1. Global Business Today 7e
by Charles W.L. Hill
Welcome to Global Business Today, Seventh Edition by Charles W.L. Hill.

2. Exporting, Importing, and Countertrade
Chapter 13
Exporting, Importing, and Countertrade
Chapter 13: Exporting, Importing, and Countertrade

3. Introduction Question: What type of firm benefits from exporting?
Answer:
Both large and small firms can benefit from exporting
The volume of export activity in the world economy is increasing as exporting has become easier thanks to
the decline in trade barriers under the WTO
regional economic agreements such as the European Union and the North American Free Trade Agreement
When you think of international business, you might think of companies exporting their products to foreign markets. You already know that exporting has become easier than ever thanks to the decline in trade barriers promoted by the WTO and regional agreements like NAFTA and the EU. Because it’s easier, we’ve seen the volume of exporting increasing in recent years.

4. Introduction Answer: Firms wishing to export must
Question: What do firms that want to export need to do?
Answer:
Firms wishing to export must
identify export opportunities
avoid a host of unanticipated problems associated with doing business in a foreign market
become familiar with the mechanics of export and import financing
learn where to get financing and export credit insurance
learn how to deal with foreign exchange risk
Today, firms of all sizes engage in exporting, and face the challenges of identifying export opportunities, dealing with the problems of doing business in foreign markets, working through the process of export financing and getting insurance, and learning how to protect themselves against foreign exchange risk.
We’ve touched on some of these areas in earlier chapters, but in this chapter, we’ll look at the process of exporting and importing in more depth. We’ll also explore countertrade, which you’ll recall involves paying for exports with other goods or services—a barter-like arrangement. We’ll begin our discussion by examining the advantages and disadvantages of exporting.

5. The Promise and Pitfalls of Exporting
Question: What are the benefits of exporting?
Answer:
The benefits from exporting can be great--the rest of the world is a much larger market than the domestic market
Larger firms may be proactive in seeking out new export opportunities, but many smaller firms take a reactive approach to exporting
Many novice exporters have run into significant problems when first trying to do business abroad, souring them on following up on subsequent opportunities
Why do firms export? Well, by exporting, firms can quickly increase the size of their market. Rather than simply relying on the domestic market for their revenues, by exporting, firms can increase their profits by viewing the world as their market. You know from the Opening Case for example, that export sales are critical to the survival of Vellus Products.
Despite the opportunity however, we know that while many large firms are proactive about exporting, smaller firms often wait for export opportunities to come to them. They take a reactive approach to the process. Sometimes, this lack of initiative by smaller companies occurs because the firms don’t really know just how great the opportunities are, nor how to pursue them.
In some cases, a bad export experience in the past, can keep a firm from pursuing new export opportunities. Novice exporters sometimes fail to realize just what’s involved in the exporting process, and then react negatively when something goes wrong.

6. The Promise and Pitfalls of Exporting
Question: What are the pitfalls facing exporters?
Answer:
Common pitfalls for exporters include
poor market analysis
poor understanding of competitive conditions
a lack of customization for local markets, poor distribution arrangements, bad promotional campaigns
a general underestimation of the differences and expertise required for foreign market penetration
difficulty dealing with the tremendous paperwork and formalities involved
Some of the pitfalls that firms make when they begin exporting include doing a poor market analysis, having a poor understanding of competitive conditions, using a marketing effort that fails to recognize both the need to customize a product or to make appropriate distribution arrangements and promotional campaigns, and simply having a general lack of understanding of the skills required to enter a foreign market.
Some firms are also surprised at the amount of paperwork involved in exporting.

7. Improving Export Performance
Question: How can exporters improve their performance?
Answer:
To improve their success, exporters should
acquire more knowledge of foreign market opportunities
consider using an export management company
adopt a successful export strategy
How can firms improve their export performance? Well, firms can start by finding out more about the opportunities that exist. Working with an export management company can also be helpful. Finally, it’s important to develop an export strategy that works. Let’s look at each of these point more closely.

