International Business by Daniels and Radebaugh Chapter 17

International Business by Daniels and Radebaugh Chapter 17 Export and Import Strategies 1

Objectives To identify the key elements of export and import strategies To compare direct and indirect selling of exports To discuss the role of several types of trading companies in exporting To show freight forwarders help exporters with the movement of goods To identify the methods of receiving payment for exports and the financing of receivables To discuss the role of countertrade in international business 2

Exporting and Importing in International Business OPERATIONS EXTERNAL INFLUENCES OBJECTIVES PHYSICAL AND SOCIETAL FACTORS STRATEGY MEANS COMPETITIVE ENVIRONMENT Modes Functions • Marketing • EXPORTING AND IMPORTING • Global manufacturing • Supply chain management • Accounting • Finance • Human resources Overlaying Alternatives 3

Export Strategy Choice of entry mode to a foreign market depends on: • Ownership advantages—specific assets, international experience, and ability to develop differentiated products – with few ownership advantages companies either do not enter foreign markets or use low-risk entry modes such as exporting • Location advantages—combination of market potential and investment risk • Internalization advantages—benefits of holding specific assets or skills within the company Other strategic concerns include: • Global concentration—only a few major players in a global industry • Global synergies—sharing functional expertise with overseas operations • Strategic motivations—reasons for exporting 4

Characteristics of Exporters Companies that export: • More likely to be large (as defined by revenues) • Are more likely to have risk-taking managers • Operate in industries where the leading companies are exporters Why companies export • Increased sales revenue most important motivation to export • Alleviate excess capacity • Exporting less risky than FDI • Countercyclical investment diversification Stage of export development—three broad phases • Stage unrelated to size of the company • Availability of Internet has increased company interest in exporting 5

Phases of Export Development Preengagement Phase 1 Phase 2 • Companies selling goods and services solely in the domestic market • Those companies considering but not currently exporting Initial Exporting • Companies that do sporadic, marginal exporting • Companies that see lots of potential in export markets • Companies unable to cope with exporting demands Advanced Phase 3 • Companies become regular exporters • Companies gain extensive overseas experience • Companies may use other strategies for entering markets 6

Designing an Export Strategy Detailed export business plan essential for effective export strategy • Assess the company’s export potential by examining its opportunities and resources • Obtain counseling on exporting • Select a market or markets • Formulate and implement an export strategy Commitment precedes success in exporting • Development of an export department is one indicator of top management commitment 7

Structure of an Export Business Plan I. Executive Summary II. Business History III. Market Research IV. Marketing Decisions V. Legal Decisions VI. Manufacturing and Operations VII. Personal Strategies VIII. Financial Decisions IX. Implementation Schedule 8

Import Strategy Importing—bringing of goods and services into a country • Results in the importers paying money to the exporter in the foreign country Two basic types of imports • Industrial and consumer goods and services provided to customers unrelated to exporter • Intermediate goods and services provided to customers that are part of the firm’s global supply chain Why companies import • Goods and services can be supplied to domestic market at cheaper price and higher quality • More efficient than attempting to manufacture every product in every market • Provide access to products not available in local market 9

Import Strategy (cont. ) Types of importers include those: • Looking for any product around the world to import and sell • Looking foreign sourcing to get their products at the cheapest price • Using foreign sourcing as part of their global supply chain Importing requires expertise in dealing with institutions and documentation • Import broker—intermediary who helps an importer clear customs 10

Role of Customs Agencies Customs—a country’s import and export procedures and restrictions • Customs agencies—assess and collect duties and ensure import regulations are adhered to – deal with smuggling – assign a tentative value and tariff classification to the merchandise – determine if import restrictions apply Broker or import consultants—help importer minimize import duties by: • Valuing products to qualify to receive more favorable duty treatment • Qualifying for duty refunds through drawback provisions • Deferring duties by using bonded warehouses and foreign trade zones • Marking import’s country of origin 11

Role of Customs Agencies (cont. ) Documentation—importers must submit to customs documents that determine whether the shipment is released and what duties are assessed • Must file documents to take title of shipment – taking title—receive products without purchasing them Third-Party Intermediaries Companies that facilitate the trade of goods but that are not related to either the exporter or importer • Stimulate sales, obtain orders, and do market research • Investigate credit and collect payments • Handle foreign traffic and shipping • Support company’s sales, distribution, and advertising staffs Some act as agents on behalf of the exporter, and some take title to goods and sell them abroad 12

Direct Selling Exporter sells through sales representatives to distributors, to foreign retailers, or to final end users • Sales representative—sells products in foreign markets on commission basis without taking title to the goods • Distributor—a merchant who purchases products and sells them at a profit – carries a stock of the product, which it also services – usually deals with retailers • A sales organization in foreign country required to deal directly with end users Direct Exporting through the Internet Allows all companies to engage in direct marketing • Export products to end users Establish home pages in different languages 13

