1. Khon Kaen University International College International Product and Pricing Strategy Course number 052 201 - First semester 2012 Monday 10:40 room 732 Friday 10:40 room 823 Lecturer: Michael Cooke office room 817

2. 1.Foreign Direct Investment (FDI) A) Is encouraged by many host countries B) Is an alternative to exporting C) Has been rapidly growing in recent years D) All of the above 2.Floating (variable) exchange rates are a source of risk in cross border trade. A) True B) False 3. The 1997-1998 baht devaluation A) Had only negative long term effects across SE Asia B) Created opportunities for service providers and goods exporters in Thailand C) Made imports to Thailand cheaper than before devaluation D) Had no effect on trade to and from Thailand 4.The ASEAN countries A) Have more people than Russia, Brazil, and South Africa combined B) Were held back by regional political problems through much of the 20 th Century C) Include one of the world’s richest and most productive economies D) All of the above 5.Back-translation is a technique to: A) Assess foreign exchange risk B) Avoid tariffs C) Is an approach used to detect errors in translating from one language to another D) Exchange Philippine Pesos directly into Thai Baht 6In a low context culture meaning is conveyed through situations A) True B) False Answers: 1=D, 2=A, 3=B, 4=D, 5=C, 6=B

3. Saturday Make-up Session 16-6-2012 at 10:30-11:55 Attendance optional – meet at room 817 We will discuss the country study – Product ideas Types of products – Ag products (rice, rubber, sugar, chicken, etc.) – Consumer products or services (luxury, low price) – Pharmaceuticals or medical devices (patented, generic) – Business equipment or services Relevant aspects of a target country – Questions about the study

4. What really keeps marketing managers awake Intellectual property (trademarks, copyrights, patents, trade secrets) Protecting brand equity (consumer awareness, reputation, etc.) from damage (such as from poor quality imitations) Legal or contractual rights do not equal automatic enforcement – Governments do not typically police contracts – The company finds violations and brings action Difficulty of bringing action and prevailing in a foreign jurisdiction Difficulty of collecting on a favorable legal outcome in any jurisdiction Discounting across borders has perverse implications – Tracking down reverse flow of goods (discounted goods flow back to home market) – Legal enforcement of contract terms may be difficult Product recalls – Foreign or domestic regulatory bodies reject shipments – Must be able to track product back to the exact source

5. Introduction International marketers should be aware that the economic interests of their companies can differ widely from the interests of the countries in which they do business. International marketers must abide by various international agreements, treaties and laws. Political and legal climates are inherently related and inseparable because laws are generally a manifestation of a country’s political processes. Chapter 5 Copyright (c) 2009 John Wiley & Sons, Inc.

6. Political and Legal Environments Practical Issues with Comparative Advantage Theory Comparative Advantage teaches we benefit from each country doing what it does best – Standard of living within a country rises – Worldwide standard of living rises Dependence on trade from few sources for vital materials carries risk – Trade has been used as a political weapon Grain embargo (USA 1980) Rare Earths embargo (China 2011) Embargoes typically backfire as target countries seek alternate sources – Partners become unstable or fail Example of the smaller Polynesian Islands 1450 (from Jared Diamond ‘Collapse’) – Small resource poor islands depended on trade for food. etc – When trade with larger island ceased the smaller islands’ populations collapsed Can happen during war as well – Countries, like businesses, mitigate risk via diverse sources and markets Countries pursue policies of self interest as defined by political groups – These interests are often narrowly defined – Often may seem against the larger interests of a state A small but focused effort usually wins over widespread but weak opposition The larger interest often has no voice, or a very soft voice (all consumers vs an industry)

7. Recall previous examples Japanese protection of their rice industry – Fear of job losses and loss of self sufficiency if rice imports allowed at world prices – Political coalitions block free trade in rice Apple computer moves assembly jobs overseas – Affected workers may require state aid – Apple effectively manages the political issues SE Asian farm raised shrimp cost less to produce than American shrimp – American shrimp fishermen successfully raise barriers – Effective use of their political tools – http://home.kku.ac.th/michco/IM/Gulf Shrimpers make money from rivals.docx http://home.kku.ac.th/michco/IM/Gulf Shrimpers make money from rivals.docx

8. Back to Apple Computer Recall that Apple computer closed factories in USA – Jobs shifted overseas – Little political opposition Why was Apple’s shifting of jobs different from the loss of jobs on the Gulf Coast? – Apple is perceived as local (American) – Local companies learn the local political and media environments In the late 1990s Microsoft learned it had to engage in politics and public relations (Gates’ congressional testimony) A foreign based company may create and exploit a perception that it is local