8. An International Comparison
Many firms fail to consider export opportunities simply because they lack knowledge of the opportunities available
both Germany and Japan have developed extensive institutional structures or promoting exports
Japanese exporters can also take advantage of the knowledge and contacts of sogo shosha - the country’s great trading houses
To improve the chance for success, firms should take advantage of export assistance programs that are offered by governments. The type of assistance offered varies by country.
Germany and Japan for example, have developed extensive institutional structures for promoting exports. You may have heard of Japan’s Ministry of International Trade and Industry or MITI for instance. Japanese firms can also take advantage of the knowledge and contacts of the sogo shosha, the country’s great trading houses that have offices and contacts all over the world. In Germany, trade associations, government agencies, and commercial banks all provide export assistance to firms.

9. Information Sources
The U.S. Department of Commerce is the most comprehensive source of information for U.S. firms
firms can get a “best prospects” list of potential foreign distributors
firms can also participate in trade fairs or get assistance from the Small Business Administration
In the U.S., exporters can collect information from the U.S. Department of Trade where they can get a “best prospects” list and also participate in the various trade events the Department of Commerce organizes. FCX Systems received considerable support from the U.S. Department of Commerce and the Development Office of West Virginia to help establish its export program. You can learn more about FCX Systems in the Management Focus in your text.
The Small Business Association, or SBA, is another good source of information for U.S. exporters. The president of Landmark Systems believes that the SBA was vital to his company’s export success. You can learn more about the export experiences of Landmark Systems in the Management Focus in your text.

10. Utilizing Export Management Companies
Question: What assistance can exporters get from export management companies?
Answer:
Export management companies - export specialists that act as the export marketing department or international department for client firms
EMCs
start exporting operations for a firm with the understanding that the firm will take over operations after they are well established
start services with the understanding that the EMC will have continuing responsibility for selling the firm’s products
Rather than trying to learn the export process themselves, some companies prefer to hire another company to handle their exporting. Export management companies, or EMCs, are export specialists that act as the export marketing department or international department for their clients.
EMCs usually work in two different ways. One way involves setting up the exporting operations for a firm with the understanding that the client will take over once things are established. The other way involves setting up the exporting process for the client, and then continuing to manage it for the firm.
While the advantage of hiring an EMC is that the EMC is a specialist that should be able to avoid many of the pitfalls of exporting, in reality, the quality level of EMCs varies, so firms need to be careful with their selection process.

11. Export Strategy Answer: Exporters
Question: What steps should exporters take to increase their chances of success?
Answer:
Exporters
can hire an EMC to help identify opportunities and navigate paperwork and regulations
start by focusing initially on just one or a few markets
enter a foreign market on a fairly small scale in order to reduce the costs of any subsequent failures
Another way that firms can reduce the risks associated with exporting is to choose their export strategy carefully. It can be helpful to hire an EMC or other experienced export consultant to help identify the best opportunities and navigate the paperwork and regulations involved in the process.
Firms can also minimize risk by entering the market on a small scale initially, and then expanding once the market is a proven thing. 3M follows this type of strategy. It initially enters a market on a small scale, and then adds in additional products once the market has proven to be successful. 3M also hires locals to promote its products. You can learn more about 3M’s strategy in the Management Focus in your text.

12. Export Strategy Exporters should also
recognize the time and managerial commitment involved in building export sales
devote attention to building strong and enduring relationships with local distributors and customers
hire local personnel to help the firm establish itself in a foreign market
keep the option of local production
Firms also need to recognize that developing a successful export business takes time and commitment, and that additional personnel may be necessary.
Building strong relationships within the importing country can also help a company avoid the pitfalls of exporting. As you can see in the Management Focus in your text, Red Spot Paint and Varnish found that developing personal relationships with client firms in the importing country was important to its export success.
Finally, keep in mind that exporting might not be the best option in some cases. Local production may make more sense in certain situations. Sometimes exporting turns out to be a good way to test a market before making a bigger commitment.

