Modes of International Business Flashcards
Exporting as an _______ strategy
ENTRY
- low risk and cost
- pop. with SME
- exports involve merchandise & channels: independent distributor, firms marketing subsidiary abroad
What else is exported other than merchandise
Services (architecture, education, banking)
Advantages to exporting
- increases sales volume, improves market share
- increase of economies of scale
- diversifies customer base
- minimize risks and maximizes flexibility
Disadvantages of exporting
- exposes firms to tariffs, trade barriers and exchange rates
- offers less opportunities to learn about customers and foreign markets
- need to gain more knowledge in international contracts, transactions, logistics, documentation
Direct exporting vs indirect exporting
Direct: Contracting with intermediaries in the
foreign market to perform export functions, such as
distributors or agents.
Indirect : Contracting with an intermediary in
the firm’s home country to perform all export functions, often an Export Management Company or a Trading company
What is importing?
The purchase of a good or service by a buyer in one
country from a seller in another
Types of importers
Input optimizers: uses foreign sourcing to optimize
Opportunistic: look for products around the world that they can import and sell to local citizens
Arbitrageurs: look to foreign sourcing to get the highest quality at the lowest price
Methods of payment
Cash in advance: best for the seller, risky for buyer
Open account: easy for exporter > bills the buyer and pays in future, risky unless there is a relationship with exporter and buyer
Letter of credit: contract between the banks, buyer and seller, involves a lot of paperwork
Countertrade
- international business transaction, payments are made in kind rather than cash
- accounts for 1/3 of world trade
- risky (time-consuming, may lead to price padding)
Examples of countertrade
- Boeing traded aircraft for oil, in Saudi Arabia.
- Caterpillar received wine in Algeria, in exchange for
earthmoving equipment. - Goodyear traded tires for minerals, textiles, and
agricultural products.
Foreign Direct Investment (FDI)
Strategy in which the firm establishes a physical presence abroad by acquiring assets:
capital, technology, labor, land, plant, and equipment.
Leading destinations for FDI (ideal locations)
Advanced economies in Europe, Japan, North America, China and Mexico
Key features of Foreign Direct Investment
- Represents substantial resource commitment.
- Implies local presence and operations.
- Firms invest in countries that provide specific
comparative advantages. - Substantial risk and uncertainty.
- Direct investors deal more intensively with specific
social and cultural variables in the host market
Motives for Foreign Direct Investment
Types of contractual relationships
1) Licensing: An arrangement in which the owner of intellectual property grants another firm the right to use that property for a specified period of time in exchange
for royalties or other compensation.
2) Franchising: Arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other compensation.
3) Royalty: A fee paid periodically to compensate a licensor for the temporary use of its intellectual property,
often based on a percentage of gross sales generated from the use of the licensed asset.
