Parallel Import & Impacts of Parallel Import in International Business

Parallel Import & Impacts of Parallel Import In International Business

Submitted To, A.S.M. Saifur Rahman Lecturer Faculty of Business Administration Cox’s Bazar International University

Submitted By,

MD Rifat Zahir Bachelor of Business Administration 2nd Batch ID: 2014201004 Cox’s Bazar International University

Date of Submission 18TH fEBRUARY, 2016

18TH February 2016

A.S.M. Saifur Rahman Lecturer Faculty of Business Administration Cox’s Bazar International University

Subject: To submit an assignment report on “Parallel Importing & It’s Impact on International Business”.

Dear Sir, This is to inform you that I have completed my study on “Parallel Importing & It’s Impact on International Business”. This study was assigned to me as a partial requirement of the “International Business” course in 5th semester.

I have tried sincerely to comprehend and translate my knowledge in writing this assignment. I enjoyed this study and gladly attend any of your calls to clarify points, if necessary.

In preparing this assignment, I have followed the instructions of yours. I will be glad to clarify any discrepancy that may arise.

Thank you for your cooperation. Sincerely,

MD Rifat Zahir BBA 2ND Batch ID: 2014201004 Faculty of Business Administration Cox’s Bazar International University MD Rifat Zahir

At the beginning, I would like to convey my sincere appreciation to the almighty Allah for giving me the strength & the ability to finish the task within the planned time. This assignment report is an accumulation of many people’s endeavors. So I would like to expressly sincere gratitude to everyone who contributed towards preparing & making this successfully.

First of all, I would like to express my Sincere & Immense gratitude to my course teacher A. S. M. Saifur Rahman, Lecturer of Faculty of Business Administration, Cox’s Bazar International University. I am deeply indebted to him whole hearted supervision to me during the thesis period. His valuable suggestion & guideline helped me a lot to prepare the report in a well-organized manner.

MD Rifat Zahir BBA 2ND Batch ID: 2014201004 Faculty of Business Administration Cox’s Bazar International University

The theoretical aspects recognize the short-term benefits of parallel trade to importing countries in terms of lower products expenditures, provided that lower costs are transferred to the consumers of products. There are likely to be direct impact through lower product expenditures due to parallel imports entering the market at prices lower than the manufacturer's price. The level of such savings is a realistic question.

Important factors in the level and distribution of any savings and resulting welfare effects are the regulatory conditions of the market and the payment mechanisms in place. To the extent that parallel trade puts competitive pressure on the originator price, thus producing price decreases or a deceleration of price increases, there will be indirect savings in products expenditures.

From a theoretical point of view, however, the response to parallel importing in the international market may not necessarily be to enter into the competition. To what extent that happens is a realistic issue.

In the longer term, it has been argued that research and development could suffer from reduced profits in the International Business sector, but it has also been shown that this is not necessarily the case under all circumstances.

NAME Page no EXECUTIVE SUMMARY I What are parallel imports? 1 The process of parallel imports 1 What is Exhaustion of Intellectual Property (IP) rights? 3 Debate on parallel imports 3 Impacts of Parallel Importing in International Business 4 Concluding Remarks 8 Bibliography 9

Parallel Importing & It’s Impact on International Business What are parallel imports?

According to Wikipedia

"A parallel import is a noncounterfeit product imported from another country without the permission of the intellectual property owner."

According to World Trade Organization

" When a product made legally (i.e. not pirated) abroad is imported without the permission of the intellectual property right-holder (e.g. the trademark or patent owner). Some countries allow this, others do not.”

According to World Health Organization

" Parallel imports are imports of a patented or trademarked product from a a country where it is already marketed.”

Parallel imports (sometimes referred to as gray market goods) refer to branded goods that are imported into a market and sold there without the consent of the owner of the trademark in that market. Parallel imports often take place when there is the differential pricing of the same product either brand name or generic products in different markets (usually owing to local manufacturing costs or market conditions).

Read The graph given below may help you understand the scenario clearly-

So finally, we can say that When an importer finds a cheaper price of a good or equivalent good on the world market and imports the good instead of paying higher local prices. These imports tend to be outside authorized importer channels, and are often carried by ordinary tourists. Goods that do not incur heavy transportation costs are most at risk from parallel imports. Authorized retailers, who are not allowed to source goods from parallel importers, generally oppose this practice since it makes them non-competitive against unauthorized retailers who can source these relatively cheap goods. The process of parallel imports

Case 1 Parallel importing is spreading from traditional to luxury and brand-name consumer products (wines, cameras, and watches) to industrial products. Industry sources estimate that parallel imports account for 10% of IBM‟s PC sales, 20% of Sharp‟s copier sales, and 20% to 30% of the world cosmetics and fragrances sales.