13. Export and Import Financing
Question: How can firms deal with the lack of trust that exists in export transactions?
Answer:
Various mechanisms for financing exports and imports have evolved over the centuries in response to lack of trust that exists in export transactions
Once a firm makes the decision to export, it’ll be faced with the decision of how the exports should be paid for. Remember, when you sell your product to someone in another country, you take on the risk of whether you’ll get paid on time, and whether the currency that you’ll be paid in will be worth what you think it’ll be worth. Because the buyer is in another country, the typical methods you use to get a delinquent account to pay up, might not work!
From the firm’s perspective, the best way to be paid would probably be cash in advance, in the exporter’s currency! However, since requiring these terms is likely to put the exporter at a competitive disadvantage, the firm has to be more flexible.
To deal with these issues, various mechanisms have evolved to handle export financing, and the issues of trust that are associated with it. Let’s begin with the issue of trust.

14. Lack of Trust
Exporters and importers have to trust someone who may be very difficult to track down if they default on an obligation
Each party has a different set of preferences regarding the configuration of the transaction
exporters prefer to be paid in advance, while importers prefer to pay after shipment arrives
Problems arising from the lack of trust can be solved by using a third party who is trusted by both - normally a reputable bank
Exporters have to trust that the importer will actually be true to his word, that he’ll pay according to the agreed upon terms in a timely manner. Remember, that it can be very difficult to track down an importer who has defaulted on an agreement, especially since the importer lives in a different country, speaks a different language, abides by a different system of law, and so on.
The importer, of course has similar concerns. If he sends payment in advance to the exporter, what guarantee does he have that he’ll get what he bought, on time, and in good condition? He would probably prefer that the goods be shipped to him prior to sending payment.
So, because of the different needs of the importer and the exporter, a system using a third party, a reputable bank, has evolved.

15. A Typical International Transaction
Figure 13.4 – A Typical International Trade Transaction
As you can see in this process for conducting an export transaction, the third party bank plays a major role. Let’s talk about what’s going on in this transaction.

16. Letter of Credit
A letter of credit is issued by a bank at the request of an importer and states the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents
this system is attractive because both parties are likely to trust a reputable bank even if they do not trust each other
Rather than dealing directly with each other, the importer and exporter deal with the trustworthy third party, the bank, using a latter of credit. A letter of credit is issued by a bank at the request of an importer. The letter states that the bank will pay a specified sum of money to the exporter upon the presentation of specified documents. It’s sort of a promise to pay.
Once the exporter sees the letter, and knows that he’ll get paid, he ships the goods, and requests payment from the bank. The bank makes payment.

17. Draft Question: How is payment actually made in an export transaction?
Answer:
Most export transactions involve a draft, also called a bill of exchange
A draft is 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
A sight draft is payable on presentation to the drawee while a time draft allows for a delay in payment - normally 30, 60, 90, or 120 days
A draft, which is sometimes called a bill of exchange, is the instrument that’s usually used for payment. It’s simply an order written by the exporter instructing the importer or importer’s agent to pay a specified amount of money at a specified time.
There are two types of drafts. A sight draft is payable immediately, while a time draft allows for a delay in payment.

18. 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
it is a contract
it is a document of title
A third document, called a bill of lading, is also included in the process. The bill of lading is issued to the exporter by the carrier that’s transporting the goods. It acts as a receipt, a contract, and as a document of title.

19. Export Assistance Answer:
Question: Where can exporters get financing help?
Answer:
U.S. exporters can draw on two forms of government-backed assistance to help their export programs
they can get financing aid from the Export-Import Bank
they can get export credit insurance from the Foreign Credit Insurance Association
Where can companies get assistance to finance their exports? In the U.S., they can get financial aid from the Export Import Bank, and credit insurance from the Foreign Credit Insurance Association. Let’s look more closely at each of these organizations.

