
pursue strategy 1 or 2.
Strategy 3, country diversification and market concentration, is
the classic global strategy whereby a company seeks out the
world market for a product. The appeal of this strategy is that
by serving the world customer, a company can achieve a greater
accumulated volume and lower costs than any competitor and,
therefore, have an unassailable competitive advantage. This is
the strategy of the well-managed business that serves a distinct
need and customer category.
Strategy 4, country and market diversification, is the corporate
strategy of a global, multibusiness company such as Panasonic
Corporation. Panasonic celebrated its 100th anniversary in
2018; the company’s founder, Konosuke Matsushita, is an icon
of twentieth-century business. Today, Panasonic is multicountry
in scope, and its various business units and groups serve
multiple consumer and business segments. Thus, at the level of
corporate strategy, Panasonic may be said to be pursuing
strategy 4. At the operating business level, however, managers
of individual units must focus on the needs of the world
customer in their particular global market. In Table 9-6, this is
strategy 3—country diversification and market concentration.
An increasing number of companies all over the world are
beginning to see the importance of market share not only in the
home or domestic market, but also in the world market. Success
in overseas markets can boost a company’s total volume and
lower its cost position.

Chapter 8 & Chapter 9 of the TextbookSource Keegan, W. J., & Gr

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