Strategy in the Entrepreneurial Millenium: Countertrade As an
Emerging Opportunity for Entrepreneurial Firms
LESLIE E. PALICH, R. DUANE IRELAND, & D. RAY BAGBY
Department of Management and Entrepreneurship
Baylor University
Waco, Texas 76798-8006
UNITED STATES OF AMERICA
Abstract: We maintain that countertrade presents an emerging opportunity for entrepreneurial firms. That is, the
trend toward more and smaller countertrade exchanges opens the door to small firms, and the flexibility and
creativity of entrepreneurial firms may indeed represent advantages for these smaller competitors. We unfold our
theory via three important considerations. First, we explain the concept of countertrade and describe its
sophisticated variations. Second, we discuss the factors that are driving the trend toward increasing countertrade,
lending confidence to the prediction that the trend toward increasing countertrade will continue. Finally, from a
resource-based perspective, we describe the fundamental characteristics of the entrepreneurial firm, thus
explaining why these firms may be uniquely positioned to exploit disproportionately the potential of countertrade
in the future. With this as background, we develop a model integrating described constructs in a way that
demonstrates the usefulness of the practice of countertrade for entrepreneurial firms.
Key Words: Countertrade, Entrepreneurship, Internationalization, International Trade, Transformation
1 Introduction
The practice of countertrade is not well understood;
and, several myths continue to obscure the notion
and discourage its use. Myth #1: Countertrade is
synonymous with barter—i.e., an international trade
wherein goods and services are paid for in kind. In
reality, this is only one of several countertrade
options, and historically not even the most used
alternative at that [6]. Myth #2: The use of
countertrade is in decline. Some associate this type
of trade arrangement with the old Soviet system,
with its unconvertible currency and insatiable
demand for western goods. However, the use of
countertrade is increasing. Though it is difficult to
obtain exact figures, Platt [26] reports that
countertrade, as a percentage of world trade, rose
from approximately two percent in 1975 to around
20 percent by 1992. Moreover, this trend is likely to
continue, with some projections approaching 50
percent by the year 2000. Several reasons for this
trend have been cited; these are discussed below.
Myth #3: Countertrade is strictly the domain of the
large firm. This is not necessarily the case. It is true
that countertrade transactions in the past have
typically involved very large contracts (at times
exceeding one billion dollars in value); however,
recent geopolitical and economic trends explain the
rise of much smaller contracts. Taken together,
these observations suggest the future of countertrade
is likely to be very different from past experiences.
We aver that countertrade presents an emerging
opportunity for entrepreneurial firms. That is, the
trend toward more and smaller countertrade
exchanges opens the door to small firms, and the
flexibility and creativity of entrepreneurial firms
may indeed represent advantages for these smaller
competitors. In an effort to establish this position,
we unfold our theory via three important
considerations. First, we explain the concept of
countertrade and describe its sophisticated
variations. In our view, the complex nature of these
contracts represents a foundation of opportunity for
entrepreneurial firms.
Second, we discuss the
factors that are driving the trend toward increasing
countertrade. Understanding these factors lends
confidence to the prediction that the trend toward
increasing countertrade will continue, spawning
more and smaller contracts for international firms.
Finally, from a resource-based perspective, we
describe the fundamental characteristics of the
entrepreneurial firm, thus explaining why these
firms may be uniquely positioned to exploit
disproportionately the potential of countertrade in
the future. With these components as background,
we develop a model integrating described constructs
in a way that demonstrates the usefulness of the
practice of countertrade for entrepreneurial firms.
barter is the most restrictive countertrade alternative
because it prescribes the specifics of a one-to-one
exchange, so one party may end up with goods that
cannot be used or are unsuitable for timely resale.
Thus, firms may not want to pursue this alternative.
2.2 Counterpurchase
2 What is Countertrade?
Countertrade is usually seen exclusively as barter,
but this is not the case. In fact, countertrade is the
generic term that is often used to reference a family
of trade financing arrangements.
The United
Nations defines this practice as “a commercial
transaction in which provisions are made, in one or a
series of related contracts, for payment by deliveries
of goods and/or services in addition to, or in place of
financial settlement” [20]. One common typology
provides greater definition by presenting five distinct
types of countertrade [4][14]. In addition to barter,
these include counterpurchase, offsets, switch
trading (or clearing accounts), and compensation (or
buybacks). Research reveals that historically firms
have used offsets and counterpurchasing far more
than barter and buyback, and switchtrading is by far
the least used of the five alternatives [6]. Though
some would argue that this list fails to include some
important variations of countertrade (e.g., clearing
arrangements and debt-equity swaps), it does
provide a useful framework for our area of study.
