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International Business

Chapter Thirteen

Export and Import Strategies

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Chapter Objectives

To introduce the ideas of import and export To identify the elements of export and

exporting strategies

To compare direct and indirect selling ofexporting To identify the elements of import and import

strategies

To discuss the types and roles of third-partyintermediaries in exporting To discuss the role of countertrade in

international business

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Introduction:

International Trade Strategy

International tradeconsists of

(i) exporting(product outflows)(ii) importing(product inflows)

In general, trade activities: are a natural extension of a firms

distribution strategy entail a lower level of risk than licensing or

foreign direct investment[continued]

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Exports: goods and services flowing out of acountry

Exporting: the sale and delivery of goods andservices by a firm based in one country tocustomers residing in a different country results in receipts from the customers

affords less control over the marketing function

Imports: goods and services flowing into acountry

Importing: the purchase of goods and servicesby a firm based in one country from sellers thatreside in a different country results in payments to the sellers affords less control over the production function

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Fig. 13.1: Exporting and Importingin International Business

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Export Strategy

The decision to export must take into accountglobal concentration, global synergies, andglobal strategic motivations.

Strategic factors affecting the choice ofexporting as a mode of entry include: the ownership advantages of the firm

the location advantages of the market

the internalization advantages of specific assets the international experience of the firm

the firms ability to differentiate its products

its fit with the overall strategy of the firm

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Strategic Advantages of Exports

Increase revenues and profitability Achieve economies of scale in production and

research Alleviate excess capacity in domestic operations Minimize risk (as compared to licensing and

foreign direct investment)

Diversify marketsExporting requires expertise in dealing with governmentinstitutions, particularly customs agencies, as well as the

documentation process.

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Characteristics of Exporters

Research has shown that:(i) the probabilityof exporting increases

with the size of company revenues

(ii) export intensity, i.e., the percent of totalrevenues generate by exports, is notpositively correlated with company size

While large companies are the biggest exporters,small companies expand their export capacity to:

increase market share overseas fortify their domestic competitiveness

The risk profile of management and the nature ofindustry competition are just as relevant as firm size.

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Stages of Export Development

Firms tend to move through three phasesof export development: pre-engagement

initial exporting advanced exporting

As they do so, firms tend to: export to a greater number of countries extend their markets to more distant countries move into environments that are increasingly different from

those of their home countries expect exports to grow as a percent of total sales consider foreign direct investment as a possible alternative to

exporting

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Fig. 13.2: Phases of ExportDevelopment

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Pitfalls of Exporting

Problems, delays, and pitfalls associated with theexport process may include:

the failure to obtain qualified export counselingand/or marketing intermediaries

the insufficient commitment of top management the underestimation of total transaction costs the poor selection of overseas agents or distributors the favoring of domestic markets at the expense of

international distributors and customers an unwillingness to make necessary modifications the failure to adequately prepare for international

dispute resolution

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Designing an Export Strategy

To design an effective export strategy, manage-ment must:

assess the companys export potential[examine market opportunities and firm resources] obtain expert counseling on exporting

[get both government and specialized assistance]

select target markets[passively or proactively pursue market opportunities]

formulate and implement an effective strategy[define objectives and tactics and establish schedulesand deadlines]

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Fig. 13.3: International BusinessTransaction Chain

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An Export Business Plan

I. Executive Summary: key elementsII. Business History: firm and industry insightsIII. Market Research: target countries & market conditions

IV. Marketing Decisions: marketing mix elementsV. Legal Decisions: legal agreements & protectionVI. Manufacturing and Operations: location & capacityVII. Personnel Strategies: short- & long-term needsVIII. Financial Decisions: funding & risk

IX. Implementation Schedule: timeline

A detailed export business plan is an essential element inthe implementation of a sound yet insightful export strategy.

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The Import Process

Basic types of imports include: industrial and consumer goods and services sought by

customers not related to the foreign exporter intermediate goods and services that are part of the

customers global supply chain The import documentation process can

be both complicated and cumbersome. Import documents are of two types:

those that determine whether customs will release a

shipment 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.

