Product Alterations in Foreign Markets

By: Carl Phelps, Research Associate with GLOBAL ID LLC.

There are three main reasons for making product alterations when introducing your product into a foreign market. Legal requirements may cause you to alter your product, usually related to product safety. All countries have different product safety requirements. For example, the United States has stricter pollution standards than many other countries, which causes foreign automobile manufacturers to alter their products. Additionally, foods and pharmaceuticals are often subjected to different testing and labeling requirements when exported to foreign markets.
There are also cultural reasons for the alteration of products. Religious differences can cause problems with the introduction of products. For example, food companies shouldn’t expect to sell as much pork in Islamic countries or as much of any meat in India. Other cultural differences are difficult to detect, and it often takes trial and error to correct the product. For example, Toyota was fairly unsuccessful at selling pickup trucks in the United States until they altered the trucks to have enough headroom for drivers to wear large cowboy hats.
A third reason for product alterations comes from economic differences. To accommodate countries with lower average incomes a company may have to design a cheaper model. It is sometimes more beneficial for companies to sell their products in smaller package sizes, as people with lower incomes tend to buy products as they need them, instead of planning ahead. Also, countries with lower average incomes tend to have poorer infrastructure, which cause alterations in products such as automobiles. For additional information on foreign production email: carlphelps@globalidllc.com

Mercantilism

The first form of international trade theory was the concept of Mercantilism. This theory began around 1500 AD and lasted through the colonial era. The theory behind Mercantilism was that measurement of a country’s wealth was based on the amount of gold it was holding. Therefore, it was important to export more than the country imported in order to gain gold from other countries. This gold was then used to fund armies and solidify a central government. Under this theory, countries would restrict their imports and heavily subsidize domestic industries in order to increase exports.

Mercantilism also encouraged countries to use their colonies in order to support their trade objectives. The colonies would supply raw materials and low value goods to the colonizing country. Colonies were also forced to import the high value goods from the mother country. Mercantilism weakened around 1800 AD as other trade theories were established and governments stopped limiting the development of industry within their colonies. Today, the term Neomercantilism is used to indicate that a country is trying to run a favorable trade balance in order to achieve some political objective.

Written by Carl Phelps, Research Associate for GLOBAL ID LLC.
For additional information, please visit our website: http://www.globalidllc.com/

The Foreign Corrupt Practices Act

In international business, bribery often takes place to influence government decisions. In 1977, The Foreign Corrupt Practices Act (FCPA) was passed by the United States in order to combat the growing problem of bribery. The act made it illegal for U.S. companies to pay bribes to any foreign government officials or political parties. Today, the act also applies to any foreign firms operating in U.S. territory or quoted on any U.S. stock exchange.

One motive for bribery is to facilitate government services such as registrations, permits, and import clearances. The FCPA allows payments to officials in order to expedite services that are legal, but does not allow payments to officials who are not directly involved in a process. The reason for this is that some foreign governments will stall imports at customs indefinitely until they receive a bribe. The FCPA allows for the U.S. companies to bribe the customs officials in order to obtain import clearance. There are many critics of the FCPA who claim that U.S. companies lose business in foreign markets because competitors from other countries are allowed and even encouraged to make bribery payments. Recently, the FCPA has appeared to be an effective deterrent of bribery as many executives of large companies have either resigned or been fined by the U.S. government.

Written by Carl Phelps, Research Associate for GLOBAL ID LLC
For additional information, visit our website: http://www.globalidllc.com/

EU-US Relations

The European Union (EU) and the United States (US) are two of the largest economies in the world. The two markets trade heavily with each other, as the US is the EU’s largest trading partner. Relations between the two, however, have always been strained. In 2001, the US passed steel tariffs and farm subsidies that worsened the relationship between the two powerhouses. The tensions eased, however, when the World Trade Organization (WTO) pressured the US into dropping the steel tariffs.

In 2004, a new dispute between the US and EU, arose regarding the aircraft industry. The US accused the EU of providing launch aid to Airbus, which are illegal according to the WTO. These soft loans would not have to be completely repaid unless Airbus performs well in the market. In retaliation, the EU accused the US government of giving Boeing illegal tax breaks and funneling Research & Development money to Boeing through NASA and the Pentagon. Both sides filed complaints with the WTO, and agreed to enter into bilateral negotiations in order to avoid harsh penalties from the WTO.

