CHAPTER THIRTEEN
EXPORT AND IMPORT STRATEGIES
OBJECTIVES
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To introduce the ideas of export and import
To identify the elements of export and exporting strategies
To compare direct and indirect selling of exporting
To identify the elements of import and import strategies
To discuss the types and roles of third-party intermediaries in exporting
To discuss the role of countertrade in international business
CHAPTER OVERVIEW
The first part of Chapter Thirteen is devoted to an examination of export and import
strategies. Table 13.1 identifies the steps to consider when developing an export (or
import) business plan. Next, the roles of a wide variety of third-party intermediaries are
discussed. The chapter concludes with a discussion of the major issues related to export
financing, including the use of countertrade as a form of payment mechanism.
CHAPTER OUTLINE
OPENING CASE: Grieve Corporation—A Small Business Export Strategy
A small firm located near Chicago, Grieve Corporation manufactures laboratory and
industrial ovens, furnaces, and heat processing systems for the U.S. market. Grieve began
losing business as (i) foreign competitors began to penetrate the U.S. market and (ii) its
customers began to move overseas and started sourcing locally. With the help of the
International Trade Administration of the U.S. Department of Commerce, Grieve was
able to identify potential Asian distributors. During a business trip to Asia, the president
of Grieve met with potential candidates and successfully recruited exclusive agents for
each country visited. Once Grieve had gained sufficient experience in the Asian market,
export activities were expanded to other regions. Moving into international markets has
proved to be a major factor in the firm’s continued growth and success.
Teaching Tip: Review the PowerPoint slides for Chapter Thirteen and select those
you find most useful for enhancing your lecture and class discussion. For additional
visual summaries of key chapter points, also review the figures and tables in the text.
I.
INTRODUCTION
Whereas exporting represent goods and services flowing out of a country, importing
represent goods and services flowing into a country. Exports result in receipts and
imports result in payments. Although export and import activities are a natural
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extension of distribution strategy, they also include elements of product, promotion
and pricing factors, and decisions. Both exporting and importing entail a lower level
of risk than foreign direct investment, but while exporting offers less control over the
marketing function, importing offers less control over the production function. This
chapter will focus primarily on the issue of a company’s motivations for and
development of an export strategy (Figure 13.1).
II. EXPORT STRATEGY
A firm’s choice of entry mode depends on various factors, such as the ownership
advantages of the firm, the location advantages of the market and the
internalization advantages of specific assets, international experience and/or the
ability to develop differentiated products. In general, firms that possess few
ownership advantages either do not enter foreign markets, or they use the lowerrisk entry modes of exporting and licensing. Still in all, the decision to export must
fit a company’s overall strategy and take into account global concentration (the
presence of relatively few major players), synergies (the gains from sharing
corporate expertise on a global basis) and strategic motivations (the firm’s
competitive reasons to enter a given market).
A. Strategic Advantages of Exports
Companies export in order to increase sales revenues, achieve economies of
scale in production, diversify markets, and minimize risk. All of these
objectives are ultimately motivated by the potential for greater profitability.
Companies can often sell their products at a greater profit abroad than at home
due to differences in the competitive environment or differences in stages in the
product life cycle in foreign markets. Government actions at home and abroad
in such areas as tax policy can also affect profitability and stimulate exporting.
B. Characteristics of Exporters
Research conducted on the characteristics of exporters has resulted in two basic
conclusions: (i) the probability of exporting increases with size of company
revenues and (ii) export intensity (the percentage of total revenues generated by
exports) is not positively correlated with company size. Factors such as the risk
profile of management and the nature of industry competition are just as
important as firm size.
C. Stages of Export Development
Firms tend to move through three phases of export development: preengagement, initial exporting, and advanced exporting. As they do so, they tend
to (i) export to more countries and (ii) expect exports to grow as a percentage of
total sales. In addition, they also tend to (iii) diversify their markets to more
distant countries and (iv) move into environments that are increasingly different
from those of their home countries. (Figure 13.2).
D. Pitfalls of Exporting
The operational mistakes associated with exporting can be very costly. Most
new exporters stumble once or twice before experiencing consistent success.
Export specific problems include:
• Failure to obtain qualified export counseling in developing a plan to guide
export expansion
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•
Insufficient commitment to exporting by top management to overcome the
initial difficulties and financial requirements of exporting.
