1. International Business 11e
By Charles W.L. Hill
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. Exporting, Importing, and Countertrade
Chapter 16
Exporting, Importing, and Countertrade

3. Why Export? Exporting is a way to increase market size and profits
lower trade barriers under the WTO and regional economic agreements, such as the EU and NAFTA, make it easier than ever
Large firms often proactively seek new export opportunities, but many smaller firms export reactively
often intimidated by the complexities of exporting
LO 16-1: Explain the promises and risks associated with exporting.
The Opening Case: Exporting Desserts explores how a small California-based dessert business decided to export its products as a way of increasing its overall business.

4. Why Export? Exporting firms need to identify market opportunities
deal with foreign-exchange risk
navigate import and export financing
understand the challenges of doing business in a foreign market
Firms that do not export lose out on huge opportunities for growth and cost reduction.
Large firms tend to be proactive in seeking foreign opportunities, while medium and small-sized firms are slow to respond.
Too busy with local side of business
Ignorant of potential opportunities
Intimidated by mechanics of exporting to a foreign country

5. What Are the Pitfalls of Exporting?
Common pitfalls include
poor market analysis
poor understanding of competitive conditions
a lack of customization for local markets
a poor distribution program
poorly executed promotional campaigns
problems securing financing
a general underestimation of the differences and expertise required for foreign market penetration
an underestimation of the amount of paperwork and formalities involved
Management Focus: Ambient Technologies and the Panama Canal explores Ambient Technologies’ move into the export market. Ambient Technologies, which provides underground imaging and drilling support for businesses in the geology, construction, and mineral extraction industries has recently exported services to Panama to help with the expansion of the Panama Canal.

6. How Can Firms Improve Export Performance?
Many firms are unaware of export opportunities available
Firms need to collect information
Firms can get direct assistance from some countries and/or use an export management companies
both Germany and Japan have developed extensive institutional structures for promoting exports
Japanese exporters can use knowledge and contacts of sogo shosha - great trading houses
U.S. firms have far fewer resources available
LO 16-2: Identify the steps managers can take to improve their firm’s export performance.
Management Focus: Exporting with a Little Government Help describes the challenges faced by small firms as they seek to expand their sales through exports. The feature notes that there are a number of agencies, institutions, and export management companies that provide assistance to small exporters.

7. Where Can U.S. Firms Get Export Information?
The U.S. Department of Commerce
the most comprehensive source of export information for U.S. firms
The International Trade Administration and the United States and Foreign Commercial Service
“best prospects” lists for firms
The Department of Commerce
organizes various trade events to help firms make foreign contacts and explore export opportunities
The Small Business Administration
Local and state governments
Trade Commissions are maintained by many large cities. They provide business counseling, information gathering, and financing.

8. What Are Export Management Companies?
Export management companies (EMCs) are export specialists that act as the export marketing department or international department for client firms
Two types of assignments are common:
EMCs start export operations with the understanding that the firm will take over after they are established
not all EMCs are equal—some do a better job than others

9. What Are Export Management Companies?
EMCs start services with the understanding that the EMC will have continuing responsibility for selling the firm’s products
but, firms that use EMCs may not develop their own export capabilities

10. How Can Firms Reduce the Risks of Exporting?
To reduce the risks of exporting, firms should
hire an EMC or export consultant to identify opportunities and handle paperwork and regulations
focus on one or a few markets at first
enter a foreign market on a small scale in order to reduce the costs of any subsequent failures
recognize the time and managerial commitment involved
develop a good relationship with local distributors and customers
hire locals to help establish a presence in the market
be proactive
consider local production
Management Focus: Export Strategy at 3M explores 3M’s export strategy. 3M generates more than 60% 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.

11. Think Like a Manager
3M, a manufacturer of household and office products, bases its export strategy on four principles: FIDO (First In Defeats Others), enter on a small scale to reduce risks, add additional product lines once the exporting operations start to become successful, and hire locals to promote the firm’s products. If you were competing with 3M for market share in a foreign country, how might you counter their strategy? Would you flood the market with similarly priced goods? Wait for 3M to develop local demand and then export competing products at a lower price point? Immediately establish local production facilities? Launch a viral web campaign tailored to the target market to promote your products?
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

