Summary about global business
Chapter 16
Exporting, Importing, and Countertrade
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Learning Objectives
LO 16-1 Explain the promises and risks associated with exporting.
LO 16-2 Identify the steps that managers can take to improve their firm’s export performance.
LO 16-3 Recognize the basic steps involved in export financing.
LO 16-4 Identify information sources and government programs that exist to help exporters.
©McGraw-Hill Education.
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Why Export?
Exporting is a way to increase market size and profits
thanks to lower trade barriers under the WTO and regional economic agreements such as GCC, the EU and NAFTA
Large firms often proactively seek new export opportunities, but many smaller firms export reactively
often intimidated by (Scared of) the complexities of exporting
Exporting firms need to
identify market opportunities
deal with foreign exchange risk
navigate import and export financing
understand the challenges of doing business in a foreign market
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If you’ve ever bought something over eBay from a foreign seller, you’ve been directly involved in an export transaction.
Many of the products you use everyday are imported from other countries.
In fact, thanks to the decline in trade barriers promoted by the WTO and regional agreements like NAFTA and the EU, exporting and importing have become easier than ever.
Because it’s easier, we’ve seen the volume of exporting increasing in recent years. Today, firms of all sizes engage in exporting, and face the challenges of identifying export opportunities, dealing with the problems of doing business in foreign markets, working through the process of export financing and getting insurance, and learning how to protect themselves against foreign exchange risk.
We’ve touched on some of these areas in earlier chapters, but in this chapter, we’ll look at the process of exporting and importing in more depth.
Why is exporting attractive?
Well, by exporting, firms can quickly increase the size of their market.
Rather than simply relying on the domestic market for their revenues, by exporting, firms can increase their profits by viewing the world as their market.
As you’ll see in the Management Focus in your text, FCX Systems was able to substantially increase its market by exporting. Similarly, recall from the Opening Case that MD International successfully built a business exporting medical equipment to Latin America.
Despite the opportunities however, we know that while many large firms are proactive about exporting, smaller firms often wait for export opportunities to come to them. We say they take a reactive approach to the process.
Sometimes, this lack of initiative by smaller companies occurs because the firms don’t really know just how great the opportunities are, nor how to pursue them.
In some cases, a bad export experience in the past, can keep a firm from pursuing new export opportunities. In addition, novice exporters sometimes fail to realize just what’s involved in the exporting process, and then react negatively when something goes wrong.
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What Are The Pitfalls of Exporting?
Common pitfalls include
poor market analysis
poor understanding of competitive conditions
a lack of customization for local markets
a poor distribution program
poorly executed promotional campaigns
problems securing financing
a general underestimation of the differences and expertise required for foreign market penetration
an underestimation of the amount of paperwork and formalities involved
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What are the disadvantages of exporting?
Firms can run into numerous pitfalls when they begin exporting including doing a poor market analysis, having a poor understanding of competitive conditions, using a marketing effort that fails to recognize both the need to customize a product or to make appropriate distribution arrangements and promotional campaigns, and simply having a general lack of understanding of the skills required to enter a foreign market.
Some firms are also surprised at the amount of paperwork involved in exporting.
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How Can Firms Improve Export Performance?
Many firms are unaware of export opportunities available
Firms need to collect information
Firms can get direct assistance from some countries and/or use an export management companies (EMCs).
both Germany and Japan have developed extensive institutional structures for promoting exports
Japanese exporters can use knowledge and contacts of sogo shosha - great trading houses
U.S. firms have far fewer resources available
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How can firms improve their export performance?
One way to improve the chance for success is to take advantage of export assistance programs that are offered by governments, or hire an export management company.
What type of assistance is available?
The type of assistance offered varies by country.
Germany and Japan for example, have developed extensive institutional structures for promoting exports.
You may have heard of Japan’s Ministry of International Trade and Industry or MITI for instance.
Japanese firms can also take advantage of the knowledge and contacts of the sogo shosha, the country’s great trading houses that have offices and contacts all over the world.
In Germany, trade associations, government agencies, and commercial banks all provide export assistance to firms.
