Export and Import Strategies Objectives •To introduce the ideas of export and import •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 Chapter Overview The first part of Chapter Thirteen is devoted to an examination of export and import strategies. Table 13. identifies the steps to consider when developing an export (or import) business plan. Next, the roles of a wide variety of third-party intermediaries are discussed. The chapter concludes with a discussion of the major issues related to export financing, including the use of countertrade as a form of payment mechanism. Chapter Outline OPENING CASE: Grieve Corporation—A Small Business Export Strategy A small firm located near Chicago, Grieve Corporation manufactures laboratory and industrial ovens, furnaces, and heat processing systems for the U.
S. market. Grieve began losing business as (i) foreign competitors began to penetrate the U. S. market and (ii) its customers began to move overseas and started sourcing locally. With the help of the International Trade Administration of the U. S. Department of Commerce, Grieve was able to identify potential Asian distributors. During a business trip to Asia, the president of Grieve met with potential candidates and successfully recruited exclusive agents for each country visited.
Once Grieve had gained sufficient experience in the Asian market, export activities were expanded to other regions. Moving into international markets has proved to be a major factor in the firm’s continued growth and success. Teaching Tip: Review the PowerPoint slides for Chapter Thirteen and select those you find most useful for enhancing your lecture and class discussion. For additional visual summaries of key chapter points, also review the figures and tables in the text. I. INTRODUCTION
Whereas exporting represent goods and services flowing out of a country, importing represent goods and services flowing into a country. Exports result in receipts and imports result in payments. Although export and import activities are a natural extension of distribution strategy, they also include elements of product, promotion and pricing factors, and decisions. Both exporting and importing entail a lower level of risk than foreign direct investment, but while exporting offers less control over the marketing function, importing offers less control over the production function.
This chapter will focus primarily on the issue of a company’s motivations for and development of an export strategy (Figure 13. 1). II. EXPORT STRATEGY A firm’s choice of entry mode depends on various factors, such as the ownership advantages of the firm, the location advantages of the market and the internalization advantages of specific assets, international experience and/or the ability to develop differentiated products. In general, firms that possess few ownership advantages either do not enter foreign markets, or they use the lower-risk entry modes of exporting and licensing.
Still in all, the decision to export must fit a company’s overall strategy and take into account global concentration (the presence of relatively few major players), synergies (the gains from sharing corporate expertise on a global basis) and strategic motivations (the firm’s competitive reasons to enter a given market). A. Strategic Advantages of Exports Companies export in order to increase sales revenues, achieve economies of scale in production, diversify markets, and minimize risk. All of these objectives are ultimately motivated by the potential for greater profitability.
Companies can often sell their products at a greater profit abroad than at home due to differences in the competitive environment or differences in stages in the product life cycle in foreign markets. Government actions at home and abroad in such areas as tax policy can also affect profitability and stimulate exporting. B. Characteristics of Exporters Research conducted on the characteristics of exporters has resulted in two basic conclusions: (i) the probability of exporting increases with size of company revenues and (ii) export intensity (the percentage of total revenues generated by exports) is not positively correlated with company size.
Factors such as the risk profile of management and the nature of industry competition are just as important as firm size. C. Stages of Export Development Firms tend to move through three phases of export development: pre-engagement, initial exporting, and advanced exporting. As they do so, they tend to (i) export to more countries and (ii) expect exports to grow as a percentage of total sales. In addition, they also tend to (iii) diversify their markets to more distant countries and (iv) move into environments that are increasingly different from those of their home countries. Figure 13. 2). D. Pitfalls of Exporting The operational mistakes associated with exporting can be very costly. Most new exporters stumble once or twice before experiencing consistent success. Export specific problems include: •Failure to obtain qualified export counseling in developing a plan to guide export expansion •Insufficient commitment to exporting by top management to overcome the initial difficulties and financial requirements of exporting. •Misestimating the complexity and costs of shipping and customs clearance to export transactions. Poor selection of overseas agents or distributors •Chasing orders from around the world instead of establishing a profitable operations and management growth. •Neglecting export markets and customers when the domestic market booms. •Failure to treat international distributors on an equal basis with domestic counterparts. •Unwillingness to modify products to meet other countries’ regulations or cultural preferences •Failure to print service, sales, and warranty messages in locally understood languages. Failure to consider use of an export management company or other marketing intermediary when the company does not have personnel to direct specialist export functions •Failure to prepare for disputes with customers; at that point no court system can be called upon as a last resort (other than international arbitration, which is seldom a viable alternative for small or midsize exporters). E. Designing an Export Strategy [See Figure 13. 3, Table 13. ] To design an effective export strategy, managers must: •Assess the company’s export potential by examining its opportunities and resources. •Obtain expert counseling on exporting. Many governments provide export assistance for companies in their countries. Banks can provide specialized help with such things as letters of credit (L/Cs), covered in detail in chapter 18. •Select a market or markets. •Formulate and implement an export strategy. III. IMPORT STRATEGY The import process involves strategic and procedural issues that basically mirror those of the export process.