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Strategic Advantages of Imports

Decrease costs and increase competitivenessand profitability

Secure essential inputs and products Secure higher quality products, supplies,

materials, and/or components Minimize risk and investment

Diversify suppliersImporting requires expertise in dealing with

government institutions, particularly customs agencies,as well as the documentation process.

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Types of Industrial Importers

The three basic types ofindustrial importersare: those that opportunistically look for any product around

the world that will generate a positive cash flow those that look to foreign sourcing as a means to

minimize product costs

those that use foreign sourcing as part of their globalsupply chainstrategy

An import brokeris a certified specialist who obtains requiredgovernment permissions and other clearances before forwarding

the necessary documents to the carrier(s) of the goods.

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The Role of Customs Agencies

Customs agencies: government bureaus chargedwith collecting duties and ensuring that traderestrictions are enforced and procedures ad-

hered to The primary duties of a customs agencyare:

the assessment and collection of all duties,taxes, and fees on imported products

the enforcement ofcustomsand related laws, and theadministration of certain navigation laws and treaties

National customs agencies are increasingly involved in dealingwith smuggling operations and preventing foreign terrorist attacks.

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The Role of Customs Brokers

Customs broker: an independent agent who executescustoms transactions on behalf of clients for a fee

Acustoms brokercan help minimize duties by: valuing products in such a way that they qualify for

more favorable treatment deferring duties by using bonded warehousesand

foreign trade zones

limiting liability by properly marking the country of originof an imported product

qualifying for duty refunds through *drawback provisions

*Drawback provisions allow U.S. exporters to apply for a 99%refund of the duty paid on imported components, provided

they are incorporated into goods to be exported.

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An Import Business Plan

I. Executive Summary: key elementsII. Business History: firm details and industry insightsIII. Market Research: target country & market conditions

IV. Marketing Decisions: marketing mix strategyV. Legal Decisions: legal agreements & protectionVI. Manufacturing and Operations: location & regulationsVII. Personnel Strategies: expertise & hiring needsVIII. Financial Decisions: funding, financial, & tax issues

IX. Implementation Schedule: timeline

A detailed import business plan is an essential element inthe implementation of a sound yet insightful import strategy.

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The Export Process

Direct exports: goods and services sold directly toan independent party (foreign customer) outsideof the exporters home country

Indirect exports: goods and services sold to or viaan intermediary in the domestic market, who inturn sells them to a foreign customer

Third-party intermediaries: independent, i.e.,unrelated, firms that facilitate international tradetransactions by assisting both importersandexporters

The export documentation process can beboth complicated and cumbersome.

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Indirect Selling/Exporting

Indirect selling/exporting: selling products toor through an independent (third-party)intermediary

Export intermediaries may perform any or all of the

following functions: stimulate sales, obtain orders, and conduct market

research perform credit investigations and payment-collection

activities

handle foreign traffic arrangements and shipping details provide support for a clients sales, distribution, andpromotion staff

While services are more likely to be exported on a direct basis,goods are exported via both avenues.

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Indirect Selling:Export Management Companies

Export management company (EMC): a firm thateither acts as a manufacturers agent or buysmerchandise from manufacturers for inter-

national distribution EMCsgenerally operate on a contractual basis,provide exclusive representation in a well-definedforeign territory, and act as the export arm of amanufacturer.

Although many EMCs are small, they often specializeaccording to product, function, and/or market area.

EMCs may not be the perfect solution if they may have too fewresources, give too little attention, and/or take too much control.

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Indirect Selling:

Export Trading CompaniesExport trading company (ETC):a large, indepen-

dent broker whose primary purpose is to match

suppliers to foreign customers for a fee ETCsoperate primarily on the basis of demand. Exporters from Great Britain, the Netherlands, and Japan

long ago realized that wide-reaching trading companiescould market and distribute products more efficiently

than any single producer could. ETCsbased in the U.S. are exempt from antitrust

provisions to allow them to better penetrate foreignmarkets by collaborating with other U.S. firms.

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Direct Selling

Direct selling:exporting through sales representativesto distributors, foreign retailers, or final end users

Direct selling: gives exporters greater control over the marketing

function offers exporters the potential to earn higher profits

a sales representative: a company representative,who usually operates on a commission basis within

an exclusive territory a distributor: a merchant who purchases goodsfrom a manufacturer and stocks, services, andresells them to retailers at a profit

[continued]

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A firm that has sufficient financial and managerialresources to export directly may adopt a variety oforganizational structures ranging from a separateinternational division to a fully integrated matrixstructure.

