UNIT EIGHT (A)

Exporting and Countertrade

Objectives

An overview of foreign market entry strategies

Internationalization of the firm

Exporting as a foreign market entry strategy

Managing export-import transactions

Export-import financing

Identifying and working with foreign intermediaries

Countertrade: a popular approach for emerging markets

& developing economies

Foreign Market Entry Strategies

• Importing or global sourcing: Procurement of products

and services from foreign sources

• Exporting: Producing products or services in one country

(often the producer’s home country), and selling and

distributing them to customers in other countries

• Countertrade: International transaction in which all or

partial payments are made in kind rather than cash

• In contrast to home-based international operations

(e.g., exporting), foreign direct investment (FDI)

involves establishing a presence in the foreign market by

investing capital and securing ownership of a factory,

subsidiary, or other facility there

• Collaborative ventures include joint ventures in which

the firm makes similar equity investments abroad, but in

partnership with another company

Foreign Market Entry Strategies (cont.)

• With licensing, the firm allows a foreign partner to use

its intellectual property in return for royalties or other

compensation

• Franchising is common in retailing.

McDonald’s, Dunkin’ Donuts, Century 21 Real Estate,

and many other firms have used franchising to

internationalize worldwide

Foreign Market Entry Strategies (cont.)

Factors to Consider When Choosing a Foreign Market Entry Strategy

• Goals and objectives of the firm, such as desired

profitability, market share, or competitive positioning

• Degree of control desired regarding decisions,

operations, and assets involved in a venture

• The firm’s financial, organizational, and technological

resources and capabilities

• The types of risk inherent in each proposed foreign

venture

• Characteristics of product/service offered

• Conditions in the target country, such as legal, cultural, and

economic circumstances, as well as distribution and

transportation systems

• Nature and extent of competition from existing rivals and from

firms that may enter the market later

• Availability and capabilities of partners in the market

Factors to Consider When Choosing Entry Strategy (cont.)

Additional Factors to Consider

• The value-adding activities the firm is willing to perform in

the market and the activities it will delegate to local partners

• Long-term strategic importance of the market

Classification of Entry Strategies

Based on Degree of Control for Focal Firms

Strategies include:

• Low control – exporting, countertrade, and global

sourcing are all examples of ceding control to foreign

partners

• Moderate control – contractual relationships such as

licensing and franchising as well as product-based

collaborative ventures

Varieties of Control in Foreign Market Entry

• High control – equity joint ventures and FDI are

examples here and reflect maximum control via the

establishment of a physical presence in the foreign

market

Varieties of Control in Foreign Market Entry

• Push and pull factors serve as initial triggers.

Combination of triggers, inside and outside the firm, are

responsible for initial international expansion

• Initial internationalization may be accidental.

Expansion is often unplanned, or result of chance events

(e.g., meeting with foreign distributor)

Characteristics of Firm Internationalization

Characteristics of Firm Internationalization

• Risk and return must be balanced. Managers

weigh potential returns of internationalization vs. the

initial costs, in terms of money, time, and other company

resources. International ventures typically take longer

than domestic ones to reach profitability

• An ongoing learning experience. The firm’s

internationalization can stretch over many years and

involve many national settings, providing ample

opportunities for managers to learn and adapt how they

do business

Characteristics of Internationalization (cont.)

Characteristics of Internationalization (cont.)

• Firms may evolve through stages of

internationalization. Historically, most firms have opted

for a gradual approach, partly due to limited resources

and partly due to lack of appropriate knowledge on how

to do international business

• However, recently some firms—born globals—have

internationalized quickly

Typical Stages of Company Internationalization

Overview of Exporting

• Usually the firm’s first foreign entry strategy

• Low risk, low cost, and flexible (b/c the firm can enter &

withdraw easily from markets)

• Popular among SMEs

• When we talk about trade, trade deficits, trade surpluses,

etc., we’re talking about exporting

• Most exports involve merchandise

International Sales Intensity of Various U.S.-Based Industries

Services Are Also Exported • In most adv. economies, services are largest component of