As background, we describe each of the five
categories below.
2.1 Barter
Barter is a noncash exchange, where one firm
exports a product or service and accepts a similar
payment from the importing firm. Perhaps the best
known illustration of this is PepsiCo’s exchange of
syrup and technology to make Pepsi products
available in the former Soviet Union which were
offset with the receipt of Stolichnaya vodka as in
kind payment [18]. However, this method has been
employed in the exchange of a variety of goods,
including Boeing jet aircraft for Saudi Arabian crude
oil and Caterpillar earth-moving equipment for
Venezuelan iron ore [6][12][23].
While these
particular transactions were successfully completed,
this is not always the case. As Hill [14] points out,
More firms use counterpurchase than barter
agreements, the former of which is best described as
a reciprocal buying contract [11]. Under this
arrangement, an exporter sells products to an
importer with the understanding that the exporter
will use all or part of the cash received to purchase
goods or services from the importer at a specified
time in the future. However, the contract is often
written in such a way that the nature of the goods
and/or services is determined in advance. This type
of contract is often used by firms trying to penetrate
new markets in developing countries [4]. And as
Verzariu [28] notes, the bulk of counterpurchase
transactions "has involved mostly counterdeliveries
of raw materials and semiprocessed commodities
rather than finished goods, since the former are more
easily marketable."
2.3 Offsets
A third form of countertrade is the offset, which is
another type of reciprocal buying agreement. As
with a counterpurchase, offsets require an exporter
to buy or arrange to sell products or services offered
by the importer [28]. However, this agreement is
different in that the exporter can fulfill the offset
requirement with a firm other than the initial
importer (as along as it is from the same country).
This provides greater flexibility to the exporter since
it increases the range of firms and products/services
with which the exporter can work and still fulfill the
requirements of the offset agreement. However,
offsets are often used in transactions involving
governments, and thus the exporter may be
constrained to shape the agreement to suit national
interests. For example, Beamish, Killing, Lecraw,
and Crockell [2] mention the case of Raytheon
Canada which was able to sell sophisticated air
traffic control equipment to the South Korean
government only after they agreed to offset the
purchase with products that supported the country’s
five-year strategic plan. Thus, the offset may still
not provide the flexibility that an exporter would like
when entering such a contract.
2.4 Switchtrading
Switchtrading occurs when a third-party trading
house becomes involved in the exchange. If an
exporter ends up with countertrade credits that it
does not wish to use, it can always sell them to a
trader, who will then resell the credits to a firm that
can make better use of them. Though not used often
[6], firms know the existence of these intermediaries
may take some of the risk out of countertrade since
they will find potential buyers for credits the
exporter cannot use.
2.5 Compensation
Finally, compensation (or buyback) involves a firm
that builds a plant in another country and then
receives compensation in the form of a percentage of
the production of that facility.
This type of
countertrade seems to be most common when doing
business with Eastern European companies [4].
Countertrade is more than just pure barter.
Instead, it is a multidimensional concept, and that
fact opens the way to sophisticated options for
creative trade contracts. Since this is the case, firms
will excel in countertrade only if they are flexible
enough to accommodate the unique demands of this
form of trade. However, factoring countertrade into
models of international business is mere academic
exercise if the opportunity to engage in such trade is
restricted. But this is not the case—the use of
countertrade is rising. We outline the factors
underlying this trend in the next section.
3 Countertrade Trends
Countertrade predates the 13th century arrival of
Marco Polo in the Far East, but it seems to have
come of age during the 1980s as many companies
from developed and developing countries used this
method to complete international transactions [21].
Some view this trend as a regression to a more
primitive way of conducting business and the World
Bank and International Monetary Fund both
discourage it; nonetheless, its use in on the increase
[4][15]. We offer several explanations for this trend.
The primary motivation for engaging in
countertrade is “to gain an export opportunity where
none existed before.” In other words, such contracts
allow the firm to grow its international business and
increase its profits. They also offer additional
advantages such as increasing market diversification,
building goodwill, obtaining inexpensive raw
materials, and penetrating markets [21]. These
motivations spawn interest in counter-trade by
providing a “pull” to get firms involved.