A. Strategic Advantages of Imports There are two basic types of imports: industrial and consumer goods to independent individuals and companies and intermediate goods and services that are part of the firm’s global supply. The three basic types of importers are those that: •look for any product around the world that will generate a positive cash flow •look to foreign sourcing as a means to minimize product costs •use foreign sourcing as part of their global supply chain strategy. An import broker is a certified pecialist who obtains required government permissions and other clearances before forwarding the necessary documents to the carrier(s) of the goods. A. The Role of Customs Agencies Customs reflect a country’s import and export procedures and restrictions. 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.
A customs broker can help an importer minimize duties by (i) valuing products in such a way that they qualify for more favorable treatment, (ii) qualifying for duty refunds through drawback provisions, (iii) deferring duties by using bonded warehouses and foreign trade zones and (iv) limiting liability by properly marking an import’s country of origin. B. Import Documentation The import documentation process can be both complicated and cumbersome. Without proper documentation, customs agencies will not release shipments.
Documents are of two types: (i) those that determine whether customs will release the shipment and (ii) 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. POINT-COUNTERPOINT: A Dirty Dilemma—Exporting Hazardous Waste POINT: An estimated 20 million computers become obsolete each year in the U. S. , with more than 200 tons of this potentially hazardous material being exported to developing countries like China, India, Bangladesh, or Pakistan for re-use, recycling, or disposal.
Disposal costs for hazardous waste in developing countries are fractions of the cost in wealthier countries, and exporting the waste allows manufacturers to take responsibility for their products from cradle to grave. COUNTERPOINT: Hazardous waste exports have created dangerous recycling industries in many countries. Electronic waste is a mixture of more than a thousand chemicals, many of which are toxic. Recyclers in developing countries also often have appalling and dangerous working conditions for their employees and create harmful contaminated water runoffs and air pollution in the process.
As of mid-2005, 148 countries had ratified the Basel Convention which adopts aggressive measures limiting the export of hazardous wastes. The United States, which generates approximately 60% of the world’s hazardous waste, is the only industrial country in the world that has yet to endorse the Basel Convention. IV. THE EXPORT PROCESS Direct exports represent products sold to an independent party outside of the exporter’s home country; indirect exports are first sold to an intermediary in the domestic market, who then sells the products in the export market.
While services are more likely to be exported on a direct basis, goods are exported via both avenues. A. Indirect Selling Indirect selling, i. e. , selling products to or through an independent domestic intermediary, is carried out via a variety of third-party intermediaries–independent (unrelated) firms that facilitate international trade transactions by assisting both importers and exporters. They may perform any or all of the following functions: •Stimulate sales, obtain orders and do market research. Make credit investigations and perform payment-collection activities. •Handle foreign traffic and shipping. •Act as support for the company’s overall sales, distribution, and advertising staff. The major types of indirect intermediaries are the export management company (EMC), the export trading company (ETC), and export agents, merchants, or remarketers. B. Export Management Companies An export management company [EMC] is a firm that either acts as a manufacturer’s agent or buys merchandise from manufacturers for international 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. Often, export management companies are small and specialize according to product, function and/or market area. C. Export Trading Companies An export trading company [ETC] is somewhat like an export management company, but its primary purpose in becoming involved in international trade as an independent broker is to match domestic exporters to foreign customers.
Export trading companies that are based in the United States may be exempt from antitrust provisions in order to allow them to penetrate foreign markets by collaborating with other U. S. firms. D. Foreign Trading Companies While the original functions of a trading company were to handle the paperwork, financing, transportation and storage services related to import and export transactions, many have expanded the scope of their operations to include production and processing facilities and operations, as well as fully integrated marketing systems.
In 1995, three large Japanese trading companies (Mitsubishi, Mitsui, and Itochu) were the top three companies on Fortune’s Global 500 list. Due to the implementation of new accounting rules that significantly lowered trading companies’ revenues, by 2004 none of these companies remained anywhere near the top of Fortune’s list. E. Direct Selling Direct selling, i. e. , exporting through sales representatives to distributors, foreign retailers, or final end users, gives exporters greater control over the marketing function and offers the potential to earn higher profits as well.
Whereas a sales representative usually operates on a commission basis, a distributor is a merchant who purchases goods from a manufacturer and resells them at a profit. Companies evaluating potential foreign sales representatives or distributors usually examine: •The size and capabilities of its sales force •Its sales record •An analysis of its territory •Its current product mix •Its facilities and equipment •Its marketing policies •Its customer profile •The principles it represents and the importance of the inquiring company to its overall business •Its promotional strategies F. Direct Selling Through the Internet
Electronic commerce is increasingly important in exporting—7% of revenues from worldwide trade in 2002 were derived from e-commerce and such trade is expected to exceed 20% of global trade in 2007. E-commerce is easy to engage, provides faster and cheaper delivery of information, generates quick feedback on new products, improves customer service, accesses a global audience, levels the field of competition, and supports electronic data interchange (EDI) with both suppliers and customers. G. Export Documentation Direct selling requires the exporter to complete many documents that regulate international trade.
