international trade in canada

7/29/2019 International Trade in Canada

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INTRODUCTIONTO EXPORTINGHOW TO SELL TOINTERNATIONAL MARKETS


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INTRODUCTION TO EXPORTING: HOW TO SELL TO INTERNATIONAL MARKETS2

WHO ARE WE?We are Canadas export credit agency. Our job is to supportand develop Canadas export trade by helping Canadian

companies respond to international business opportunities.We are a sel-nancing Crown corporation that operates atarms length rom the government.

WHAT DO WE DO?We provide insurance and nancial services, bonding productsand small business solutions to Canadian exporters and investorsand their international buyers. We also support Canadian directinvestment abroad and investment into Canada. Much o our

business is done in partnership with other nancial institutionsand through collaboration with the government o Canada.

HOW WE OPERATEWe are nancially sel-sucient and operate much like acommercial institution. We collect interest on our loans andpremiums on our insurance products. We also have a treasurydepartment that sells bonds and raises money in globalcapital markets.

We are committed to the principles o corporate social responsibility.Our rigorous due diligence requirements ensure that all projectsand transactions we support are nancially, environmentally andsocially responsible. We believe that good business adoptingand embracing these principles while we acilitate trade orCanadian investors and exporters is good or business.

PARTNERSHIP PREFERRED PHILOSOPHYWhen we work on a transaction, we preer to do it in explicitpartnership with the private sector. We let the private sector

player set the terms and we add capacity and share the risk.

TO CONTACT EDCPlease reer to our Contact Us web page.

ABOUT EXPORT DEVELOPMENT CANADA
http://www.edc.ca/EN/About-Us/Contact-Us/Pages/default.aspxhttp://www.edc.ca/EN/About-Us/Contact-Us/Pages/default.aspx


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CONTENTS

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

CHAPTER 1: DIVERSIFYING INTO FOREIGN MARKETS . . . 6

Benets o doing business abroad. . . . . . . . . . . . . . . . . . . . . . . . 6

Chal lenges o doing business abroad . . . . . . . . . . . . . . . . . . . . . 7Sources o assistance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

CHAPTER 2: GETTING READY FOR

INTERNATIONAL TRADE . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Identiying and closing the gaps . . . . . . . . . . . . . . . . . . . . . . . . . 9Company performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Human resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Financial resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Production resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Logistics resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Your export plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

CHAPTER 3: APPROACHING A NEW MARKET . . . . . . . . . 12

Narrowing your list . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Market size and growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Market accessibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Business and pol it ical environment . . . . . . . . . . . . . . . . . . . . 13Resources for market research . . . . . . . . . . . . . . . . . . . . . . . . 14

The ol low-your-customer strategy . . . . . . . . . . . . . . . . . . . . . . 14Visiting your target market . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Trade shows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Coping with cultural differences abroad. . . . . . . . . . . . . . . . . 17

CHAPTER 4: ESTABLISHING YOUR PRESENCE ABROAD . . . 18Distributors, agents and trading companies . . . . . . . . . . . . . . . 18Foreign direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Types o oreign direct investment. . . . . . . . . . . . . . . . . . . . . . . 20

Representative or branch ofces . . . . . . . . . . . . . . . . . . . . . . 20Licensing and franchising . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Wholly owned afliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Acquisition of a foreign company. . . . . . . . . . . . . . . . . . . . . . 21Merging with a foreign company . . . . . . . . . . . . . . . . . . . . . . 21

Strategic alliances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Exporting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Immigration issues for services companies. . . . . . . . . . . . . . . 22

Dealing with political risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

CHAPTER 5: DEALING WITH

INTERNATIONAL CONTRACTS . . . . . . . . . . . . . . . . . . . . . 24

Due diligence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Basic principles o international contracts. . . . . . . . . . . . . . . . . 25Contracts and Incoterms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Essential contract terms and clauses. . . . . . . . . . . . . . . . . . . . . 26Bonding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Bonding collateral and wrongul cal ls . . . . . . . . . . . . . . . . . . . . 29Contract cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

CHAPTER 6: GETTING PAID . . . . . . . . . . . . . . . . . . . . . . . 31

Forms o payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Cash in advance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Open account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Open account with receivables insurance . . . . . . . . . . . . . . . . 32

Documentary collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Protecting against payment risk . . . . . . . . . . . . . . . . . . . . . . . . 33

Checking buyer credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Insuring against payment risk . . . . . . . . . . . . . . . . . . . . . . . . 33

CHAPTER 7: FINANCING YOUR EXPORTS . . . . . . . . . . . .35

Cash fow in international trade . . . . . . . . . . . . . . . . . . . . . . . . 35Obtaining the nancing you need . . . . . . . . . . . . . . . . . . . . . . . 36

Loans from individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Venture capital nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Commercial lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Asset-based lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Export Development Canada . . . . . . . . . . . . . . . . . . . . . . . . . 38

Managing oreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Foreign buyer nancing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

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CONTENTS

Foreign suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Supplier advance payments 40Controlling foreign input costs 40Reducing customs duties 41

Dealing with taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

CHAPTER 8:TRADE COMPLIANCE ANDTRADE BARRIERS 42

Critical Areas o Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Complying with standards 43Complying with regulations 43Complying with country rules of origin 44Using Harmonized System Codes 44Restricted and controlled goods 44Canadian export controls 45Canadian export reporting requirements 45

Tari barriers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Non-tariff barriers 46

CHAPTER 9: LOGISTICS AND DELIVERY 47

Freight orwarders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Packing and labelling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Clearing oreign customs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Using customs brokers 50Customs documentation 51

CHAPTER 10: THE LEGAL DIMENSION 53

Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53Commercial arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Advantages of arbitration 54Arbitration under NAFTA Chapter XI 54

Intellectual property protection. . . . . . . . . . . . . . . . . . . . . . . . . 55Patents 55Industrial designs 55Trademarks 55

Copyrights 55Trade secrets 56Licensing your IP 56

Product liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

CHAPTER 11: MAINTAINING THE RELATIONSHIP 57

Following up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Service and support. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Responding to problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58Working together . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

