Chapter 13

Exporting and Countertrade

International Business Strategy, Management & the New Realities by Cavusgil, Knight and Riesenberger

International Business: Strategy, Management, and the New Realities

Overview of Foreign Market Entry Strategies 1. International transactions that involve the exchange of products: Home based international trade activities such as global sourcing, exporting, and countertrade. 2. Equity or ownership-based international business activities: Include FDI and equity-based collaborative ventures. 3. Contractual relationships: Include licensing and franchising.
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1. Exchange of Products
Global sourcing: Strategy of buying products and services from foreign sources. Also known as importing, global procurement, or global purchasing. Exporting: Strategy of producing products or services in one country (often the producers home country), and selling and distributing them to customers in another country. Countertrade: Refers to a transaction in which all or part of the payment is received in the form of products or commodities.
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2. Equity or Ownership-Based IB Activities

Typically involve foreign direct investment (FDI) and equity-based collaborative ventures. In contrast to home-based international operations (e.g., exporting), the firm establishes 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
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3. Contractual Relationships Usually licensing or franchising The firm allows a foreign partner to use its intellectual property in return for royalties or other compensation. Franchising is common in retailing. McDonalds, Dunkin Donuts, Century 21 Real Estate, and many others have used franchising to internationalize worldwide.
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Factors Relevant to Choice of Foreign Market Entry Strategy

1. 2. 3. The goals and objectives of the firm, such as desired profitability, market share, or competitive positioning; The firms financial, organizational, and technological resources and capabilities; Unique conditions in the target country, such as legal, cultural, and economic circumstances, as well as distribution and transportation systems; Risks inherent in each proposed foreign venture; The nature and extent of competition from existing and potential rivals; The characteristics of the product or service to be offered to customers in the market (e.g., glass, yogurt, tires, copy machines)
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4. 5. 6.

Exporting
The firm manufactures in one country (usually the home country) conducts marketing, distribution, and customer service activities in a foreign export market. Export channels:
Independent distributor or agent, or Firms own marketing subsidiary abroad

Exporting is low risk, low cost, and flexible. Popular among SMEs.
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Services Are Exported As Well

Examples: architecture, education, banking, insurance, entertainment, information. However, many pure services cannot be exported because they cannot be transported. Retailers offer their services by establishing retail stores abroad, that is, via FDI. This is because retailing requires direct contact with customers. Overall, most services are delivered to foreign customers via entry strategies other than exporting.
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Advantages of Exporting
Increase sales and profits Increase economies of scale Diversify customer base, reducing dependence on the home market Stabilize fluctuations in sales associated with economic cycles or seasonality Low cost entry strategy Minimal risk Maximal flexibility Develop useful foreign relationships
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Disadvantages of Exporting
Requires firm to acquire new capabilities and redirect organizational resources Sensitive to tariffs and other trade barriers

Sensitive to exchange rate fluctuations

Compared to FDI, firm has fewer opportunities to learn about customers, competitors, and the marketplace

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A Systematic Approach to Exporting

(1) Assess Global Market Opportunity. Screen for the most attractive export markets; identify qualified distributors; Estimate industry market potential and company sales potential. (2) Organize for Exporting. Assess company resource needs. Establish timetable for achieving export goals. Decide on distribution strategy.
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Indirect versus Direct Exporting

Indirect Exporting: Contracting with intermediaries in the firms home country to perform export functions, such as an Export Management Company (EMC) or a Trading Company. These intermediaries assume responsibility for finding foreign buyers, shipping products, and getting paid. Direct Exporting: Contracting with intermediaries located in the foreign market to perform export functions, such as distributors or agents. They perform downstream value-chain activities in the target market.
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Company-Owned Foreign Subsidiary Handles downstream value-chain activities, such as marketing, physical distribution, promotion, and customer service activities, directly in the market. Preferred method if:
target market is big target market is complex firm needs to closely control local operations firm needs to control its intellectual property
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A Systematic Approach to Exporting (contd)

(3) Acquire Needed Skills and Competencies. Gain new capabilities in areas such as product development, distribution, logistics, finance, contract law, currency management, foreign languages, cross-cultural skills. (4) Implement Exporting Strategy. Devise needed on-the-ground tactics. Adapt products and marketing as needed.
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Export Documentation
The official forms and other paperwork required to transport exported goods and clear customs. Quotation or pro forma invoice: issued on request by potential customers to advise a potential buyer about the price and description of the exporters product or service. Commercial invoice: actual demand for payment issued by the exporter when a sale is concluded. Packing list: indicates exact contents of a shipment, particularly when there are many goods
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Export Documentation (cont.)

Bill of lading: basic contract between exporter and shipper. Authorizes the shipping company to transport the goods to the buyers destination. Shipper's export declaration: lists the contact information of the exporter and the 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 being shipped, indicating the country where the product originated. Insurance certificate: protects the exported goods against damage, loss, pilferage (theft) and, in some cases, delay.
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Incoterms (International Commerce Terms)

A system of universal, standard terms of sale and delivery. Commonly used in international sales contracts and price lists to specify how the buyer and the seller share the cost of freight and insurance, and at which point the buyer takes title to the goods.

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Methods of Payment
Cash in Advance. Risky from the buyers standpoint; Unpopular with foreign buyers; Tends to discourage sales. Open Account. Exporter simply bills the customer, who is expected to pay under agreed terms at some future time. Best between buyer/seller with an established relationship. Letter of Credit. Contract between the banks of the buyer and the seller. Essentially risk-free. Immediately establishes trust between the parties.
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Sources of Export Financing

Commercial banks Distribution channel intermediaries Buyers Suppliers Government assistance programs (e.g., ExportImport Bank, Small Business Administration)

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Sources of Information to Identify Potential Intermediaries

Country and regional business directories such as Kompass (Europe), Bottin International (worldwide), Japanese Trade Directory, as well as 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 attachs in embassies and consulates abroad. Branch offices of government agencies located in the exporters country, such as JETRO, the Japan External Trade Organization.
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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.

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Examples of Countertrade
Caterpillar received caskets from Colombian customers and wine from Algerian customers in return for selling them earthmoving equipment. Goodyear traded tires for minerals, textiles, and agricultural products. Coca-Cola received tomato paste from Turkey, oranges from Egypt, and beer from Poland, in exchange for Coke.
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Nature of Countertrade
Accounts for between 10% and 1/3 of all world trade. Common in large-scale government procurement. Occurs mainly when a developing country cannot obtain sufficient hard currency. Enables developing-country firms to generate otherwise unobtainable sales. Risky (e.g., may involve inferior goods, hard-to-price goods; leads to price padding; complex, cumbersome, and time-consuming)
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Types of Countertrade
Barter: Direct exchange of goods without any money. Compensation deals: Involve payment both in goods and cash.

Counterpurchase: Seller sells its product at a set price for cash, but also agrees to buy goods from the buyer.
Buy-back agreement. Seller agrees to supply technology or equipment to construct a facility and receives payment in the form of goods produced by the facility.
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