Summary Chapters 16 -20 (plus lecture week 7)
International Business – Competing in the Global Marketplace 12e
Chapter 16
Exporting, Importing, and Countertrade
Introduction
If a form wishes to export:
It must identify foreign market opportunities.
Avoid a host of unanticipated problems that are often associated with doing business in a
foreign market.
Familiarize itself with the mechanics of export and import financing.
Learn where it can get financing and export credit insurance.
Learn how it should deal with the foreign exchange risk.
Product and company readiness to export and import:
Export:
Is your product or service ready to be exported?
o What international customer needs does your product satisfy?
Is your company ready to export the product?
o Do you have top-level commitment, resources, skills, and knowledge?
Import?
Is your product ready to be imported?
o What needs does the product or part satisfy for your value chain?
Is your company ready to import the product?
o Do you have top-level commitment, resources, skills, and knowledge?
Export = selling to foreign markets.
Import = purchasing raw materials, component parts, or finished goods for operations.
The promise and pitfalls of exporting
The great promise of exporting is that large revenue and profit opportunities are to be found in foreign
markets for most firms and industries.
International market is normally so much larger than the firm’s domestic market that
exporting is nearly always a way to increase the revenue and profit base of a company.
By expanding the size of the market, exporting can enable a firm to achieve economies of
scale, thereby lowering its unit costs.
Reasons why some firms do not export:
One reason that firms are not proactive in their exporting is that they are not familiar with
foreign market opportunities.
They simply do not know how big the opportunities actually are or where they might lie.
Many firms (especially smaller ones) are often intimidated by the complexities and mechanics
of exporting to countries where businesses practices, language, culture, legal systems, and
currency are very different from those in the home market.
Common pitfalls in exporting:
, Poor market analysis.
Poor understanding of competitive conditions in the foreign market.
Failure to customize the product offering to the needs of foreign customers.
Lack of an effective distribution program.
Poorly executed promotional campaign.
Problems securing financing.
Improving export performance
International comparisons:
Often there are many markets for a firm’s product, but because they are in countries separated
from the firm’s home base by culture, language, distance, and time the firm does not know
them.
Sogo shosha = Japanese trading houses located all over the world (help in identifying
exporting opportunities).
Information sources:
Most comprehensive source of information is the U.S. Department of Commerce and its
districts all over the country (this is for U.S. firms).
Firms can get customized market research for a small fee, it organizes trade events.
There are also other U.S. governmental organizations and some private firms helping
entrepreneurs in their exporting decisions.
Service providers:
Freight forwarders mainly into business to orchestrate transportation for companies that are
shipping internationally.
o Main task is to combine smaller shipments into a single large shipment to minimize
shipping costs.
o Also help with documentation and payment and carrier selection.
Export management companies (EMC) offers services to companies that have not
previously exported products (like having an own exporting department).
Export trading companies they export products for companies that contract with them (they
identify and work with companies in foreign countries that will market and sell the products).
o Provide comprehensive exporting services, including export documentation, logistics,
and transportation.
Export packaging companies provide services to companies that are unfamiliar with
exporting.
o Can assist companies to minimize their packaging to maximize packages shipped.
o E.g., if a country requires packages to meet certain specifications.
Customs brokers can help companies avoid pitfalls involved in customs regulations.
Confirming houses (buying agents) represent foreign companies that want to buy your
product.
Export agents and merchants buy products directly from the manufacturer and package and
label the products in accordance with their own wishes and specifications. They then sell the
products internationally through their contacts under their own names and assume all risks.
Piggyback marketing arrangement whereby one firm distributes another firm’s products.
o E.g., a firm may have a contract to provide an assortment of products to an overseas
client, but it does not have all the products requested.
Economic processing zones (EPZ) EPZs include foreign trade zones, special economic
zones, bonded warehouses, free ports, and customs zones.
The probability of exporting successfully can be increased drastically by taking a handful of simple
strategic steps:
, 1. It helps to hire an EMC or at least an experienced export consultant to identify opportunities
and navigate the paperwork and regulations so often involved in exporting.
2. It often makes sense to initially focus on one market or a handful of markets.
3. It often makes sense to enter a foreign market on a small scale to reduce the costs of any
subsequent failure.
4. Exporter needs to recognize the time and managerial commitment involved in building export
sales and should hire additional personnel to oversee this activity.
5. In many countries, it is important to devote a lot of attention to building strong and enduring
relationships with local distributors and/or customers.
6. It is important to hire local personnel to help the firm establish itself in the foreign market.
7. Several studies have suggested the firm needs to be proactive about seeking export
opportunities.
8. It is important for the exporter to retain the option of local production.
Product readiness + company readiness = company’s overall readiness to export.
