1. International Business: The New Realities by
This chapter will examine various methods firms use when exporting their products.
International Business: The New Realities by
Cavusgil, Knight and Riesenberger
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Learning Objectives
1. An overview of foreign market entry strategies
2. Internationalization of the firm
3. Exporting as a foreign market entry strategy
4. Managing export-import transactions
5. Payment methods in exporting and importing
6. Export-import financing
7. Identifying and working with foreign intermediaries
8. Countertrade
Learning objectives will include how to identify potential foreign partners and methods of payment for importing and exporting goods.
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3. Foreign Market Entry Strategies
Importing or global sourcing: Procurement of products and services from foreign sources
Exporting: Producing products or services in one country (often the producer’s home country), and selling and distributing them to customers in other countries
Countertrade: International transaction in which all or partial payments are made in kind rather than cash
Definitions of key trading terms include: global sourcing, which is procuring goods from foreign sources; exporting, which is selling products to countries other than where they were produced; and countertrade, which is trading a product for a product rather than using cash.
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4. Foreign Market Entry Strategies (cont.)
In contrast to home-based international operations (e.g., exporting), foreign direct investment (FDI) involves establishing a presence in the foreign market by investing capital and securing ownership of a factory, subsidiary, or other facility there.
Collaborative ventures include joint ventures in which the firm makes similar equity investments abroad, but in partnership with another company.
Additional definitions include: Foreign Direct Investment (FDI), which is establishing a presence in another country through a financial investment; and collaborative ventures, which include partnerships with firms in other countries.
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5. Foreign Market Entry Strategies (cont.)
With licensing, the firm allows a foreign partner to use its intellectual property in return for royalties or other compensation.
Franchising is common in retailing. McDonalds, Dunkin’ Donuts, Century 21 Real Estate, and many other firms have used franchising to internationalize worldwide.
Licensing means one firm allows another firm to produce their product in return for royalties. In contrast, franchising means a firm opens their own store or facility in the country, which is then operated by local interests.
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6. Factors to Consider When Choosing a Foreign Market Entry Strategy
Goals and objectives of the firm, such as desired profitability, market share, or competitive positioning
Degree of control desired regarding decisions, operations, and assets involved in a venture
The firm’s financial, organizational, and technological resources and capabilities
The types of risk inherent in each proposed foreign venture
When choosing entry into a foreign market, a firm should consider several factors. What is the goal; is it more profit? How much control is needed to accomplish the goal, and is this possible? Also, the firm should consider whether it has the resources to accomplish these goals and how risky the investment is.
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7. Factors to Consider When Choosing Entry Strategy (cont.)
Conditions in the target country, such as legal, cultural, and economic circumstances, as well as distribution and transportation systems
Nature and extent of competition from existing rivals and from firms that may enter the market later
Availability and capabilities of partners in the market
Additional considerations are the legal and economic conditions of the country being considered; the level of competition; and whether partners are available.
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8. Additional Factors to Consider
The value-adding activities the firm is willing to perform in the market and the activities it will delegate to local partners
Long-term strategic importance of the market
Characteristics of the product or service
Factors to consider also include the value-adding activities of the firm itself and local partners; the strategic importance of the new entry; and the question of whether the firm’s products match the needs of the new market.
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Classification of Entry Strategies Based on Degree of Control for Focal Firms
Depending on the strategy chosen, this exhibit shows how much control, resources, flexibility, and risk the firm will experience.
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10. Characteristics of Company Internationalization
Push and pull factors serve as initial triggers. Usually a combination of triggers, inside and outside the firm, is responsible for initial international expansion.
Initial internationalization may be accidental. Foreign expansion is often unplanned, or is the result of chance events, such as a meeting with a foreign distributor.
Risk and return must be balanced. Managers weigh the potential returns of internationalization against the initial costs, in terms of money, time, and other company resources. International ventures typically take longer than domestic ones to reach profitability.
The starting point for internationalization may be triggered by internal or external factors. Managers must then begin the process of analyzing the opportunity, while realizing that this process will take longer than expansion in the domestic market.
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11. Characteristics of Internationalization (cont.)
An ongoing learning experience. The firm’s internationalization can stretch over many years and involve many national settings, providing ample opportunities for managers to learn and adapt how they do business.
Firms may evolve through stages of internationalization. Historically, most firms have opted for a gradual approach, partly due to limited resources and partly due to lack of appropriate knowledge on how to do international business.
However, recently some firms—born globals—have internationalized quickly.
Internationalization takes time. A firm has much to learn about the countries involved, how much and what kind of resources are necessary, transportation methods, and so on. A slow, moderate time process is the norm, although the process is taking less time that it has in the past.
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12. Typical Stages of Company Internationalization
This chart shows the typical stages that a firm passes through when internationalizing, the activities in which the firm’s management engages, and how the firm typically behaves while in these stages.