20. Export-Import Bank
1. The Export Import Bank (Eximbank) - an independent agency of the U.S. government
Its mission is to provide financing aid that will facilitate exports, imports, and the exchange of commodities between the U.S. and other countries
The Export Import Bank, which is also called the Eximbank, is an independent agency of the U.S. government that provides financial aid to facilitate exports, imports, and the exchange of commodities between the U.S. and other countries.

21. Export Credit Insurance
2. Export Credit Insurance - provided in the U.S. by the Foreign Credit Insurance Association (FICA)
FICA provides coverage against commercial risks and political risks
The Foreign Credit Insurance Association, or FICA, provides export credit insurance to cover against commercial and political risk.

22. Countertrade
Question: What alternatives do exporters have when conventional methods of payment are not an option?
Answer:
Exporters can use countertrade when conventional means of payment are difficult, costly, or nonexistent
Countertrade - a range of barter-like agreements that facilitate the trade of goods and services for other goods and services when they cannot be traded for money
Suppose there’s great potential for your product in a certain market, but that you’ve been having trouble exporting because the government of that country restricts the convertibility of its currency. Do you walk away? You might, but you also might see whether another form of payment is an option.
Countertrade refers to a range of barter like agreements that facilitate the exchange of goods and services for other goods and services when they can’t be traded for money. Boeing sold jets to Saudi Arabia and got paid in oil using a countertrade arrangement. Similarly, Venezuela traded iron ore for Caterpillar’s earth moving equipment.

23. The Incidence of Countertrade
In the 1960s the Soviet Union and the Communist states of Eastern Europe, whose currencies were generally nonconvertible, turned to countertrade to purchase imports
Many developing nations that lacked the foreign exchange reserves required to purchase necessary imports turned to countertrade during the 1980s
there was a notable increase in the volume of countertrade after the Asian financial crisis of 1997
Countertrade began in the 1960s primarily as a way for the U.S. to trade with the Soviet Union and its neighbors. Remember from our discussion of the international monetary system that at that time, these countries had currencies that were inconvertible, and so couldn’t be used for trade. Countertrade became a viable option for trade.
During the 1980s, many developing countries turned to countertrade to purchase imports when they didn’t have sufficient foreign exchange reserves. While we’re not sure exactly how much countertrade goes on in the world today - estimates run from as low as two percent of world trade to as high as 10 percent - we do know that its incidence increased after the 1997 Asian crisis. Many Asian countries had only limited hard currency at the time, and had to find alternative methods of payment.

24. Types of Countertrade There are five types of countertrade barter
counterpurchase
switch trading
offset
compensation or buyback
There are a number of different ways to structure a countertrade agreement including barter, counterpurchase, offset, switch trading, and compensation or buyback. Let’s look at each type.

25. Types of Countertrade
Barter - a direct exchange of goods and/or services between two parties without a cash transaction
the most restrictive countertrade arrangement
used primarily for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy
Counterpurchase - a reciprocal buying agreement
occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made
3. Switch Trading - when a specialized third-party trading house buys a firm’s counterpurchase credits and sells them to another firm
Barter, which is the most restrictive form of countertrade, involves a direct exchange of goods and/or services between two parties without a cash transaction.
While barter is a relatively simple process, it’s not very common because one party ends up with goods it doesn’t really want, and may even have to wait for the goods. Usually, barter is only used for one-time deals with trading partners that aren’t creditworthy or trustworthy.
Counterpurchase is a reciprocal buying arrangement where a firm agrees to purchase a certain amount of materials back from the country to which the sale is made. So, when Rolls-Royce sold jet parts to Finland, it agreed to use some of the proceeds of the sale to buy Finish TVs.
In a switch trading arrangement, a third party trading house is involved. The third party buys, at a discount, the counterpurchase credits that a firm has received in a counterpurchase or offset agreement. The third party then sells them, for a profit, to another firm that can use them more efficiently.

