Exporting, Importing and Countertrade

Question 1

increased export opportunities due to

Answer 1

In a positive move for international trade, the gradual decline in trade barriers under the umbrella of the World Trade Organization (see Chapter 7), along with regional economic agreements such as the European Union (EU) and the North American Free Trade Agreement (NAFTA) (see Chapter 9), has significantly increased export opportunities.

At the same time, modern communication and transportation technologies have alleviated the logistical problems associated with exporting.

Question 2

Over the last two decades, firms have increasingly used

Answer 2

e-commerce and international air services to reduce the costs, distance, and cycle time associated with exporting.

Question 3

Export statistics

Answer 3

More than 90 percent of all companies engaged in the
global marketplace export
– Low commitment
– Preferred by many small and medium-sized enterprises

Nevertheless, exporting remains a challenge for many firms. Take the United States as an example. Fewer than 1 percent of all U.S. firms trade across their country borders to other countries, and those companies that do engage in trade with typically only one other country (about 60 percent of all U.S. companies that export trade only with one other country)

Question 4

The firm wishing to export must:

Answer 4

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,

and learn how it should deal with foreign exchange risk.

Question 5

a problem can be

Answer 5

currencies that are not freely convertible. Arranging payment for exports to countries with weak currencies can be a problem.

Question 6

Countertrade

Answer 6

Countertrade allows payment for exports to be made through goods and services rather than money.

Question 7

product vs company readiness for export

Answer 7

16.1.

Question 8

By expanding the size of the market, exporting can

Answer 8

enable a firm to achieve economies of scale, thereby lowering its unit costs. Firms that do not export often lose out on significant opportunities for growth and cost reduction.

Question 9

Typically, such reactive firms do not even consider exporting

Answer 9

until their domestic market is saturated and the emergence of excess productive capacity at home forces them to look for growth opportunities in foreign markets.

Many small and medium-sized firms tend to wait for the world to come to them, rather than going out into the world to seek opportunities.

MMO’s experience is common, and it suggests a need for firms to become more proactive about seeking export opportunities.

One reason more firms are not proactive is that they are unfamiliar with foreign market opportunities; they simply do not know how big the opportunities actually are or where they might lie

Question 10

neophyte exporters run into significant problems when first trying to do business abroad

Answer 10

To make matters worse, many neophyte exporters run into significant problems when first trying to do business abroad, and this sours them on future exporting ventures.

Common pitfalls include

poor market analysis,

a poor understanding of competitive conditions in the foreign market,

a failure to customize the product offering to the needs of foreign customers,

a lack of an effective distribution program,

a poorly executed promotional campaign, and

problems securing financing.

Question 11

Novice exporters tend to underestimate

Answer 11

the time and expertise needed to cultivate business in foreign countries.

Few realize the amount of management resources that have to be dedicated to this activity.

Many foreign customers require face-to-face negotiations on their home turf.

An exporter may have to spend months learning about a country’s trade regulations, business practices, and more before a deal can be closed.

Question 12

Most companies that engage in international trade enlist the help of export–import service providers, but there are many choices. Let’s look at the main ones: LIST

Answer 12

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Question 13

freight forwarders

Answer 13

freight forwarders - are mainly in business to orchestrate transportation for companies that are shipping internationally. Their primary task is to combine smaller shipments into a single large shipment to minimize the shipping cost. Freight forwarders also provide other services that are beneficial to the exporting firm, such as documentation, payment, and carrier selection.

Question 14

export management companies

Answer 14

export management companies (EMC) offers services to companies that have not previously exported products. EMCs offer a full menu of services to handle all aspects of exporting, similar to having an internal exporting department within your own firm. For example, EMCs deal with export documents and operate as the firm’s agent and distributor; this may include selling the products directly or operating a sales unit to process sales orders.

Question 15

export trading companies

Answer 15

export trading companies - export products for companies that contract with them. They identify and work with companies in foreign countries that will market and sell the products. They provide comprehensive exporting services, including export documentation, logistics, and transportation

Question 16

export packaging companies -

Answer 16

or export packers for short, provide services to companies that are unfamiliar with exporting. For example, some countries require packages to meet certain specifications, and the export packaging firm’s knowledge of these requirements is invaluable to new exporters in particular. The export packer can also advise companies on appropriate design and materials for the packaging of their items. Export packers can assist companies in minimizing packaging to maximize the number of items to be shipped.

Question 17

customs brokers

Answer 17

can help companies avoid the pitfalls involved in customs regulations. The customs requirements of many countries can be difficult for new or infrequent exporters to understand, and the knowledge and experience of the customs broker can be very important. For example, many countries have certain laws and documentation regulations concerning imported items that are not always obvious to the exporter. Customs brokers can offer a firm a complete package of services that are essential when a firm is exporting to a large number of countries.

Question 18

confirming houses -

Answer 18

represent foreign companies that want to buy your products. Typically, they try to get the products they want at the lowest prices and are paid a commission by their foreign clients. A good place to find these potential exporting linkages is via government embassies.