Today, the relationship between the US and the EU remains somewhat strained due to these disruptive disputes. Ironically, the largest union in the US, the AFL-CIO, will be lobbying the US government to purchase Boeing planes rather than Airbuses for an upcoming procurement. Union representatives will be in Washington DC on May 19, 2008.

Written by Kelly Kasic and Carl Phelps
For additional information, visit our website: www.globalidllc.com

Ethical Dilemmas in the Pharmaceutical Industry

Tiered pricing is the pharmaceutical industry’s answer to providing low-income developing nations with the drugs that they need. In order for pharmaceutical companies to cover their large Research and Development (R&D) expenses, they must charge a high price for their drugs while they are patented. Once a patent expires (usually about 17 years), the drugs are produced by several generic drug manufacturers that can charge lower prices because they don’t have the large R&D budget. Many low-income developing nations have the largest number of people who are in need of these innovative drugs (yet cannot afford them). As a solution, pharmaceutical companies employ a tiered pricing system in which they charge much higher prices in industrial countries, and a much lower price for developing countries.

One major problem with the tiered pricing system is that some deadly diseases don’t exist in industrial nations. This means that the pharmaceutical companies can’t use tiered pricing to cover their high R&D costs. As a result, there is no development by pharmaceutical companies of vaccines and drugs against some of the world’s deadliest diseases, such as malaria. This is where governments and companies fall short of expectations to be socially responsible and solve the problem of disease in developing countries. In the case of Malaria, not-for-profit organizations such as the Bill and Melinda Gates Foundation have stepped in to help fund the development and distribution of a vaccine that could help stop this deadly disease.

Written by Carl Phelps, Research Associate with GLOBAL ID LLC.
For more information, contact us: carlphelps@globalidllc.com

Regional Economic Integration

Regional Trade Agreements (RTA) were developed following the rise of Bilateral Agreements. RTAs are trade agreements that involve two or more countries confined to a common region. Countries in close proximity tend to form trade agreements because of similar consumer tastes and shorter travel distance. Two types of RTAs are Free Trade Agreements and the Customs Union. As regional economic integration reduces trade barriers; producing static and dynamic effects.

Static effects are efficiencies that are formed through trade creation and diversion. In trade creation, barriers are broken down and production becomes more efficient because of comparative advantage. Trade diversion occurs because trade shifts to the countries that are members of the RTA, even if non-member countries are more efficient with no trade barriers. Dynamic effects occur when the overall size of the market increases due to the elimination of trade restrictions. When RTAs are established, and trade barriers between the countries are eliminated, the size of the market for a particular company grows from its home country to include all of the RTA member countries.

By Carl Phelps, Research Associate for GLOBAL ID, LLC.

For additional information, please visit our website: www.identifyglobal.com

Company Orientation Towards Cultural Diversity

The attitudes of companies and managers can affect how they successfully adapt to foreign cultures. Polycentrism is one type of attitude towards cultural diversity in which the company believes that its business units must act as close to its local competitors as possible. The problem with a Polycentric orientation is that the company can become too cautious about certain countries and pass up good opportunities. Also, home-country practices may actually work well in a foreign country, and a company that is too Polycentric will never apply any of its home-country practices to its business units abroad.

Another management orientation towards cultural diversity is Ethnocentrism. This is the belief that what works in the home-country should work in the host-country as well. The problem with Ethnocentrism is that it ignores important cultural variables in the foreign country. Sometimes, companies understand the environmental factors, but fail to change their objectives to fit the foreign market. This results in a loss of long-term competitiveness in the foreign country as the business unit cannot perform as well as its local competitors.

Geocentrism is a third orientation that is between the extremes of Polycentrism and Ethnocentrism. This approach is when the company adapts to the cultural differences abroad while also adopting some of the practices that are successful within the home market. This allows the company to increase its innovation as well as success rate in its international operations.

Written by Carl Phelps, Research Associate for GLOBAL ID, LLC.

