1. International Business Functions
Dwight Burdette/Wikimedia Commons
Chapter 14: Exporting, Importing, and Countertrade

2. Learning Objectives
LO 14-1 Explain the promises and risks associated with exporting. LO 14-2 Identify the steps managers can take to improve their firm’s export performance. LO 14-3 Identify information sources and government programs that exist to help exporters. LO 14-4 Recognize the basic steps involved in export financing. LO 14-5 Describe how countertrade can be used to facilitate exporting.

3. Introduction 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
Regional economic agreements such as the European Union and the North American Free Trade Agreement
The decline in trade barriers under the WTO
Modern communication and transportation technologies have alleviated logistical problems
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 do so with typically one other country (about 60 percent of all U.S. companies that export trade only with one other country). This means knowledge, data, and experience oftentimes are lacking, and smaller enterprises, in particular, can find the exporting process intimidating.

4. Introduction Global Trade as Percentage of Global GDP
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 do so with typically one other country (about 60 percent of all U.S. companies that export trade only with one other country). This means knowledge, data, and experience oftentimes are lacking, and smaller enterprises, in particular, can find the exporting process intimidating.

5. The Promise and Pitfalls of Exporting 2 of 2
Common pitfalls for exporters
Poor market analysis
Poor understanding of competitive conditions
Failure to customize the product offering to foreign customers
Lack of an effective distribution program
Poorly executed promotional campaign
Problems securing financing
Voluminous paperwork, complex formalities, potential delays and errors
According to a United Nations report on trade and development, a typical international trade transaction may involve 30 parties, 60 original documents, and 360 document copies, all of which have to be checked, transmitted, reentered into various information systems, processed, and filed. The UN has calculated that the time involved in preparing documentation, along with the costs of common errors in paperwork, often amounts to 10 percent of the final value of goods exported

6. Improving Export Performance 2 of 6
International Comparisons
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 for promoting exports
Japanese exporters can also take advantage of the knowledge and contacts of sogo shosha, Japan’s trading houses
U.S. has not developed an institutional structure for promoting exports similar to Germany or Japan

7. Improving Export Performance 3 of 6
Information Sources
globalEDGETM
The U.S. Department of Commerce is the most comprehensive source of information for U.S. firms
U.S. and Foreign Commercial Service and International Trade Administration
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
The United States has also established a set of 17 Centers for International Business Education and Research (CIBERs), which assist with exporting needs. The CIBERs were created by the U.S. Congress under the Omnibus Trade and Competitiveness Act of 1988 to increase and promote the nation's capacity for international understanding and competitiveness.

8. Improving Export Performance 4 of 6
Service Providers
Freight forwarder
Export management companies (EMC) handle all aspects of exporting
Export trading company
Export packaging company
Customs brokers
Confirming houses (buying agents)
Export agents, merchants, remarketers
Piggyback marketing
Freight forwarder’s primary task is to combine smaller shipments into a single large shipment to minimize the shipping costs.
Export trading companies export products for companies that contract with them.
Export packaging companies, or export packers for short, provide services to companies that are unfamiliar with exporting.
Customs brokers 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.
Confirming houses, sometimes called buying agents, represent foreign companies that want to buy your products.
Export agents, merchants, and remarketers buy products directly from the manufacturer and package and label the products in accordance with their own wishes and specifications.
Piggyback marketing is an arrangement whereby one firm distributes another firm’s products.

9. Improving Export Performance 5 of 6
Export Strategy
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 small scale in order to reduce the costs of any subsequent failures
Recognize time and managerial commitment involved in building export sales
Devote a lot of attention to building strong and enduring relationships with local distributors and/or customers
Hire local personnel to establish firm in foreign market
Be proactive about seeking export opportunities
Exporter should retain the option of local production
Management Focus: Exporting Strategy at 3M
Summary
This feature explores the Minnesota Mining and Manufacturing Company’s (3M) export strategy. In 2007, 3M generated more than 60 percent of its revenues from outside the United States. The company often uses exports to establish an initial presence in a foreign market, only building foreign production facilities once sales volume rises to a level where local production is justified. Discussion of the feature can begin with the following questions:
Suggested Discussion Questions
1. Discuss why 3M initially enters markets on a small scale. How does the firm’s strategy fit with the philosophy that exporting is not an end in itself, but merely a step on the road toward establishment of foreign production?
Discussion Points: The basic idea behind 3M’s strategy of entering markets on a small scale is that it allows the company to learn about the market before it risks making a big push into the country. Students will probably recognize that this approach allows the company to break its international expansion into a series of stages beginning with a test of the market going all the way to a complete foreign presence.
2. Explain the three principles that make 3M so successful. Why was it important for 3M to hire local personnel?
Discussion Points: 3M’s principles are central to its success in foreign markets. The company believes that it is important to be first to a market, learn about it and sell there before competitors do. Second, 3M likes to learn about a market by selling a single product. Only after it has proven to be successful, will the company enter the market on a larger scale. Third, 3M believes strongly because locals are more familiar with the market, local employees are essential to its success. 3M believes that local employees have a better idea of how to sell in their own country than Americans.
Teaching Tip: To learn more about 3M and its international strategy, go to{