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Where Can Firms Get Export Information?
United States:
The U.S. Department of Commerce
The International Trade Administration
United States and Foreign Commercial Service Agency
Local and state governments
Saudi Arabia:
Saudi Export Development Authority
Ministry of Trade and Industry
Saudi Arabian Investment Authority
Chamber of Commerce
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Where can American firms get export assistance?
In the U.S., exporters can collect information from the U.S. Department of Trade where they can get a “best prospects” list and also participate in the various trade events the Department of Commerce organizes.
The Small Business Association, or SBA, is another good source of information for U.S. exporters.
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What Are Export Management Companies?
Export management companies (EMCs) are export specialists that act as the export marketing department or international department for client firms
EMCs normally accept two types of assignments
They start export operations with the understanding that the firm will take over after they are established.
They start services with the understanding that the EMC will have continuing responsibility for selling the firm’s products.
but, firms that use EMCs may not develop their own export capabilities
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Some companies prefer to hire another company to handle their exporting.
Export management companies, or EMCs, are export specialists that act as the export marketing department or international department for their clients.
EMCs usually work in two different ways.
One way involves setting up the exporting operations for a firm with the understanding that the client will take over once things are established.
The other way involves setting up the exporting process for the client, and then continuing to manage it for the firm.
It’s important to recognize that while the advantage of hiring an EMC is that the EMC is a specialist that should be able to avoid many of the pitfalls of exporting, in reality, the quality level of EMCs varies, so firms need to be careful with their selection process.
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How Can Firms Reduce The Risks Of Exporting?
Export Strategy
To reduce the risks of exporting, firms should
hire an EMC or export consultant to identify opportunities and navigate paperwork and regulations
focus on one, or a few, markets at first
enter a foreign market on a small scale in order to reduce the costs of any subsequent failures
recognize the time and managerial commitment involved
develop a good relationship with distributors and customers in the foreign market
hire locals to help establish a presence in the market
be proactive
consider local production
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Firms can also reduce the risks associated with exporting by choosing their export strategy carefully.
It can be helpful to hire an EMC or other experienced export consultant to help identify the best opportunities and navigate the paperwork and regulations involved in the process.
Firms can also minimize risk by entering the market on a small scale initially, and then expanding once the market is a proven thing.
3M follows this type of strategy. It initially enters a market on a small scale, and then adds in additional products once the market has proven to be successful. 3M also hires locals to promote its products. You can learn more about 3M’s strategy in the Management Focus in your text.
Firms also need to recognize that developing a successful export business takes time and commitment, and that additional personnel may be necessary.
Building strong relationships within the importing country can also help a company avoid the pitfalls of exporting. As you can see in the Management Focus in your text, Red Spot Paint and Varnish found that developing personal relationships with client firms in the importing country was important to its export success.
Finally, keep in mind that exporting might not be the best option in some cases. Local production may make more sense in certain situations.
Sometimes exporting turns out to be a good way to test a market before making a bigger commitment.
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How Can Firms Overcome The Lack of Trust in Export Financing?
Because trade implies parties from different countries exchanging goods and payment the issue of trust is important
Exporters prefer to receive payment prior to shipping goods, but importers prefer to receive goods prior to making payments
To get around this difference of preference, many international transactions are facilitated by a third party - normally a reputable bank
By including the third party, an element of trust is added to the relationship
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Firms involved with exporting must also deal with collecting payments for their exports.
Remember, when you sell your product to someone in another country, you take on the risk of whether you’ll get paid on time, and whether the currency that you’ll be paid in will be worth what you think it’ll be worth.
But because the buyer is in another country, the typical methods you use to get a delinquent account to pay up, might not work!
From the firm’s perspective, the best way to be paid would probably be cash in advance, in the exporter’s currency!
However, since requiring these terms is likely to put the exporter at a competitive disadvantage, the firm has to be more flexible.
To deal with these issues, various mechanisms have evolved to handle export financing, and the issues of trust that are associated with it.
Let’s begin with the issue of trust.
Exporters have to trust that the importer will actually be true to his word, that he’ll pay according to the agreed upon terms in a timely manner.