For additional information on Cultural Diversity email: info@identifyglobal.com

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Non-Tariff Barriers to Trade

There are two categories of nontariff barriers to trade: direct price influences and quantity controls. Direct price influences are similar to tariffs in that they raise the prices of goods in order to limit trade. Subsidies are perhaps the most well-known type of direct price influence. Subsidies are used to protect domestic industries and keep them competitive. The government makes a direct payment to their domestic companies to give them assistance for selling abroad. Countries also offer their domestic industries tools such as market information and foreign contacts. Aid and loans are another form of direct price influence. This occurs when a government gives aid to another country, usually in the form of tied aid, which requires the country to spend the funds in the donor country. A third form of direct price influence is customs valuation. This occurs when customs agents are instructed to use discretionary power to value goods too high, which may require them to pay a higher ad valorem tariff and increase overall price.

The most common quantity control used is the quota. Import quotas prohibit the quantity of a product that can be imported in a given year. This puts a ceiling on the supply of foreign made products, and therefore restricts trade. The voluntary export restraint (VER) is when one country asks a foreign country to “voluntarily” restrict its exports into their country. This is really not voluntary at all, as the importing country will impose tougher trade restrictions if the foreign country does not limit its exports. An embargo is a type of quota in which a country prohibits all trade from a particular country or on a particular product. Another type of quantity control is standards and labels. Countries can impose tougher standards for product safety which will prohibit imports from foreign countries. Other forms of quantity controls include specific permission requirements, administrative delays, reciprocal requirements, and “buy local” legislation.

Written by Carl Phelps, Research Associate for GLOBAL ID, LLC.
www.identifyglobal.com

Trade Pattern Theories

There are two main factors that determine a country’s tendency to trade internationally. The first is the proportion of its production that is comprised of nontradeable goods, or products and services that aren’t practical to export. The other factor is the country size, which can mean land area or the size of the economy. A country with a larger land area has a tendency to trade a lower proportion of its production because it will have a larger variety of natural resources. Countries with large economies trade more because they have greater production and higher incomes.

The factor-proportions theory explains what types of products a country has a tendency to trade. This theory looks at the basic factors of production of labor, land, and capital. If a country has a high endowment of a particular factor, then this factor will tend to be cheaper than the other factors. This helps to determine what types of products are produced, and thus traded.

Written by Carl Phelps, Research Associate for GLOBAL ID, LLC.

The Foreign Exchange Market

There are two main segments that define the foreign exchange market: the over-the-counter market (OTC), and the exchange-traded market. Most activity is in the OTC market, which is made up of commercial and investment banks as well as other financial institutions. The exchange-traded markets are securities exchanges in which foreign-exchange instruments are traded, such as the Chicago Mercantile Exchange or the Philadelphia Stock Exchange.

There are three types of traditional foreign-exchange instruments that are the most common:

Spot Transactions – A currency exchange the second day after an agreement to the transaction.

• Outright Forward Transactions – A currency exchange three or more days after an agreement to the transaction.
• FX Swap – A currency exchange in which currency is swapped on one day and then swapped back on a predetermined future date.

In addition to these traditional instruments, there are three other important foreign-exchange instruments:

• Currency Swaps – Exchanges of interest-bearing financial instruments.
• Options – The right, but not the obligation to trade foreign currency in the future.
• Futures Contract – Agreement to buy or sell a particular currency at a particular rate on a particular future date.

For additional information, contact Carl Phelps, Research Associate of GLOBAL ID, LLC. – a Management Consulting and International Market Research Company. http://www.identifyglobal.com/ (720) 334-6982

Regional Economic Integration

Regional Trade Agreements (RTA) were developed following the rise of Bilateral Agreements. RTAs are trade agreements that involve two or more countries confined to a common region. Countries in close proximity tend to form trade agreements because of similar consumer tastes and shorter travel distance. Two types of RTAs are Free Trade Agreements and the Customs Union. As regional economic integration reduces trade barriers; producing static and dynamic effects.