Direct selling demands a separate international salesforce because foreign markets demand differenttypes of expertise.

Internet marketing allows firms both large and smallto quickly, easily, and inexpensively engage in directmarketing.

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Export Documentation

Key export documents include: a pro forma invoice

an outline of the terms of sale, price, and delivery details

a commercial invoice a detailed invoice used to assess duties

a bill of lading a detailed receipt from the carrier transporting the cargo

a consular invoice sometimes required as a means to monitor imports

a certificate of origin

used to determine the tariff schedule a shippers export declaration

used to monitor exports and compile trade statistics

an export packing list used to determine the nature of the cargo

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Foreign Freight Forwarders

Foreign freight forwarder: an international trade specialistwho assists in the delivery of goods from producer tocustomer

Intermodal transportation:the movement of goods across

a variety of modes from origin to destination The typical freight forwarder is the largest export intermediary

in terms of the weight and value of cargo handled. Freight forwarders may specialize in the type of

mode used or the geographical area served.

Recent trends leading to a preferencefor air freight over ocean freight include: the need for more frequent shipments lighter-weight shipments high-value shipments

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Sources of Foreign TradeAssistance

Firms typically have many sources of assistance foridentifying their best foreign trade opportunities.

Government agencies actively aid the efforts ofpotential and active exporters and, to a lesserextent, potential and active importers. In Japan, the Ministry of International Trade and

Industry (MITI) plays a vital role in developingstrategic trade policy and providing operationalassistance.

In the U.S., a number of institutions, most notablythe Department of Commerce, the Ex-Im Bank, andthe Small Business Administration (SBA) help firmsidentify and realize export opportunities.

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Types of Foreign Trade Informationby Source

U.S. Government Agencies Market demographics, channels and joint venture partners,

customs regulations & tax issues, credit & insurance, tradeevents & leads, documentation requirements, quotations

Trade Associations and Trade Groups Market demographics, promotion alternatives, channels,

customs regulations & tax issues

Export Intermediaries Channels, host-country requirements, financing, credit &

insurance, logistics

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Countertrade

Countertrade: a reciprocal flow of goods and services

The two basic types ofcountertradetransactionsinclude:

barter[based on clearing arrangements used to avoidmoney-based exchange]

buybacks, offsets, and counterpurchase[all of whichare used to impose reciprocal commitments]

Countertradeprovides a means to complete a trans-action when a firm (or government): lacks sufficient funds to pay for imports

lacks sufficient convertible currencyor sufficient hardcurrencyto pay for imports

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Countertrade:Barter and Buybacks

Barter: the exchange of goods or services for othergoods and services, i.e., a non-monetarytransaction

[Barter is not only the oldest form of countertrade,it is the oldest form of any type of trade transaction.]

Buybacks: counter-deliveries received as payment bythe exporter that are related to or originate fromthe original exported product

The disadvantages ofcountertradeinclude: transaction inefficiencies transaction risk t ransaction complexities

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Countertrade: Offsets

Offset trade: an exchange of goods or services forcash that includes a reciprocal commitment to findopportunities for the importer to earn hard currency

[similar to counterpurchase, but permitting flexibility in

the choice of firm for fulfilling the reciprocal obligation] In offset trade, the exporter sells the product for cash,

but then undertakes the promotion of exports from theimporting country in order to help it earn foreignexchange.

Offset arrangements are usually one of two types: direct offsets: include generated business that directly relates

to the export product indirect offsets: include generated business unrelated to the

exported product

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Fig. 13.4: An Offset Transaction

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Implications/Conclusions

Exporting and importing are necessary

functions for the implementation of firmsinternational business strategies.

The specialization of labor makes exportingto and importing from countries around theworld more efficient than manufacturingevery product in every country.

[continued]

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Born global companies tend to make ex-porting a primary goal from the time of theirinception.

The import process involves strategic andprocedural issues that largely mirror thoseof the export process.