countertrade: reactive or proactive?

J BUSN RES 198X:16:327-335

327

Countertrade: Reactive or Proactive?

David Shipley Bill Neale llniversity of Bradford Shejjield City Polytechnic

The conventional treatment of countertrade as a “second best” trading option is attacked as being incomplete and misleading in a study of large British companies. There is evidence that countertraders meet with problems and that noncountertraders misunderstand the effects. However, the problems are not insurmountable, and findings demonstrate considerable countertrade benefits. Conditions for profitable countertrading are seen to be improving, and Western companies are en- couraged to proactively seek out countertrade opportunities.

Introduction

The main purpose of this article is to encourage a more proactive approach to countertrade. It now occurs in numerous firms, industries, and countries (Bates, 1986; Wills et al., 1986) and represents between 8% and 30% of total world trade (DTI, 1986; OECD, 1981; Verzariu, 1985). Countertrade-goods for goods--cre- ates many major benefits for Western firms (Cho, 1987; Khoury, 1984; Verzariu, 1985; Yoffie, 1984). For example, it boosts competitiveness, finds attractive input sources, and facilitates fuller capacity utilization. Most important, however, since it is highly sought after in the enormous but semiclosed markets of China, the Eastern bloc, South America, and the Third World, countertrade provides major growth opportunities for Western firms.

Despite the powerful benefits, however, the conventional view of countertrade, based on a preoccupation with risk minimization, discourages firms from seeking out countertrade opportunities. It treats countertrade as a “second best” alternative and holds that Western firms do and should prefer payment in cash and secured credit and accept countertrade terms only when relative demand and supply conditions strongly favor customers seeking them.

Many motives underpin customer demands for countertrade. They are made in cases of international credit or hard currency shortages and high value transactions or when customers or governments want to access Western marketing channels, avoid balance of payments problems, mask dumping, offload poor quality goods, or push products in world excess supply (Huszagh and Huszagh, 1986; Kaikati, 1981; Neale and Shipley, 1988a; Weigand, 1979).

Western exporters prefer hard currency or credits to payment in goods, since

Address correspondence to: David Shipley, University of Bradford, Management Centre, Emm Lane, Bradford BD9 4JL, England.

Journal of Business Research 16, 327-335 (1988) 0 1988 Elsevier Science Publishing Co., Inc. 1988 52 Vanderbilt Ave., New York, NY 10017

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328 J BUSN RES 1988:16:327-335 D. Shipley and B. Neale

currency is more liquid, more certain, and less bothersome. If, though, there are serious supply-side problems such as widespread surplus capacity and/or fiercely competitive rivals, Western exporters may accept customer demands for countertrade terms so as to meet their own (volume) objectives. Thus, in the conventional explanation, it is environmental adversity that in part obliges customers to demand countertrade terms and that in full forces Western suppliers to accept them.

This conventional explanation is incorrect. Many Western firms do accept countertrade terms thrust upon them by foreign customers. However, the treatment is incomplete since it ignores the existence of domestic countertrade in Western countries. This is because many of the factors to which countertrade is ascribed are unique to or more visible in international trade, so that it is not considered in the domestic context. In practice, however, some of these factors, such as acute rivalry, flat demand, and large value transactions, do occur intranationally, and domestic countertrade is not uncommon.

The conventional approach is also misleading. While it does not actually advise firms to avoid countertrade entirely, it so strongly emphasizes caution and possible dangers that it biases Western companies against searching for profitable countertrade opportunities. As Weigand (1979) puts it, “Westerners usually enter into such arrangements reluctantly only after they are convinced traditional approaches are unworkable.”

This overly pessimistic approach is unjustified because, although countertrading does involve potential problems, these can be minimized or removed through good management (Cho, 1987; Paliwoda, 1981; Shipley and Neale, 1987). Furthermore, Westerners can hire from among numerous specialist countertrade brokers and agents to carry most of the risks involved (Neale and Shipley, 1988b). Hence, given the powerful benefits that countertrade provides, there is a strong case for Western companies to adopt a proactive philosophy to this mode of trading.

The sections below discuss data provided by countertraders and noncountertraders in a survey of large British companies. The first objective is to establish the existence of British domestic countertrade, while the second objective is to augment the threadbare empirical literature on the causes, benefits, and problems of countertrading and to examine reasons why some firms refrain from participating in it. The third objective is to show that noncountertraders seem to overstate the problems of countertrade relative to firms that actually experience them, and it is posited that this is a reason for their nonparticipation. The last objective is to show that there are good and improving reasons why many Western firms should adopt a proactive, initiating approach to countertrade.