But there are also “push” factors that encourage
the use of countertrade and thus promote its growth.
For example, shortages of hard currency, lethargic
export activity, trade deficits, and tight credit have
left many developing and planned economies with
few alternatives to obtain the capital goods and
services that are very much in demand. As Pearson
and Forker [24] observe, “countertrade is an
important marketing tool because it enables firms to
overcome trade barriers, obstacles of inconvertible
currencies and borrowing constraints, and to enter
otherwise saturated markets.”
In some cases,
countertrade may be the only possible means to trade
[25]. Furthermore, countertrade exchanges usually
do not register in international payment accounts,
which helps less developed countries with high
exchange rates sell goods without upsetting
domestic prices. These conditions promote the
continued increase in countertrade activity.
Trade trends in two regions of the world—
Russia and Asia—may explain most of the surge in
countertrade in recent years. In no country is the
value of countertrade more apparent than in Russia.
Due to its vast natural resource endowments and its
economic instability, Russia is a prime candidate for
such arrangements. In an effort to stabilize the ruble
and ensure coverage of foreign debt obligations,
Boris Yeltsin issued foreign exchange regulations in
the early 1990s and later banned hard currency sales.
These changes left Russian companies with fewer
resources and discouraged foreign investment—a
fertile climate for countertrade activity.
Though Asia’s situation is quite different, the
resulting boost to countertrade is just as evident. As
Kotabe [16] points out, China’s currency
devaluation in 1994 triggered a financial crisis that
continues to ripple through the region’s economies.
Thailand was hit hard in 1997, and neighboring
economies anticipated—and in many cases,
experienced—similar economic crises. Devalued
currencies and tight monetary policies (required by
the IMF) made countertrade an attractive alternative.
What are the potential outcomes of these events?
More than likely, countertrade will continue to grow
in popularity. The trend certainly received a boost
starting in the mid-1990s when emerging economies
in areas such as the Near East, Southeast Asia, and
South Africa enacted new countertrade requirements
for civilian procurement [28]. At the same time,
however, those interested in striking noncash deals
must tap a limited pool of willing participants in
western economies, which will require greater
flexibility on the part of foreign importers [23]. In
turn, this flexibility should lead to smaller contracts
(indeed, Hill [14] mentions completed transactions
involving less than $250,000). This trend portends
well for smaller firms, especially more “fleet-offoot,” entrepreneurial competitors.
4 Entrepreneurial Firms Uniquely
Positioned For Countertrade?
Through the lens of the resource based view, firms
are considered collections of resources that are
difficult to copy. Resources are defined as the set of
tangible and intangible assets that are linked with the
firm on a relatively permanent basis. The resource
based lens calls for decision-makers to be seen as
rational agents. In this context, individuals make
decisions regarding the selection and accumulation
of particular resources that are then expected to yield
competitive advantages.
In turn, competitive
advantages are the pathway through which the firm
earns above-average rates of return on its
investments. Decisions of this type are seen as
economically rational since they are made within the
decision makers’ constraints from limited data,
cognitive biases, and causal ambiguity [22].
Firms able to combine resources in meaningful,
idiosyncratic (i.e., heterogeneous) ways can expect
to gain advantage in the marketplace relative to their
counterparts who are either unable or unwilling to
combine their resources in ways that facilitate the
creation of value [10][13]. The collection and use of
resources that are valuable, rare, imperfectly
imitable and nonsubstitutable is expected to result in
enduring variations across firms [1]. Moreover, the
use of these types of resources is the capability that
permits the firm to formulate and implement valuecreating strategies across time and markets [17].
The strategic management literature, which seeks
to explain differential firm performance, argued that
large firms have a comparative advantage over their
smaller rivals. Often these advantages derive from
economies of scale, market power, and entry
barriers. However, as noted by Dean, Brown, and
Bamford [9], contributions and insights from several
sources, including Porter [27] and Birch [3] altered
the assumption of uniform superiority of large over
small firms. In essence, Porter recognized the ability
of focused strategies to achieve superior returns, thus
questioning the conclusion that small size
automatically results in a competitive disadvantage.
Birch’s classic finding that small firms are major
stimulators of economic development also
highlighted the significance of small firms as social
constructions that may not be disadvantaged relative
to their large counterparts.