Question 19

export agents and merchants -

Answer 19

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 own contacts under their own names and assume all risks. The effort it takes for you to market the product internationally is very small, but you also lose any control over the marketing, promotion, and positioning of your product

Question 20

piggyback marketing

Answer 20

arrangement whereby one firm distributes another firm’s products. For example, 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. In such cases, another firm can piggyback its products to fill the contract’s requirements. Successful piggybacking usually requires complementary products and the same target market of customers

Question 21

economic processing zones

Answer 21

There are now more than 600 export processing zones (EPZs) in the world, and they exist in more than 100 countries. The EPZs include foreign trade zones (FTZs), special economic zones, bonded warehouses, free ports, and customs zones. Many companies use EPZs to receive shipments of products that are then reshipped in smaller lots to customers throughout the surrounding areas. Founded in 1978 by the United Nations, the World Economic Processing Zones Association (wepza.org) is a private nonprofit organization dedicated to the improvement of the efficiency of all EPZs.

Question 22

The probability of exporting successfully can be increased dramatically by taking a handful of simple strategic steps.

Answer 22

First, particularly for the novice exporter, 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.

Second, it often makes sense to initially focus on one market or a handful of markets. Learn what is required to succeed in those markets before moving to other markets. The firm that enters many markets at once runs the risk of spreading its limited management resources too thin. The result of such a shotgun approach to exporting may be a failure to become established in any one market.

Third, as with 3M, it often makes sense to enter a foreign market on a small scale to reduce the costs of any subsequent failure. Most important, entering on a small scale provides the time and opportunity to learn about the foreign country before making signifcant capital commitments to that market.

Fourth, the exporter needs to recognize the time and managerial commitment involved in building export sales and should hire additional personnel to oversee this activity.

Fifth, in many countries, it is important to devote a lot of attention to building strong and enduring relationships with local distributors and/or customers.

Sixth, as 3M often does, it is important to hire local personnel to help the firm establish itself in a foreign market. Local people are likely to have a much greater sense of how to do business in a given country than a manager from an exporting firm who has previously never set foot in that country.

Seventh, several studies have suggested the firm needs to be proactive about seeking export opportunities.

Finally, it is important for the exporter to retain the option of local production. Once exports reach a sufficient volume to justify cost-efficient local production, the exporting firm should consider establishing production facilities in the foreign market. Such localization helps foster good relations with the foreign country and can lead to greater market acceptance.

Question 23

Exporting is often not an end in itself but

Answer 23

merely a step on the road toward establishment of foreign production (again, 3M provides an example of this philosophy).

Question 24

Company Readiness to Export (CORE)

Answer 24

Company Readiness to Export (CORE) tool has become a frequently used option by a variety of small, medium, and large firms to assess

(1) a company’s readiness to export a product and

(2) the product’s readiness to be exported.

16.2.

Question 25

Mechanisms for financing exports and imports have evolved over the centuries in response to a problem

Answer 25

that can be particularly acute in international trade: the lack of trust that exists when one must put faith in a stranger. In this section, we examine the financial devices that have evolved to cope with this problem in the context of international trade:

the letter of credit,

the draft (or bill of exchange), and

the bill of lading.

Question 26

problem solution Paris example

Answer 26

example

Question 27

A letter of credit

Answer 27

abbreviated as L/C, stands at the center of international commercial transactions. Issued by a bank at the request of an importer, the letter of credit states that the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents.

Question 28

A draft

Answer 28

A draft, sometimes referred to as a bill of exchange, is the instrument normally used in international commerce to effect 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.

In the example of the U.S. exporter and the French importer, the exporter writes a draft that instructs the Bank of Paris, the French importer’s agent, to pay for the merchandise shipped to France. The person or business initiating the draft is known as the maker (in this case, the U.S. exporter). The party to whom the draft is presented is known as the drawee (in this case, the Bank of Paris).

Drafts fall into two categories, sight drafts and time drafts.

A sight draft is payable on presentation to the drawee.

A time draft allows for a delay in payment—normally 30, 60, 90, or 120 days. It is presented to the drawee, who signifies acceptance of it by writing or stamping a notice of acceptance on its face. Time drafts are negotiable instruments; that is, once the draft is stamped with an acceptance, the maker can sell the draft to an investor at a discount from its face value.

Once accepted, the time draft becomes a promise to pay by the accepting party. When a time draft is drawn on and accepted by a bank, it is called a banker’s acceptance. When it is drawn on and accepted by a business firm, it is called a trade acceptance

Question 29

bill of lading.

Answer 29

The third key document for financing international trade is the 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, a contract, and a document of title. As a receipt, the bill of lading indicates that the carrier has received the merchandise described on the face of the document.

Question 30

Typical international trade transaction

Answer 30

14

Question 31

Export Assistance

Answer 31

For reasons outlined earlier, exporters clearly prefer to get letters of credit from importers.

However, sometimes an exporter who insists on a letter of credit will lose an order to one who does not require a letter of credit.

The lack of a letter of credit exposes the exporter to the risk that the foreign importer will default on payment. The exporter can insure against this possibility by buying export credit insurance. If the customer defaults, the insurance firm will cover a major portion of the loss.