Methodology

Countertrade exists in various forms ranging through barter, buybacks, compensation trade, switchtrade, and so on. These have been well discussed in the literature (Huszagh and Huszagh, 1986; Khoury, 1984; Paliwoda, 1986; Verzariu, 1985) and they are not elaborated here, since the main focus is on countertrade as a general phenomenon. Indeed, the working definition here is as brief and general as “the sale of goods or services from one party to another conditional on a sale in the opposite direction.”

Data were collected in a 1985 mail survey of marketing directors in the “Times

Countertrade: Reactive or Proactive? J BUSN RES 1988:16:327-335

Table 1. Regional Location of International Countertrade Customers

329

% of 35 British Countertraders

Eastern Europe 71

Africa 31

Far East 31

South America 23

Middle East 17

Australasia 14

Western Europe 11

North America 3

1000” largest British companies. The lo-page questionnaire included an introduc- tory letter, instructions on how to answer the questions, and clear definitions where technical terms could not be avoided. Anonymity and a copy of findings were offered to boost the response, although there was only one mailing. The questions sought information from both countertraders and noncountertraders in both overseas and domestic markets.

A high response rate was not expected owing to the quasi-conventional and sensitive nature of countertrading. However, there were 217 usable responses yield- ing a rate of 21.7%. Among these were 57 countertraders and 160 noncountertraders, representing 26.3% and 73.7% of all respondents. The sample includes the largest set of countertraders studied, and it is uniquely British, it uniquely includes domestic countertraders, and it uniquely allows analysis of views of noncountertraders.

Findings and Discussion

Location of Countertrade Partners

In separate questions, repondents were asked whether their companies countertrade in the British home market and overseas, and 22% and 35%, respectively, said they do. None of the respondents stated that their firms countertrade in both market categories. An explanation is that the questionnaire was in two sections, and many of the executives who responded had responsibility for either domestic or export markets and, having answered their part, may not have then channelled it on to another person to complete. If this is so, the number of domestic and/or export countertraders may be understated.

The international market countertraders were asked about the regional location of their countertrade customers. The response, presented in Table 1, shows that a majority of the firms countertrade with Eastern bloc nations. These markets are attractive to British firms since they offer growth opportunities and are relatively close geographically. Countertrade is common among these countries, and they may well be seeking countertrade terms with British firms to acquire imports despite having severe hard currency and international credit shortages (Verzariu, 1985; Paliwoda, 1981). Additionally, large proportions of the sample countertrade in various Third World and developing regions, while there is also some indication of countertrade with advanced nations. The results accord well with the U.S. empirical findings of Huszagh and Barksdale (1986), which suggest that Western

330 J BUSN RES 1988:16:327-335

D. Shipley and B. Neale

Table 2. Problems of International and Domestic Countertrade

International (N = 35) Domestic (N = 22)

% Mean’ Rank’ % Mean’ Rank’

No “in-house” use of goods offered by

customers 77 3.6 1 59 3.7 1 Time consuming negotiations x9 3.5 2 64 2.9 3 Complex negotiations 91 3.5 2 68 2.9 3 Difficult to resell goods offered by customer ‘S 80 3.4 4 55 3.3 2 Increases costs 94 3.3 5 36 2.9 3 Problems with “pricing” 89 3.3 5 59 2.x 7

Increases uncertainty generally 86 3.1 7 45 2.5 10 Brokerage costs and facilities needed 80 2.9 8 32 2.6 9 Customers’ negotiating strength 80 2.8 9 68 2.x 7

Customers become potential customers 49 2.3 IO 41 2.9 3 Other 6 4 0 0

‘Mean importance on a S-point scale where 1 = no importance and 5 = utmost importance -‘Rank determined by mean importance.

international countertraders generally are recognizing the need for and/or gains from broadening countertrade activities beyond its traditional Eastern bloc stronghold.

Problems Perceived by Countertraders

Although this paper challenges the excess caution and conservatism of the conventional “second best” treatment of countertrade, it does not deny the existence of pitfalls in countertrade itself. Rather, to identify the nature, prevalence, and importance of these, respondents were asked to evaluate various factors and show how far they were problems of countertrade for their firms by rating each on a scale ranging from “1, of no importance” to “5, of utmost importance.” The findings are shown in Table 2. Notably, the incidence and mean importance of each problem is higher in export markets than in the British market. This may suggest that countertrade is less troublesome in the home market because sellers are closer to customers enabling them to communicate their needs and problems more effectively and to administer tighter control over their own managers’ and their cutomers’ countertrade activities.