Indirect Selling Exporter sells goods directly to or through an independent domestic intermediary in the exporter’s home country that exports the products to foreign markets Export Management Companies (EMCs)—act as export arm of manufacturer – operate on contractual basis – provide exclusive representation in a well-defined foreign territory – manufacturer loses some control over foreign sales to EMC • Export Trading Company (ETCs)—identify suppliers to fill orders in overseas markets – determine what foreign customers want – identify different domestic suppliers for the products – look for as many suppliers as possible 14

Non–U. S. Trading Companies Largest trading companies in the world are from Japan, South Korea, Germany, and China • U. S. has a large number of small trading companies Sogo Shosha—Japanese trading companies • The trading arm of the large kieretsus – kieretsus—Japanese business groups that are networks of manufacturing, service, and financial companies Korean trading companies—part of Chaebols • Chaebols—large Korean business groups that contain a trading company Piggyback Exports Products exported by a company through another manufacturer’s channels of distribution 15

Foreign Freight Forwarders Freight forwarder—an import or export specialist dealing in the movement of goods from producer to consumer • Largest intermediary in terms of value and weight of products managed • Services more limited than those of EMC • Obtains best routing and means of transportation • Moves products to air or ocean terminal • Secures space on planes or ships and necessary storage prior to shipment • Does not take title to goods or act as sales representative • Charges based on the shipment value Intermodal transportation—movement of goods across different modes from origin to destination • Increasing reliance on airfreight – more frequent and lighter-weight shipments 16

Documentation Export license—allows products to be shipped to specific countries Pro forma invoice—invoice from exporter to importer outlining the selling terms, price, and delivery if the goods are actually shipped Commercial invoice—bill for the goods from the buyer to the seller Bill of lading—receipt for goods delivered to the common carrier for transportation, a contract for services rendered, and a document of title Consular invoice—means of monitoring price of imports and to generate revenue for the embassy that issues it Certificate of origin—indicates where goods originated Shipper’s export declaration—used to monitor exports and compile trade statistics Export packing list—itemizes materials in each package 17

Export Financing Product price—export prices tend to escalate due to transportation costs, duties, multiple wholesale channels, insurance costs, and banking costs May depend on dumping laws in importing country Method of payment—flow of money across borders requires the use of special documents • Draft (bill of exchange)—the drawer directs the drawee to make a payment – documentary drafts—protect both parties by requiring that payment be made based on the presentation of documents conveying the title » sight drafts—payments must be made immediately » time drafts—payment may be made at a later time 18

Export Financing (cont. ) Method of payment (cont. ) • Letter of credit—obligates the buyer’s bank to pay the exporter – forms—sight versus time » revocable—terms may be changed by parties at any time » irrevocable—letter that cannot be changed or canceled without consent of all of the parties – confirmed letter of credit—exporter has the guarantee of an additional bank – open account—necessary shipping documents are mailed to the importer before any payment from or definite obligation on the buyer’s part » usually for members of the same corporation 19

Letter-of-Credit Relationships Importer’s Bank (opening bank) The relationship between opening bank and exporter is governed by the terms of credit issued by that bank Exporter The relationship between importer and opening bank is governed by the terms of the application and agreement for the letter of credit Importer The relationship between 20

Export Financing (cont. ) Financing receivables—increased time and distance of exporting can create cash flow problems for exporter • Banks unwilling to fund exporting due to risks • Exporters can get access to funds by: – factoring—discounting of a foreign account receivable – forfaiting—purchase an exporter’s debt due from customer, usually as promissory note or bill of exchange » bank in importer’s country guarantees these instruments – some government agencies provide direct loans to exporters or guarantee foreign receivables so that exporters can get bank financing of receivables – Export-Import Bank of the United States 21

Export Financing (cont. ) Insurance—covers: • Transportation risks • Political, commercial, and foreign-exchange risks Countertrade Barter—goods are exchanged for goods of equal value without any flow of cash • Barter firms act as intermediaries • Buybacks—products the exporter receives as payment that are related to or originate from the original export Offset trade—exporter sells products for cash and then helps to promote exports from the importing country in order to help it earn foreign exchange Direct offsets—any business directly related to the export • Indirect offsets—all business unrelated to the export 22

An Offset Transaction Mc. Donnell-Douglas Monitoring bank that credits and debits payments F-18 s Canadian military Exporter’s product division Payments Goods Importer in Canada Importer in U. S. Payments Goods Monitoring bank that credits and debits payments Exporter in Canada Importer in third country Payments Goods Exporter in Canada 23