Onkvisit S., Shaw J. International Marketing: Analysis and Strategy

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investments, the ﬁrms still depend overwhelmingly

on internal sources, coming from the principal own-

ers or out of retained earnings.Among the external

funding sources, informal channels, credit unions,

and commercial banks are about equally repre-

sented. Outside equity (including public equity) and

public debt markets do not play a signiﬁcant role.

Regarding ﬁrm size, internal sources become less

important as ﬁrms grow larger. For smaller ﬁrms,

share of commercial bank loans increases with ﬁrm

size. For the largest ﬁrms, commercial banks are the

second most important source of funds, after

retained earnings. Apparently, banks provide more

support for larger and more successful private ﬁrms.

However, Chinese banks play a relatively small role

in ﬁnancing private ﬁrms, with 29 percent of the

ﬁrms securing loans in the previous ﬁve years.

There is conﬂicting evidence on the relationship

between corporate international activity and cost

and level of debt ﬁnancing. To gain a better under-

standing of the relationship, one study explored the

impact of ﬁrm internationalization on debt ﬁnancing

by using a market-based sample of American ﬁrms.

The ﬁndings show a nonmonotonic relation between

ﬁrm international activity and both the cost and

level of debt ﬁnancing. Contrary to prior research,

ﬁrm international activity is associated with a 13

percent reduction in the cost of debt ﬁnancing and a

30 percent increase in ﬁrm leverage.

A company’s nationality may be useful in pre-

dicting its ﬁnancial leverage. National culture appears

to affect corporate capital structures. According to

a sample of 5591 ﬁrms across twenty-two coun-

tries, countries with high scores on cultural dimen-

sions of “conservatism” and “mastery” tend to have

lower corporate debt ratios. Such effects are strong

and remain signiﬁcant even after consideration is

given to differences in economic performance, legal

systems, ﬁnancial institutions, and some other well-

known determinants of debt ratios.

Equity ﬁnancing

With regard to the other means of self-ﬁnancing, it

is a common practice for MNCs to use both equity

and debt ﬁnancing. As an example, Munich Re, the

world’s largest reinsurer, announced in 2003 that it

would sell new shares worth $4.4 billion to shore

up its capital base.

A company can raise equity capital by selling

stock, both in its own country and in foreign

markets.American stocks are traded in London, and

European stocks are traded in New York. Israel has

sixty-two companies quoted on US exchanges,

second only to Canada.

It is not surprising that international exchanges

like to attract new listings. The New York Stock

Exchange, with 234 foreign ﬁrms, has been trying

to get newly privatized companies in Europe to list

in New York.

Japanese companies have been paying

more attention to this strategy.Toyota ﬁrst listed its

shares on the New York Stock Exchange in 1999,

allowing its three long-time shareholders (a bank

and two casualty insurers) to sell their holdings for

$1.5 billion. NEC Corp., a Japanese computer and

communications equipment maker, has also planned

to list its existing shares on the New York Stock

Exchange. Foreign investors already own about 30

percent of NEC. The listing should enable NEC to

later issue new shares to pursue mergers and acqui-

sitions in the USA.

The London Stock Exchange has 524 foreign

companies. It claims that it is less expensive to list

in London than in New York because its regulatory

branch is not as strict as the Securities & Exchange

Commission. In addition, a European Union rule

allows brokers licensed in one country to deal

directly on other European Union exchanges.

American investors interested in buying foreign

securities, instead of working through foreign secu-

rities ﬁrms and exchange currencies, should con-

sider American Depository Receipts (ADRs). Issued

by US banks, ADRs represent ownership of a set

amount of the respective security on deposit in a

foreign branch. Benetton, for example, offers 8 to 9

million (ADRs) worth approximately $150 million

on the New York Stock Exchange. For those wanting

to own foreign securities when ADRs are not avail-

able, they may ﬁnd it easier to deal with mutual

funds that invest in a particular country or region.

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Although many ﬁrms limit the listing of their

securities to their domestic exchanges, the growing

internationalization of capital markets suggests that

more and more ﬁrms perceive that the beneﬁts of

listing their stocks on foreign exchanges outweigh

the related costs. A study of 459 internationally

traded MNCs, with at least one foreign listing on

one of nine major stock exchanges, found strong

evidence that ﬁnancial disclosure levels and the level

of exports to a given foreign country signiﬁcantly

inﬂuenced foreign listing locations.