Many of the problems are interrelated. For example, countertrade negotiations are time-consuming, complex, and held with customers that enjoy negotiating strength. One reason for this last factor is that relative demand and supply conditions often favor customers in countertrade transactions. Also, although many Western exporters have only limited countertrade know-how, they are often re- quired to negotiate terms with very experienced, large, and powerful state buying agencies (Khoury, 1984; Pahwoda, 1981). These reasons may also partly explain why countertrade negotiations are long and complex. However, these two problems are also due to the difficulties of agreeing on rates of exchange, the ratio of currency to goods, the length of contract, and so on.

Two important problems cited are that firms have no “in-house” use for the

Countertrade: Reactive or Proactive? J BUSN RES 198X:16:327-335

331

compensation goods offered and that they find it difficult to resell the goods offered. These problems often arise when the goods are of inappropriate or inconsistent specification, involve quality and delivery shortcomings, or lack any provision for the return of unsatisfactory goods (Khoury, 1984; Weigand, 1980). However, firms may have no need for the goods, they may be highly satisfied with their present suppliers, or, as Paliwoda (1986) has noted, they may be averse to frequently taking on new and unknown suppliers. Reselling problems also occur because the goods offered in countertrade are often in world excess supply, or firms may simply lack adequate distribution channels. The point is that if the goods accepted cannot be used, resold, or stocked without prohibitive expense, then countertrade cannot be viable in the long term.

Many of the respondents, particularly among the exporters, encounter higher costs in countertrading. This probably reflects some of the problems discussed above. Also, though, higher costs arise from the need to employ specialist personnel and/or to acquire the services of specialist agents and brokers. Indeed, as shown in Table 2, the costs of brokerage and facilities is a common countertrade shortcoming.

Another problem is raised in the “pricing” of countertrade goods. This is due to various factors such as the cost-effects already referred to, the expense and uncertainty of discounting resold goods, and the variation in the value of goods when deliveries are spread over a long time span. A potential major long-term problem is that customers can eventually become competitors, as, e.g., in buyback transactions where compensation goods may compete for sales in the vendor’s own markets (Khoury, 1984; Weigand, 1980). Finally, the last problem is that countertrade increases uncertainty, which seems inevitable, given the other problems cited.

Reasons For Not Countertrading

Using the same l-5 scale of importance, the noncountertrade samples were asked to indicate the extent that each, in a list of variables, explained their reasons for not countertrading. The results are presented in Table 3. These are similar, although often lower in frequency but higher in perceived mean importance, than the perceived problems of actual countertraders shown in Table 2. The lower incidence may be because some of the noncountertraders are unaware of the pitfalls as supported by the many who cited “do not know enough about it” as a reason for not participating. However, the higher means given by the noncountertraders are consistent with the suspicion that many of them refrain from the activity not so much because it involves serious problems, but because their managers, influenced by the gloomy conventional approach to countertrade, imagine that it may do.

Of the domestic and export noncountertrader samples, 54 and 20, respectively, gave high importance to ‘other’ (write in) reasons for not participating. These revealed much inertia or ignorance about the benefits of seeking out countertrade. Thus, 46 of the domestic firms and 16 of the exporters said that it is not conventional or had not been requested by customers, while only two respondents said the opportunity had not arisen.

Finally, it is acknowledged that the real (not imagined) problems of countertrade can have severe consequences if they are allowed to. However, it is the respon-


Table 3. Reasons For Not Countertrading in International and Domestic Markets

International (N = 142)’ Domestic (N = 195)’

% Mean’ Rank’ % Mean” Rank’

No “in-house” use for goods offered by

customers 77 4.1 1 64 4.1 1

Difficult to resell goods offered by customers 75 4.0 2 56 4.0 2

Increases uncertainty generally 64 3.6 3 46 3.5 3 Complex negotiations 70 3.5 4 51 3.3 6 Time-consuming negotiations 68 3.5 4 53 3.5 3 Problems with “pricing” 62 3.2 6 48 3.5 3 Increases costs 62 3.2 6 47 3.3 6 Don’t know enough about it 63 3.1 8 47 3.1 8 Brokerage costs and facilities needed 62 3.0 9 44 3.0 9

Customers’ negotiating strength 55 2.9 10 39 2.9 10 Customers become potential competitors 45 2.8 11 38 2.9 10 Others (specified by respondents) 14 4.4 28 4.6

‘Of the 217 total respondents. 40 do not export, and 35 do countertrade overseas. There are thus 142 exporters that do not countertrade overseas. All the respondents market products domestically, but 195 do not countertrade domestically.