economic activity

• Examples: architecture, banking, insurance, entertainment, &

info

• However, many pure services cannot be exported because they

cannot be transported

• Retailers offer their services by establishing retail stores abroad

via FDI. Retailing requires direct contact with customers

• Overall, most services are delivered to foreign customers via

entry strategies other than exporting

Advantages of Exporting

• Increase overall sales, improve market share, & generate

profit margins that are more favorable than in domestic

market

• Increase economies of scale, reducing per-unit costs

• Diversify customer base, reducing dependence on home

markets

• Stabilize fluctuations in sales associated with economic

cycles or seasonal demand

Advantages of Exporting

• Minimize the cost of foreign market entry; the

firm can use exporting new markets before

committing greater FDI resources

• Minimize risk/maximize flexibility relative to

other entry strategies

• Leverage capabilities & skills of foreign

distributors & other partners located abroad

Disadvantages of Exporting

• Compared to FDI, firm has fewer opportunities to learn

about customers, competitors, and the marketplace

• Requires firm to acquire new capabilities and redirect

organizational resources

• Sensitive to tariffs and other trade barriers

• Sensitive to exchange rate fluctuations

A Systematic Approach to Exporting

Devise needed

on-the-ground

tactics; adapt

products and

marketing as

needed

Screen for the most

attractive markets;

identify qualified

distributors;

estimate industry

market potential

and company sales

potential

Assess firm’s

resource needs;

establish

timetable for

achieving export

goals; decide on

distribution

strategy

Acquire new abilities

in such areas as

product

development,

logistics, finance,

contracts, currency

management, foreign

languages, and cross-

cultural skills

• Indirect exporting: Contracting with an intermediary,

often an export management company or a trading

company, in the firm’s home country to perform all export

functions; common among firms new to exporting

• Direct exporting: Contracting with intermediaries, such as

distributors or agents, in the foreign market to perform

export functions; perform downstream value-chain

activities in the target market

Organizing for Exporting

• Company-owned foreign subsidiary: Similar to direct

exporting, except the exporter owns the foreign

intermediation operation; the most advanced option

Export Management

• Firm implements and manages its export strategy

• Product adaptation may be necessary – may need to

change product features to fit local tastes

• Marketing communications adaptation – modifying

advertising, selling style, or more

• Price competitiveness – keep foreign pricing in line with

that of competitors

Importing

• When the firm chooses to buy products & services from

foreign sources & bring them to home market

• Manufacturing firms import raw materials & parts for

assembling finished products

• Retailers such as Walmart, Lowes, and Target are among

the largest importers in the U.S.

• By itself, Walmart is responsible for approx. 10% of U.S.

imports from China (over $20 billion/year)

Managing Transactions: Export Documentation

The official forms and other paperwork required to transport

exported goods and clear customs.

• Quotation or pro forma invoice: Issued on request to

advise a potential buyer about the price and description of

the exporter’s product or service

Managing Transactions: Export Documentation

• Commercial invoice: Actual demand for payment

issued by the exporter when a sale is concluded

• Bill of lading: Basic contract between exporter and

shipper; authorizes the shipping company to transport the

goods to the buyer’s destination

Export Documentation (cont.)

• Shipper's export declaration - Lists the contact

information of the exporter and buyer, full description,

declared value, and destination of the products being

shipped; used by governments to collect statistics

• Certificate of origin - The "birth certificate" of the goods,

showing country where the product originated

• Insurance certificate - Protects the exported goods

against damage, loss, pilferage, and, sometimes, delay

• License – a permission to export

Incoterms (International Commerce Terms)

• A system of universal, standard terms of sale and

delivery

• Commonly used in international sales contracts &

price lists to specify how buyer and seller share

freight & insurance costs, and at which point the

buyer takes title to the goods

Examples of INCOTERMS

Methods of Payment METHOD ADVANTAGES DISADVANTAGES

Cash in Advance Best for the seller Risky from the buyer’s

standpoint, and unpopular;

tends to discourage sales

Letter of Credit A contract between the

banks of the buyer and the

seller. Largely risk-free, it

helps establish instant trust.

Requires following a strict

protocol, specified in the

contract; can involve much

paperwork and long set of

sequential steps

Open Account Easy for exporter, who

simply bills the buyer, who

is expected to pay at agreed

future time

Risky unless there is strong

established relationship

between exporter and buyer

Four key factors determine cost of financing for export sales

Creditworthiness of the exporter

Creditworthiness of the importer

Riskiness of the sale

Timing of the sale

Import-Export Financing

Sources of Export Financing

• Commercial banks – same banks that finance domestic

business can often do the same for exports

• Factoring, Forfaiting, & Confirming

– Factoring: the discounting of a foreign account receivable

by transferring title of the sold item (& it’s acct. receivable)

to a factoring house at a discount over face value

Sources of Export Financing

– Forfaiting: the discount selling of long-term accounts

receivable of seller or promissory notes of foreign buyer

– Confirming: a financial service in which an

independent company confirms an export order in

seller’s country & makes payment for those goods in

that country’s currency

• Distribution channel intermediaries – these representatives

can often provide funding in addition to their other

functions

• Buyers & Suppliers – foreign buyer down payments can

reduce need for financing

• Intracorporate financing – large MNE’s can provide

many sources of funds for financing export sales of its

subsidiaries

Sources of Export Financing (cont.)