• Misestimating the complexity and costs of shipping and customs clearance
to export transactions.
• Poor selection of overseas agents or distributors
• Chasing orders from around the world instead of establishing a profitable
operations and management growth.
• Neglecting export markets and customers when the domestic market booms.
• Failure to treat international distributors on an equal basis with domestic
counterparts.
• Unwillingness to modify products to meet other countries’ regulations or
cultural preferences
• Failure to print service, sales, and warranty messages in locally understood
languages.
• Failure to consider use of an export management company or other
marketing intermediary when the company does not have personnel to
direct specialist export functions
• Failure to prepare for disputes with customers; at that point no court system
can be called upon as a last resort (other than international arbitration,
which is seldom a viable alternative for small or midsize exporters).
E. Designing an Export Strategy [See Figure 13.3, Table 13.1]
To design an effective export strategy, managers must:
• Assess the company’s export potential by examining its opportunities and
resources.
•
Obtain expert counseling on exporting. Many governments provide export
assistance for companies in their countries. Banks can provide specialized
help with such things as letters of credit (L/Cs), covered in detail in chapter
18.
• Select a market or markets.
• Formulate and implement an export strategy.
III. IMPORT STRATEGY
The import process involves strategic and procedural issues that basically mirror
those of the export process.
A. Strategic Advantages of Imports
There are two basic types of imports: industrial and consumer goods to
independent individuals and companies and intermediate goods and services that
are part of the firm’s global supply. The three basic types of importers are those
that:
• look for any product around the world that will generate a positive cash
flow
• look to foreign sourcing as a means to minimize product costs
• use foreign sourcing as part of their global supply chain strategy.
An import broker is a certified specialist who obtains required government
permissions and other clearances before forwarding the necessary documents to
the carrier(s) of the goods.
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B. The Role of Customs Agencies
Customs reflect a country’s import and export procedures and restrictions. The
primary duties of a customs agency are the assessment and collection of all
duties, taxes and fees on imported products, the enforcement of customs and
related laws and the administration of certain navigation laws and treaties.
National customs agencies are increasingly involved in dealing with smuggling
operations and preventing foreign terrorist attacks. A customs broker can help an
importer minimize duties by (i) valuing products in such a way that they qualify
for more favorable treatment, (ii) qualifying for duty refunds through drawback
provisions, (iii) deferring duties by using bonded warehouses and foreign trade
zones and (iv) limiting liability by properly marking an import’s country of
origin.
C. Import Documentation
The import documentation process can be both complicated and cumbersome.
Without proper documentation, customs agencies will not release shipments.
Documents are of two types: (i) those that determine whether customs will
release the shipment and (ii) those that contain the information necessary for
duty assessment and data gathering purposes. At a minimum, the required
documents would include an entry manifest, a commercial invoice and a packing
list.
POINT-COUNTERPOINT:
A Dirty Dilemma—Exporting Hazardous Waste
POINT: An estimated 20 million computers become obsolete each year in the U.S., with
more than 200 tons of this potentially hazardous material being exported to developing
countries like China, India, Bangladesh, or Pakistan for re-use, recycling, or disposal.
Disposal costs for hazardous waste in developing countries are fractions of the cost in
wealthier countries, and exporting the waste allows manufacturers to take responsibility
for their products from cradle to grave.
COUNTERPOINT: Hazardous waste exports have created dangerous recycling
industries in many countries. Electronic waste is a mixture of more than a thousand
chemicals, many of which are toxic. Recyclers in developing countries also often have
appalling and dangerous working conditions for their employees and create harmful
contaminated water runoffs and air pollution in the process. As of mid-2005, 148
countries had ratified the Basel Convention which adopts aggressive measures limiting
the export of hazardous wastes. The United States, which generates approximately 60%
of the world’s hazardous waste, is the only industrial country in the world that has yet to
endorse the Basel Convention.
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IV. THE EXPORT PROCESS
Direct exports represent products sold to an independent party outside of the
exporter’s home country; indirect exports are first sold to an intermediary in the
domestic market, who then sells the products in the export market. While services
are more likely to be exported on a direct basis, goods are exported via both avenues.
