International Business Fourth Edition

Exporting, Importing, and Countertrade CHAPTER 15 Exporting, Importing, and Countertrade

Chapter Focus Examine the “nuts and bolts” of exporting (and importing). Identify foreign market opportunities: Avoid unanticipated problems. Be familiar with the mechanics of export and import financing. Learn where to get financing and export insurance. Deal with foreign exchange risk. Countertrade.

To ship to another country for sale or exchange. 15-4 Exporting To ship to another country for sale or exchange. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Promise and Pitfalls of Exporting Ignorance and Intimidation Poor market analysis Poor understanding of competitive conditions Failure to customize product offering Poor distribution program Poorly executed promotional campaign Problems securing financing

Improving Export Performance Information from government sources Export Management Companies Utilizing export strategies

Government Support for Exports www.bundesregierung.de www.miti.go.jp

US Export Support www.doc.gov www.ita.doc.gov

Utilizing Export Management Companies EMCs: Export specialists who act as the export management department or international department for client firms. Two types of assignment: Start operations for a firm with understanding the firm will take over after they are well established. Start-up services with continuing responsibility for selling the firms products internationally.

15-10 Exporting Strategy It helps to hire an EMC or, at least, someone with experience. Focus on one or a few markets. Enter markets on a fairly small scale until you ‘learn the ropes’. Add new lines after initial success. Need to recognize the time and managerial commitment. Build strong and lasting relationships. Hire locals to help firm establish itself. Keep the option of local production in mind. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Export/Import Financing 15-11 Export/Import Financing Issue of TRUST Letters of Credit (LOC) Bank guarantee on behalf of importer to exporter assuring payment when exporter presents specified documents Drafts (Bill of Exchange) Written order exporter, telling an importer to pay a specified amount of money at a specified time. Bill of Lading Issued to exporter, by carrier. Serves as receipt, contract and document of title. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Preference of the US Exporter French Importer American Exporter 1. Importer Pays for Goods 2. Exporter Ships Goods After Being Paid Figure 15-1

Preference of the French Importer American Exporter 1. Exporter Ships the Goods 2. Importer pays after the Goods are Received Figure 15-2

1. Importer Obtains Bank’s Promise to Pay on Importers Behalf The Use of a Third Party 1. Importer Obtains Bank’s Promise to Pay on Importers Behalf 5. Bank Gives Merchandise to Importer 6. Importer Pays Bank 3. Exporter Ships “to the Bank.” trusting Bank’s Promise to Pay 2.Bank Promises Exporter to pay on Behalf of Importer 4. Bank Pays Exporter American Exporter Bank French Importer Figure 15-3

A Typical International Transaction French Importer American Exporter 6. Goods Shipped to France 7. Exporter Presents Draft to Bank 10 and 11 Exporter Sells Draft to Bank 14. B of NY Presents Matured Draft and Gets Payment 12. Bank Tells Importer Documents Arrive 13. Importer Pays Bank 2. Exporter Agrees to Fill Order 1. Importer Orders Goods 3. Importer Arranges for LOC 5. B of NY Informs Exporter of LOC 8. B of NY Presents Draft to Bank of Paris 9. Bank of Paris Returns Accepted Draft 4. Bank of Paris Sends LOC to B of NY Bank of New York Bank of Paris Figure 15-4

Insurance Association Export Assistance Foreign Credit Insurance Association www.exim.gov

Trade carried out wholly or partially in goods rather than money. 15-17 Countertrade Trade carried out wholly or partially in goods rather than money. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Countertrade as a Share of World Trade Value 15-18 Countertrade as a Share of World Trade Value % McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Countertrade Practice 15-19 Countertrade Practice Percent of companies engaged in each countertrade practice Figure 15-5 McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Countertrade Typically, 5 kinds of countertrade Barter Counterpurchase 15-20 Countertrade Typically, 5 kinds of countertrade Barter Counterpurchase Offset Switch trading Compensation or Buyback McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

15-21 Definitions Barter: direct exchange of goods and/or services without a cash transaction. Counterpurchase: reciprocal buying agreement. Offset: like counterpurchase, but can buy goods from any firm in country. Switch trading: uses third-party trading house. Buybacks: foreign plant takes products as contract payment. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

Pros and Cons of Countertrade 15-22 Pros and Cons of Countertrade Gives firms a way to finance an export deal when other means are unavailable. Foreign governments may require it. Helps countries that don’t have sufficient foreign currency reserves. However: May involve defective goods. Must invest in in-house trading department - expensive and time consuming. Most attractive to large, diverse multinational enterprises. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.