Depending on the situation, these documents may include: •A pro forma invoice—an invoice from the exporter to the importer that outlines the selling terms, price, and delivery if the goods are actually shipped. •A commercial invoice—a bill for the goods from the buyer to the seller. •A bill of lading—a receipt for goods delivered to the common carrier for transportation. •A consular invoice—sometimes required by countries as a means of monitoring imports. •A certificate of origin—indicates where the products originate and usually is validated by an external source. A shipper’s export declaration—used by the exporter’s government to monitor exports and to compile trade statistics. •An export packing list—itemizes the material in each individual package, indicates the type of package, and is attached to the outside of the package. H. Foreign Freight Forwarders A forward freight forwarder is a foreign trade specialist who deals in the movement of goods from producer to customer, and is the largest export intermediary in terms of value and weight of products managed. Even export management companies may use the specialized services of foreign freight forwarders.
The typical freight forwarder is the largest export intermediary in terms of the weight and value of cargo handled. Some may specialize in the type of mode used, others in the geographical area served. The movement of goods across a variety of modes from origin to destination is known as intermodal transportation. Three recent trends leading to a preference for air freight over ocean freight are: (i) the need for more frequent shipments, (ii) lighter-weight shipments and (iii) high-value shipments. LOOKING TO THE FUTURE: The Technology of Trade Although global trade continues to increase, the process of trade continues to get more complex.
The heightened importance of national and international security, the formation of complex national, regional, and global trade arrangements, and the increasing list of international regulations makes international trade more of a challenge than ever before. On the other hand, advances in transportation and communications systems steadily facilitate export growth and make it easier for companies to reach international markets. Electronic data interchange allows companies to synchronize their importing and exporting activities with other companies in real time. It also allows companies to connect with their foreign customers in new ways.
Traditional trade intermediaries like EMCs and ETCs are growing in technological sophistication, and new intermediaries like Federal Express and UPS are improving the efficiency and effectiveness of export and import operations. These intermediaries often allow exporters to integrate mechanisms like online shopping, online order tracking, consolidated billing, product returns, warranty claims, parts exchanges, and reverse logistics. I. Sources of Assistance Government agencies such as the Department of Commerce in the United States are particularly useful resources for export assistance. Table 13. outlines types of trade information available by source, including government agencies, trade associations and trade groups, and export intermediaries. In Japan, offices such as the Small and Medium Enterprise Agency, Agency of Industrial Science and Technology, and the Ministry of International Trade and Industry (MITI) all are available to assist exporters. Agencies in the United States such as the Ex-Im Bank and Small Business Administration can help international traders obtain financing for their activities. Most states and several cities fund and operate export financing programs as well.
V. COUNTERTRADE Countertrade involves a reciprocal flow of goods and services. It provides a means to complete a transaction when a firm (or government) does not have sufficient convertible currency to pay for imports, or it simply does not have sufficient funds. Countertrade transactions can be divided into two basic types: (i) barter (based on clearing arrangements used to avoid money-based exchange) and (ii) buybacks, offsets and counterpurchase (all of which are used to impose reciprocal commitments). A. Barter Barter occurs when goods or services are traded for other goods and services, i. e. it represents a non-monetary transaction. (Barter is not only the oldest form of countertrade, it is the oldest form of any type of trade transaction. ) B. Buybacks Buybacks are products the exporter receives as payment that are related to or originate from the original export. These arrangements are quite common in the sale of technology, licenses, and even complete “turnkey” factories. C. Offset Trade Offset trade occurs when the exporter sells goods or services for cash but then helps the importer find opportunities to earn hard currency. Direct offsets include generated business that directly relates to the export; ndirect offsets include generated business unrelated to the export. Figure 13. 4 shows how one might structure an offset transaction. CLOSING CASE: Alibaba. com Alibaba. com is a web site that facilitates transactions between importers and exporters around the world. Other web sites that have created similar online marketplaces include www. global. kita. net focused on products from Korea, www. trade-India. com for Indian products, and www. europages. com for Europe. These electronic trading venues have changed the mechanics of importing and exporting and opened up tremendous opportunities, especially for smaller enterprises.