Remember, that it can be very difficult to track down an importer who has defaulted on an agreement, especially since the importer lives in a different country, speaks a different language, abides by a different system of law, and so on.
The importer, of course has similar concerns.
If he sends payment in advance to the exporter, what guaranty does he have that he’ll get what he bought, on time, and in good condition?
He would probably prefer that the goods be shipped to him prior to sending payment.
So, because of the different needs of the importer and the exporter, a system using a third party - a reputable bank - has evolved.
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How Can Firms Overcome The Lack of Trust in Export Financing?
The Use Of A Third Party
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As you can see in this process for conducting an export transaction, the third party bank plays a major role. Let’s talk about what’s going on in this transaction.
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What Is A Letter Of Credit?
A letter of credit is issued by a bank at the request of an importer and states the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents
main advantage is that both parties are likely to trust a reputable bank even if they do not trust each other
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Rather than dealing directly with each other, the importer and exporter deal with the trustworthy third party, the bank, using a letter of credit.
A letter of credit is issued by a bank at the request of an importer.
The letter states that the bank will pay a specified sum of money to the exporter upon the presentation of specified documents.
It’s sort of a promise to pay.
Once the exporter sees the letter, and knows that he’ll get paid, he ships the goods, and requests payment from the bank.
The bank makes payment.
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What Is A Draft?
A draft (also called a bill of exchange) is an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time
the instrument normally used in international commerce for payment
A sight draft is payable on presentation to the drawee while a time draft allows for a delay in payment - normally 30, 60, 90, or 120 days
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How is payment made?
A draft, which is sometimes called a bill of exchange, is the instrument that’s usually used for payment.
It’s simply an order written by the exporter instructing the importer or importer’s agent to pay a specified amount of money at a specified time.
There are two types of drafts.
A sight draft is payable immediately, while a time draft allows for a delay in payment.
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What Is A Bill of Lading?
The bill of lading is issued to the exporter by the common carrier transporting the merchandise
It serves three purposes
It is a receipt - merchandise described on document has been received by carrier
It is a contract - carrier is obligated to provide transportation service in return for a certain charge
It is a document of title - can be used to obtain payment or a written promise before the merchandise is released to the importer
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Another document, called a bill of lading, is also included in the process.
The bill of lading is issued to the exporter by the carrier that’s transporting the goods.
It acts as a receipt, a contract, and as a document of title.
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How Does An International Trade Transaction Work?
A Typical International Trade Transaction
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What does a typical international trade transaction look like?
Here you can see the fourteen steps in a typical international trade transaction.
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Where Can Firms Get Export Assistance?
United States:
Financing aid is available from the Export-Import Bank (Eximbank) - an independent agency of the U.S. government
provides financing aid to facilitate exports, imports, and the exchange of commodities between the U.S. and other countries
Export credit insurance is available from the Foreign Credit Insurance Association (FICA) - provides coverage against commercial risks and political risks
Saudi Arabia:
Saudi Export Development Authority -seeks to promotes Saudi products in international markets by assisting exporters to attend international exhibitions and business missions.
Saudi Export Program:
provides financial and non financial aid to Saudi companies in order to encourage local productions and increase exports.
promote the export sector and assist in diversifying the national economic base to minimizing dependence of the economy on a single commodity "crude oil".
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Where can companies get assistance to finance their exports?
In the U.S., they can get financial aid from the Export Import Bank, and credit insurance from the Foreign Credit Insurance Association.
Let’s look more closely at each of these organizations.
The Export Import Bank, which is also called the Eximbank, is an independent agency of the U.S. government that provides financial aid to facilitate exports, imports, and the exchange of commodities between the U.S. and other countries.
Because Eximbank guarantees repayment of medium and long-term loans, commercial banks are more likely to make loans to foreign buyers to purchase U.S. exports. In addition, Eximbank makes direct loans to foreign borrowers.
What should exporters do if the importer refuses to get a letter of credit?
The exporter can buy export credit insurance.
The Foreign Credit Insurance Association, or FICA, provides export credit insurance to cover against commercial and political risk.