10. Export and Import Financing 1 of 4
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
LO Recognize the basic steps involved in export financing.

11. Figure 14.3 Preference of the U.S. Exporter
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
Figure Preference of the French Importer

12. Figure 14.5 The Use of a Third Party
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
Jump to Appendix 3 long image description

13. Export and Import Financing 2 of 4
Letter of Credit
Issued by a bank at the request of an importer stating 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

14. Export and Import Financing 3 of 4
Draft
Most export transactions involve a draft: 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
Also called a bill of exchange
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
Time drafts are negotiable

15. Export and Import Financing 4 of 4
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
As a receipt, the bill of lading indicates that the carrier has received the merchandise described on the face of the document. As a contract, it specifies that the carrier is obligated to provide a transportation service in return for a certain charge. As a document of title, it can be used to obtain payment or a written promise of payment before the merchandise is released to the importer.

16. Figure 14.6 A Typical International Trade Transaction
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
Jump to Appendix 4 long image description

17. Export Assistance 1 of 3
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
LO Identify information sources and government programs that exist to help exporters.

18. Export Assistance 2 of 3 Export-Import Bank
The Export Import Bank (Ex-Im Bank) is a wholly owned U.S. government corporation
Established in 1934
Designed to supplement, not compete, with capital lending
Provides financing aid that will facilitate exports, imports, and the exchange of commodities between the U.S. and other countries
Has a direct lending operation to lend dollars to foreign borrowers for use in purchasing U.S. exports

19. Export Assistance 3 of 3 Export Credit Insurance
Insures exporter against risk that foreign importer will default on payment
Provided by Foreign Credit Insurance Association
Provides coverage against commercial risks and political risks
Losses due to commercial risk result from the buyer’s insolvency or payment default. Political losses arise from actions of governments that are beyond the control of either buyer or seller

20. Countertrade 1 of 7
Exporters can use countertrade when conventional means of payment are difficult, costly, or nonexistent
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
Example: General Electric won a contract for a $150 million electric generator project in Romania by agreeing to market $150 million of Romanian products in markets to which Romania did not have access.
Example: Philip Morris shipped cigarettes to Russia, for which it received chemicals that can be used to make fertilizer. Philip Morris shipped the chemicals to China, and in return, China shipped glassware to North America for retail sale by Philip Morris.
LO Describe how countertrade can be used to facilitate exporting

21. Countertrade 2 of 7 The Popularity 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

22. Countertrade 3 of 7 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

23. Countertrade 4 of 7 Types of Countertrade continued
Offset: similar to counterpurchase - one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale
This party can fulfill the obligation with any firm in the country to which the sale is being made
Switch Trading: occurs when a specialized third-party trading house buys a firm’s counterpurchase credits and sells them to another firm

24. Countertrade 5 of 7 Types of Countertrade continued
Compensation or Buybacks: occur 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 percentage of the plant’s output as a partial payment for the contract

25. Countertrade 6 of 7 Pros and Cons of Countertrade
Countertrade is a way for firms to finance an export deal when other means are not available
Firms that are unwilling to engage in countertrade may lose an export opportunity to a competitor that will
Countertrade may be required by the government of a country to which a firm is exporting goods or services

26. Countertrade 7 of 7 Pros and Cons of Countertrade continued
Countertrade can be unattractive
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 countertrade
Japan’s sogo shosha are masters at countertrade
The masters of countertrade are Japan’s giant trading firms, the sogo shosha, which use their vast networks of affiliated companies to profitably dispose of goods acquired through countertrade agreements. Firms affiliated with one of Japan’s sogo shosha often have a competitive advantage in countries where countertrade agreements are preferred.

27. Summary In this chapter we have
Explained the promises and risks associated with exporting.
Identified the steps managers can take to improve their firm’s export performance.
Identified information sources and government programs that exist to help exporters.
Recognized the basic steps involved in export financing.
Described how countertrade can be used to facilitate exporting.