Static effects are efficiencies that are formed through trade creation and diversion. In trade creation, barriers are broken down and production becomes more efficient because of comparative advantage. Trade diversion occurs because trade shifts to the countries that are members of the RTA, even if non-member countries are more efficient with no trade barriers. Dynamic effects occur when the overall size of the market increases due to the elimination of trade restrictions. When RTAs are established, and trade barriers between the countries are eliminated, the size of the market for a particular company grows from its home country to include all of the RTA member countries.

For additional information, contact Carl Phelps, Research Associate of GLOBAL ID, LLC. – a Management Consulting and International Market Research Company. http://www.identifyglobal.com/ (720) 334-6982

Collecting International Research and Data

Companies conduct research when selecting a country that is appropriate for international business. This research is then used to narrow the alternatives in the country evaluation process. International research is also used to reduce uncertainties by answering the following questions:

“Can qualified personnel be hired?”
“Will the economic and political climate allow for a reasonable certainty of operations?”
“Where are possible new sources of funds or sales?”

Unfortunately, the inaccuracies of data on many countries sometimes create more uncertainties about location decisions. This inaccurate data comes from an inability of many governments to collect and publish the data. These governments have limited funds, and need to spend this money on fixing problems rather than reporting on them. Other inaccuracies form due to cultural differences and the government purposely publishing misleading data. Companies need to be careful when researching location to conduct foreign business, particularly when they are developing countries.

Written by Carl Phelps, Research Associate, GLOBAL ID LLC

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The Textile Industry of Vietnam

The largest sector in Vietnam is industry, accounting for 41.8% of GDP. One of the top industries in Vietnam is the textile industry. Vietnam exported $5.8 billion worth of textiles in 2006, and expects to reach $7 billion in 2007. This industry is Vietnam’s second biggest exporter, behind crude oil, and accounts for about 15% of the country’s export value in merchandise. Over 50% of Vietnam’s textile exports go to the U.S., and over 15% to the EU.

A drastic increase in U.S. textile imports from Vietnam occurred in 2001, after the U.S.-Vietnam Bilateral Trade Agreement was signed. In 2003, however, a U.S.-Vietnam Textile Agreement was put into place. This agreement set base quotas for 26 different categories of U.S. imports of Vietnamese textiles and garments, increasing at a rate of 7% annually. The Vietnam Textile and Apparel Association works to keep the Vietnamese textile industry expanding by aiding its member companies. The association supports its members by promoting their trademarks both domestically and in foreign markets. Diversification of products to meet specific markets as well as expansion into Africa and Eastern Europe is also being encouraged by the Vietnam Textile and Apparel Association.

Written by Carl Phelps, Research Associate, GLOBAL ID LLC

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Minimizing Risk by Engaging In International Business

One reason why companies engage in international business is to minimize risk. In particular, companies decide that it will be beneficial to go into foreign markets to minimize swings in sales and profits. This has to do with smoothing sales and profits, as a company will try to take advantage of a business cycle in another country that differs with their own. Sales will tend to increase or grow more quickly during an economic upswing and decrease or grow more slowly during a recession. It makes sense then for companies to expand to other countries with business cycles opposite that of their domestic country, in order to counteract slower sales during a recession in the domestic country. One example of this is when Nestlé experienced slower growth in Western Europe and the United States in the early twenty-first century, but this was offset by higher growth in Asia, Eastern Europe, and Latin America.

Also, by purchasing the same products, services, or components from different countries, a company can avoid being affected by price swings and shortages from one particular country. Companies will also do international business to defend themselves against competitors. They might need to counter an advantage that a competitor is getting from going global. These are all ways to minimize risk and some reasons why companies will decide to conduct international business.

Written by Carl Phelps, Research Associate for GLOBAL ID, LLC

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Government Regulations of U.S. Business in Thailand

Before companies decide to do business in any country, especially Thailand, they need to be aware of the government regulations. There are three basic laws in Thailand that restrict foreign business. Together, these laws state that business in Thailand is closed to foreigners except in a few industries and unless promoted by the Board of Investment. If a foreign business is promoted, its performance of certain business functions is still restricted by the Alien Business Act.

