Global Trade Operations
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Week5LectureSlidesupdated-OMGT2243.pptx
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OMGT 2243:
Global Trade Operations
Week: 5
Export Strategy & Exporting and importing documentation
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Learning objectives
After you have read this chapter, you should:
Understand the promises and risks associated with exporting.
Be familiar with the steps managers can take to improve their firm’s export performance.
Be able to identify information sources and government programs that exist to help exporters.
Grasp the basic steps involved in export financing.
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Introduction
Exporting is on the rise due to the decline in trade barriers under the WTO, regional economic agreements such as the CER, AUSFTA, TAFTA, SAFTA, NZTCEP, NZSCEP, EU and NAFTA, and transaction facilitation transportation, communications and information technologies.
Large and small firms export:
Australia and New Zealand exporters are predominately SMEs.
Exporting firms need to:
Identify their ownership-specific advantage
identify market opportunities
deal with foreign exchange risk
navigate import and export financing
understand the challenges of doing business in a foreign market – the liability of foreignness
there are many uncertainties to accommodate.
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The promise and pitfalls of exporting
Exporting is a way to increase market size - the rest of the world is a much larger market than any one domestic market.
Large firms often proactively seek new export opportunities:
they have the resources to do so and the capacity to fulfil market demands.
Many smaller firms are reactive and wait for foreign markets to come to them:
they lack the necessary resources and orders are sometimes unsolicited.
Many firms fail to realise the potential of the export market.
Smaller firms are often intimidated by the complexities of exporting and initially run into problems.
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The promise and pitfalls of exporting
Common pitfalls include:
poor market analysis
poor understanding of competitive conditions
a lack of customisation for local markets
a poor distribution system
poorly executed promotional campaigns
problems securing financing
a general underestimation of the activities required for foreign market penetration and the expertise needed
an underestimation of the amount of paperwork and formalities involved.
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Information sources
A big impediment to exporting is the simple lack of knowledge of the opportunities available.
To overcome ignorance firms need to collect information.
Both Germany and Japan have developed extensive institutional structures for promoting exports.
Japanese exporters can also take advantage of the knowledge and contacts of sogo shosha, the country’s great trading houses.
In contrast, American firms have far fewer resources available.
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Improving export performance
There are various ways to gain information about foreign market opportunities and avoid the pitfalls associated with exporting:
Some countries provide direct assistance to exporters through government agencies:
Austrade in Australia
World Class in New Zealand
Department of Export Promotion in Thailand
International Expertise Singapore.
Export management companies can also help with the export process.
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An international comparison
SMEs that export:
In Australia, SMEs account for at most 14% of goods exports, up from 4% in 2000
By contrast, for G7 countries SMEs are responsible for an average of around 25% of goods exports.
The EU average is 35%.
Spain, 34%
Germany, 40%
Ireland, 47%
Poland, 52%
Turkey, 56%
Finland, 58%
Austria, 68%
Increasing Australia’s SME exports to 25% would increase its GDP by around $36 billion
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Utilising 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 export assignments:
they start exporting operations for a firm with the understanding that the firm will take over operations after they are well established
they start services with the understanding that the EMC will have continuing responsibility for selling the firm’s products.
A good EMC will help the neophyte exporter identify opportunities and avoid common pitfalls.
However, not all EMCs are equal—some do a better job than others.
Firms that rely on an EMC may not develop their own export capabilities:
The critical international marketing and export information remains with the EMC.
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Export strategy
To reduce the risks of exporting, firms should:
hire an EMC, or export consultant, to help identify opportunities and navigate through the tangled web of paperwork and regulations so often involved in exporting.
focus on one, or a few, markets at first:
consider psychic distance, liability of foreignness and the level of commitment and resources needed.
enter a foreign market on a fairly small scale in order to reduce the costs of any subsequent failures.
recognise the time and managerial commitment involved.
develop a good relationship with local distributors and customers:
is localisation needed or will standardisation suffice?
hire locals to help establish a presence in the market:
be recognised as a good corporate citizen.
be proactive.
consider increasing commitment through local production:
the internationalisation process stages of deepening commitment.
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Export assistance
There are two main forms of government-backed assistance available to exporters in Australia:
Financing and insurance assistance is available from the Export Finance and Insurance Corporation (EFIC):
For small firms, the EFIC Headway Program
For larger firms, the Export Payments Insurance.
Export market development assistance is available through the Export Market Development Grants (EMDG) Scheme:
Reimbursement of some expenses incurred overseas for accessing markets, particularly marketing visits, trade fair and seminar attendance overseas, promotional literature and advertising.
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Export and import financing
Over time, various mechanisms for financing exports and imports have evolved:
a response to a problem that can be particularly acute in international trade.
A fundamental problem exists with the export–import transaction:
the lack of trust that exists when one must put faith in a stranger
there is an information asymmetry between the exporter and the importer
the exporter prefers payment before shipping the goods to the importer
however, the importer prefers to receive the goods before paying for them.
Needed is an ‘honest broker’.
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 to resolve the asymmetry.
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Preference of the Australian exporter
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Preference of the Hong Kong importer
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The use of a third party
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Export and import financing
Documentation
Letter of Credit
The promise that a foreign importer obtains from its bank, to pay on its behalf, knowing that the exporter will trust the bank.
Bill of Exchange (the Draft)
The instrument used to effect payment.
Bill of Lading
Issued to the exporter by the common carrier who transports the merchandise.
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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.
The main advantage of the letter of credit is that both parties to the transaction are likely to trust a reputable bank even if they do not trust each other.
The instrument used to resolve the asymmetry caused by the fundamental lack of trust.
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Draft
A draft, also called a bill of exchange, is the instrument normally used in international commerce for payment.
A draft is simply 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.
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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Bill of lading
The bill of lading is issued to the exporter by the common carrier transporting the merchandise.
It serves three purposes:
As a receipt of having received the merchandise
As a contract to transport the merchandise
As a document of title, it can also be used as collateral, i.e. the exporter can obtain payment for the merchandise during shipment, and before the importer has made final payment.
B0L
Receipt:
Quality
Quantity
Condition
Identification
Evidence of contract
Document of title:
Possession
Transfer
Claim
Bill of lading
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A typical international trade transaction
Thank you