Sources of Export Financing (cont.)

• Government assistance programs – Numerous

government agencies offer programs to help exports (e.g.,

Export-Import Bank, Small Business Administration)

• Multilateral Development Banks (MDB’s) – international

financial institutions owned by several governments that

promote economic progress in part by funding assistance

Sources of Information to Identify Potential Intermediaries • Country and regional business directories such as

Kompass (Europe), Bottin International (worldwide),

Japanese Trade Directory, and Foreign Yellow Pages

• Trade associations such as the National Furniture

Manufacturers Association or the National Association of

Automotive Parts Manufacturers

• Government ministries and agencies such as Austrade in

Australia, Export Development Canada, and the U.S.

Department of Commerce

• Commercial attachés in embassies and consulates abroad

• Branch offices of government agencies located in

exporter’s country, such as the Japan External Trade

Organization

Sources of Information to Identify Potential Intermediaries

Working with Foreign Intermediaries

• Exporter relies on intermediaries for much of marketing,

physical distribution, & customer service activities in the

export market

• The exporter should cultivate mutually beneficial,

bonding relations; respond to the intermediary’s needs;

demonstrate commitment; and build trust

• Intermediaries prefer handling good,

profitable products, and desire various

types of support

Foreign Intermediaries’ Expectations for Exporters

• Good, reliable products for which there is a ready

market

• Products that provide significant profits

• Opportunities to handle other product lines

• Support for marketing communications, advertising, &

product warranties

• A non-burdensome payment method

• Training for their staff in exporter’s methods

• Help establishing after-sales service

Criteria for Evaluating Export Intermediaries

Common Dispute Areas With Intermediaries

• Compensation arrangements

• Pricing practices

• Advertising and promotion practices and the extent of

advertising support

• After-sales service

• Return policies

• Adequate inventory levels

• Incentives for promoting new products

• Adapting the product for local customers

Countertrade

• An international business transaction in which all or

partial payments are made in kind rather than cash;

similar to barter. Used when conventional means of

payment are difficult, costly, or nonexistent

• Accounts for between 10% and 33% of all world trade

• Common in large-scale government procurement &

governments may mandate countertrade (“I’ll buy your

product if you buy mine”)

• Barter: Goods are directly exchanged without the transfer of

any money

• Compensation deal: Payment in goods and cash

• Counterpurchase: Entails two distinct contracts

• In the first, the seller agrees to a set price for goods and

receives cash from the buyer

• In the second, the seller agrees to purchase goods from the

buyer

Types of Countertrade

• Buy-back agreement: Seller agrees to supply technology or

equipment to construct a facility and receives payment in the

form of goods it produces

Examples of Countertrade

• Boeing traded aircraft for oil in Saudi Arabia

• Caterpillar received caskets in Colombia and wine in

Algeria in exchange for earth-moving equipment

• Goodyear traded tires for minerals, textiles, & agricultural

products.

• Coca-Cola received tomato paste from Turkey, oranges

from Egypt, and beer from Poland in exchange for Coke

Risks of Countertrade

1. Goods offered by customer may be inferior, limiting

sale potential

2. Difficult to put market value on these goods b/c they’re

often commodities or low-quality manufactured

products that buyer can’t inspect ahead of time

3. Both parties will ‘pad’ their prices, expecting the other

to do the same

4. Countertrade involves complex deals that are time-

consuming to put together and then value

5. Government rules can make countertrade bureaucratic

Why Consider Countertrade?

• Because in some cases, the alternative is no trade at all (esp.

if a government mandates

• It can help firm get a foothold in new markets & thereby

develop new customer relationships

• Many firms use countertrade to also develop new supply

sources

• It can be used as a way to repatriate profits that are

somehow blocked in a foreign subsidiary

• Firms may be able to set up separate divisions that can be

used to develop global managers who are entrepreneurial,

innovative, and knowledgeable about tradable goods and

commodities