Another investigation of the motives for listing

abroad analyzed data on 481 multinationals. There

is a signiﬁcant correlation between the likelihood of

listing abroad and a ﬁrm’s relative size in its domes-

tic capital market as well as its ratio of foreign to

total sales. In general, the absolute size of ﬁrms (and

their relative size), their main line of business, and

their nationality affect the decision to list on foreign

stock exchanges. Firms that are larger within their

domestic capital markets appear more likely to

list abroad. Regarding the extent of a ﬁrm’s depen-

dence on foreign consumer and product markets,

ﬁrms that generate a greater portion of their rev-

enues abroad are more likely to list on a foreign

stock exchange. Firms are willing to list on stock

exchanges located in capital markets that are smaller

than their own because of the positive relationship

between foreign sales and listing abroad. Further-

more, listing abroad increases visibility in that

country and provides free advertising.

Equity markets appear to have a life cycle consist-

ing of four distinct stages. As an equity market

becomes more developed and has some degree of

credibility, market liquidity increases. In the ﬁnal

(mature) stage, the most active stocks are just as liq-

uid as those listed on industrial country exchanges.

There is strong evidence that greater stock market

liquidity supports (or precedes) economic growth.

Emerging stock markets vary greatly in terms of

the number of ﬁrms listed, the number of new list-

ings per year, market capitalization, and so on (see

Marketing Strategy 18.1). Naturally, such markets

carry signiﬁcant risk, but emerging stock markets

are likely to play an increasingly important role in

ﬁnancing companies’ growth. The share of total

world capitalization represented by the emerging

markets has soared.

It goes without saying that the

emerging stock markets can be very volatile. Take

the case of Turkey.This stock market has alternated

between being one of the world’s best performing

markets and one of the worst. In 1992, the market’s

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Emerging economies should create an effective frame-

work for the development of private equity markets.

Private equity markets in China are at an embryonic

stage of development. In fact, offshore venture funds

seem to be a far more important source of capital for

start-ups in China than domestic funds. Chinese ﬁrms

rely more on internal sources of ﬁnancing than

do their counterparts in transition and developed

economies.

In transition economies, the share of internal

funding is signiﬁcantly lower in advanced reformers

such as Estonia (33 percent), Poland (34 percent),

and Lithuania (37 percent). In the USA, a far smaller

share of ﬁnancing is internal. Even for small and

medium-sized enterprises under two years old, inter-

nal ﬁnancing reached a maximum of 54 percent of

total ﬁnancing.

Vietnam has a brand new and ﬂedgling stock

exchange. The market capitalization is about $48

million, and the average daily turnover is a mere

$70,000. Only four companies have listed so far, and

all of them happen to be formerly state-owned enter-

prises. The market is open two hours a day, three

days a week.

Sources:

Neil Gregory and Stoyan Tenev, “The Financing of

Private Enterprise in China,”

Finance & Development

March 2001, 14–17; “Never Mind the Snail’s Pace. This Is

Capitalism,”

Business Week

, November 20, 2000, 57.

MARKETING STRATEGY 18.1 EMERGING STOCK MARKETS

loss of 53 percent of its market capitalization was

among the worst in the world.The market bounced

back the following year, gaining 111 percent and

becoming the top performing stock market.Then,

in 2001, due to the economic and political crises,

the stock market lost 15 percent of its value in one

day and promptly lost another 18 percent, the

largest drop ever, two days later.

Because of various regulatory and traditional bar-

riers to entry, stocks have historically played a rela-

tively minor role in corporate ﬁnancing in many

European countries. In the case of German equity

markets, for example, until recently, the largest

banks that had a monopoly on brokerage effectively

controlled access to the stock exchange. Small

ﬁrms, being kept from issuing equity, remained

captive loan clients. In addition, the integration of

banking and commerce in Germany has contributed

to large German ﬁrms’ traditional reliance more on

bank credit and bonds than on equity to ﬁnance

growth. German ﬁrms use their equity holdings to

exert ownership control over industrial ﬁrms.

As may be expected, stock exchanges were small,

inefﬁcient, and illiquid.

