Parallel Importing

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Parallel Import

Impacts of Parallel Import

In International Business


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Submitted By,

MD Rifat ZahirBachelor of Business Administration

2nd

Batch

ID: 2014201004

Coxs Bazar International University

Submitted To,

A.S.M. Saifur Rahman

Lecturer

Faculty of Business Administration


Date of Submission 18THfEBRUARY, 2016


3/15

18THFebruary 2016

A.S.M. Saifur Rahman

LecturerFaculty of Business Administration


Subject: To submit an assignment report on Parallel Importing & Its Impact on

International Business.

Dear Sir,

This is to inform you that I have completed my study on Parallel Importing & Its Impact onInternational Business. This study was assigned to me as a partial requirement of the

International Business coursein 5thsemester.

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 2NDBatch

ID: 2014201004


Coxs Bazar International University MD Rifat Zahir


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At the beginning, I would like to convey my sincere appreciation to the almighty Allah for giving me thestrength & the ability to finish the task within the planned time. This assignment report is an

accumulation of many peoples 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, Coxs 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 2NDBatch

ID: 2014201004




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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 theInternational Business sector, but it has also been shown that this is not necessarily the case under all

circumstances.

I


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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


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Parallel Importing & Its Impact on International Business

1

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 importsoften 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 IBMs PC sales, 20% of Sharps copier sales, and 20% to 30% of the world cosmetics and fragrances

sales.


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2

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 manufacturers 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.


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3

What is Exhaustion of Intellectual Property (IP) rights?

Again, According to World Trade Organization

"

When a product made legally(i.e. not pirated) abroad is imported without the permission of

the in tel lectual propertyright-holder (e.g. the trademark or patent owner). Some countr ies

all ow this, others do not.

In this definition, intellectual property word used by the WTO, which brings up the matter ofExhaustion of IP rights. Besides, they also mentioned that Some countr ies all ow thi s, others do not.

So Id like to clear the air a bit.

Exhaustion of IP rightsrefers 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

Whena 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 countr ies all ow

thi s, others do not.

Once again Id 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

countr ies all ow this, others do not. So Id 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


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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, PIRsadversely 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

Allowed Parallel imports are permitted

United States, Argentina, Chile, Costa Rica,

Mexico, Mongolia, Singapore, South Korea,

Brazil

Banned Parallel imports are not permitted Ecuador, Paraguay, Per

Partly

Allowed

Parallel imports are generally not

permitted but are permitted in a few

instances.

Armenia, Australia, Cameroon, China, Egypt,

Hong Kong, New Zealand, Philippines, Vietnam

Partly

Restricted

Parallel imports are generally permitted

and are restricted in a few instances.

Bolivia, Colombia, Guyana, Israel, Japan,

Malaysia, Switzerland, Venezuela

Presumably

allowed

Restrictions on parallel importation are

not mentioned in the copyright law or in

any other law and hence are presumably

allowed.

Pakistan, Uruguay

Source: Centre for I nternet 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 fostercompetition 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 well have to discuss the both sides of the coin, as usual.


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5

Parallel Imports and Their Effect on Prices

Positive Impacts Negative ImpactsParallel imports can reduce the price of

products by introducing competition.However, they can also affect the

negotiation of tiered pricing regimes with

companies. If a private company agrees tosell a product at a lower price in poor

countries, it will need some assurance that

the cheaper product will not be imported

back into its rich country markets,

undercutting its profits (product diversion).

To decide a price of anything is complicated and research

sensitive process. It is not easy for anycompany to launch the price of any product and especially

internationally. They launch the price after the market

research of their international competitors. When parallelimports occur in any country the goods which are already in

the market are expensive that is why people would like to buy

the parallel import goods because they are cheap. Therefore,

they would reduce the price of their goods to compete for the

parallel imports goods. It will cause losses to the home goods

makers.

Example ScenarioFor 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 ImpactsEconomic theory suggests that the short-term

effects of allowing parallel trade of products

would stimulate direct savings to purchasers of

products in importing countries as parallel

imports would be sold at a lower price than the

originator price.

Indirect savings may arise either because

competition results in price decreases (or reduces

the price increases below the level expected

without competition) or because the potential

competition leads to limit pricing (where the

manufacturer chooses to reduce the domestic

price to a level at which it is less profitable for

parallel importers to enter the market).