Parallel Importing & It’s Impact on International Business

The following graph may help you to understand the scenario properly-

Case 2 The second method of parallel importing is when a foreign manufacturer (e.g. German) licenses a company to be the exclusive importer of a product bearing a foreign name or trademark. supply chains in different countries, creating tension between the manufacturer and different distributors, which affects the manufacturer‟s overall profitability.

The following graph may help you to understand the scenario properly-

Case 3 Another way of parallel imports is the use of mail orders. This type of unauthorized channel is emerging with Internet development and is a very important source of parallel trade. Retailers and consumers can currently purchase products either from catalogs from large, local retailers or going directly to mail order houses in the different market. Anyone with a credit card and access to an Internet-linked computer can order CDs, software, books and whatever from overseas suppliers. E-commerce can be a good example of that. As we can download music, books, movies from the sites and the manufacturer of that product is being deprived of fair prices.

Parallel Importing & It’s Impact on International Business

What is Exhaustion of Intellectual Property (IP) rights?

Again, According to World Trade Organization

In this definition, “intellectual property” word used by the WTO, which brings up the matter of “Exhaustion of IP rights”. Besides, they also mentioned that “Some countries allow this, others do not.” So I‟d like to clear the air a bit.

Exhaustion of IP rights refers to the extent to which IP rights holders can control the distribution of their branded goods. According to the concept of exhaustion, once IP right holders sell in a particular jurisdiction a product to which their IP rights are attached, they must allow the resale of that product in that jurisdiction. The IP rights covering the product have been “exhausted” by the first sale.

There are two types of exhaustion regimes: national (or regional) and international.

National (or Regional) Exhaustion These regimes are followed by countries and regions that only allow trademarked goods that have been exhausted to be resold in the national or, in the case of the European Union (EU), a regional area that the goods are from. It does not allow for goods to be sold outside of those areas.

International Exhaustion This regime is followed by countries and regions that allow trademarked goods that have been exhausted to be resold in regions other than the country or region of origin.

Some countries use a hybrid approach that modifies one of the two basic types of exhaustion. For example, a country nominally applies the principle of international exhaustion but does place some limits on the goods that may be imported.

The Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement explicitly states that this practice cannot be challenged under the World Trade Organization (WTO) dispute settlement system and so neither effectively a matter of national discretion. Debate on parallel imports

Once Again, According to World Trade Organization “When a product made legally (i.e. not pirated) abroad is imported without the permission of the intellectual property right-holder (e.g. the trademark or patent owner). Some countries allow this, others do not.”

Once again I‟d like to denote the definition provided by the WTO, as we are going to discuss the impacts of Parallel Importing in International Trade. In their definition, the last part, they mentioned that “Some countries allow this, others do not.” So I‟d like to focus on this burning issue & provide a realistic judgment on the topic. Of course, the judgment will be from my own point of view.

It has been argued that parallel import restrictions (PIRs) strengthen IP holders‟ control over distribution channels, thereby permitting market segmentation and leading to price discrimination. The third party (unauthorized) has an incentive to operate parallel imports due to the feasibility of price arbitrage. Producers have argued that price discrimination, as compared with uniform price, benefits consumers because it encourages production in different segmented markets. Price discrimination permits access to the consumer

Parallel Importing & It’s Impact on International Business who could have been deprived of the uniform (relatively high) price mechanism. Also, higher output allows producers to reap economies of scale and, thus, lower the costs. Monopoly profit is used to finance further research and development. Thus, parallel import restrictions (PIRs) benefit consumers.

However, restrictions on parallel imports go against the spirit of free trade that has been the core principle of multilateral and regional trade treaties. Trade restrictions lead to undesirable economic side effects. „Market democracy rather than entrepreneurial dictatorship should be the rule of the future‟ (WHO, 1999). The principle of international exhaustion opens up trade channels that benefit consumers. Further, PIRs adversely affect the operations of authorized IP licensees in developing countries because they are not permitted to export their production to other countries. Producers do not prefer such international trade since it affects their geographic market segmentation and limits their ability to charge different prices in different markets. Market segmentation is likely to increase producer surplus but lower consumer welfare.

IPR matters are practiced differently across countries and also across types of IP products. There have been confusing judgments in the case of the United States, although the most recent one on March 19, 2013, has spoken in favor of parallel imports.

Term Meaning Countries

United States, Argentina, Chile, Costa Rica, Allowed Parallel imports are permitted Mexico, Mongolia, Singapore, South Korea, Brazil

Banned Parallel imports are not permitted Ecuador, Paraguay, Per

Parallel imports are generally not Partly Armenia, Australia, Cameroon, China, Egypt, permitted but are permitted in a few Allowed Hong Kong, New Zealand, Philippines, Vietnam instances. Partly Parallel imports are generally permitted Bolivia, Colombia, Guyana, Israel, Japan, Restricted and are restricted in a few instances. Malaysia, Switzerland, Venezuela Restrictions on parallel importation are Presumably not mentioned in the copyright law or in Pakistan, Uruguay allowed any other law and hence are presumably allowed.