One study examined a relationship between mar-

ket valuation and geographic scope of US MNCs’

foreign operations.According to the evidence,based

on the importance of location of MNC operations,

MNCs with presence in developing economies have

signiﬁcantly higher market values than MNCs that

operate only in advanced economies.Also the mar-

ket value impact of intangible assets increases with

the degree of an MNC’s expansion into developing

locations only.

FINANCIAL INSTITUTIONS

International companies have several options in

ﬁnancial institutions that have the capability of

dealing in international ﬁnance (see Figure 18.2).

The most common alternative are banks (and

nonbank banks), both domestic and overseas. In

addition to the well-known giant banks that operate

globally, there are many medium-sized banks that

have international banking departments.The multi-

national banks can make arrangements to satisfy all

kinds of ﬁnancing needs.

Other than making loans, banks are also involved

in ﬁnancing indirectly by discounting (i.e., factor-

ing) letters of credit and time drafts. Some factor-

ing houses buy accounts receivable with or

without recourse at face value and then provide

loans at competitive rates on 90 percent of the

factors’ acquired but not yet collected receivables.

In general, factors help clients eliminate several

internal credit costs by providing credit guarantee

of receivables, by managing and collecting accounts

receivable, and by performing related bookkeeping

functions. The industry average factoring commis-

sion for these services is 1 percent. Factoring is a

substantial part of business for a company such as

Heller International (see Figure 18.3).

An exporter usually initiates a factoring arrange-

ment by contacting a factor offering export services.

This factor then requests a credit undertaking on the

importer from an afﬁliate (import) factor, through

an international correspondent factor network.

After local approval of credit, the exporter ships the

goods on open account and submits the invoice to

the export factor. The export factor then sends it

to the import factor for credit risk assumption and

administration and collection of the receivables.

Typically, the exporter does not deal with the

import factor. In any case, factoring export receiv-

ables allows small and medium-sized exporters to be

competitive as it is a hassle-free method of ﬁnancing

export sales and collecting payment from buyers.

Another familiar ﬁnancing tool for European

exporters but rather an unknown tool for American

ﬁrms is forfaiting which ﬁnances about 2 percent of

all world trade. Forfaiting originates from the

French term “a forfait” which means to surrender

or relinquish rights to something. When used, an

exporter surrenders possession of export receiv-

ables by selling them at a discount.The cost depends

on country risk. For sales to Japan and France the

discount rate may be 6.75 percent, and terms may

reach ﬁve years, whereas sales to Pakistan may boost

the discount rate to 7.75 percent with a one-year

term limit. Generally, an exporter consults with a

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SOURCES OF FINANCING

forfaiter before incorporating the discount rate into

the ﬁnal selling price.

Export factoring and forfaiting are similar since

both involve selling export receivables to a third

party at a discount. There are a few differences,

however, between the two parties. First, factors like

a large percentage of an exporter’s business, but

forfait houses do not mind working on a one-off

basis. Second, while factors specialize in short-term

receivables (up to 180 days), forfaiters tend to work

with medium-term receivables. Finally, forfaiters

are more willing to deal with high-risk countries.To

protect themselves, forfait houses require a guaran-

tee from a reputable commercial bank in the

importer’s country.The guarantee is in the form of

an aval (bank guarantee).An endorsement with the

words “PER AVAL” or “GUARANTEED PER AVAL”

is stamped directly on to the notes or bills by the

guarantor bank.

Banks may provide equipment leasing as

another alternative form of ﬁnancing. The most

attractive beneﬁt of leasing is its low cost while

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Figure 18.2

Financial services

allowing an exporter to conserve capital and

improve cash ﬂow. Leasing may involve 100 percent

ﬁnancing with no down payment (see Figure 18.4).

It may be used in conjunction with conventional

lending sources.

In the United Kingdom, companies have a

number of ﬁnancial institutions to contact for loans.

These institutions include foreign banks, British

clearing banks, merchant banks (factor houses),

ﬁnance houses, investment trust companies,

pension funds and insurance companies, leasing

ﬁrms, and development capital and other specialist

venture-capital organizations. In Germany, com-

panies may be able to obtain short-term loans for

German and foreign banks, usually by overdraft.

At present, among the world’s largest banks,

Japanese banks dominate the top ten positions.

Figures 18.5 and 18.6 show two international banks

with a strong presence in the world’s ﬁnancial

markets.