But this is also a fact that economic theory is less clear

as to what extent any competitive pressure will be

sufficient to result in lower originator prices, especially

if the parallel traders experience supply restrictions and

the market is characterized by one large manufacturer

and one or a few parallel importers.

In principle, indirect savings are calculated from the

quantity sold of the original product multiplied by the

price differential between the original manufacturers

product as it would have developed in the absence of

competition from parallel imports and the actual

development after the introduction of parallel imports in

the market. It is not known, however, how prices would

have developed in the absence of parallel imports.

Example ScenarioIt 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 ImpactsThe quality function of the trademark does not replace

the source function but stands alongside it as a

guarantee of consistent quality. Product quality,

however, is not simply measured at the factory; it is also

determined at the time of retail sale. Many trademarkowners thus invest in their product by careful shipping,

storage, inventory control, and quality management. This

investment is a natural adjunct of their desire to build and

protect the reputation of their product.

In contrast, gray marketers may unknowingly or

unknowingly sell inferior products because they

provide less quality control and have less

incentive to make these expenditures. Inferior

products, however, confuse and deceiveconsumers and may negatively impact genuine

products and their image.


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Example ScenarioIn 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 ImpactsIt needs to be made clear that parallel imports are n

of counterfeits but genuine products that are often

sold at a lower price to consumers than these

distributed by regular channels.

Thus, the profit is being shared among a larger

quantity.

However, these may not necessarily have a lower

profit margin because they can free ride on the

promotional efforts of authorized dealers.

Consequently parallel imports may undermine

authorized dealers selling efforts.

Example ScenarioFor 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 ImpactsThe source function of a trademark encompasses

more than the geographic origin of goods. As a result

of modern marketing and distribution techniques,

consumers perceive a genuine article to be those

from the wholesaler, retailer or servicing company

they have been able to rely on in the past.

The authorized distributor is in effect the sponsor

of the trademarked good, providing many ancillary

services. Consumer confusion is possible if the

parallel importer does not disclose that they are not

the authorized distributors or they do not offer the

same warranty protection or services, which the

consumer has come to expect.

Example ScenarioFor 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 ImpactsIt needs to be made clear that parallel imports are n

of counterfeits but genuine products that are often

sold at a lower price to consumers than these

distributed by regular channels.

Parallel imports may have financial consequences

for licensed distributors if they do not derive

sufficient revenue from the sale of these branded

goods. In such instances, they may not be able to

continue with their advertising and promotional

efforts.

Example ScenarioFor 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.


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Customers Perceived Value

Positive Impacts Negative ImpactsSome scholars argue that because parallel

importers sell genuine trademarked goods thereis no possibility of confusion about the origin or

source of the goods.

Parallel importing of trademarked goods may also create

confusion for consumers. Besides, involving anunauthorized channel or outlet increases the likelihood

of consumer confusion about product source and quality.

Example ScenarioFor 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 ImpactsThere is some evidence to indicate that parallelimport channels from the manufacturer have been

used to penetrate foreign markets.

Some manufacturers recognized that parallel

channels could be used to increase overall foreign

sales and market share.

Parallel importing minimizes the opportunity grab a

new market for the original producers as they are

already selling those products.

In addition, Parallel channels may also grab

consumers in foreign markets whom the

manufacturer may not be aware of.

Example ScenarioFor 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 ofthe relative monopoly they enjoyed.

Distribution Channel

Positive Impacts Negative ImpactsParallel channels may help overcome a weak

distributors performance at no additional costs to

the manufacturer.

Furthermore, when a final decision on an exclusive

distributorship was pending, a parallel channel givesthe manufacturer an opportunity to evaluate one

distributor against another.

Due to competition with the parallel importers the

authorized distribution channel may become

frustrated and the situation may even get worse when

the profit margin goes to the negative.

Example ScenarioFor 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 ImpactsParallel channels may help overcome the demand ofconsumers in the remote international marketplace

when the manufacturer cannot meet the demand.

Sometimes, the situation may prove adverse whenthe supply of product becomes more than the

demand, which may cause a fall in price.


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Example ScenarioFor 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

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 maynot 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.


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Bibiliography

Brown, D. M. (1996) Whats 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. 1995Managing 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. 1993Parallel imports, London: Sweet & Maxwell.

Parallel Importing

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