CHAPTER 12: MAJOR OPPORTUNITY MARKETS 59

The Andean region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59Association o Southeast Asian Nations . . . . . . . . . . . . . . . . . . 60Australia and New Zealand . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63The Gul Cooperation Council (GCC) . . . . . . . . . . . . . . . . . . . . . 64India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Mexico. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67The United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

CHAPTER 13: EDC FINANCING SOLUTIONS AT WORK 69

Accounts Receivable Insurance/increase working capital . . . . . . .69Single Buyer Insurance/maintain cash ow . . . . . . . . . . . . . . . . 69Contract Frustration Insurance/fnance an export contract . . . . 70

Export Guarantee Program/increase operating line. . . . . . . . . . 70Export Guarantee Program/support multiple export contracts . . .71Export Guarantee Program/margin oreign receivables. . . . . . . 71Political Risk Insurance/borrow against oreign receivables. . . . . .72Account Perormance Security Guarantee/meet bonding needs . . . 72Foreign Exchange Facility Guarantee/help operating line . . . . . 73

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This guide is designed to help Canadian companies learn about international markets and how they can do business

there. I you believe you have a product or service that might do well abroad, the guide can help you decide how or

whether you should proceed. It concentrates on providing basic, practical inormation and supplements it withlinks to many other resources that will help you plan and carry out your export strategy.

The international market is enormously varied and extremely competitive, but the basic principles o exporting

are quite straightorward. Many Canadian companies have used them to succeed abroad, and your company

may be ready to do the same.

INTRODUCTION


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I your company has a top-class product or service and an ambition to diversiy, venturing into oreign trade may be

the smartest decision youll ever make. This can be true even i youre not a large company, since size isnt closely

related to success abroad in act, most Canadian companies operating internationally have annual oreign sales oless than a million dollars.

O course, succeeding in oreign markets means dealing with many new challenges o nancing, marketing and logistics.

This will take thorough preparation and planning, together with a long-term commitment to establishing an international

presence. But the payo or a successul venture into oreign markets can be substantial and, in an era when the worlds

trade is becoming ever more integrated, it can be essential to survival.

CHAPTER 1: DIVERSIFYING INTO FOREIGN MARKETS

BENEFITS OF DOING BUSINESS ABROAD

A company operating successully abroad can expect to see anyor all o these benets:

4 Increased salesCanadas domestic market is relatively small and, dependingon your industry, relatively easy to saturate. This means thatexporting or investing abroad may be the only way to increaseyour sales.

Even i you arent selling everywhere in Canada, it may stillbe more cost-eective to expand your business by acquiring

oreign customers. I a company does most o its business inOntario, Quebec or the Maritimes, or example, it may dobetter by expanding into the U.S. Northeast than by looking orsales in the Prairies or British Columbia. Similarly, a companyin Atlantic Canada may preer to look or new customers inEurope and New England, while a British Columbia businessmay nd its most accessible markets on the U.S. west coast,in Japan or in Southeast Asia.

4 Lower market vulnerability

The more diverse your markets, the less vulnerable you willbe to downturns resulting rom local or regional businesscycles or rom seasonal sales fuctuations. Diminishing salesgrowth in Canada or the United States, or example, can becountered by new sales elsewhere in the world.

4 Extending the lie o your productsMany products have a natural lie cycle, beginning with highsales growth ollowed by a levelling-o period and then adecline. But you may be able to take a product that is allingo in sales domestically and introduce it (with appropriate

updating or other changes) in a market where it has neverbeen available. This strategy could substantially increase thelongevity o your product.


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4 Improving your competitivenessBecause the global market is so competitive, youll need tobe very ecient and very ocused on quality and innovationin order to succeed. This can only strengthen your abilityto compete at home. In act, businesses that are successul

internationally oten do very well domestically because theyhave learned so much abroad.

CHALLENGES OF DOING BUSINESS ABROADGetting started in international business means dealingwith many new and unamiliar challenges. You are, ater all,marketing your products or services in places where Englishmay not be the language o commerce, where the businessculture can be subtly or even dramatically dierent, wherelogistics can be problematic and where regulations and lawscan be opaque. For example:

4 Foreign customers will be quite dierent rom your Canadianbuyers, and this extends beyond the dierence in language.Living standards, social norms, business etiquette and culturaltastes will oten diverge in important ways rom those in Canada.The old saying that people are the same everywhere doesnotapply to many aspects o international business.

4 Foreign economic, legal and political systems can also be verydierent rom Canadian ones, especially in markets whoseinstitutions did not evolve out o European traditions.

4 Operating abroad exposes you to ar wider and more intensecompetition than at home.

4 Contracts are more complex and must be careully structuredto prevent misunderstandings and the costly litigation orarbitration that can result.

4 Payment tends to be slower sometimes much slower thanat home. This can aect your cash fow or the worse, so youneed to plan your nancing accordingly. Exchange ratesare also a actor, so you may need to use oreign exchangehedging to protect your prot margins.

4 Logistics are more complicated and more prone to delays.

4 Your goods may be subject to customs controls and taris.

4 Local regulations and technical standards that apply to yourgoods may require you to modiy them beore they can besold in the oreign market.

4 In general, the complexity o oreign trade will add signicantlyto your management tasks.

SOURCES OF ASSISTANCEThe complications o oreign trade may seem quite intimidatingat rst. Remember, though, that thousands o Canadian companieshave dealt with them successully and are doing well abroad.

But you dont need to deal with them by yoursel. There aremany sources o assistance or companies getting started ininternational trade or already exporting, but wish to enter neworeign markets. The ollowing list will give you a good start.

4 Foreign Aairs and International Trade Canada(DFAIT)provides inormation about oreign aairs, oreign policy, theCanadian economy, international trade, travel assistance andpassport services.

4 The Canadian Trade Commissioner Service (TCS) ispart o DFAIT and has Trade Commissioners in more than150 cities worldwide and in regional oces across Canada.
http://www.international.gc.ca/international/index.aspx?view=dhttp://www.tradecommissioner.gc.ca/eng/home.jsphttp://www.tradecommissioner.gc.ca/eng/home.jsphttp://www.international.gc.ca/international/index.aspx?view=d


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4 The TCS provides a broad range o services to Canadianbusinesses in Canada and abroad. Trade Commissioners can helpyou prepare or international markets, assess market potential,nd qualied contacts and advise on market access problems.The TCS also oers market research and country-specic

trade and economic reports, and its Step-by-Step Guide toExporting 2011 is a good primer on international trade.