26. Types of Countertrade
4. Offset - similar to 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
5. Compensation or Buybacks - occurs when 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 a partial payment for the contract
An offset agreement is similar to counterpurchase because one party agrees to purchase goods and services with some percentage of the proceeds of the original sale, but it’s different in that the party can fulfill the obligation with any firm in the country to which the sale is being made. So, it has a little more flexibility than a counterpurchase agreement.
A buyback involves building a plant in a foreign country, or supplying technology, equipment, training, or other services, and then agreeing to take a percentage of the plant’s output as a partial payment for the contract. Occidental Petroleum used this type of arrangement in Russia where it built several ammonia plants, and then received ammonia as a partial payment.

27. The Pros and Cons of Countertrade
Question: What are the advantages and disadvantages of countertrade?
Answer:
Countertrade is a way for firms to finance an export deal when other means are not available
firms that are unwilling to enter a countertrade agreement may lose an export opportunity to a competitor that is willing to make a countertrade agreement
A countertrade arrangement may be required by the government of a country to which a firm is exporting goods or services
What are the pros and cons of countertrade? Well, the main advantage of countertrade is, as we discussed earlier, that it gives firms a chance to complete an export deal that might not have otherwise happened because of financing difficulties.
Firms that are unwilling to make countertrade agreements run the risk of losing export opportunities to those firms that are willing to make the deals. In some cases, countertrade agreements are required by governments. Boeing is currently purchasing aircraft parts from an Indian supplier as part of a deal with Air India to buy Boeing aircraft. If Boeing had been unwilling to make the deal, Airbus would have stepped in.

28. The Pros and Cons of Countertrade
Countertrade is unattractive because
most firms prefer to be paid in hard currency
it may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably
Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrading
Keep in mind however, that a firm that gets into a countertrade agreement may end up with unusable or poor quality goods that are difficult to dispose of at a profit. For this reason, countertrade is usually more attractive to large, diverse MNEs that have a network of contacts around the world that can unload the goods that are acquired in countertrade deals. Japan’s sogo shosha, for example, use their networks to sell countertrade goods. Sinilarly, 3M’s willingness to enter countertrade arrangements gives it a profit advantage over competitors. 3M has even established its own trading company to manage its countertrade deals.

29. Classroom Performance System
An order written by an exporter instructing an importer to pay a specified amount of money at a specified time is
A letter of credit
A draft
A bill of lading
A confirmed letter of credit
Now, let’s see how well you understand the material in this chapter. I’ll ask you a few questions. See if you can get them right. Ready?
Question 1: An order written by an exporter instructing an importer to pay a specified amount of money at a specified time is
A letter of credit
A draft
A bill of lading
A confirmed letter of credit
If you picked B, you’re right!

30. Classroom Performance System
A bill of lading serves all of the following purposes except
It is a receipt
It is a contract
It is a document of title
It is a form of payment
Question 2: A bill of lading serves all of the following purposes except
It is a receipt
It is a contract
It is a document of title
It is a form of payment
If you picked D, you’re correct!

31. Classroom Performance System
The use of a specialized third-party trading house in a countertrade arrangement is called
Buyback
Offset
Counterpurchase
Switch trading
Question 3: The use of a specialized third-party trading house in a countertrade arrangement is called
buyback
offset
counterpurchase
switch trading
The correct answer is D. Did you get it right?

32. Classroom Performance System
Which of the following is not an advantage of countertrade?
It may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably
It can give a firm a way to finance an export deal when other means are not available
It can be a strategic marketing weapon
It can give a firm an advantage over firms that are unwilling to engage in countertrade arrangements
Question 4: Which of the following is not an advantage of countertrade?
It may involve the exchange of unusable or poor quality goods that the firm can’t dispose of profitably
It can give the firm a way to finance an export deal when other means aren’t available
It can be a strategic marketing weapon
It can give a firm an advantage over firms that are unwilling to engage in countertrade arrangements
Did you pick A? I hope so!