chapter 14

International Business: The New Realities, Global Edition, 3rd Edition

by

Cavusgil, Knight, and Riesenberger

Chapter 14


Learning Objectives

1. An overview of foreign market entry strategies2. Internationalization of the firm3. Exporting as a foreign market entry strategy4. Managing export-import transactions5. Payment methods in exporting and importing6. Export-import financing7. Identifying and working with foreign intermediaries8. Countertrade: A popular approach for emerging markets and developing economies


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. The firm receives other products in payment.


Foreign Market Entry Strategies (cont’d)

• 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.


Foreign Market Entry Strategies (cont’d)

• 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 others have used franchising to internationalize worldwide.


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


Factors to Consider When Choosing Entry Strategy (cont’d)

• 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


Factors to Consider When Choosing Entry Strategy (cont’d)

• The value-adding activities the firm is willing to perform itself 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


Classification of Entry Strategies Based on Degree of Control for Focal Firms


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 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.


Characteristics of Internationalization (cont’d)

• 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 opted for a gradual approach partly due to limited resources and a lack of appropriate knowledge on how to do international business. (However, recently, some firms – born globals – internationalize pretty quickly.)


Typical Stages of Company Internationalization


Overview on 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 exporting.• Most exports involve merchandise.• Export channels:o Independent distributor or agent; oro Firm’s own marketing subsidiary abroad


International Sales Intensity of Various U.S.-based Industries


Services are Exported as Well

• Examples: architecture, education, banking, insurance, entertainment, 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.


Advantages of Exporting


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.


A Systematic Approach to Exporting

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A Systematic Approach to Exporting


Export Intermediation Options

• Indirect Exporting: Contracting with an intermediary in the firm’s home country to perform all export functions, often an export management or trading company. Common among firms new to exporting.

• Direct Exporting: Contracting with intermediaries in the foreign market, such as distributors or agents, to perform export functions. They 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.


Alternative Organizational Arrangements for Exporting


Country Realities• The performance of Germany’s economy is impressive,

with exports leading the way. • Top export destinations include emerging markets such

as China, India, and Brazil. • In such markets, demand for German-made products is

at an all time high, especially for high-value goods such as cars, heavy machinery, and power plants.

• Exporting helps reduce German unemployment, which recently declined to its lowest level in 20 years – about 7% percent.

• Exporting helps Germany weather poor economic conditions in Europe.


Importing

The United States imports enormous amounts of goods from China. As one of the largest U.S. importers, Walmart alone accounts for about 10% of the country’s imports of toys and other products from China, worth more than $20 billion a year.


United States: Top Trading Partners

Sum of merchandise exports and imports, in billions of U.S. dollars


Canada: Top Trading Partners



China: Top Trading Partners



European Union: Top Trading Partners



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.


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.


Exporting and the Global Economy

Exporting is the entry strategy responsible for global trade and generates enormous earnings for nations. Exporting serves the internationalization goals of firms, both small and large. Aircraft manufacturers such as Airbus and Boeing are among the world’s leading exporters.


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.


Examples of INCOTERMS


Exports and Shipping

Export transactions generally ship products through seaports and other maritime facilities. This container ship is passing through the Panama Canal.


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 a 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.


Letter of Credit Cycle


Sources of Export Financing

• Commercial banks

• Distribution channel intermediaries

• Buyers

• Suppliers

• Government assistance programs (e.g., Export-Import Bank, Small Business Administration)


Sources of Information to Identify Potential Intermediaries

• Country and regional business directories such as Kompass (Europe), Bottin International (worldwide), Japanese Trade Directory, as well as 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 OrganizationCopyright © 2014 Pearson Education

• 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.

Working with Foreign Intermediaries


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


Criteria for Evaluating Export Intermediaries


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 1/3 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.Copyright © 2014 Pearson Education

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, contingent on a second contract in which the seller agrees to purchase goods from the buyer.

• Buy-back agreement: Seller supplies technology or equipment to construct a facility and receives payment in the form of goods produced by it.


Examples of Countertrade

• Boeing traded aircraft for oil in Saudi Arabia.• Caterpillar received caskets in Colombia and wine in

Algeria in exchange for earth-moving 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.


Overview on Countertrade


chapter 14

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