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SOURCES OF FINANCING

Figure 18.3 Factoring

Source:

Reprinted with

permission of Heller Financial.

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Figure 18.4 Lease ﬁnancing

Source:

Reprinted with permission of Bank of America.

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SOURCES OF FINANCING

Figure 18.5 An international bank and ﬁnancial services: Sanwa Bank

Source:

Reprinted with permission of Sanwa Bank.

GOVERNMENT AGENCIES

It is not unusual for governments to provide

concessionary ﬁnancing. Such public loans,

as a rule, carry lower than market interest rates,

and their terms are more favorable than those

of private ﬁnancial institutions. Governments’ role

in ﬁnancing can also be indirect but signiﬁcant.

Japan, for example, uses qualiﬁcation for public

loans as an inducement for private banks to co-

ﬁnance. The qualiﬁcation carries this signiﬁcance

by implying that any investment would be in the

national interest and that the ﬁrm in question is

ﬁnancially sound.

To win a project in a developing nation, an

exporting country may provide tied aid which is

concessionary ﬁnancing terms conditioned on

the purchase of the equipment and services

from the donor country. Trade-motivated tied aid

may thus persuade a buyer to lean in the direction

of the donor – not necessarily on the merit of

product quality and true price. Ellicott Machine

Corp. International, a small US company, lost

market share in Indonesia where the Indonesian

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Figure 18.6 An

international bank

and ﬁnancial services:

Credit Suisse

Source:

Reprinted with

permission of Credit Suisse.

government has been the company’s largest single

customer for dredging equipment for over 100

years. The market share loss was due to European

competitors’ use of tied aid soft loans.

To win back market share, a team of trade

promotion agencies – Export-Import Bank, the

Department of Commerce, the Department of

Transportation, the US Embassy, and TDA – joined

forces. Export-Import Bank approved a $22 million

direct loan to Ellicott. The Secretary of the

Department of Transportation wrote a letter to the

Indonesian Minister of Communications. Further-

more, TDA hosted a reverse trade mission which

allowed Indonesian ofﬁcials to visit the USA to learn

about American-made equipment. As a result,

Ellicott was able to sell ﬁve split barges, one tug

boat, and spare parts to P.T. Runkindo, Indonesia’s

state-owned dredging company.

The USA has several government agencies

that provide ﬁnancial assistance. One is the Small

Business Administration (SBA). In addition to its

regular SBA loans, this agency can assist small

ﬁrms in their export activities through its Export

Revolving Line of Credit Loan (ERLC) which is

under the SBA’s guarantee plan. Another agency

is the Overseas Private Investment Corporation

(OPIC). Although best known for its Insurance

Department’s political risk insurance programs,

OPIC also makes direct loans and works with

private capital to provide OPIC-supported funds.

A major source of funding for US ﬁrms is the US

Export-Import Bank (Eximbank), which is respon-

sible for the promotion of exports through ﬁnancial

assistance. Among its activities are direct loans,

protective guarantees for banks’ loans, and export

credit insurance. Eximbank has several ﬁnancial

assistance programs. Its working Capital Guarantee

program allows exporters to obtain pre-export

ﬁnancing by providing repayment protection for

US bank loans. Another kind of payment protec-

tion is through the Foreign Credit Insurance

Association (FCIA) Export Credit Insurance policy,

which protects those exporters that extend credit

to foreign customers.The policy covers political and

commercial risk.

In addition to providing direct loans, Eximbank

may induce commercial banks to make loans by

guaranteeing payment in case of default.The process

is simple. An exporter applies to a bank for the

ﬁnancing of export sales, and the bank then applies

to Eximbank for guaranteed coverage of both com-

mercial and political risks. Furthermore, Eximbank

may buy the bank’s export loans at a discount

through its Discount Loan Program so that banks

can acquire funds for further lending.

European governments have been offering

mixed or blended credit.This type of ﬁnancing

package combines an ofﬁcial, conventional loan with

either outright grants or foreign aid grants at below

market rates, in effect reducing the actual interest

rate based on the condition that donor countries’

products are bought. France, the heaviest user of

this technique, won Malaysia’s contract for a $200

million turnkey power plant by disguising its thirty-

year loan at a 4.5 percent rate as an aid grant, which

made up almost half of the ﬁnancing package. Mixed

credit is particularly important in the sale of high-

technology capital goods, and the indiscriminate use

of this technique in foreign aid/export ﬁnancing

packages has fostered a built-in expectation for it on

the part of buyers.