The impact has been especially dramatic for small Chinese manufacturers, who now have ready access to a global market for their products. Questions 1. List, in separate columns, the benefits and costs of using sites like Alibaba’s to trade internationally. What does your analysis say to companies like Grieve (in our opening case) as they think about their export strategy? Benefits Low cost Access to many suppliers/buyers Quick transaction time More transparency in transaction Lower risk of fraud Easy to make contacts with SMEs Costs Listings are free Searches are free Personalized Web pages cost additional
Certification costs some Companies like Grieve need to make web sites such as Alibaba. com a central part of their export strategy. The benefits of using these services overwhelm the costs. 1. Is it reasonable to speculate that eventually most trade between small- and medium-sized firms might take place in the context of sites like Alibaba. com? If so, does that influence your inclination to consider importing and exporting? With the rapid growth of the use of these sites and the corresponding increase in trade among SMEs, it is very reasonable to speculate that eventually most trade between SMEs might take place in this context.
My inclination to consider importing and exporting rises dramatically with powerful tools such as these at my disposal. 2. Visit www. alibaba. com, www. trade-india. com, and www. europages. com. Compare and contrast these Web sites. Alibaba has a Chinese emphasis and focus, while Trade-India is of course directed to India and Europages to Europe. Of the three, Alibaba has the most broad appeal, but all are very useful. Trade-India gives more direct access to product catalogs for some companies, but does not have the certification and authentication features of Alibaba.
Also, the Alibaba contact templates are much more user friendly than both Trade-India and Europages. Europages is available in many different languages, while the others are more limited and are mostly in English. 3. Visit www. alibaba. com, go to “Advanced Search,” and enter the product you seek in the relevant box. Select required criteria and click on “Search. ” Review the list of companies that qualify and find a suitable one. Analyze this process for ease, usefulness, and potential value. This process is very easy, useful, and has tremendous potential value. It takes only seconds to find a long list of potential suppliers.
One drawback is the urge to contact too many suppliers to find the best possible terms. The method of contact is made very easy by the use of templates and drop-down menus that help to standardize requests. If the suppliers will respond to these requests in a timely manner, the process has huge potential value. 4. How transparent do sites like Alibaba. com make the import-export transaction? Would you still worry about fraud? These sights increase transparency and reduce the risk of fraud. Alibaba allows suppliers to post information about their companies, including video tours of their facilities.
In addition, Alibaba has developed the TrustPass designation. In order to obtain this designation, companies must pass an authentication and verification test from a third-party credit agency. Also available is the “Gold Supplier” designation, which also requires third party verification of trustworthiness. These mechanisms greatly reduce the risk of fraud, but do not eliminate it entirely. Mechanisms such as letters of credit should still be used to safeguard transactions from commercial risk. WEB CONNECTION Teaching Tip: Visit www. prenhall. om/daniels for additional information and links relating to the topics presented in Chapter Thirteen. Be sure to refer your students to the on-line study guide, as well as the Internet exercises for Chapter Thirteen. _________________________ Chapter Terminology: letters of credit (L/Cs), p. 460 import broker, p. 463 export management company, p. 467 ownership advantages, p. 465 location advantages, p. 465 internalization advantages, p. 465 direct export, p. 466 indirect export, p. 466 export trading company, p. 467 sales representatives, p. 469 distributors, p. 469 direct selling, p. 469 ro forma invoice, p. 470 commercial invoice, p. 470 bill of lading, p. 470 consular invoice, p. 471 certificate of origin, p. 471 shipper’s export declaration, p. 471 export packing list, p. 471 foreign freight forwarder, p. 471 intermodal transportation, p. 471 countertrade, p. 474 offset trade, p. 475 barter, p. 475 buybacks, p. 475 _________________________ Additional Exercises: Export and Import Strategies Exercise 13. 1. Research has shown although the largest firms in the world also tend to be the world’s largest exporters, export intensity is not positively correlated with the size of a firm.
Begin a discussion by asking students to explore the reasons for this. Then, ask students to discuss the levels of export intensity they would expect to find with respect to a variety of industries. Be sure they explain their reasoning and compare differences across industries. Exercise 13. 2. A major barrier to international trade activities is the issue of trust. Even when importers and exporters are known to each other, there is a high degree of risk associated with international trade transactions, i. e. exporters want to be sure they’ll be paid and importers want to be sure they receive the full value of an order. Ask students to discuss the reasons letters of credit and the various forms of a draft help both importers and exporters overcome this challenge. Under what conditions might each instrument be preferred? Exercise 13. 3. Assign each student (or team of students) a given product and foreign country market. Then have the students (or teams) consult the National Trade Data Bank to collect information useful in developing a strategy for exporting the specific product to the designated country market.
Discuss the information the students find and its relevance to exporting in class. Be sure to compare information across products and countries. Exercise 13. 4. Ask each student (or team of students) to choose a product to import to the United States from a foreign country market. Are there regulations regarding their chosen product that they would have to be aware of before importing? Have them look up the tariff for the product. Tariffs can be found on the United States International Trade Commission web site (www. usitc. gov).