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Overview of Exporting
Usually the firm’s first foreign entry strategy.
Low risk, low cost, and flexible.
Popular among SMEs.
When we talk about trade, trade deficits, trade surpluses, etc., we’re talking about exporting.
Most exports involve merchandise.
Export channels:
Independent distributor or agent
Firm’s own marketing subsidiary abroad
A firm’s involvement with trade usually begins with the exporting of its goods. This is frequently done with the assistance of agents or independent distributors and later with the firm’s own employees.
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14. International Sales Intensity of Various U.S.-Based Industries
This chart shows how some industries have average international sales of over percent and in some cases, such as computers, over 50 percent. Companies within these industries can have international sales of over percent of their total sales.
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15. Services Are Also Exported
Examples are architecture, education, banking, insurance, entertainment, and information.
However, many pure services cannot be exported because they cannot be transported.
Retailers offer their services by establishing retail stores abroad via FDI. Retailing requires direct contact with customers.
Overall, most services are delivered to foreign customers via entry strategies other than exporting.
Services, such as banking and information, can also be exported. However, in order to facilitate sales, companies will frequently establish a presence in the foreign country when they have services, rather than goods, as their products.
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16. Advantages of Exporting
There are many advantages of exporting. For example, exporting increases the economies of scale, diversifies the customer base, and increases sales volume.
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17. Disadvantages of Exporting
Requires firm to acquire new capabilities and redirect organizational resources;
Sensitive to tariffs and other trade barriers;
Sensitive to exchange rate fluctuations;
Compared to FDI, firm has fewer opportunities to learn about customers, competitors, and the marketplace.
However, exporting can adversely be affected by exchange rate fluctuations and may require new capabilities and allocation of corporate resources.
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18. A Systematic Approach to Exporting
Screen for the most attractive markets; identify qualified distributors; estimate industry market potential and company sales potential
Assess firm’s resource needs; establish timetable for achieving export goals; decide on distribution strategy
Acquire new abilities in such areas as product development, logistics, finance, contracts, currency management, foreign languages, cross-cultural skills
Devise needed on-the-ground tactics; adapt products and marketing as needed
This slide shows a four-step, systematic way to approach exporting, beginning with assessment, followed by organizing, acquiring the necessary resources, and implementation.
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19. Export Intermediation Options
Indirect exporting: Contracting with an intermediary, often an export management company or a trading company, in the firm’s home country to perform all export functions; common among firms new to exporting
Direct exporting: Contracting with intermediaries, such as distributors or agents, in the foreign market to perform export functions; perform downstream value-chain activities in the target market
Company-owned foreign subsidiary: Similar to direct exporting, except the exporter owns the foreign intermediation operation; the most advanced option
Once the decision to export has been made, there are options for how to implement the decision. It can be done indirectly with home country intermediaries, directly with foreign market agents, or the firm can establish a foreign subsidiary to handle the exporting operations.
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20. Alternative Organizational Arrangements for Exporting
This chart shows the many options available to a firm that begins the exporting process.
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21. United States: Top Trading Partners
This chart shows the top trading partners of the United States, led by the European Union. Exports and imports are totaled.
Sum of merchandise exports and imports, in billions of U.S. dollars
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22. Canada: Top Trading Partners
This chart shows that the United States is the top trading partner of Canada, with other countries significantly lower.
Sum of merchandise exports and imports, in billions of U.S. dollars
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23. China: Top Trading Partners
This chart shows that China’s top trading partners are the EU and the U.S., with Japan and South Korea not far behind.
Sum of merchandise exports and imports, in billions of U.S. dollars
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24. European Union: Top Trading Partners
This chart shows that the United States is the EU’s top trading partner, but China and Russia are not far behind.
Sum of merchandise exports and imports, in billions of U.S. dollars
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Export Documentation
The official forms and other paperwork required to transport exported goods and clear customs
Quotation or pro forma invoice: Issued on request to advise a potential buyer about the price and description of the exporter’s product or service
Commercial invoice: Actual demand for payment issued by the exporter when a sale is concluded
Bill of lading: Basic contract between exporter and shipper; authorizes the shipping company to transport the goods to the buyer’s destination
It is important to fill out and keep the proper paperwork when a firm is engaged in exporting. Invoices and bills of lading are two of the most common official forms of paperwork.
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26. Export Documentation (cont.)
Shipper's export declaration: Lists the contact information of the exporter and buyer, full description, declared value, and destination of the products being shipped
Used by governments to collect statistics
Certificate of origin: The "birth certificate" of the goods, showing country where the product originated
Insurance certificate: Protects the exported goods against damage, loss, pilferage, and, sometimes, delay
Addition documentation that may be required for exporting includes a shipper’s export declaration, a certificate of origin, and insurance certificates.
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27. Incoterms (International Commerce Terms)
A system of universal, standard terms of sale and delivery.