4 The Virtual Trade Commissioner, also available though theTCS, is a personalized, web-based resource that will give youmarket inormation and leads specic to your business interests.You can register or the Virtual Trade Commissioner whenyou visit the TCS web site.

4 Export Development Canada(EDC) is Canadas exportcredit agency. Its job is to support and develop Canadas exporttrade by helping Canadian companies respond to international

business opportunities. The web sites About Exportingpage leads to a wealth o export-oriented resources andinormation.

4 Canada Business is a collaborative network o ederaland provincial government services that helps Canadianentrepreneurs and exporters build their companies.

4 CanadExportis a ree, online publication maintained byDFAIT. It provides news about trade opportunities, exportprograms, trade airs, business missions and more.

4

Industry Canadaoers market reports as well as theextremely useul Trade Data Online research tool.

KEEP INFORMED WITH EDC

4EDCs Knowledge Centre can help you stay up-to-date withinternational trade. Heres some o whats available:

4Publications such as market and industry export guides

4Subscriptions to EDCs weekly, monthly and quarterly publications,including articles and newsletters

4A weekly commentary on world economic trends

4ExportWise, a quarterly magazine eaturing exporters stories, industryand market trends, economic analyses and exporter resources

4Economic and market analysis, including economic perspectives,political research and market assessments
http://www.tradecommissioner.gc.ca/eng/guide-exporting.jsphttp://www.tradecommissioner.gc.ca/eng/guide-exporting.jsphttp://www.tradecommissioner.gc.ca/eng/guide-exporting.jsphttp://www.tradecommissioner.gc.ca/eng/guide-exporting.jsphttp://www.tradecommissioner.gc.ca/eng/virtual-trade-commissioner.jsphttp://www.tradecommissioner.gc.ca/eng/virtual-trade-commissioner.jsphttp://www.edc.ca/http://www.edc.ca/EN/About-Exporting/Pages/default.aspxhttp://www.canadabusiness.ca/eng/http://www.international.gc.ca/canadexport/index.aspx?view=dhttp://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Homehttp://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Homehttp://www.edc.ca/EN/Knowledge-Centre/Pages/default.aspxhttp://www.edc.ca/EN/Knowledge-Centre/Pages/default.aspxhttp://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Homehttp://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Homehttp://www.international.gc.ca/canadexport/index.aspx?view=dhttp://www.canadabusiness.ca/eng/http://www.edc.ca/EN/About-Exporting/Pages/default.aspxhttp://www.edc.ca/http://www.tradecommissioner.gc.ca/eng/virtual-trade-commissioner.jsphttp://www.tradecommissioner.gc.ca/eng/guide-exporting.jsphttp://www.tradecommissioner.gc.ca/eng/guide-exporting.jsp


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Beore you commit any major resources to becoming an exporter, you should careully evaluate your business to make

sure it can measure up to the demands o international trade. Even i you have a product or service that is very likely

to sell well abroad, your company may not actually be ready to export it.Most non-exporting rms dont yet have everything they need to be viable abroad. Your business may not have enough

nancial resources to sustain its cash fow until its exports begin to turn a prot, or it may need capital investments

to ensure that it can produce enough to meet demand rom abroad. Its very likely, thereore, that youll need to ll

in some gaps beore you can ship that rst container to another country.

The ollowing sections can help you decide where those gaps are and whether its realistically possible or you to close them.

IDENTIFYING AND CLOSING THE GAPSCOMPANY PERFORMANCE

Your companys overall perormance should have the ollowingcharacteristics:

4 Your products or services are successul in Canada and arewidely sold here at home.

4 You have a solid domestic business plan that has proven itseectiveness.

4 Your rm has specic advantages over the competition.

4 Your products are unique in one or more ways and arecompetitively priced.

HUMAN RESOURCES

Your human and managerial resources may be adequate or yourdomestic needs, but do they have the capacity to support businessoperations that may be on the other side o the world? Theollowing abilities are important here:

4 You have a strong management team that is capable odeveloping a comprehensive export plan.

4 Your management team is committed to pursuing exportmarkets and is willing to dedicate time, personnel and undsto its export program.

4 Overall, the company has enough personnel to meet increaseddemand or is in a position to hire people to ll the gaps.

4 You have, or can hire, trained marketing sta with experiencein selling products or services abroad. An alternative is to useintermediaries with the required expertise, such as agents,distributors or trading companies.

CHAPTER 2: GETTING READY FOR INTERNATIONAL TRADE


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FINANCIAL RESOURCES

I the ollowing describes your business, you probably have thenancial capacity needed to operate abroad:

4 You have the nancial resources to support the marketingo your products in overseas markets.

4 You a have a strong, dependable cash fow.

4 You have the nancial strength to compete with oreignproducts and services in terms o quality and price.

4 You have enough cash, savings, and access to nancing(such as increased operating lines o credit or term loansor capital expenditures) to support your production andmarketing or at last two years without making much prot.

4 You have, or can acquire, adequate knowledge oexport payment mechanisms such as letters o creditand open account.

PRODUCTION RESOURCES

One sure way to ail internationally is to secure a large contractand then be unable to ll it. There are several ways to avoid this:

4 Make sure your suppliers will provide you with the raw

materials and components you need to meet yourproduction commitments.

4 Make sure you have enough spare production capacity or can create it quickly to meet unexpectedly largeoreign demand.

4 Be prepared to modiy and manuacture versions o yourproducts to meet the cultural, regulatory and certicationstandards o your oreign market.