Question 32

Countertrade:

Answer 32

A government may restrict the convertibility of its currency to preserve its foreign exchange reserves so they can be used to service international debt commitments and purchase crucial imports. This is problematic for exporters. Nonconvertibility implies that the exporter may not be paid in his or her home currency, and few exporters would desire payment in a currency that is not convertible. Countertrade is a common solution.

Countertrade denotes a range of barterlike agreements; its principle is to trade goods and services for other goods and services when they cannot be traded for money

Question 33

Barter

Answer 33

e direct exchange of goods and/or services between two parties without a cash transaction.

Although barter is the simplest arrangement, it is not common. Its problems are twofold. First, if goods are not exchanged simultaneously, one party ends up financing the other for a period. Second, firms engaged in barter run the risk of having to accept goods they do not want, cannot use, or have difficulty reselling at a reasonable price.

For these reasons, barter is viewed as the most restrictive countertrade arrangement. It is primarily used for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy

Question 34

Counterpurchase -

Answer 34

reciprocal buying agreement. It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made. Suppose a U.S. firm sells some products to China. China pays the U.S. firm in dollars, but in exchange, the U.S. firm agrees to spend some of its proceeds from the sale on textiles produced by China. Thus, although China must draw on its foreign exchange reserves to pay the U.S. firm, it knows it will receive some of those dollars back because of the counterpurchase agreement. In one counterpurchase agreement, Rolls-Royce sold jet parts to Finland. As part of the deal, Rolls-Royce agreed to use some of the proceeds from the sale to purchase Finnish-manufactured TV sets that it would then sell in Great Britain.

Question 35

Offset

Answer 35

An offset is similar to a counterpurchase insofar as one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale. The difference is that this party can fulfill the obligation with any firm in the country to which the sale is being made. From an exporter’s perspective, this is more attractive than a straight counterpurchase agreement because it gives the exporter greater flexibility to choose the goods that it wishes to purchase.

Question 36

switch trading

Answer 36

use of a specialized third-party trading house in a countertrade arrangement. When a firm enters a counterpurchase or offset agreement with a country, it often ends up with what are called counterpurchase credits, which can be used to purchase goods from that country. Switch trading occurs when a third-party trading house buys the firm’s counterpurchase credits and sells them to another firm that can better use them.

For example, a U.S. firm concludes a counterpurchase agreement with Poland for which it receives some number of counterpurchase credits for purchasing Polish goods. The U.S. firm cannot use and does not want any Polish goods, however, so it sells the credits to a third-party trading house at a discount. The trading house finds a firm that can use the credits and sells them at a profit.

Question 37

compensation or buyback

Answer 37

a firm builds a plant in a country—or supplies technology, equipment, training, or other services to the country—and agrees to take a certain percentage of the plant’s output as partial payment for the contract. For example, Occidental Petroleum negotiated a deal with Russia under which Occidental would build several ammonia plants in Russia and as partial payment receive ammonia over a 20-year period

Question 38

PROS countertrade

Answer 38

Given the problems that many developing nations have in raising the foreign exchange necessary to pay for imports, countertrade may be the only option available when doing business in these countries. Even when countertrade is not the only option for structuring an export transaction, many countries prefer countertrade to cash deals. Thus, if a firm is unwilling to enter a countertrade agreement, it may lose an export opportunity to a competitor that is willing to make a countertrade agreement. In addition, a countertrade agreement

In addition, a countertrade agreement may be required by the government of a country to which a firm is exporting goods or services. Boeing often has to accept counterpurchase agreements to capture orders for its commercial jet aircraft. For example, in exchange for gaining an order from Air India, Boeing may be required to purchase certain component parts, such as aircraft doors, from an Indian company. Taking this one step further, Boeing can use its willingness to enter into a counterpurchase agreement as a way of winning orders in the face of intense competition from its global rival, Airbus. Thus, countertrade can become a strategic marketing weapon.

Question 39

CONS countertrade

Answer 39

However, the drawbacks of countertrade agreements are substantial. Other things being equal, firms would normally prefer to be paid in hard currency. Countertrade contracts may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably.

For example, a few years ago, one U.S. firm got burned when 50 percent of the television sets it received in a countertrade agreement with Hungary were defective and could not be sold. In addition, even if the goods it receives are of high quality, the firm still needs to dispose of them profitably. To do this, countertrade requires the firm to invest in an in-house trading department dedicated to arranging and managing countertrade deals. This can be expensive and time-consuming

Question 40

countertrade is most attractive

Answer 40

Given these drawbacks, countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrading.

Question 41

different entrymodes pros and cons

Answer 41

slide 3

Question 42

How to improve export performance?

Answer 42

Improving export performance and resuce risks
associated with it
– Gaining information (to learn on opportunities)
– Setting an export strategy (to avoid
implementation pitfalls)
– Setting fit mechasnisms for financing export (to
overcome trust problems)

GAINING INFORMATION
Gain effective information on how foreign
markets operate
– Larger and more experienced firms might be
advantaged as respect to SMEs
– ‘Path dependencies and history to support
experience
– Gain information via trade associations,
government agencies, commercial banks

Question 43

Free zones

Answer 43

slide 13-15