International Business Chapter Thirteen Export and Import Strategies.

International Business

Chapter Thirteen

Export and Import Strategies

2

Chapter Objectives

• To introduce the ideas of import and export• To identify the elements of export and

exporting strategies• To compare direct and indirect selling of

exporting • To identify the elements of import and import

strategies• To discuss the types and roles of third-party

intermediaries in exporting• To discuss the role of countertrade in

international business

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Introduction:International Trade Strategy

• International trade consists of (i) exporting (product outflows) (ii) importing (product inflows)

• In general, trade activities:– are a natural extension of a firm’s

distribution strategy– entail a lower level of risk than licensing or foreign

direct investment[continued]

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• Exports: goods and services flowing out of a country

• Exporting: the sale and delivery of goods and services by a firm based in one country to customers residing in a different country– results in receipts from the customers– affords less control over the marketing function

• Imports: goods and services flowing into a country

• Importing: the purchase of goods and services by a firm based in one country from sellers that reside in a different country– results in payments to the sellers– affords less control over the production function

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Fig. 13.1: Exporting and Importing in International Business

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Export Strategy

• The decision to export must take into account global concentration, global synergies, and global strategic motivations.

• Strategic factors affecting the choice of exporting as a mode of entry include:– the ownership advantages of the firm– the location advantages of the market– the internalization advantages of specific assets– the international experience of the firm– the firm’s ability to differentiate its products– its fit with the overall strategy of the firm

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Strategic Advantages of Exports

• Increase revenues and profitability• Achieve economies of scale in production and

research• Alleviate excess capacity in domestic operations• Minimize risk (as compared to licensing and

foreign direct investment)• Diversify markets

Exporting requires expertise in dealing with government institutions, particularly customs agencies, as well as the documentation

process.

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Characteristics of Exporters

Research has shown that:(i) the probability of exporting increases with the size of company revenues (ii) export intensity, i.e., the percent of total revenues generate by exports, is not positively correlated with company size

• While large companies are the biggest exporters, small companies expand their export capacity to: – increase market share overseas – fortify their domestic competitiveness

• The risk profile of management and the nature of industry competition are just as relevant as firm size.

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Stages of Export Development

• Firms tend to move through three phases of export development: – pre-engagement – initial exporting – advanced exporting

• As they do so, firms tend to:– export to a greater number of countries – extend their markets to more distant countries– move into environments that are increasingly different from

those of their home countries – expect exports to grow as a percent of total sales – consider foreign direct investment as a possible alternative to

exporting

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Fig. 13.2: Phases of Export Development

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Pitfalls of Exporting

Problems, delays, and pitfalls associated with the export process may include:

• the failure to obtain qualified export counseling and/or marketing intermediaries

• the insufficient commitment of top management• the underestimation of total transaction costs • the poor selection of overseas agents or distributors• the favoring of domestic markets at the expense of

international distributors and customers• an unwillingness to make necessary modifications• the failure to adequately prepare for international

dispute resolution

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Designing an Export Strategy

To design an effective export strategy, manage-ment must:

• assess the company’s export potential [examine market opportunities and firm resources]

• obtain expert counseling on exporting [get both government and specialized assistance]

• select target markets [passively or proactively pursue market opportunities]

• formulate and implement an effective strategy [define objectives and tactics and establish schedules and deadlines]

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Fig. 13.3: International Business Transaction Chain

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An Export Business Plan

I. Executive Summary: key elements II. Business History: firm and industry insights III. Market Research: target countries & market conditions IV. Marketing Decisions: marketing mix elements V. Legal Decisions: legal agreements & protection VI. Manufacturing and Operations: location & capacity VII. Personnel Strategies: short- & long-term needsVIII. Financial Decisions: funding & risk IX. Implementation Schedule: timeline

A detailed export business plan is an essential element in the implementation of a sound yet insightful export strategy.

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The Import Process

• Basic types of imports include:– industrial and consumer goods and services sought by

customers not related to the foreign exporter– intermediate goods and services that are part of the

customer’s global supply chain • The import documentation process can

be both complicated and cumbersome. • Import documents are of two types:

– those that determine whether customs will release a shipment

– those that contain the information necessary for duty assessment and data gathering purposes.

At a minimum, the required documents would include an entry manifest, a commercial invoice, and a packing list.