LOGISTICS RESOURCES

Producing enough to ll an order is only hal the job you stillhave to make sure your buyer gets your goods on time and inthe expected condition. Here are the essentials:

4 You have, or can acquire, an adequate knowledge o how yourproduct should be shipped abroad.

4 Your sta is (or can be) trained in export logistics.

4 You have sta you can train to troubleshoot delivery problemsquickly and eciently.

TRAINING IN INTERNATIONAL TRADE

The Forum or International Trade Training (FITT) designs and

oers training programs through which you can acquire the proessionaldesignation o Certied International Trade Proessional (CITP).Delivered by a broad network o educational partners, FITTs trainingprograms can provide you with knowledge and practical skillsessential to engaging in international trade.
http://www.fitt.ca/http://www.fitt.ca/


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YOUR EXPORT PLANI your readiness assessment convinces you that your companyis capable o operating abroad, and you decide that this makessense or your business, the next step is to develop your exportplan. This is the master plan that will dene your internationalgoals and how youll achieve them. Much o the inormationyoull use to do this will fow rom the market researchdescribed in the next chapter.

Export plans are complex and are always works in progress.The details o creating them are beyond the scope o this guide,but there are numerous resources that can help you create one.Among them are the TCSs Step-by-Step Guide to Exporting 2011and the Starting to Exportsection o the Canada BusinessNetwork web site.

In brie, though, your export plan should cover at leastthe ollowing:

4 your export objectives;

4 your management and stang plans;

4 your nancial strategy or obtaining the cash fow youll need;

4 the key selling eatures o your product;

4 your competitive advantages and disadvantages relativeto exporting;

4 your key competitors and major market risks;

4 how youll adapt your product to meet the needs o theoreign customer;

4 the price at which youll sell your product;

4 your strategy or promoting your product to your customers;

4 your logistics or delivering your product;

4 how youll enter the market (by direct selling, or example,or though a distributor);

4 your export budget, which covers travel, marketing expenses,trade show participation, logistics, ongoing market research andthe expenses o adapting your product to the target market; and

4 an implementation schedule setting the deadlines youll needto meet.

You wont likely make much o a prot during your rst twoyears o exporting, so your export plan (and your nances)should allow or this. In year three, you should start to seesome positive cash fow rom your oreign operations. I youdont, you should review your approach to see i youre doingsomething wrong. That said, some markets are extremelydicult to penetrate, with lead times beore the rst sale(let alone an overall prot) o ve years or more.

WHEN SHOULDNT YOU BECOME AN EXPORTER?

The odds will be stacked against your success as an exporter i you:

4dont have a solid business plan or your Canadian market;

4are struggling to survive in Canada;

4are producing and selling a very ordinary product that is readilyavailable internationally; or

4have limited nancial, human and production resources.
http://www.tradecommissioner.gc.ca/eng/guide-exporting.jsphttp://www.canadabusiness.ca/eng/105/165/922/http://www.canadabusiness.ca/eng/105/165/922/http://www.tradecommissioner.gc.ca/eng/guide-exporting.jsp


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Is there actually a oreign market or your product or service? I youre considering whether to go international, thats

the most undamental question to ask, and answering it is the rst stage in your market research. At the end o this

stage, you should have identied at least one potential oreign market and be able to respond to questions suchas these:

4Will your products or services be acceptable in the market?

4What sales volume can you reasonably expect?

4What is the long-term potential o your product in the market?

4Who are your customers likely to be?

4How should you modiy your products to strengthen their appeal to these customers?

4What is the best way o marketing your products in the market, and who can help you sell your goods there?

Youll likely begin with a airly long list o places where you think you might be able to sell your products.

This has to be narrowed to the one or two markets that present the most potential or success.

CHAPTER 3: APPROACHING A NEW MARKET

NARROWING YOUR LISTTo do this, analyze the ollowing characteristics o each marketand try to determine whether they increase or decrease themarkets potential:

MARKET SIZE AND GROWTH

4 How many potential buyers are there likely to be?

4 How much is spent annually on products like yours?

4 Are there a lot o products already in the market that willcompete with yours?

4 Can you match or beat the prices your competitorsare charging?

4 Is the demand or your type o product likely to growor shrink?

4 Are there cultural actors that may aect the marketabilityo your product?

4 Is the market industrializing rapidly? I so, can you developnew products to take advantage o this?


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MARKET ACCESSIBILITY

4Are high tari and/or non-tari barriers applied to productssuch as yours?

4 Are there already many suppliers o your type o product (thiswill make it harder to access the market share you need)?

4 Will shipping your products to the market be expensive and/or logistically complicated?

BUSINESS AND POLITICAL ENVIRONMENT

4 Is the economy stable and growing?

4

Are governments at the national and sub-national levelsriendly to oreign companies and investors?

4 Are there any issues with currency exchange, transeror convertibility?

4 Is the political system stable?

4 I you place assets in the country or invest there, are thererisks o political upheavals that could threaten these assetsand investments?

4 How strong are the local legal and governmental institutions?

4 Is there widespread corruption?Once youve gone into some depth on these questions, youll bein a better position to identiy which market oers you the bestopportunities or success. A single market is oten the optimumnumber, although you could choose two i they both seem highlypromising. But more than two is overstretch because o thecosts involved in entering oreign markets, it makes no senseat this stage to try or more than that.

ONE MARKET OR MANY?

It can be useul to view large countries with big populations not asone market, but as a mosaic o regional markets. China, or example,has more than 50 distinguishable markets, ve o which are majorentities in themselves, and the United States has at least a dozenidentiable markets. Focusing on a regional market in countries suchas these can be much more eective than trying to cover the wholecountry which, in the case o nations such as China, is almostimpossible anyway. Conversely, some countries within a region areso similar that you can apply a common approach to all o them. TheEU and the Andean markets, or example, would all into this category.

FOLLOWING YOUR DOMESTIC CUSTOMERS

One o the most successul ways or a company to enter a oreign

market is to ollow its existing customers abroad. I you haveCanadian buyers who are operating in India, or example, ollowingthem there can provide excellent opportunities and contacts whilesignicantly reducing your market-entry risks. For more detail, seethe section entitled The ollow-your-customer strategy.


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RESOURCES FOR MARKET RESEARCH

The ollowing resources can be useul or researching potentialtarget markets.

4 EDCs About Exportingpages have a wealth o export-

related resources, rom creating business plans to managingoreign exchange risk. The Find Export Opportunitiessection provides Canadian, American and internationalprocurement resources as well as inormation about tradeshows and travelling abroad.