Source: Centre for Internet and Society, Bangalore.

Those favoring parallel imports argue that international price discrimination restricts competition to the disadvantage of consumers in countries having higher prices. They say that parallel imports foster competition and efficiency, thus benefiting consumers in importing countries. Impacts of Parallel Importing in International Business

There are a number of impacts of all of this parallel importing activity. Here, the predicaments and opportunities created by these parallel distribution channels are discussed in more detail.

So there are both positive and negative aspects of parallel importing in International Business. So It seems like we‟ll have to discuss the both sides of the coin, as usual.

Parallel Importing & It’s Impact on International Business Parallel Imports and Their Effect on Prices Positive Impacts Negative Impacts Parallel imports can reduce the price of To decide a price of anything is complicated and research products by introducing competition. sensitive process. It is not easy for any However, they can also affect the company to launch the price of any product and especially negotiation of tiered pricing regimes with internationally. They launch the price after the market companies. If a private company agrees to research of their international competitors. When parallel sell a product at a lower price in poor imports occur in any country the goods which are already in countries, it will need some assurance that the market are expensive that is why people would like to buy the cheaper product will not be imported the parallel import goods because they are cheap. Therefore, back into its rich country markets, they would reduce the price of their goods to compete for the undercutting its profits (product diversion). parallel imports goods. It will cause losses to the home goods makers. Example Scenario For example, The practice exists of luxury car dealers in New Zealand buying Mercedes-Benz vehicles in Malaysia at a low price and importing the cars into New Zealand to sell at a price lower than the price offered by Mercedes-Benz to New Zealand consumers.

Direct & Indirect Savings Positive Impacts Negative Impacts Economic theory suggests that the short-term But this is also a fact that economic theory is less clear effects of allowing parallel trade of products as to what extent any competitive pressure will be would stimulate direct savings to purchasers of sufficient to result in lower originator prices, especially products in importing countries as parallel if the parallel traders experience supply restrictions and imports would be sold at a lower price than the the market is characterized by one large manufacturer originator price. and one or a few parallel importers. Indirect savings may arise either because In principle, indirect savings are calculated from the competition results in price decreases (or reduces quantity sold of the original product multiplied by the the price increases below the level expected price differential between the original manufacturers‟ without competition) or because the potential product as it would have developed in the absence of competition leads to limit pricing (where the competition from parallel imports and the actual manufacturer chooses to reduce the domestic development after the introduction of parallel imports in price to a level at which it is less profitable for the market. It is not known, however, how prices would parallel importers to enter the market). have developed in the absence of parallel imports. Example Scenario It finds that indirect savings for 2004 in Denmark and Sweden amount to €8.3 million and €16.4 million, respectively. According to these estimates, indirect savings add another 58% to direct savings in Denmark, and another 36% in the case of Sweden. Trademark Positive Impacts Negative Impacts The “quality function” of the trademark does not replace In contrast, gray marketers may unknowingly or the “source function” but stands alongside it as a unknowingly sell inferior products because they “guarantee” of consistent quality. Product quality, provide less quality control and have less however, is not simply measured at the factory; it is also incentive to make these expenditures. Inferior determined at the time of retail sale. Many trademark products, however, confuse and deceive owners thus invest in their product by careful shipping, consumers and may negatively impact genuine storage, inventory control, and quality management. This products and their image. investment is a natural adjunct of their desire to build and protect the reputation of their product.