All U.S. businesses, however, are exempt from these Thai laws due to the Amity and Economic Relations Treaty signed in 1968. All American companies are allowed to maintain a majority shareholding in their investments in Thailand with few restrictions. There are strict limitations on inland communications and transportation, banking, and land ownership for U.S. companies in Thailand. The Amity Treaty provides international law protection for U.S. firms, not allowing Thai government to discriminate against them. U.S. firms in Thailand are protected against Thai expropriation and are allowed to return all profits to the U.S. without delay. These laws are reciprocated for Thai firms in the U.S. The Treaty of Amity has been successful in promoting investment between Thailand and the U.S. by creating a hospitable environment for foreign business.

Written by Carl Phelps, Research Associate for GLOBAL ID, LLC

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The Vietnamese Economy

The countries of Eastern Asia are some of the most exciting economies in today's world. Businesses around the world are looking towards this area for new growth opportunities. Vietnam has one of the leading economies of the Southeast Asia area, and one of the fastest growing economies in all of Asia. The country boasts a GDP growth rate of 8.2%, exceeding all other ASEAN nations (see chart). This is very impressive, as only China has a higher GDP growth rate in all of Asia. Vietnam has the lowest unemployment out of all the ASEAN nations, at 2%. This, however, is offset by the relatively high inflation rate of 7.5%. The high inflation rate is the weakest element of Vietnam's economy, and is the result of the political practices in the country.

Vietnam also has an industrial production growth rate of 11.3%, which is the third highest among all ASEAN nations, and higher than the industrial growth rate of the United States or Japan. Developing countries typically desire industrial growth as it helps stimulate the economy and leads to improvements in country infrastructure. Some of Vietnam's major exporting industries are Crude Oil, Electronics, Plastics, and Footwear. The United States is the biggest importer of Vietnamese products, followed by Japan, China, Australia, and Singapore. Vietnam is one of the most prominent emerging markets in the world, however, its citizens have very few political rights and the country is ranked 109th in the world in terms of Human Development.

Written by Carl Phelps, Research Associate for GLOBAL ID
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How to Cope With Import Competition

Governments impose policies that affect trade between to countries, sometimes resulting in an increase of import competition. Companies have several options when faced with government influences on trade that increase import competition. One option is to move operations to a lower-cost country. This will allow companies to produce more cheaply, however many companies lack the proper resources to exercise this option. A second option is for the company to shift focus to specific market niches that attract less international competition. However, in many industries, a problem arises with identifying profitable market niches. A third option is for companies to innovate internally, in order to make domestic output more competitive. This will usually include trying to create greater efficiencies or products that are superior to the international competition. The problem is that the foreign companies usually will quickly copy any internal efficiency that is developed.

If a company cannot successfully combat import competition caused by foreign government's subsidies, they often ask their own governments for help. Companies request that their government restrict imports in their industry or open up export markets for them to compete. However, governments cannot help every company that faces competition from foreign imports. Companies stand the best chance of receiving help from their government if they ally with the other domestic companies in their industry. The government still might not be willing to help, as in most cases helping one industry will end up hurting another.

Written by Carl Phelps, Research Associate for GLOBAL ID, LLC
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Exporting May Not be the Best Option

There are several situations in which exporting may not be the most feasible form of entering a foreign market. If it is cheaper to produce the product abroad then it is more cost-effective to establish a manufacturing facility in the foreign market. This will be a more productive way to serve that market and its surrounding export markets. If the transportation costs of exporting to the foreign market are a high percentage of the manufacturing costs, then exporting won’t be very efficient. Keep in mind that the farther the market is from the home country, the higher the transportation costs and transportation costs can vary a lot depending on the product. If the product needs to be altered to better serve this foreign market, an additional investment might be needed. It may be more efficient to make this investment in the foreign market to save on transportation costs. Also, trade barriers play a huge role in deterring exports to foreign markets. If the market is large enough, it might be worthwhile to invest directly in these countries in order to bypass the trade restrictions. These are several situations in which exporting may not be the appropriate option for pursuing international business, however there are many factors that go into such an important decision.

Written by Carl Phelps, Research Associate for GLOBAL ID

To Learn More About Exporting and Other Options For Expanding Overseas, Visit Our Website: http://www.identifyglobal.com/