4 Industry Canadas searchable Trade Data Online databasecan help you determine how much export business your sectorcarried on in the worlds markets over various time periods.

4 Also valuable are the market reports compiled by the TCS,which you can obtain ater registering (or ree) with the

Virtual Trade Commissioner.4 Canadian embassies, consulates, high commissions and trade

oces around the world can oten help with trade-relatedqueries. A complete listo these oces is available online.

4 The United Nations Commodity Trade Statistics Database( COMTRADE) is the worlds largest depository o internationaltrade data. It is not very user-riendly, but it is ree and youcan search it in many dierent ways.

4 The UN Service Trade database is searchable and providesinormation on worldwide imports and exports o services.

Registration is required but use o the database is ree.

4 You can also check trade magazines and industry publicationsor inormation, and perhaps see i the target countrysdiplomatic mission in Canada has trade attachs you canconsult. Industry/sector associations and chambers ocommerce both in Canadaand in the target marketmay be useul sources o inormation as well.

As you assess the inormation youve collected, you should alsobe working on your export plan, as discussed in Chapter 2.You wont nalize your plan until youve completed the bulko your research and spent some time in the market itsel, butyou should expect to have a solid export plan in place by thetime you actually enter your chosen market.

THE FOLLOW-YOUR-CUSTOMER STRATEGYI some o your Canadian customers are operating in othercountries, this can open a door or you. I you sell electroniccomponents to a company in Haliax, or example, and thatcompany has an aliate in Mexico, you may be able to sell

directly to the Mexican aliate.

Finding such a ready-made oreign customer, whose parentcompany is amiliar to you and with whom you have an establishedrelationship, can eliminate much o the risk associated withentering a new market abroad. A second advantage is that yourbusiness with the aliate will help you learn about the localmarket and give you a presence there, which will make it easierto nd other customers.

SELLING TO FOREIGN GOVERNMENTS

Foreign governments can present a rich source o contracts

or exporters o both goods and services. Canada BusinesssSelling to Foreign Governments page provides inormation

on how to navigate oreign government procurement, includingservices to help you be successul.
http://www.edc.ca/EN/About-Exporting/Pages/default.aspxhttp://www.edc.ca/EN/About-Exporting/Trade-Links/Pages/find-export-opportunities.aspxhttp://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Homehttp://www.tradecommissioner.gc.ca/eng/market-report-access.jsphttp://www.tradecommissioner.gc.ca/eng/virtual-trade-commissioner.jsphttp://www.international.gc.ca/ciw-cdm/embassies-ambassades.aspx?lang=eng&view=dhttp://comtrade.un.org/db/default.aspxhttp://comtrade.un.org/db/default.aspxhttp://unstats.un.org/unsd/ServiceTrade/default.aspxhttp://www.chamber.ca/http://www.canadabusiness.ca/eng/90/895/http://www.canadabusiness.ca/eng/90/895/http://www.chamber.ca/http://unstats.un.org/unsd/ServiceTrade/default.aspxhttp://comtrade.un.org/db/default.aspxhttp://www.international.gc.ca/ciw-cdm/embassies-ambassades.aspx?lang=eng&view=dhttp://www.tradecommissioner.gc.ca/eng/virtual-trade-commissioner.jsphttp://www.tradecommissioner.gc.ca/eng/market-report-access.jsphttp://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Homehttp://www.edc.ca/EN/About-Exporting/Trade-Links/Pages/find-export-opportunities.aspxhttp://www.edc.ca/EN/About-Exporting/Pages/default.aspx


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Following your customer abroad may also be necessary to protectyour sales levels i the customer shits some or all production toa oreign location. It can also be an opportunity to enhanceyour sales i your customers oreign operation leads to anoverall increase its production levels.

I youre a services rather than a manuacturing business, ollowinga client can provide excellent opportunities or overseas expansion you get to operate in a new oreign market, at relatively low risk,by servicing a amiliar customer. This enhances your visibility inthe market and can make it easier to attract new local clients asyou gain experience with the oreign business culture.

VISITING YOUR TARGET MARKETOnce youve identied your most promising target market

(or two at the most), it will be time or an on-the-ground visit.During this visit, youll try to veriy that this is in act the marketyou want to enter and, i at all possible, to meet potential buyers.

At this stage, you should contact the TCS ofce in theCanadian diplomatic mission located in the target country.Trade Commissioners there can assist you with inormationabout market prospects and local companies and can help withvisits to the country, contact searches and ace-to-ace briengs.

For example, a Trade Commissioner might introduce you to

members o the local chamber o commerce or local tradeassociations; you could then open discussions with thesecontacts and ollow up with an on-the-ground visit to establishpersonal relationships and perhaps make your rst sale. I youvealready identied a company as a potential customer, a TradeCommissioner can help by telling you more about the companyand how it ts into the local scene.

Here are some tips that can help make your visit a success:

4 Plan your trip well in advance so you can arrange to meetTrade Commissioners or EDC representatives (i applicable)in the target market.

4 Make sure your visit wont coincide with local holidays orholiday seasons.

4 Arrange interpreters, i necessary, beore you go.

4 At least two people rom your company should travel to themarket. Your party should include senior executives withdecision-making powers.

4 I your product is complex, you may want to include technicalsta to answer questions rom potential buyers.

4 Beore going, learn about the local business culture and its

attitudes to things such as punctuality, ormality and styleso negotiation.

4 Allow time to build relationships with potential buyers.

4 Make sure you can answer detailed questions about matterssuch as price, production capacity and delivery times.

EDC ABROAD

EDC has overseas ofces in Brazil, Chile, China, Germany,

India, Mexico, Panama, Peru, Russia, Singapore, Turkey andthe United Arab Emirates.
http://www.tradecommissioner.gc.ca/eng/trade-offices.jsphttp://www.edc.ca/EN/About-Us/Contact-Us/Pages/default.aspxhttp://www.edc.ca/EN/About-Us/Contact-Us/Pages/default.aspxhttp://www.tradecommissioner.gc.ca/eng/trade-offices.jsp


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4 Make sure your passports are up-to-date and obtain anynecessary visas.