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Strategic Advantages of Imports

• Decrease costs and increase competitiveness and profitability

• Secure essential inputs and products• Secure higher quality products, supplies,

materials, and/or components• Minimize risk and investment• Diversify suppliers

Importing requires expertise in dealing with government institutions, particularly customs agencies, as well as

the documentation process.

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Types of Industrial Importers

The three basic types of industrial importers are:• those that opportunistically look for any product around

the world that will generate a positive cash flow• those that look to foreign sourcing as a means to

minimize product costs • those that use foreign sourcing as part of their global

supply chain strategy

An import broker is a certified specialist who obtains required government permissions and other clearances before forwarding

the necessary documents to the carrier(s) of the goods.

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The Role of Customs Agencies

Customs agencies: government bureaus charged with collecting duties and ensuring that trade restrictions are enforced and procedures ad-hered to

• The primary duties of a customs agency are:– the assessment and collection of all duties,

taxes, and fees on imported products – the enforcement of customs and related laws, and the

administration of certain navigation laws and treaties

National customs agencies are increasingly involved in dealing with smuggling operations and preventing foreign terrorist attacks.

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The Role of Customs Brokers

Customs broker: an independent agent who executes customs transactions on behalf of clients for a fee

• A customs broker can help minimize duties by: – valuing products in such a way that they qualify for

more favorable treatment – deferring duties by using bonded warehouses and

foreign trade zones – limiting liability by properly marking the country of origin of

an imported product– qualifying for duty refunds through *drawback provisions

*Drawback provisions allow U.S. exporters to apply for a 99% refund of the duty paid on imported components, provided

they are incorporated into goods to be exported.

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An Import Business Plan

I. Executive Summary: key elements II. Business History: firm details and industry insights III. Market Research: target country & market conditions IV. Marketing Decisions: marketing mix strategy V. Legal Decisions: legal agreements & protection VI. Manufacturing and Operations: location & regulations VII. Personnel Strategies: expertise & hiring needsVIII. Financial Decisions: funding, financial, & tax issues IX. Implementation Schedule: timeline

A detailed import business plan is an essential element in the implementation of a sound yet insightful import strategy.

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The Export Process

Direct exports: goods and services sold directly to an independent party (foreign customer) outside of the exporter’s home country

Indirect exports: goods and services sold to or via an intermediary in the domestic market, who in turn sells them to a foreign customer

Third-party intermediaries: independent, i.e., unrelated, firms that facilitate international trade transactions by assisting both importers and exporters

The export documentation process can be both complicated and cumbersome.

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Indirect Selling/Exporting

Indirect selling/exporting: selling products to or through an independent (third-party) intermediary

• Export intermediaries may perform any or all of the following functions:– stimulate sales, obtain orders, and conduct market

research– perform credit investigations and payment-collection

activities– handle foreign traffic arrangements and shipping details – provide support for a client’s sales, distribution, and

promotion staff

While services are more likely to be exported on a direct basis, goods are exported via both avenues.

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Indirect Selling:Export Management CompaniesExport management company (EMC): a firm that

either acts as a manufacturer’s agent or buys merchandise from manufacturers for inter-national distribution

• EMCs generally operate on a contractual basis, provide exclusive representation in a well-defined foreign territory, and act as the export arm of a manufacturer.

• Although many EMCs are small, they often specialize according to product, function, and/or market area.

EMCs may not be the perfect solution if they may have too few resources, give too little attention, and/or take too much control.

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Indirect Selling:Export Trading CompaniesExport trading company (ETC): a large, indepen-

dent broker whose primary purpose is to match suppliers to foreign customers for a fee

• ETCs operate primarily on the basis of demand. • Exporters from Great Britain, the Netherlands, and

Japan long ago realized that wide-reaching trading companies could market and distribute products more efficiently than any single producer could.

• ETCs based in the U.S. are exempt from antitrust provisions to allow them to better penetrate foreign markets by collaborating with other U.S. firms.

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Direct Selling

Direct selling: exporting through sales representatives to distributors, foreign retailers, or final end users

• Direct selling: – gives exporters greater control over the marketing

function – offers exporters the potential to earn higher profits

• a sales representative: a company representative, who usually operates on a commission basis within an exclusive territory

• a distributor: a merchant who purchases goods from a manufacturer and stocks, services, and resells them to retailers at a profit

[continued]

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• A firm that has sufficient financial and managerial resources to export directly may adopt a variety of organizational structures ranging from a separate international division to a fully integrated matrix structure.

• Direct selling demands a separate international sales force because foreign markets demand different types of expertise.