‘Mean importance on a 5-point scale where 1 = no importance and 5 = utmost Importance. ‘Rank determined by mean importance.

sibility of countertrade managers to forestall them or to minimize their effects. Appropriate guidelines for this are proposed elsewhere (Paliwoda, 1981; Shipley and Neale, 1987; Yoffie, 1984).

Benefits of Countertrade

The countertraders were asked to study a list of variables and on the same l-5 scale to indicate the extent to which each factor is a countertrade benefit to their company. The response, set out in Table 4, indicates that the advantages are most common and most important among the exporters. Even so, most of the benefits

Table 4. Benefits of International and Domestic Countertrade

Allows entry into difficult markets

Increases company competitiveness Overcomes currency control and exchange

problems Increases sales volume Overcomes credit difficulties

Allows fuller use of capacity Provides sources of attractive inputs Allows disposal of declining products

Other

International (N = 35)

% Mean’ Rank’

89 4.0 1

89 3.7 2

80 3.4 3

97 3.4 3

69 3.2 5 74 2.9 6

40 2.4 7 37 2.3 8

3 4.0

Domestic (N = 22)

% Mean’ Rank’

64 2.8 7

82 3.2 3

77 3.3 1

64 3.1 4

64 3.1 4

50 3.3 1 50 2.9 6 23 3.2

‘Mean importance on a 5-point scale where 1 = no importance and 5 = utmost importance. ‘Rank determined by mean importance.


were specified by 60% or more of both samples, and some of them are very widely cited indeed.

Many of the benefits are interrelated. The most powerful general advantage, however, is that willingness to countertrade enhances the firm’s overall attractiveness to customers. This advantage was not an explicit variable in the list offered to respondents. Instead, it is implicit in most of the other benefits shown in Table 4. To begin with, it raises company competitiveness, which, as well as gaining edge over rivals that do not countertrade, may be a prerequisite for not losing edge to those that do. Here, 80% of the international and 50% of the home country countertraders reported that their main rivals do indeed countertrade.

Boosting attractiveness via countertrading leads to three other common and important advantages cited among both samples. It allows firms to enter difficult markets, to increase sales volume, and to enjoy greater capacity utilization. These benefits enable firms to achieve scale and experience economies, cash-flow targets, and other objectives. A related advantage is that countertrade permits offloading of declining products, which is especially important nowadays, given rapid tech- nological advance. Another related advantage is one not covered in this survey but which has been discussed elsewhere (Yoffie, 1984). Namely, participation in countertrade can foster important long-term customer goodwill. This arises not only in the practical help that customers receive but also from the personal relationships that are built among personnel in the long negotiations that countertrade involves. This was the point made by all except one of the respondents who cited their own other “write-in” advantages.

A major gain from countertrading among the exporters is its ability to overcome currency and exchange problems. This is important since Western companies seeking business in South American and Eastern European markets, as well as elsewhere, may find that countertrade is the only mode of trade open to them. Such countries are so short of hard currency that their imports cannot be financed in conventional ways.

Countertrading enables many respondents to overcome credit difficulties. For exporters, countertrade may be the only way of settlement by customers in countries like Argentina and Poland, whose chronic international debts deprive them of all conventional sources of credit. Similarly, although for different reasons, British domestic firms sometimes find themselves denied credit so that countertrade represents the only means for securing inputs.

The remaining countertrade benefit offered to respondents is that it provides sources of attractive inputs. This may, for example, provide lower costs or wider choice. It was noted above, however, that countertrade inputs can be susceptible to problems of poor quality and so on, especially when trade is with Eastern European countries (Paliwoda, 1981; Weigand, 1980). Accordingly, the inputs advantage is cited more commonly and rated more highly among the domestic countertraders. This emphasizes the earlier point whereby domestic countertraders enjoy better communications with and tighter controls over their partners in exchange deals. They can, for example, more easily return defective goods or even establish quality control facilities in the supplier’s factory.