Through sophisticated theoretical models and
empirical methods, researchers are expanding our
knowledge regarding the strategic advantages of
small, and especially entrepreneurial, firms. In their
study of competitive dynamics, Chen and Hambrick
[8] recognized that competitive actions and
responses differ by firm size. Based on the evidence
that smaller firms in their sample were speedier,
more active in their initiation of competitive
challenges, and more secretive in executing their
challenges, these researchers concluded that
organizational size shapes the nature of competitive
dynamics. Results from other studies show that
strategies chosen by entrepreneurial firms affect
performance outcomes (e.g., ROA, growth) based on
industry conditions [7][19].
Following a comprehensive literature review,
Brush & Chaganti [5] revealed a foundation through
which we can better understand “…differences in
performance of entrepreneurial ventures depending
on strategy, the industry, and the entrepreneur(s)”
(page 235). As suggested by this foundation, Brush
& Chaganti [5] discovered that for entrepreneurial
service and retail firms, relationships among
strategic variables vary depending on the one
selected as a key indicator of the “goodness” of the
firm’s performance. In terms of our arguments
about countertrade, these researchers’ results suggest
that some configurations of the entrepreneurial
venture’s resources can be expected to lead to
competitive success.
Dean et al. [9] argued that large and small
entrepreneurial firms differ fundamentally in the
resources that they control.
Moreover, these
differences were expected to allow smaller firms to
outperform their larger competitors in particular
industry settings. Supporting this logic, Dean et al.
[9] found that small firms exploit competitive
advantages in terms of speed, strategic flexibility,
and a niche-filling capacity to outperform larger
companies. In contrast, large firms compete on the
advantages they possess as a result of what are often
significant resource bases.
These resources
(primarily financial and human) often allow large
firms to exert bargaining power over suppliers and
customers and to exploit patents in the marketplace.
The findings that we have discussed suggest that
large and small entrepreneurial firms are affected
differently by an industry’s structural characteristics.
Extending this further, these findings can be
interpreted to argue that the entrepreneurial
venture’s advantages of speed, flexibility, and an
ability to satisfy the particular needs of specific
market segments or customers may position it
uniquely to achieve competitive success through
countertrade practices. Stated somewhat differently,
advantages grounded in speed, flexibility and market
segmentation may be more relevant when engaging
in countertrade activities as compared to advantages
that exist primarily because of the large firm’s “deep
pockets” [9]. Because of these possibilities, in the
future, countertrade may be considered the domain
of the entrepreneurial firm.
5 A New Model of Countertrade and
Entrepreneurial Firms
These thoughts lead to a model of countertrade for
entrepreneurial firms, especially those that are
expanding their international involvement [12]. As
Verzariu [28] observes, expanding opportunities
abroad will require firms to be creative in the
business proposals they tender, developing
customized countertrade agreements where these
will procure projects that would not otherwise take
form. This creates more room for smaller and more
entrepreneurial firms in international trade. That is,
entrepreneurial firms are more likely than their
nonentrepreneurial counterparts to have the
flexibility required to consummate countertrade
deals. Though they lack the deep pockets of their
larger competitors (a disadvantage in international
business), entrepreneurial firms may, on balance,
have greater competitive advantage in the world of
countertrade owing to their commercial agility.
Integrating the dynamics described above, we
propose an initial model of countertrade for
entrepreneurial firms that recognizes two primary
advantages that derive from their characteristic
flexibility. First, they can exploit a broader range of
opportunities in the global marketplace since they
can adapt to the unique demands of countertrade
arrangements. Large, bureaucratic firms are likely
to forego such contracts if they are committed to a
business model that cannot accommodate stipulated
requirements. Second, entrepreneurial firms can
often demand a premium price for goods or services
rendered under a countertrade deal, profiting from
their strategic flexibility by accepting trade
conditions that others find unacceptable. In other
words, countertrade exigencies limit the number of
interested competitors (supply), which then puts
upward pressure on prices since the need (demand)
for a countertrade partner remains constant.
6 Conclusion
The dynamics outlined above engender competitive
advantage for the entrepreneurial firm, which
translates into favorable outcomes such as enhanced
profit margins and increased market share [28]. As
the new competitive landscape continues to unfold,
we may find that we are entering what is indeed the
entrepreneurial millenium–even in countertrade.
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