4 Always ollow up with the business contacts you make, ideallywithin 24 to 48 hours. Thank them or meeting you, provideollow-up inormation and promise to get back to them by aspecic time i they have requested more inormation.

TRADE SHOWS

Participating in international trade shows can be an eectivemeans o exploring a new market, identiying sales prospectsand gaining useul contacts and eedback. By exhibiting atthe right trade show, you can:

4 get attention in your new market;

4 introduce your company and its products to many potential

buyers in just a ew days;4 show your sales prospects how they can benet rom your

product or service;

4 nd distributors, representatives or partners;

4 help you see whats happening in your industry as a whole;

4 demonstrate your long-term commitment to the market; and

4 see how other companies are competing in the market.

There are several major types o trade shows:

4 Major trade shows or a specialized audienceThese are devoted to a specic industrial sector (such asautomobiles) or a market (such as health care). Many areinternational and draw large numbers o senior executiveswho can make important sales decisions.

4 Major trade shows or a general audienceThese large shows may be international, national or regional.They showcase all kinds o goods and services or the publicand or businesses. Because they attract a general audience,they may be less suitable or your company than more

specialized shows.

4 Secondary trade showsLess prominent than the major shows, these can still be importantto their particular sectors or markets at both the internationalor national levels. They are oten highly specialized and areusually open to business participants only. For companies thatarent quite ready or one o the major shows, these eventscan be a good investment.

4 Consumer trade shows

As the name suggests, these shows are or the public at large.Some are general, while others are devoted to particularaudience interests, such as home shows or sports shows.Companies that concentrate on selling directly to end usersmay nd these shows useul; otherwise, one o the otherthree types is likely a better bet.

Finding the most suitable trade show(s) in your target marketwill be easier i you check with a Trade Commissioner orthe EDC representative there. You should also contact yourindustrys trade associations, since many o these keep tracko the years shows and can provide inormation about them.Trade publications or your sector can also be useul, as canChambers o Commerce, convention centres and visitorsbureaus. The TCSs online CanadExportmagazine listsupcoming trade events.
http://www.international.gc.ca/canadexport/index.aspx?view=dhttp://www.international.gc.ca/canadexport/index.aspx?view=d


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COPING WITH CULTURAL DIFFERENCES ABROAD

In many cultures, especially in Asia and Latin America, peopleplace great importance on personal relationships and thisextends to business dealings in a way that isnt common inCanada. In practice, this means that your counterparts in suchcultures will want to get to know you, to some degree at least,beore they will be inclined to do business with you. For them,establishing a personal side to your business relationship ispart o building mutual trust and understanding.

When operating in such cultures, you must be ready to committime and resources to visiting the market, meeting ace-to-ace withyour customers and representatives, and maintaining regularemail and telephone contacts anything that will keep the lineso communication open and nurture the long-term relationshipsthat will be the lieblood o your business abroad.

In a narrower context, the etiquette and courtesies that arenormal in a oreign business culture (and in the culture ingeneral) can also present pitalls or the unwary. In businessmeetings in Japan, or example, a very strict hierarchy governswhere everyone sits. Being unaware o it and sitting in the wrongplace can make one appear rude to the Japanese, althoughallowances are usually made or a oreigner.

The ederal governments Centre or Intercultural Learningcan help you in this area; its Country Insights page, or example,

lets you read up on the etiquette and sensitivities o speciccountries and regions. There are also numerous online guidesto proper behaviour abroad, such as World Business Cultureand Executive Planet. And you can, o course, simply ask yourlocal business counterparts or help i youre not sure what to do.
http://www.international.gc.ca/cfsi-icse/cil-cai/index-eng.asphttp://www.intercultures.ca/cil-cai/countryinsights-apercuspays-eng.asphttp://www.intercultures.ca/cil-cai/countryinsights-apercuspays-eng.asphttp://www.worldbusinessculture.com/http://www.worldbusinessculture.com/http://www.executiveplanet.com/index.php?title=Main_Pagehttp://www.executiveplanet.com/index.php?title=Main_Pagehttp://www.worldbusinessculture.com/http://www.intercultures.ca/cil-cai/countryinsights-apercuspays-eng.asphttp://www.international.gc.ca/cfsi-icse/cil-cai/index-eng.asp


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As you pursue your research, youll need to think about how youll actually enter your market and set up a business

presence within it. There are numerous ways to do this, rom direct selling to establishing a oreign aliate o your

Canadian rm.

CHAPTER 4: ESTABLISHING YOUR PRESENCE ABROAD

DISTRIBUTORS, AGENTS ANDTRADING COMPANIESThe most basic way to operate in a oreign market would be tosell your goods directly to local end users, who could be eitherconsumers or other businesses. This can work well i your buyersare in countries such as the United States or the United Kingdom,where the business and consumer cultures resemble ours, andi you are willing to send company representatives to the market

to generate sales.

In other markets, where there are language barriers, culturaldierences and unamiliar ways o doing business, most expertsrecommend that you work with intermediaries. Good ones willbe amiliar with local conditions and can help you nd customers,arrange distribution channels, handle documentation, clearyour goods though customs and provide ater-sales service.

There are three basic types o intermediaries:

4 Distributors

Distributors buy your product rom you and then sell it on tothe end users. They can represent you in all aspects o salesand service, but may handle competing products. Usually theywill want exclusive rights or a specic territory.

4 AgentsAn agent is an individual or rm you employ, usually oncommission, to sell your product to wholesalers, retailers andsometimes end users in the target market. Unlike distributors,they do not at any time own the products they represent. Theyoten have particular territories and sell to a particular set ocustomers. They may also handle products that competewith yours.

4

Trading housesFull-service trading houses handle multiple aspects o exporting,such as market research, transportation and advertising. Somerms buy your product outright, while others may act as agentson commission.

Finding the right intermediary will take some work. Contacts attrade airs are one avenue, and you should also check with sourcessuch as the Trade Commissioner Service and your sectors tradeassociations. Other companies in your sector may be willing to shareinormation about their experience with particular intermediaries.

Investigative trips to potential markets can also be useul.