• Internet marketing allows firms both large and small to quickly, easily, and inexpensively engage in direct marketing.

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Export DocumentationKey export documents include:• a pro forma invoice

– an outline of the terms of sale, price, and delivery details• a commercial invoice

– a detailed invoice used to assess duties• a bill of lading

– a detailed receipt from the carrier transporting the cargo• a consular invoice

– sometimes required as a means to monitor imports• a certificate of origin

– used to determine the tariff schedule• a shipper’s export declaration

– used to monitor exports and compile trade statistics• an export packing list

– used to determine the nature of the cargo

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Foreign Freight Forwarders

Foreign freight forwarder: an international trade specialist who assists in the delivery of goods from producer to customer

Intermodal transportation: the movement of goods across a variety of modes from origin to destination

• The typical freight forwarder is the largest export intermediary in terms of the weight and value of cargo handled.

• Freight forwarders may specialize in the type of mode used or the geographical area served.

• Recent trends leading to a preference for air freight over ocean freight include: – the need for more frequent shipments – lighter-weight shipments – high-value shipments

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Sources of Foreign Trade Assistance

• Firms typically have many sources of assistance for identifying their best foreign trade opportunities.

• Government agencies actively aid the efforts of potential and active exporters and, to a lesser extent, potential and active importers.– In Japan, the Ministry of International Trade and

Industry (MITI) plays a vital role in developing strategic trade policy and providing operational assistance.

– In the U.S., a number of institutions, most notably the Department of Commerce, the Ex-Im Bank, and the Small Business Administration (SBA) help firms identify and realize export opportunities.

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Types of Foreign TradeInformation by Source

U.S. Government Agencies• Market demographics, channels and joint venture partners,

customs regulations & tax issues, credit & insurance, trade events & leads, documentation requirements, quotations

Trade Associations and Trade Groups• Market demographics, promotion alternatives, channels,

customs regulations & tax issues

Export Intermediaries• Channels, host-country requirements, financing, credit &

insurance, logistics

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Countertrade

Countertrade: a reciprocal flow of goods and services• The two basic types of countertrade transactions include:

– barter [based on clearing arrangements used to avoid

money-based exchange]– buybacks, offsets, and counterpurchase [all of which

are used to impose reciprocal commitments] • Countertrade provides a means to complete a trans-

action when a firm (or government):– lacks sufficient funds to pay for imports– lacks sufficient convertible currency or sufficient hard

currency to pay for imports

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Countertrade:Barter and Buybacks

Barter: the exchange of goods or services for other goods and services, i.e., a non-monetary transaction[Barter is not only the oldest form of countertrade,

it is the oldest form of any type of trade transaction.]

Buybacks: counter-deliveries received as payment by the exporter that are related to or originate from the original exported product

• The disadvantages of countertrade include: ̶ transaction inefficiencies ̶ transaction risk ̶ transaction complexities

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Countertrade: Offsets

Offset trade: an exchange of goods or services for cash that includes a reciprocal commitment to find opportunities for the importer to earn hard currency

[similar to counterpurchase, but permitting flexibility in the choice of firm for fulfilling the reciprocal obligation]

• In offset trade, the exporter sells the product for cash, but then undertakes the promotion of exports from the importing country in order to help it earn foreign exchange.

• Offset arrangements are usually one of two types:– direct offsets: include generated business that directly relates

to the export product– indirect offsets: include generated business unrelated to the

exported product

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Fig. 13.4: An Offset Transaction

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Implications/Conclusions

• Exporting and importing are necessary functions for the implementation of firms’ international business strategies.

• The specialization of labor makes exporting to and importing from countries around the world more efficient than manufacturing every product in every country.

[continued]

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• “Born global” companies tend to make ex-porting a primary goal from the time of their inception.

• The import process involves strategic and procedural issues that largely mirror those of the export process.

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Government Support for Exports

www.bundesregierung.de

www.miti.go.jp

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US Export Support

www.doc.gov

www.ita.doc.gov

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Export Assistance

www.exim.gov

Foreign CreditInsurance Association

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Countertrade as a Share of World Trade Value

05

10152025303540

4550

1975 1985 1990 1992 2000

%

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

41

Countertrade Practice

Off set S wit ch T r adin g B ar t er B uyback C oun t er pur chase

73

3

19 22

60

0

20

40

60

80

100

Offset

Switch Trading

Barter

Buyback

Counterpurchase

Percent of companies engaged in each countertrade practice

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.