A. Indirect Selling
Indirect selling, i.e., selling products to or through an independent domestic
intermediary, is carried out via a variety of third-party intermediaries-independent (unrelated) firms that facilitate international trade transactions by
assisting both importers and exporters. They may perform any or all of the
following functions:
• Stimulate sales, obtain orders and do market research.
• Make credit investigations and perform payment-collection activities.
• Handle foreign traffic and shipping.
• Act as support for the company’s overall sales, distribution, and advertising
staff.
The major types of indirect intermediaries are the export management
company (EMC), the export trading company (ETC), and export agents,
merchants, or remarketers.
B. Export Management Companies
An export management company [EMC] is a firm that either acts as a
manufacturer’s agent or buys merchandise from manufacturers for international
distribution. EMCs generally operate on a contractual basis, provide exclusive
representation in a well-defined foreign territory and act as the export arm of a
manufacturer. Often, export management companies are small and specialize
according to product, function and/or market area.
C. Export Trading Companies
An export trading company [ETC] is somewhat like an export management
company, but its primary purpose in becoming involved in international trade as
an independent broker is to match domestic exporters to foreign customers.
Export trading companies that are based in the United States may be exempt
from antitrust provisions in order to allow them to penetrate foreign markets by
collaborating with other U.S. firms.
D. Foreign Trading Companies
While the original functions of a trading company were to handle the
paperwork, financing, transportation and storage services related to import and
export transactions, many have expanded the scope of their operations to include
production and processing facilities and operations, as well as fully integrated
marketing systems. In 1995, three large Japanese trading companies (Mitsubishi,
Mitsui, and Itochu) were the top three companies on Fortune’s Global 500 list.
Due to the implementation of new accounting rules that significantly lowered
trading companies’ revenues, by 2004 none of these companies remained
anywhere near the top of Fortune’s list.
E. Direct Selling
Direct selling, i.e., exporting through sales representatives to distributors,
foreign retailers, or final end users, gives exporters greater control over the
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marketing function and offers the potential to earn higher profits as well.
Whereas a sales representative usually operates on a commission basis, a
distributor is a merchant who purchases goods from a manufacturer and resells
them at a profit. Companies evaluating potential foreign sales representatives or
distributors usually examine:
• The size and capabilities of its sales force
• Its sales record
• An analysis of its territory
• Its current product mix
• Its facilities and equipment
• Its marketing policies
• Its customer profile
• The principles it represents and the importance of the inquiring company to
its overall business
• Its promotional strategies
F. Direct Selling Through the Internet
Electronic commerce is increasingly important in exporting—7% of revenues
from worldwide trade in 2002 were derived from e-commerce and such trade is
expected to exceed 20% of global trade in 2007. E-commerce is easy to engage,
provides faster and cheaper delivery of information, generates quick feedback
on new products, improves customer service, accesses a global audience, levels
the field of competition, and supports electronic data interchange (EDI) with
both suppliers and customers.
G. Export Documentation
Direct selling requires the exporter to complete many documents that regulate
international trade. Depending on the situation, these documents may include:
• A pro forma invoice—an invoice from the exporter to the importer that
outlines the selling terms, price, and delivery if the goods are actually
shipped.
• A commercial invoice—a bill for the goods from the buyer to the seller.
• A bill of lading—a receipt for goods delivered to the common
carrier for transportation.
• A consular invoice—sometimes required by countries as a means of
monitoring imports.
• A certificate of origin—indicates where the products originate and usually
is validated by an external source.
• A shipper’s export declaration—used by the exporter’s government to
monitor exports and to compile trade statistics.
• An export packing list—itemizes the material in each individual package,
indicates the type of package, and is attached to the outside of the package.
H. Foreign Freight Forwarders
A forward freight forwarder is a foreign trade specialist who deals in the
movement of goods from producer to customer, and is the largest export
intermediary in terms of value and weight of products managed. Even export
management companies may use the specialized services of foreign freight
forwarders. The typical freight forwarder is the largest export intermediary in
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terms of the weight and value of cargo handled. Some may specialize in the type
of mode used, others in the geographical area served. The movement of goods
across a variety of modes from origin to destination is known as intermodal
transportation. Three recent trends leading to a preference for air freight over
ocean freight are: (i) the need for more frequent shipments, (ii) lighter-weight
shipments and (iii) high-value shipments.
