1. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

2. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. CHAPTER Exporting, Importing and Countertrade

3. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Key Issues What are the opportunities and risks associated with exporting? How can companies improve their export performance? What information programs and government resources can help exporters? What are the basic steps in financing exporting? How can countertrade facilitate exporting? Slide 12-1

4. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Exports, FDI, or Licensing? Are home manufacturing costs and transportation costs high? Is know-how easy to license? Tight control over foreign ops required? Is know-how valuable and is protection possible? Export FDI License No Yes No Yes Import Barriers? No Yes Slide 12-2

5. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Exporting Promises and Pitfalls Uninformed view that huge revenue and profit opportunities overseas “there for the pickings” Large firms may realize promise –are proactive about exporting –systematic with exporting effort –have knowledge of overseas markets –Can see where they can leverage their technology, products and marketing skills Smaller firms are more likely to stumble –reactive and seek overseas markets as an afterthought –effort ad-hoc, opportunistic and often naïve Slide 12-3

6. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Exporting Pitfalls Poor market analysis Superficial understanding of competitive conditions Underestimation of time and expertise needed to develop a foreign export market –Some customers require face-to-face interactions –Lack of allocation of sufficient managerial resources –Underestimation of need/value to develop local relationships (“let the agent deal with this”) Failure to customize the product to the needs of foreign users (industrial or consumer) Ineffective distribution system Weak promotion program Slide 12-4

7. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Exporting Pitfalls (cont.) Poor understanding of involved logistics –specialized paperwork –labyrinthian regulations that may involve for typical transaction 30 parties, 60 original documents, 360 document copies need to have staff competent to produce and check –Can by up to 10% of cost of exported product Lack of excellent documentation system Slide 12-5

8. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Export Performance Improvement Government information sources –In US various parts of the Department of Commerce –In other countries similar organization –Embassies and consulates have commercial sections Export management companies –Act as the export marketing department of firms –Experienced specialists –However, not exclusive Focused export strategy Slide 12-6

9. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Export/Import Financing Service that allows exporter to be assured of payment and importer to be assured of product Banks offer financing intermediary service –Letter-of-Credit: bank guarantee of payment to exporter “bought” by the corresponding importer –Draft or Bill-of-Exchange: instructions to bank to pay at a certain time based on certain documentation Carriers move product from A to B –Bill-of-Lading issued to exporter by the carrier: is a receipt, a contract and a document of title issued to the exporter by the carrier Slide 12-7

10. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Export Assistance Export-Import Bank (Eximbank) –Independent agency of US Government –Provides financing for US exports, imports, and exchange of commodities –Guarantees repayment of medium, long term loans to foreign borrowers for purchasing US exports Export Credit Insurance –Covers the exporter who must deal with an importer who insists on no letter-of-credit –Issued by the Foreign Credit Insurance Association Grouping of private commercial banks Under the guidance of Export-Import Bank Coverage against commercial and political risk Slide 12-8

11. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Countertrade A range of barterlike agreements –Trade goods/services for other goods/services –Used when currencies not convertible –Used when the currencies are too unstable Types of Countertrade –Barter: direct exchange of goods –Counterpurchase: reciprocal buying agreement –Offset: similar to Counterpurchase but more than one set of exchanges can be involved –Switch trading: involves the use of a specialized third party trading house in a countertrade agreement –Buybacks: a firm builds a plant, supplies technology or equipment or training or other service in a country and agrees to take percentage of output as partial payment Slide 12-9

12. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Countertrade: Pros and Cons Pros –Can offer a way to finance exports when other forms of financing are not available –Can be the preferred financing method in cases where cash deals are too risky –May satisfy the need to build good will with the host government Cons –May involve the exchange of poor quality goods –Importing firm must find a market for goods in an unrelated industry Can involve building a marketing infrastructure to dispose of a stream of such goods More suitable to large firms Slide 12-10