9. Some strategies for ‘going local’ Evoke a local identity (see case 5-3 ‘McDonald’s in Serbia’) – Participate in local activities – Adopt local culture Use local suppliers or base production in the host country – Local suppliers employees become advocates – By buying local, the firm integrates with the local economy Work the local political system (without bribes) – Identify and mitigate problems before they become legal issues – Grassroots efforts to influence the affected population Buy a local brand and sell under that name Do a joint venture with a local company – Risk s from sharing trade secrets – Risk of partner disputes under unfavorable conditions Sell your product under license as a local brand – This strategy has control risks – Intellectual property risks Latter two are usually employed where host country restrictions or culture make imports or factory ownership difficult Use a ‘white box’ strategy where imports are unrestricted – Minimal marketing cost – Might also be done where excess domestic capacity should not be discounted locally

10. Political Environment - Social Pressures and Political Risk Social Pressures and Special Interests Foreign companies also have to consider social factors as part of the political environment of host countries, e.g., feelings of nationalistic sentiment. Risks from owning assets in a host country – Expropriation Country takes over company assets with some compensation to the company May happen without warning, such as in Venezuela, 2010 (Economist) – Confiscation is takeover of assets without compensation Often employed as a legal tool (against money laundering, corruption, etc.) Also used in times of conflict to fund war efforts – Nationalization is takeover for purpose of making the company a government entity (banks, mines, telecom) Government ownership considered in national interest Often occurs with change to socialist governing philosophy – Domestication Policy/Phase-Out Policy refers to gradual transfer of ownership rights to local companies Adapted from Kotabe and Helson, 2009

11. International Law and Local Legal Environments Cultural Values and Legal Systems – Japan’s population of lawyers is low. – In the U.S., emphasis is on explicit contracts and a reliance on the legal system is high. – In China, relationships (guanxi) and verbal contracts are important. – In Brazil, Jeitinho is used to find solutions outside the legal system. Planning Ahead Arbitration and Enforcement Chapter 5 Copyright (c) 2009 John Wiley & Sons, Inc.

12. Political Environment - Individual Governments Government affects almost every aspect of business life in a country. (Exhibits 5-1 and 5-2) National politics affect business environment directly, through changes in policies, regulations, and laws. The political stability and mood in a country affect the actions a government will take. Home Country versus Host Country. Chapter 5 Copyright (c) 2009 John Wiley & Sons, Inc.

13. 5-1 International Law and Local Legal Environments Local Legal Systems and Laws – Business Practices and the Legal Systems Chapter 5 Copyright (c) 2009 John Wiley & Sons, Inc.

14. Exhibit 5-2: Government Policy Areas and Instruments Chapter 5 Copyright (c) 2009 John Wiley & Sons, Inc.

15. Issues Transcending National Boundaries – The FCPA does not prohibit so-called facilitating or grease payments. – Small payments to lower level officials are allowed to expedite the process. – FCPA does not prohibit bribery payments to nongovernmental personnel. Chapter 5 Copyright (c) 2009 John Wiley & Sons, Inc.

16. WalMart in Mexico Penalties for FCPA violations can be high Companies or their foreign subsidiaries may see bribes as part of local business culture Crossing the line between minor facilitation payments and prohibited bribes

17. Issues Transcending National Boundaries (cont.) Public Health Environmental laws – Affect both manufacturing and disposal of product – Activist groups in home or host country advocate or work to raise awareness May be involved in host country politics Can organize opposition in either home or host country Child labor laws – Success of product boycotts when child labor is thought to be used in product production – Child labor most often found where cheap labor is sought TRIPS (Trade-Related Aspects of Intellectual Property) – WTO rules to protect intellectual property give 20 year patent protection – Compulsory Licensing makes exceptions for public health or emergencies (often pharmaceuticals) – Countries with CL laws include France and Canada – Thailand’s legislation used as model for China and others High cost of HIV medication in 2006-07 Thailand issued CL against Merck Extends to other drugs where patent holders would not agree to discounts Product safety laws and consumer perceptions of product safety – Food products shipped across borders an especially sensitive political issue – Medical products and devices highly regulated in some countries

18. Thai chicken exports Declined to near zero after ‘bird flu’ scare in 2004 In 2009 Russia excluded chicken from USA due to safety concerns (processing methods) Russia approved raw chicken from 21 Thai exporters in 2010 EU approved raw Thai chicken imports 2012 How to lower the Thai chicken industry risk?

19. Rabo Bank Recommendations Source: http://www.reuters.com/article/2012/05/14/idUS68340+14-May-2012+HUG20120514http://www.reuters.com/article/2012/05/14/idUS68340+14-May-2012+HUG20120514 Diversify the country's export portfolio, which is currently overwhelmingly focused on the EU and Japan - 90 per cent of Thailand's exports go to these two markets. It needs to establish itself in other markets, particularly in Asia and the Middle East. Internationalize the industry's business model by investing in production and distribution facilities in leading markets such as China and the EU, something that companies such as CP Foods and Bangkok Ranch have already done.