LOOKING TO THE FUTURE:
The Technology of Trade
Although global trade continues to increase, the process of trade continues to get more
complex. The heightened importance of national and international security, the
formation of complex national, regional, and global trade arrangements, and the
increasing list of international regulations makes international trade more of a challenge
than ever before. On the other hand, advances in transportation and communications
systems steadily facilitate export growth and make it easier for companies to reach
international markets. Electronic data interchange allows companies to synchronize their
importing and exporting activities with other companies in real time. It also allows
companies to connect with their foreign customers in new ways. Traditional trade
intermediaries like EMCs and ETCs are growing in technological sophistication, and new
intermediaries like Federal Express and UPS are improving the efficiency and
effectiveness of export and import operations. These intermediaries often allow exporters
to integrate mechanisms like online shopping, online order tracking, consolidated billing,
product returns, warranty claims, parts exchanges, and reverse logistics.
I.
Sources of Assistance
Government agencies such as the Department of Commerce in the United States
are particularly useful resources for export assistance. Table 13.2 outlines types
of trade information available by source, including government agencies, trade
associations and trade groups, and export intermediaries. In Japan, offices such
as the Small and Medium Enterprise Agency, Agency of Industrial Science and
Technology, and the Ministry of International Trade and Industry (MITI) all are
available to assist exporters. Agencies in the United States such as the Ex-Im
Bank and Small Business Administration can help international traders obtain
financing for their activities. Most states and several cities fund and operate
export financing programs as well.
V. COUNTERTRADE
Countertrade involves a reciprocal flow of goods and services. It provides a means
to complete a transaction when a firm (or government) does not have sufficient
convertible currency to pay for imports, or it simply does not have sufficient funds.
Countertrade transactions can be divided into two basic types: (i) barter (based on
clearing arrangements used to avoid money-based exchange) and (ii) buybacks,
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offsets and counterpurchase (all of which are used to impose reciprocal
commitments).
A. Barter
Barter occurs when goods or services are traded for other goods and services,
i.e., it represents a non-monetary transaction. (Barter is not only the oldest form
of countertrade, it is the oldest form of any type of trade transaction.)
B. Buybacks
Buybacks are products the exporter receives as payment that are related to or
originate from the original export. These arrangements are quite common in the
sale of technology, licenses, and even complete “turnkey” factories.
C. Offset Trade
Offset trade occurs when the exporter sells goods or services for cash but then
helps the importer find opportunities to earn hard currency. Direct offsets
include generated business that directly relates to the export; indirect offsets
include generated business unrelated to the export. Figure 13.4 shows how one
might structure an offset transaction.
CLOSING CASE: Alibaba.com
Alibaba.com is a web site that facilitates transactions between importers and
exporters around the world. Other web sites that have created similar online
marketplaces include www.global.kita.net focused on products from Korea,
www.trade-India.com for Indian products, and www.europages.com for Europe.
These electronic trading venues have changed the mechanics of importing and
exporting and opened up tremendous opportunities, especially for smaller
enterprises. The impact has been especially dramatic for small Chinese
manufacturers, who now have ready access to a global market for their products.
Questions
1.
List, in separate columns, the benefits and costs of using sites like Alibaba’s to trade
internationally. What does your analysis say to companies like Grieve (in our
opening case) as they think about their export strategy?
Benefits
Costs
Low cost
Listings are free
Access to many suppliers/buyers
Searches are free
Quick transaction time
Personalized Web pages cost additional
More transparency in transaction
Certification costs some
Lower risk of fraud
Easy to make contacts with SMEs
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Companies like Grieve need to make web sites such as Alibaba.com a central part of
their export strategy. The benefits of using these services overwhelm the costs.
2.
Is it reasonable to speculate that eventually most trade between small- and mediumsized firms might take place in the context of sites like Alibaba.com? If so, does that
influence your inclination to consider importing and exporting?
With the rapid growth of the use of these sites and the corresponding increase in
trade among SMEs, it is very reasonable to speculate that eventually most trade
between SMEs might take place in this context. My inclination to consider
importing and exporting rises dramatically with powerful tools such as these at my
disposal.