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But no matter how you look or intermediaries, always exercisedue diligence:

4 Be sure they have the marketing knowledge, industry expertise,nancial capacity and acilities (such as showrooms, sta andwarehousing) required to represent you properly.

4 Be sure theyre motivated to develop new markets and newcustomers or you, and that you can be comortable workingwith them.

4 Find out i they pay promptly.

4 I they represent products that compete head-to-head withyours, nd out how theyll resolve this potential confict.

4 Dont hire them merely on the basis o their enthusiasm oryour product or their persistence in trying to get yourbusiness.

4 Always, alwayscheck their reputations and reerences.

FOREIGN DIRECT INVESTMENTUsing an intermediary isnt the only way o establishing yourrm in a oreign market. Many Canadian companies got startedthat way, but then discovered that their expanding overseasbusiness required an equally expanded oreign presence.

These more advanced types o business presence are usuallyreerred to as oreign direct investment (FDI) and range in

sophistication and complexity rom small representative ocesto wholly owned aliates producing or the local market.

FDI can be a successul strategy or Canadian exporters becauseit can help them:

4

increase sales;4 expand market share;

4 access oreign markets more eectively;

4 serve customers better;

4 join a global or regional supply chain;

4 enhance competitiveness within a supply chain;

4 secure sources o supply;

4 gain access to new technology; and

4

ollow buyers who have invested abroad.

That said, engaging in FDI is more likely to be a realistic optionater youve established yoursel as an exporter and have becomethoroughly amiliar with your oreign market or markets. Even asa new or less-experienced exporting company, though, you maynd it useul to know about the more common FDI strategies.Given time, ater all, a oreign investment may be in your uture.

TAKING ADVANTAGE OF INVESTMENT INCENTIVES

Many countries oer incentives to encourage oreign companies to

invest in the local market. These are oten associated with ree tradezones and include benets such as tax and duty relie, simplied customsclearance, development nancing, real-estate price reductions,long-term land leases and warehousing and logistics acilities.


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TYPES OF FOREIGN DIRECT INVESTMENTThe most common FDI approaches used by Canadiancompanies are the ollowing:

REPRESENTATIVE OR BRANCH OFFICESI all you need is a sales presence in the market, opening yourown representative or branch oce may be the answer. Locallaws, however, will oten limit these oces to perorming basicunctions such as market research and identiying customers,although some jurisdictions allow branch oces to carry out avery limited range o commercial activity.

I they do more than the local limits allow (even by accident),either o these oces may be reclassied by the authorities as alocal aliate o your company and will be subject to taxes and

corporate regulations. Obtain local legal advice beore you setup one o these oces to make sure its what you really need.

LICENSING AND FRANCHISING

A licence is the grant o certain rights to another company. Itallows the other business to use your proprietary technologyand/or intellectual property or specic purposes in a speciccountry or region.

Franchising is a specialized orm o licensing. The ranchisee

is given the right to use specic manuacturing or servicedelivery processes, along with established business systems ortrademarks, in accordance with the ranchising agreement.

WHOLLY OWNED AFFILIATES

Most countries allow oreign businesses to establish wholly ownedaliates within the local market. Also called subsidiaries, thesecompanies are owned by a business abroad but operate as localrms with respect to regulations, laws and taxes.

Governments vary widely in their attitudes to oreign companiessetting up businesses on their soil. Some, like Mexico, welcomethe investment and oer incentives to attract and keep it, whileothers may treat locally owned enterprises more avourably thanoreign-owned ones.

SUBCONTRACTING

I you are thinking about setting up an aliate in your target market

to produce your goods or local consumption, or example you mightinstead consider subcontracting the work to a local manuacturer.This will require much less capital investment than acquiring orbuilding a manuacturing aliate.

Alternatively, you can engage an intermediary to nd a subcontractoror you, help you negotiate the contract, ensure quality control andarrange payments. But no matter which alternative you select, besure to carry out your due diligence. Working with a subcontractorwho turns out to have a bad human-rights record, or uses substandardor raudulent manuacturing inputs, can do your company

considerable damage.


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ACQUISITION OF A FOREIGN COMPANY

In an acquisition, the Canadian rm purchases the shares and/or assets o a local rm. Payment might be made in cash orthrough an exchange o the Canadian rms shares or securities.Alternatively, the Canadian company may set up a business entity inthe oreign market, such as an aliate, to carry out the acquisition.In either case, the acquisition is carried out by purchasingenough o the target companys stock to achieve control o thebusiness. Acquisitions are complex and require careul duediligence as well as expert legal, accounting and tax advice.

MERGING WITH A FOREIGN COMPANY

In a merger, two businesses (such as a Canadian-owned companyin a oreign market and a locally owned company in the same

market) are combined into one rm. One business disappearsand all its assets and liabilities become the property o thesurviving company, which continues as the successor to bothbusinesses. Like acquisitions, mergers are complex and mustbe handled careully.

STRATEGIC ALLIANCES

A strategic alliance is a cooperative arrangement between twoor more businesses and is designed to achieve a shared goal.A Canadian and a U.S. company, or example, could orm

an alliance to operate in a U.S. regional market. Ideally, thestrengths o the two rms would complement each otherand enhance their joint competitiveness in that market.

Strategic alliances are designed to share risk and thus require aconsiderable level o cooperation and trust between the two

companies. Establishing such a relationship with a oreignpartner may allow you to expand your business in that marketand gain access to resources that would be very dicult toacquire by yoursel.

JOINT VENTURES

In a joint venture, your company and a oreign rm agree tocooperate in order to achieve a specic business objective. Thiscooperation could be a simple partnership that is limited in scopeor duration. In a more elaborate approach, your two companiesmight establish a separate corporation in the local market toachieve your joint objectives.

DUE DILIGENCE IN FDI

A oreign investment o any signicant size will require careul due

diligence. When acquiring a company or merging with it, or example,youll need to cover actors such as but not restricted to the targetcompanys legal structure, its nancial condition, its principal contracts,its environmental situation, the reputation o its management and itscompliance with employee benets requirements.


