Page 169 - DMGT547_INTERNATIONAL_MARKETING

International Marketing

Notes In an offset, a foreign supplier or manufacturer is required to assemble the product locally and
purchase local components as an exchange for the right to sell its products locally. In effect, the
supplier has to manufacture at a location that may not be optimal from an economic point of
view. Offsets are often found in purchases of aircraft and Military equipment. Clearing Agreement
is clearing account barter with no currency transaction required. With a line of credit being
established in the central banks of two countries, the trade in this case is continuous and the
exchange of products between two governments is designed to achieve an agreed on value or
volume of trade tabulated or calculated in non-convertible “clearing account units”.

Task Give examples of each type of counter-trade. Also discuss about any one in details.

Self Assessment

Fill in the blanks:
10. Trade that involves a good being traded for another good is called ……………….

11. In……………….type of counter-trade, three parties are involved.
12. .......................... occurs when there are two contracts or a set of parallel cash sale agreement
each paid in cash.

9.5 Transfer Pricing

In international marketing, different units under the same corporate body but located in different
foreign countries, exchange goods and services among themselves. The pricing of such exchanges
(of goods and services) is known as transfer pricing. A rational system of transfer pricing is
required to ensure profitability at each level. Global companies, while determining transfer
prices for supplies to subsidiaries and affiliated in foreign countries, take into account a number
of factors like taxes and duties leviable in the countries concerned, their market conditions,
ability of the potential customers to pay for the customers to pay for the company’s products,
different profit transfer rules, Marketing Mix conflicting objectives of joint venture partners and
varying government regulations. There are four major approaches to transfer pricing:
1. Transfer at cost
2. Transfer at cost plus overhead and margin
3. Transfer at price derived from end market prices

4. Transfer at “arm’s length price”
Details of these methods are given below:
Transfer at Cost Method: This approach is based on the assumption that lower costs lead to
better performance by the subsidiary/affiliate. This also helps to keep duties at the receiving
end to the minimum. The companies using this method of transfer pricing do not have
expectations of profits on transfer sale. Rather, the receiving unit (subsidiary or affiliate) is
expected to generate profit by subsequent sale.
Transfer at Cost plus Method: This method is applied in recognition of the principle that profit
must be shown for every product or service at every stage of movement through the corporate
system. But this may result in pricing that is completely unrelated to the competition or demand
conditions in foreign markets. However, some companies having wide experiences and
information about various foreign markets use this method quite successfully.

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