3.
Visit www.alibaba.com, www.trade-india.com, and www.europages.com. Compare
and contrast these Web sites.
Alibaba has a Chinese emphasis and focus, while Trade-India is of course directed to
India and Europages to Europe. Of the three, Alibaba has the most broad appeal, but
all are very useful. Trade-India gives more direct access to product catalogs for
some companies, but does not have the certification and authentication features of
Alibaba. Also, the Alibaba contact templates are much more user friendly than both
Trade-India and Europages. Europages is available in many different languages,
while the others are more limited and are mostly in English.
4.
Visit www.alibaba.com, go to “Advanced Search,” and enter the product you seek in
the relevant box. Select required criteria and click on “Search.” Review the list of
companies that qualify and find a suitable one. Analyze this process for ease,
usefulness, and potential value.
This process is very easy, useful, and has tremendous potential value. It takes only
seconds to find a long list of potential suppliers. One drawback is the urge to contact
too many suppliers to find the best possible terms. The method of contact is made
very easy by the use of templates and drop-down menus that help to standardize
requests. If the suppliers will respond to these requests in a timely manner, the
process has huge potential value.
5.
How transparent do sites like Alibaba.com make the import-export transaction?
Would you still worry about fraud?
These sights increase transparency and reduce the risk of fraud. Alibaba allows
suppliers to post information about their companies, including video tours of their
facilities. In addition, Alibaba has developed the TrustPass designation. In order to
obtain this designation, companies must pass an authentication and verification test
from a third-party credit agency. Also available is the “Gold Supplier” designation,
which also requires third party verification of trustworthiness. These mechanisms
greatly reduce the risk of fraud, but do not eliminate it entirely. Mechanisms such as
letters of credit should still be used to safeguard transactions from commercial risk.
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WEB CONNECTION
Teaching Tip: Visit www.prenhall.com/daniels for additional information and
links relating to the topics presented in Chapter Thirteen. Be sure to refer your
students to the on-line study guide, as well as the Internet exercises for Chapter
Thirteen.
_________________________
CHAPTER TERMINOLOGY:
letters of credit (L/Cs), p. 460
import broker, p. 463
export management company,
p. 467
ownership advantages, p. 465
location advantages, p. 465
internalization advantages, p. 465
direct export, p. 466
indirect export, p. 466
export trading company, p. 467
sales representatives, p. 469
distributors, p. 469
direct selling, p. 469
_________________________
pro forma invoice, p. 470
commercial invoice, p. 470
bill of lading, p. 470
consular invoice, p. 471
certificate of origin, p. 471
shipper’s export declaration, p. 471
export packing list, p. 471
foreign freight forwarder, p. 471
intermodal transportation, p. 471
countertrade, p. 474
offset trade, p. 475
barter, p. 475
buybacks, p. 475
ADDITIONAL EXERCISES: Export and Import Strategies
Exercise 13.1. Research has shown although the largest firms in the world also tend
to be the world’s largest exporters, export intensity is not positively correlated with
the size of a firm. Begin a discussion by asking students to explore the reasons for
this. Then, ask students to discuss the levels of export intensity they would expect to
find with respect to a variety of industries. Be sure they explain their reasoning and
compare differences across industries.
Exercise 13.2. A major barrier to international trade activities is the issue of trust.
Even when importers and exporters are known to each other, there is a high degree
of risk associated with international trade transactions, i.e., exporters want to be sure
they’ll be paid and importers want to be sure they receive the full value of an order.
Ask students to discuss the reasons letters of credit and the various forms of a draft
help both importers and exporters overcome this challenge. Under what conditions
might each instrument be preferred?
Exercise 13.3. Assign each student (or team of students) a given product and foreign
country market. Then have the students (or teams) consult the National Trade Data
Bank to collect information useful in developing a strategy for exporting the specific
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product to the designated country market. Discuss the information the students find
and its relevance to exporting in class. Be sure to compare information across
products and countries.
Exercise 13.4. Ask each student (or team of students) to choose a product to import
to the United States from a foreign country market. Are there regulations regarding
their chosen product that they would have to be aware of before importing? Have
them look up the tariff for the product. Tariffs can be found on the United States
International Trade Commission web site (www.usitc.gov).
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