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Chapter 14

International Business: The New Realities, Global Edition, 3rd Edition

by
Cavusgil, Knight, and Riesenberger
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Learning Objectives
1. An overview of foreign market entry strategies
2. Internationalization of the firm
3. Exporting as a foreign market entry strategy
4. Managing export-import transactions
5. Payment methods in exporting and importing
6. Export-import financing
7. Identifying and working with foreign intermediaries
8. Countertrade: A popular approach for emerging
markets and developing economies
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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 producers 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. The firm receives other products in payment.
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Foreign Market Entry Strategies (contd)

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.
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Foreign Market Entry Strategies (contd)

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. McDonalds,
Dunkin Donuts, Century 21 Real Estate, and many
others have used franchising to internationalize
worldwide.

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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 firms financial, organizational, and
technological resources and capabilities
The types of risk inherent in each proposed foreign
venture
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Factors to Consider When

Choosing Entry Strategy (contd)
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

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Factors to Consider When

Choosing Entry Strategy (contd)
The value-adding activities the firm is willing to
perform itself in the market and the activities it will
delegate to local partners
Long-term strategic importance of the market
Characteristics of the product or service

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Classification of Entry Strategies

Based on Degree of Control for Focal Firms

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Characteristics of Company Internationalization

Push and pull factors serve as initial triggers. Usually
a combination of triggers inside and outside the firm is
responsible for initial international expansion.
Initial internationalization may be accidental. Foreign
expansion is often unplanned or the result of chance
events, such as a meeting with a foreign distributor.
Risk and return must be balanced. Managers weigh
the potential returns of internationalization against the
initial costs in terms of money, time, and other company
resources. International ventures typically take longer
than domestic ones to reach profitability.
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Characteristics of Internationalization (contd)

An ongoing learning experience. The firms
internationalization can stretch over many years and
involve many national settings, providing ample
opportunities for managers to learn and adapt how
they do business.
Firms may evolve through stages of
internationalization. Historically, most firms opted
for a gradual approach partly due to limited
resources and a lack of appropriate knowledge on
how to do international business. (However, recently,
some firms born globals internationalize pretty
quickly.)
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Typical Stages of Company Internationalization

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Overview on Exporting
Usually the firms first foreign entry strategy
Low risk, low cost, and flexible
Popular among SMEs
When we talk about trade, trade deficits, trade
surpluses, etc., were talking exporting.
Most exports involve merchandise.
Export channels:
o Independent distributor or agent; or
o Firms own marketing subsidiary abroad
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International Sales Intensity

of Various U.S.-based Industries

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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, via FDI. 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

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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

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A Systematic Approach to Exporting

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A Systematic Approach to Exporting

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A Systematic Approach to Exporting

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Export Intermediation Options

Indirect Exporting: Contracting with an intermediary in
the firms home country to perform all export functions,
often an export management or trading company.
Common among firms new to exporting.
Direct Exporting: Contracting with intermediaries in
the foreign market, such as distributors or agents, to
perform export functions. They perform downstream
value-chain activities in the target market.
Company-Owned Foreign Subsidiary: Similar to
direct exporting except the exporter owns the foreign
intermediation operation; the most advanced option.
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Alternative Organizational
Arrangements for Exporting

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Country Realities
The performance of Germanys economy is impressive,
with exports leading the way.
Top export destinations include emerging markets such
as China, India, and Brazil.
In such markets, demand for German-made products is
at an all time high, especially for high-value goods such
as cars, heavy machinery, and power plants.
Exporting helps reduce German unemployment, which
recently declined to its lowest level in 20 years about
7% percent.
Exporting helps Germany weather poor economic
conditions in Europe.
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Importing

The United States imports enormous amounts of goods from China. As one of the
largest U.S. importers, Walmart alone accounts for about 10% of the countrys
imports of toys and other products from China, worth more than $20 billion a year.
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United States: Top Trading Partners

Sum of merchandise exports and imports, in billions of U.S. dollars

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Canada: Top Trading Partners

Sum of merchandise exports and imports, in billions of U.S. dollars

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China: Top Trading Partners

Sum of merchandise exports and imports, in billions of U.S. dollars

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European Union: Top Trading Partners

Sum of merchandise exports and imports, in billions of U.S. dollars

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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
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.
Bill of lading: Basic contract between exporter and
shipper. Authorizes the shipping company to
transport the goodsCopyright
to the
buyers destination.
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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.
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Exporting and the Global Economy

Exporting is the entry strategy responsible for global trade and generates enormous earnings
for nations. Exporting serves the internationalization goals of firms, both small and large.
Aircraft manufacturers such as Airbus
and Boeing
are
among the worlds leading exporters.
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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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Examples of INCOTERMS

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Exports and Shipping

Export transactions generally ship products through seaports and other maritime
facilities. This container ship is Copyright
passingthrough
the Panama Canal.
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Methods of Payment
METHOD

ADVANTAGES

DISADVANTAGES

Cash in
Advance

Best for the seller

Risky from the buyers

standpoint, and thus
unpopular; tends to
discourage sales.

Open
Account

Easy for the exporter, who

simply bills the buyer, who is
expected to pay at some
future time as agreed.

Risky unless there is a

strong, established
relationship between exporter
and buyer

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.

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Letter of Credit Cycle

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Sources of Export Financing

Commercial banks
Distribution channel intermediaries
Buyers
Suppliers
Government assistance programs (e.g.,
Export-Import 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 exporters
country, such as the Japan External Trade Organization
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Working with Foreign Intermediaries

The exporter relies on intermediaries for much of
the marketing, physical distribution, and customer
service activities in the export market.
The exporter should cultivate mutually beneficial,
bonding relations; respond to the intermediarys
needs; demonstrate commitment; and build trust.
Intermediaries prefer
handling good, profitable
products, and desire
various types of support.
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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
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Criteria for Evaluating Export Intermediaries

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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.
Accounts for between 10% and 1/3 of all world trade.
Common in large-scale government procurement.
Risky. May involve inferior or hard-to-price goods;
may lead to price padding; can be complex,
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Types of Countertrade
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, contingent on a
second contract in which the seller agrees to
purchase goods from the buyer.
Buy-back agreement: Seller supplies technology or
equipment to construct a facility and receives
payment in the form of goods produced by it.
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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, 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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Overview on Countertrade

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