The incidence of countertrade is growing worldwide (DTI, 1986; Huszagh and Barksdale, 1986). To explore the reasons, respondents were asked to study a list of variables and to indicate on the 5-point scale how far each had caused them to


Table 5. Reasons for Increasing International and Domestic Countertrade Activity During Recent Years

International (N = 35) Domestic (N = )

% Mean’ Rank % Mean’ Rank’

Customers’ diminished access to foreign

currency 77 4.0 1 Increased pressure for countertrade from

customers

To maintain/increase competitiveness

Increased difficulty of obtaining credit

69 3.9 2 41 2.7 3 69 3.7 3 55 3.2 1

for the firm 66 3.2 4 14 2.3 6 Firm has more “in-house” expertise for

countertrade

Growth of specialist brokers

Increased currency exchange uncertainty

Increased political instability in the market

Easier to resell goods offered by customers

Increased product price uncertainty

More attractive range of goods offered by

60 2.9 5

40 2.8 6

51 2.8 6 57 2.7 8 34 2.5 9

40 2.2 10

41 2.7 3

23 2.0 8

23 2.4 5

23 2.2 7

customers

Other

29 2.1 11 23 3.2 1 3 5 23 3.8

‘Mean importance on a 5.point scale where 1 = no importance and 5 = utmost importance ‘Rank determined by mean importance.

increase countertrading, if at all. The findings have been described at some length elsewhere (Shipley and Neale, 1987) and are discussed only in summary here. Generally, however, the results displayed in Table 5 indicate that Western firms are increasing their countertrading in response to diminishing problems, better management, increasing benefits, and growing opportunities. Whether this means that British countertraders are becoming more proactive is not the main concern. Rather, it is to encourage more firms to do so.

Summary and Conclusions

The traditional view of countertrade as a second-best alternative is attacked here on the grounds of its excess caution and conservatism. The findings show that approach is wrong to overlook domestic countertrading. Moreover, it is wrong to dwell excessively on the problems of countertrade, since these can be overcome, and the findings show that major benefits can be obtained. Certainly, much care and management acumen is needed to minimize the pitfalls and maximize the benefits of countertrade. However, as the advantages are powerful and plentiful, and as there are numerous and growing opportunities for gaining advantages, Western firms are strongly urged to introduce a proactive approach to this rewarding

mode of trading.

References

Bates, C., Are Companies Ready For Countertrade? International Marketing Review, 3( 1986): 28-36.

Cho, K. O., Using Countertrade As A Competitive Management Tool, Management International Review, 27(1987): 50-57.


Department of Trade and Industry, Countertrade: Some Guidance For Exporters, London, 1986.

Huszagh, S., and Barksdale, 1986. International Barter And Countertrade: An Exploratory Study, Journal of the Academy of Marketing Science 14( 1986): 21-28.

Huszagh, S., and Huszagh F., International Barter And Countertrade, International Marketing Review 3(1986): 7-19.

Kaikati, J., The International Barter Boom: Perspective And Challenges, Journal of International Marketing l( 1981): 29-38.

Khoury, S., Countertrade: Forms, Motives, Pitfalls And Negotiation Requisites, Journal of Business Research 12(1984): 257-270.

Neale, C. W., and Shipley, D., Effects Of Countertrade - Divergent Perceptions Between Practitioners And Non-Participants, Journal of Management Studies 25(1988):

Neale, C. W., and Shipley, D., Empirical Insights Into British Countertrade With Eastern Bloc Countries, International Marketing Review 5( 1988b):

Organisation For Economic Co-operation And Development, East- West Trade: Recent Developments in Countertrade, Paris, OECD, 1981.

Paliwoda, S.. East-West Countertrade Arrangements: Barter, Compensation, Buyback And Counterpurchase Or Parallel Trade, in Department of Management Sciences Occasional Paper No. 8105. University of Manchester Institute of Science and Technology, Manchester, England, 1981.

Paliwoda, S., International Marketing, Heinemann, London, 1986.

Shipley, D., and Neale, W.. Industrial Barter And Countertrade. Industrial Marketing Management 16(1987): l-8.

Verzariu, P., Countertrade, Barter And Offsets, McGraw-Hill, New York, 1985.

Weigand, R., Apricots For Amonia. California Management Review 21(Spring 1979): 33-41.

Weigand, R., Barters And Buy-Backs: Let Western Firms Beware, Business Horizons 23(1980): 54-61.

Wills, J., Jacobs, L., and Palia, A., Countertrade: The Asia-Pacific Dimension, fnternational Marketing Review 3( 1986): 20-27.

Yoffie, D., Profiting From Countertrade, Harvard Business Review 86(May-June 1984): 8-16.

countertrade: reactive or proactive?

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