Commonly used in international sales contracts and price lists to specify how the buyer and the seller share the cost of freight and insurance, and at which point the buyer takes title to the goods.
Incoterms, or International Commerce Terms, are terms in which firms should be fluent, because they are commonly used in the world of trading.
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Examples of INCOTERMS
For example, FOB, or Free on Board, means that delivery is not official until the goods are unloaded by the ship at the port of destination.
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Methods of Payment
METHOD
ADVANTAGES
DISADVANTAGES
Cash in Advance
Best for the seller
Risky from the buyer’s standpoint, and thus unpopular; tends to discourage sales
Open Account
Easy for the exporter, who simply bills the buyer, who is expected to pay at some future time as agreed.
Risky unless there is strong established relationship between exporter and buyer
Letter of Credit
A contract between the banks of the buyer and the seller. Largely risk- free, it helps establish instant trust.
Requires following a strict protocol, specified in the contract; can involve much paperwork
Frequently used terms that refer to methods of paying for goods include a “Letter of Credit,” which means that the buyer has a contract with its bank to guarantee payment to the seller.
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Letter of Credit Cycle
This figure shows how a letter of credit is created and how it is used to facilitate the flow of trade.
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31. Sources of Export Financing
Commercial banks
Distribution channel intermediaries
Buyers
Suppliers
Government assistance programs (e.g., Export-Import Bank, Small Business Administration)
There are many sources of export financing in addition to conventional banks. Suppliers, buyers, and sometimes governments can finance exports.
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32. Sources of Information to Identify Potential Intermediaries
Country and regional business directories such as Kompass (Europe), Bottin International (worldwide), Japanese Trade Directory, and Foreign Yellow Pages
Trade associations such as the National Furniture Manufacturers Association or the National Association of Automotive Parts Manufacturers
Government ministries and agencies such as Austrade in Australia, Export Development Canada, and the U.S. Department of Commerce
Commercial attachés in embassies and consulates abroad
Branch offices of government agencies located in exporter’s country, such as the Japan External Trade Organization
There are many sources of information to help a firm find trade intermediaries, such as trade associations, commercial attachés, and various government organizations.
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33. Working with Foreign Intermediaries
The exporter relies on intermediaries for much of the marketing, physical distribution, and customer service activities in the export market.
The exporter should cultivate mutually beneficial, bonding relations; respond to the intermediary’s needs; demonstrate commitment; and build trust.
Intermediaries prefer handling good, profitable products, and desire various types of support.
When an exporter is working with a foreign intermediary for marketing or distribution, demonstrating commitment and building trust are essential for a good relationship.
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34. Common Dispute Areas With Intermediaries
Compensation arrangements
Pricing practices
Advertising and promotion practices and the extent of advertising support
After-sales service
Return policies
Adequate inventory levels
Incentives for promoting new products
Adapting the product for local customers
A firm should be aware that there are several areas that commonly result in disputes with intermediaries. Compensation arrangements, product pricing, return policies, and inventory levels are a few examples.
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35. Criteria for Evaluating Export Intermediaries
This chart provides a list of criteria for evaluating potential intermediaries. The four key areas that should be evaluated are the intermediaries’ strengths, product awareness, marketing skills, and commitment.
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Countertrade
An international business transaction in which all or partial payments are made in kind rather than cash; similar to barter.
Used when conventional means of payment are difficult, costly, or nonexistent
Accounts for between 10% and 33% of all world trade
Common in large-scale government procurement
Risky
May involve inferior or hard-to-price goods
May lead to price padding
Can be complex, cumbersome, and time consuming
About 10 percent of international business transactions use countertrade, or the exchange or goods for goods, rather than goods for currency. One of the risks is that the goods the firm receives may be inferior to or less than what was expected.
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Types of Countertrade
Barter: Goods are directly exchanged without the transfer of any money
Compensation deal: Payment in goods and cash
Counterpurchase: Entails two distinct contracts
In the first, the seller agrees to a set price for goods and receives cash from the buyer.
In the second, the seller agrees to purchase goods from the buyer.
Buy-back agreement: Seller agrees to supply technology or equipment to construct a facility and receives payment in the form of goods it produces
There is more than one form of countertrade or barter. There can be buy-back arrangements, counterpurchases, or compensation deals.
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38. Examples of Countertrade
Boeing traded aircraft for oil in Saudi Arabia.
Caterpillar received caskets in Colombia and wine in Algeria in exchange for earthmoving equipment.
Goodyear traded tires for minerals, textiles, and agricultural products.
Coca-Cola received tomato paste from Turkey, oranges from Egypt, and beer from Poland in exchange for Coke.
Many international companies engage in countertrade, such as Boeing, which traded its aircraft for oil from Saudi Arabia.
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39. Overview of Countertrade
Finally, countertrade can result in a partial payment of cash or goods to a marketer, or a countertrade broker may be utilized to complete the transaction.
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