1 Trade & Financial Flows Lecture 3, Week 4 w/c 11 October 2010 Dr Michael Wynn-Williams

2  Exports  Are measured fob (free-on-board)  Imports  Are measured cif (cost-insurance-freight)  Exports are receipts of forex into a country, imports are debits  Normally, cif/fob ratio is 1.03

3  FOB to Dover – domestic tax  CIF from Calais – for comparison with domestic rivals England France

4  Opportunity  Increase revenue  Avoid risk of operating abroad  Access to economies of scale  Low cost expansion  Large firms proactive in exporting  Risks  Loss of control and responsiveness  SMEs lack overseas contacts and knowledge – globalisation is changing this  Intimidated by mechanics of exporting

5  Probability of being an exporter increases with company size defined by revenues  Companies with risk-taking managers are more likely to export  Leading firms influence the probability  Export intensity, the % of revenues coming from exports, is related more to firm-specific factors (management etc.) than firm size

6 1. Assess the firm’s export potential 2. Obtain expert counseling on exporting Local agent Special financing 3. Select one market to gain experience 4. Formulate immediate and long-term export objectives 5. Build strong and enduring relationships with local distributors & customers

7  Direct selling  Sells through sales representatives  Sells to distributor  Sells to foreign retailer, or end user  Indirect selling  Export management companies (EMC)  Export trading companies (ETC)  Internet and E-commerce  Example: Amazon.Com

8  You are the sales director of a British pharmaceutical company  Your company has developed a new antibiotic drug  The drug can be sold cheaply if it produced at high volumes  Why should you look at exporting?  What would be your export strategy to these countries?  USA  North Korea

9  Financial devices evolved to cope with the lack of trust  Lack of trust between international trading partners due to several factors  Parties have never met  Language, cultural and legal system differences  Difficulties in tracking down a party in case of default

10 Chinese exporterBritish importer 1 Importer pays for the goods 2 Exporter ships the goods after being paid Exporter’s preference Chinese exporterBritish importer 1 Exporter ships the goods 2 Importer pays after the goods are received Importer’s preference

11 4 Banks pays exporter 6 Importer pays banks 5 Bank gives merchandise to importer 3 Exporter ships “to the bank”, trusting bank’s promise to pay 1 Importer obtains bank’s promise to pay on importer’s behalf 2 Bank promises to pay on behalf of importer British importer Chinese exporter Bank

12  Letter of Credit (L/C)  Bank guarantee on behalf of importer to exporter assuring payment when exporter presents specified documents  Bill of Lading  Issued to exporter, by carrier. Serves as receipt, contract and document of title  Draft (Bill of Exchange): sight and time (Usance Bills)  Written order by exporter, telling an importer to pay a specified amount of money at a specified time

13  Imports  Industrial and consumer goods and services  Part of the firm’s global supply chain  Importers  Those looking for any product  Those looking at foreign sourcing to get their products at the cheapest prices  Those looking for foreign sourcing as a part of their global supply chain

14  Trade carried out wholly or partially in goods rather than money  Barter: Direct exchange of goods and services between two parties without a cash transaction  Counterpurchase: Reciprocal buying agreement  Offset: purchase goods/services with a specified percentage of the proceeds from original sale  Switch trading: A third-party trading house buys the firm’s counterpurchase credits and sells them to another that can better use them  Compensation or buybacks: Take certain percentage of plant’s output as partial payment for the contract

15  Examine why companies export  Identify key elements of export strategies  Compare direct and indirect selling of exports  Understand tools used to aid export and import transactions

16  DRS Chapter 13

17  Organise tutorial into three groups  Each group to be assigned one company  BAE Systems – military products  Greenwich Business Training videos  Jaguar Motor Cars  Develop examples of the different options for exporting. (Direct/ Indirect/ electronic)  What are the problems of using Banks as the intermediary? How can these be resolved?