12. How Can Firms Overcome the Lack of Trust in Export Financing?
Because trade implies parties from different countries exchanging goods and payment, the issue of trust is important
exporters prefer to receive payment prior to shipping goods, but importers prefer to receive goods prior to making payments
To get around this difference of preference, many international transactions are facilitated by a third party - normally a reputable bank
adds an element of trust to the relationship

13. How Can Firms Overcome The Lack Of Trust in Export Financing?
The Use of a Third Party
The lack of trust between international trading partners due to several factors:
parties that have never met
language, cultural, and legal system differences
difficulties in tracking down a party in case of default
The problem is resolved by using a third party trusted by both as an intermediary – normally a reputable bank

14. What Is a Letter of Credit?
A letter of credit is issued by a bank at the request of an importer
states the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents
main advantage is that both parties are likely to trust a reputable bank even if they do not trust each other
LO 16-4: Recognize the basic steps in export financing.
The letter of credit is Issued by a bank at the request of the importer.
The bank pays a specified sum to a beneficiary, normally the exporter, on presentation of particular, specified documents.
The fee for letter of credit is paid by the importer.
May reduce borrowing ability of importer since the letter is a financial liability.

15. What Is a Draft?
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
the instrument normally used in international commerce for payment
also called a bill of exchange

16. What Is a Draft?
A sight draft is payable on presentation to the drawee
A time draft allows for a delay in payment
normally 30, 60, 90, or 120 days
once a time draft has been “accepted” it becomes a negotiable instrument that can be sold at a discount from its face value

17. What Is a 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 - merchandise described on document has been received by carrier
It is a contract - carrier is obligated to provide transportation service in return for a certain charge
It is a document of title - can be used to obtain payment or a written promise before the merchandise is released to the importer
The bill of lading is issued to the exporter by the common carrier transporting the merchandise.
It serves three purposes:
Receipt - merchandise described on document has been received by carrier
Contract - carrier is obligated to provide transportation service in return for a certain charge
Document of title – can be used to obtain payment or a written promise before the merchandise is released to the importer

18. How Does an International Trade Transaction Work?
A Typical International Trade Transaction

19. Where Can U.S. Firms Get Export Assistance?
Financing aid is available from the Export-Import Bank (Ex-Im Bank)
an independent agency of the U.S. government
provides financing aid to facilitate exports, imports, and the exchange of commodities between the U.S. and other countries
achieves its goals though loan and loan guarantee programs
LO 16-3: Identify information sources and government programs that exist to help exporters.

20. Where Can U.S. Firms Get Export Assistance?
Export credit insurance is available from the Foreign Credit Insurance Association (FCIA)
provides coverage against commercial risks and political risks
protects exporters against the risk that the importer will default on payment

21. What Is Countertrade?
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
emerged as a means purchasing imports during the1960s when the USSR and the Communist states of Eastern Europe had nonconvertible currencies
grew in popularity in the 1980s among many developing nations that lacked the foreign exchange reserves required to purchase necessary imports
notable increase after the 1997 Asian financial crisis
LO 16-5: Describe how countertrade can be used to facilitate exporting.
Estimates of the percentage of world trade covered by some sort of countertrade agreement range from highs of 8 and 10 percent by values to lows of around 2 percent.

22. What Are the Forms of Countertrade?
There are five distinct versions 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

23. What Are the Forms of Countertrade?
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
Offset - similar to counterpurchase - one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale
difference is that this party can fulfill the obligation with any firm in the country to which the sale is being made

24. What Are the Forms of Countertrade?
A buyback occurs when a firm builds a plant in a country or supplies technology, equipment, training, or other services to the country
agrees to take a certain percentage of the plant’s output as a partial payment for the contract

25. What Are the Forms of Countertrade?
Switch trading - the use of a specialized third-party trading house in a countertrade arrangement
when a firm enters a counterpurchase or offset agreement with a country, it often ends up with counterpurchase credits which can be used to purchase goods from that country
switch trading occurs when a third-party trading house buys the firm’s counterpurchase credits and sells them to another firm that can better use them

26. What Are the Pros of Countertrade?
Countertrade is attractive because
it gives a firm a way to finance an export deal when other means are not available
it give a firm a competitive edge over a firm that is unwilling to enter a countertrade agreement
Countertrade arrangements may be required by the government of a country to which a firm is exporting goods or services

27. What Are the Cons of Countertrade?
Countertrade is unattractive because
it may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably
it requires the firm to establish an in-house trading department to handle countertrade deals
Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrade deals
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