The USA, considering the use of mixed credit as

unfair export credit subsidies, has fought back by

making ﬁnancing more costly for OECD members.

The new OECD guidelines require mixed credit to

include at least 50 percent grants, up from the inter-

nationally agreed 25 percent. Furthermore, the

USA has begun to play the same game by offering

some unusually low-interest loans. For example, it

assisted General Electric with a $30 million gas-

turbine project in India with a 32.5 percent aid

grant. GE had the lower bid, but credit assistance

from Eximbank was nevertheless crucial in securing

the project. In another case, the Eximbank offered

a $100 million mixed credit line to Thailand for

the purchase of US high-technology products.

Another technique used to create a built-in disin-

centive for cheap credit is for the USA to retaliate

against its European competitors with longer

payback terms.

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This discussion should illustrate to international

marketers that a low price by itself does not neces-

sarily provide advantages, especially in the case of

expensive projects. Government ﬁnancing is a

necessity, and this involves more than just a low

interest rate.The effective rate can be greatly mod-

erated by the amount to be ﬁnanced, outright

grants, varying maturity dates, and other ﬁnancing

techniques.

INTERNATIONAL FINANCIAL

INSTITUTIONS/DEVELOPMENT BANKS

One major source of ﬁnancing is international

nonproﬁt agencies.There are several regional devel-

opment banks, such as the Asian Development

Bank, the African Development Bank and Fund, and

the Caribbean Development Bank. The primary

purpose of these agencies is to ﬁnance productive

development projects or to promote economic

development in a particular region. The Inter-

American Development Bank, for example, has

as its principal purpose the acceleration of the eco-

nomic development of its Latin American member

countries. The European Bank for Reconstruction

and Development (EBRD), located in London, is

funded by thirty-nine countries and two European

Union organizations. The USA, with a 10 percent

share, is the largest single shareholder. The bank

targets 60 percent of its loans for the private

sector in Central and Eastern Europe. The ﬁve

multilateral development banks (World Bank,

Inter-American Development Bank,Asian Develop-

ment Bank, African Development Bank, and the

European Bank for Reconstruction and Develop-

ment) have annual commitments topping $45

billion. They are active in all major economic

sectors and offer good long-term export opportu-

nities for equipment suppliers, contractors, and

consultants. Therefore, they are an important

ﬁnancing source.

In general, both public and private entities are

eligible to borrow money from such agencies as

long as private funds are not available at reasonable

rates and terms.Although the interest rate can vary

from agency to agency, these loan rates are very

attractive and very much in demand.

Of all the international ﬁnancial organizations,

the most familiar is the World Bank, formally known

as the International Bank for Reconstruction and

Development (IBRD).The World Bank Group con-

sists of ﬁve associated institutions. They are: (1)

IBRD, (2) IDA, (3) IFC, (4) MIGA, and (5) ICSID.

Each institution has a distinct role in the mission to

ﬁght poverty and improve living standards.

The World Bank has two afﬁliates that are legally

and ﬁnancially distinct entities, the International

Development Association (IDA) and the Inter-

national Finance Corporation (IFC).All three orga-

nizations have the same central goal: to promote

economic and social progress in poor or developing

countries by helping to raise standards of living and

productivity to the point at which development

becomes self-sustaining.

Toward this common objective, the Bank, IDA,

and IFC have three interrelated functions, and these

are to lend funds, to provide advice, and to serve as

a catalyst in stimulating investments by others. In

the process, ﬁnancial resources are channeled from

developed countries to the developing world. The

hope is that developing countries, through this

assistance, will progress to a level that will permit

them, in turn, to contribute to the development

process in other, less fortunate countries. Japan is a

prime example of a country that has come full

circle. From being a borrower, Japan is now a major

lender to these three organizations. South Korea is

moving in a direction similar to that of Japan nearly

a quarter century ago.

World Bank

The World Bank is owned by the governments of the

184 countries that have subscribed to providing

its capital. Only countries that are members of the

International Monetary Fund can qualify for World

Bank membership. The USA, with 22.4 percent of

the subscribed capital and 20.6 percent of the voting

power, is the Bank’s largest shareholder. By tradi-

tion, the World Bank’s president is an American.

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