Parallel Importing & It’s Impact on International Business

Example Scenario In Russian, trademark rights exhaustion turned national in 2002, and, as of April 2013, an act is being prepared that could make original goods imported without a permission of the producer officially "counterfeit". According to the Criminal Code, illegal use of a trademark can be punished up to 6 years of imprisonment; and a similar article in the Offences Code makes goods with an illegal copy of a trademark subject to confiscation. Profit Share Positive Impacts Negative Impacts It needs to be made clear that parallel imports are n However, these may not necessarily have a lower of counterfeits but genuine products that are often profit margin because they can free ride on the sold at a lower price to consumers than these promotional efforts of authorized dealers. distributed by regular channels. Consequently parallel imports may undermine Thus, the profit is being shared among a larger authorized dealers‟ selling efforts. quantity. Example Scenario For example, NOKIA, as a producer discouraging their investment in a sales-force or shelf-space. This will motivate the consumers for parallel imported products and profit is being shared but in a less amount. Product Quality Positive Impacts Negative Impacts The “source function” of a trademark encompasses The authorized distributor is in effect the “sponsor” more than the geographic origin of goods. As a result of the trademarked good, providing many ancillary of modern marketing and distribution techniques, services. Consumer confusion is possible if the consumers perceive a “genuine” article to be those parallel importer does not disclose that they are not from the wholesaler, retailer or servicing company the authorized distributors or they do not offer the they have been able to rely on in the past. same warranty protection or services, which the consumer has come to expect. Example Scenario For example, Consumers may be prejudiced against buying products which have been parallel imported because sometimes they cannot be properly serviced or maintained. They also may be worried that the so- called technical requirements for certain products may not meet by gray importers. Financial Consequences Positive Impacts Negative Impacts It needs to be made clear that parallel imports are n Parallel imports may have financial consequences of counterfeits but genuine products that are often for licensed distributors if they do not derive sold at a lower price to consumers than these sufficient revenue from the sale of these branded distributed by regular channels. goods. In such instances, they may not be able to continue with their advertising and promotional efforts. Example Scenario For example, IBM PC, the brand is being sold in the local market of Bangladesh is much cheaper than the original price, it is being sold in the USA.

Parallel Importing & It’s Impact on International Business Customers Perceived Value Positive Impacts Negative Impacts Some scholars argue that because parallel Parallel importing of trademarked goods may also create importers sell genuine trademarked goods there confusion for consumers. Besides, involving an is no possibility of confusion about the origin or unauthorized channel or outlet increases the likelihood source of the goods. of consumer confusion about product source and quality. Example Scenario For example, The practice exists of luxury car dealers in New Zealand buying Mercedes-Benz vehicles in Malaysia at a low price and importing the cars into New Zealand to sell at a price lower than the price offered by Mercedes-Benz to New Zealand consumers. There are also many parallel import dealers of electronics hardware. Parallel importing is allowed in New Zealand and has resulted in a significant lowering of margins on many products. New Market Positive Impacts Negative Impacts There is some evidence to indicate that parallel Parallel importing minimizes the opportunity grab a import channels from the manufacturer have been new market for the original producers as they are used to penetrate foreign markets. already selling those products. Some manufacturers recognized that parallel In addition, Parallel channels may also grab channels could be used to increase overall foreign consumers in foreign markets whom the sales and market share. manufacturer may not be aware of. Example Scenario For example, Some Sony PSP video game consoles were imported into the European Economic Area from Japan up to twelve months prior to the European launch. The unusual component of this example is that some importers were selling the console for a higher price than the intended EU price, taking advantage of the relative monopoly they enjoyed. Distribution Channel Positive Impacts Negative Impacts Parallel channels may help overcome a weak Due to competition with the parallel importers the distributor‟s performance at no additional costs to authorized distribution channel may become the manufacturer. frustrated and the situation may even get worse when Furthermore, when a final decision on an exclusive the profit margin goes to the negative. distributorship was pending, a parallel channel gives the manufacturer an opportunity to evaluate one distributor against another. Example Scenario For example, in Bangladesh iPhone has been parallel imported since the beginning. Now in 2014, they have introduced their authorized dealers. But they are not being coped up with the parallel importing competition. Demand & Supply Positive Impacts Negative Impacts Parallel channels may help overcome the demand of Sometimes, the situation may prove adverse when consumers in the remote international marketplace the supply of product becomes more than the when the manufacturer cannot meet the demand. demand, which may cause a fall in price.

Parallel Importing & It’s Impact on International Business

Example Scenario For example, the salt industry of Bangladesh. Bangladesh had enough salt to meet the demand. But some parallel importers imported salt from India to sell which caused the huge loss in industry.

Concluding Remarks

Parallel Importing & It’s Impact on International Business Bibiliography

► Brown, D. M. (1996) What’s the difference? Comparing patent and copyright protection for software, [online] Available: http://www.callaw.com//mccutdiff.html assessed February 2016. ► Buffon, E. C. and Bradley, A. C. (1996) Using copyright as a barrier to gray-market imports, [online] Available: http://www.portal.com/”recorder/buffon.html assessed in February 2016. ► Gallini, N. T. and Hollis, A. (1996) A contractual approach to the gray market. Working paper No. UT-ECIPA-Gallini-96-01, Department of Economics, University of Toronto, [online] Available: http://netec.mcc.ac.uk./%eadnetec/WoPEc/series.html assessed in February 2016. ► Ahmadi, R. H. and Yang, B. R. 1995 Managing a multinational supply chain: The Impact of parallel imports. Working Paper OTM95-10, The John E. Anderson Graduate School Of Management, UCLA, Los Angeles. ► Rothnie, A. W. 1993 Parallel imports, London: Sweet & Maxwell.