Company readiness = competitive capabilities in domestic markets; motivation for going
international; commitment of owners and top management; experience and training; skills,
knowledge, and resources.
Export and import financing
By doing international business it is important to have trust.
Many companies have to do business with someone they have even never seen.
The problem of trust is solved by using a third party trusted by both (usually a bank) to act as
intermediary.
E.g., first the French importer obtains the bank’s promise to pay on her behalf, knowing the
U.S. exporter will trust the bank, having seen the letter of credit the U.S. exporter ships the
product to France. Title to the products is given to the bank in the form of a document called a
bill of lading. In return, the U.S. exporter tells the bank to pay for the products, which the
bank does. The document for requesting this payment is referred to as draft. The bank, having
paid for the products now passes on the title to the French importer, whom the bank trusts. At
that time or later, depending on their agreement, the importer reimburses the bank.
Letter of credit (L/C) = states that the bank will pay a specified sum of money to the beneficiary,
normally the exporter, on presentation of particular, specified documents.
Advantage of this is that both the French importer and the U.S. exporter are likely to trust the
banks, even if they do not trust each other.
May also help in lending for example the U.S. exporter extra funds (now that they know there
is additional money coming in to that exporter).
Draft (bill of exchange) = 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.
Maker = person or business initiating the draft.
Drawee = party to whom the draft is presented to.
Two categories of drafts:
Sight draft = payable on presentation to the drawee.
Time draft = allows for a delay in payment – normally 30, 60, 90, or 120 days.
o Once accepted, the time draft becomes a promise to pay by the accepting party.
o Banker’s acceptance = when a time draft is drawn on and accepted by a bank.
o Trade acceptance = when it is drawn on and accepted by a business firm.
o Time drafts are negotiable instruments, which means once a draft is accepted, the
maker can sell the draft to an investor at a discount from its face value.
, Bill of lading = issued to the exporter by the common carrier transporting the merchandise. It serves
three purposes:
1. It is a receipt this indicates that the carrier has received the merchandise described on the
face of the document.
2. It is a contract this specifies that the carrier is obliged to provide a transportation service in
return of a certain charge.
3. It is a document of title can be used to obtain payment or a written promise of payment
before the merchandise is released to the importer.
The bill of lading can also function as collateral against which funds may be advanced to the exporter
by its local bank before or during shipment and before final payment by the importer.
14 steps in a typical international trade transaction:
1. The French importer places an order with the U.S. exporter and asks the American if he would
be willing to ship under a letter of credit.
2. The U.S. exporter agrees to ship under a letter of credit and specifies relevant information
such as prices and delivery terms.
3. The French importer applies to the bank of Paris for a letter of credit to be issued in favor of
the U.S. exporter for the merchandise the importer wishes to buy.
4. The bank of Paris issues a letter of credit in the French importer’s favor and sends it to the
U.S. exporter’s bank, the bank of New York.
5. The bank of NY advises the exporter of the opening of a letter of credit in his favor.
6. The U.S. exporter ships the goods to the French importer on a common carrier. An official of
the carrier gives the exporter a bill of lading.
7. The U.S. exporter presents a 90-day time draft drawn on the bank of Paris in accordance with
its letter of credit and the bill of lading to the bank of NY. The exporter endorses the bill of
lading so title to the goods is transferred to the bank of NY.
8. The bank of Ny sends the draft and bill of lading to the bank of Paris. The bank of Paris
accepts the draft, taking possession of the documents and promising to pay the now-accepted
draft in 90 days.
9. The bank of Paris returns the accepted draft to the bank of NY.
10. The bank of NY tells the U.S. exporter that it has received the accepted bank draft, which is
payable in 90 days.
11. The exporter sells the draft to the bank of NY at a discount from its face value and receives
the discounted cash value of the draft in return.
12. The bank of Paris notifies the French importer of the arrival of the documents. She agrees to
pay the bank of Paris in 90 days. The bank of Paris releases the documents so the importer can
take possession of the shipment.
13. In 90 days, the bank of Paris received the importer’s payment, so it has funds to pay the
maturing draft.
14. In 90 days, the holder of the matured acceptance (in this case the bank of NY) presents it to
the bank of Paris for payment. The bank of Paris pays.
Export assistance
Prospective U.S. exporters can draw on two forms of government-backed assistance to help finance
their export programs:
1. Export-import bank = a wholly owned U.S. government corporation that was established in
1934 with a mission to assist in the financing of U.S. exports of products and services to
support U.S. employment and market competitiveness.
Various loan and loan-guarantee programs to achieve its mission.
Also has a direct lending operation under which it lends dollars to foreign borrowers for the
use in purchasing U.S. exports.
2. export credit insurance = an insurance against default of the importer with absence of a letter
of credit.