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EXPORTING SERVICESService exports, by their very nature, tend to be intangibles.Nevertheless, the major methods o delivering services in aoreign market resemble those or exporting goods:

4 I the business environment o the target market resemblesthat o Canada, and language barriers are minimal, you may beable to provide your services directly to oreign clients. In thecase o the United States, or example, youd market your servicedirectly to potential U.S. customers and, once you secured acontract, send your personnel across the border to do the work.

4 I the market is unlike Canadas or is very distant (or both),you could instead use an intermediary to negotiate a servicecontract or you with the client. Your sta would then go tothe market to deliver the service.

4 I the demand justies it, you could set up a representative orbranch oce to promote your services locally. Youd thensend your sta there to deliver the services as needed.

4 Increasing demand or your services might justiy establishingan aliate company in the target market to deliver them. Thiscan be a very fexible mode o delivery, since you can hire andtrain local proessionals to deliver the service or you, or transerCanadian personnel overseas to work directly or the aliate.

4 You could establish a partnership or joint venture with arm whose services dovetail with yours, to the advantage

o both companies.

The method you choose will depend on the nature o yourservice, the resources available to you and the particular marketyoure entering. No matter which approach you select, however,youll need to establish an awareness o your rms services inthe target market and demonstrate your companys credibility,

competence and proessionalism. In this regard at least, sellingyour services abroad is not all that dierent rom selling themin Canada.

IMMIGRATION ISSUES FOR SERVICES COMPANIES

Almost all countries have immigration laws that restrict thereedom o non-resident oreigners to work locally, even orshort periods o time. Consequently, i you intend to have yourCanadian sta deliver your service in a oreign market, youllneed to make sure beorehand that theyll be allowed to do

this. I theyre going to work in the United States, or example,theyll need a visa beore they can even cross the border. Visarequirements o this nature are common around the world.

You should also be aware that immigration authorities take avery dim view o oreigners who work locally without permission.The penalties or doing so can be severe, so its wise to consultlocal immigration lawyers beore you commit to sending yoursta abroad. These legal proessionals can help with the paperwork,speed up the visa process and ensure that you dont inadvertentlybreak the law.

O course, i your personnel can provide your services withoutleaving Canada delivering them via the Internet, or example the immigration problem disappears.


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DEALING WITH POLITICAL RISKCanada presents next to no political risks or companiesoperating within its borders. The same cant be said or manyother places, however, especially in emerging markets where

governments are oten short o cash, legal institutions are weakand the political environment is unstable.

For an exporter, political risk can be an issue i it leads tonon-payment by a buyer. For an investor with assets or equityin a oreign market, it can present acute problems i the localinvestment environment deteriorates because o political unrest.

I you do want to operate in a country where political risksare signicant, one o EDCs Political Risk Insurance (PRI)policies may help protect you. These policies can providecoverage against the ollowing hazards:

4 Breach o contractThis occurs i a state-owned entity or oreign governmentdoesnt live up to its end o a contract or reuses to honouran arbitral award in your avour.

4 Non-payment by a oreign governmentThis is the reusal or inability o a oreign government tomake scheduled loan payments or honour a guarantee,thus exposing you or your bank to non-payment risk.

4 Creeping or outright expropriationIn this case, a oreign government seizes, conscatesor expropriates your investment, sometimes withoutjustication or an apparent reason.

4 Political violencePolitical terrorism, war, civil strie or other orms o politicalviolence can damage or destroy your assets, or orce you toshut down business operations or an extended periodo time.

4 Conversion riskDuring an economic crisis, oreign governments or theircentral banks may impose restrictions or prohibitions on theconversion o the local currency to hard currency, or preventhard currency rom leaving the country.

4 Transer riskIn times o crisis, oreign governments or their central banksmay prevent hard currency rom leaving the country at all.

4 Repossession riskRepossession risk is the danger that a oreign governmentmight prevent you rom repossessing or re-exporting physicalassets you brought into the country, such as machineryor equipment.

OBTAINING RISK INFORMATION FROM EDC

Even i youre not intending to use one o EDCs PRI solutions, you

can still contact EDC or risk inormation about any o the marketswhere EDC is active.
http://www.edc.ca/EN/Our-Solutions/Insurance/Pages/political-risk-insurance.aspxhttp://www.edc.ca/EN/Our-Solutions/Insurance/Pages/political-risk-insurance.aspx


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International commercial contracts are inherently more complicated than domestic ones. The reasons or this include:

4International commercial contracts have to comply with both the laws o Canada and those o the buyers country,

and possibly with the provisions o international law.4They must allow or dierences in Canadian and oreign business cultures.

4They must oten bridge language barriers.

4They must allow or the mechanics o international trade, such as longer payment terms, complicated logistics,

customs clearance and a host o other details.

Because o the wide scope or misunderstanding, the terms and conditions o international contracts should be as

clear and unambiguous as possible. A poorly drated contract increases the risk o disputes, which may lead to a

reusal to pay or other diculties. Needless to say, you should always consult with qualied legal proessionals

beore signing an international commercial contract.

CHAPTER 5: DEALING WITH INTERNATIONAL CONTRACTS

DUE DILIGENCEAlways carry out due diligence on a potential buyer beorecommitting yoursel to a contract. This requires investigating thecompanys creditworthiness, its nancial situation, the quality o itsmanagement, its business history and its reputation in the localand international marketplace.

Legal, consulting and credit-reporting rms may help you veriya prospective customers soundness, but in many oreignmarkets it can be dicult to nd out everything youd like

to know. The Canadian Trade Commissioner Service in thetarget market may be able to help you here, since its trade teamsare amiliar with local business conditions.

For its part, EDC can help you with its EXPORT Checkservice. For a modest ee, this service will allow you to reviewthe credit proles o more than 20 million U.S. and 80 millioninternational customers beore you close your deal.
http://www.tradecommissioner.gc.ca/eng/trade-offices.jsphttps://www.edc.ca/english/creditinformation.htmhttps://www.edc.ca/english/creditinformation.htmhttps://www.edc.ca/english/creditinformation.htmhttp://www.tradecommissioner.gc.ca/eng/trade-offices.jsp


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BASIC PRINCIPLES OFINTERNATIONAL CONTRACTSAn international commercial contract is a legally enorceableagreement between two or more parties who are transacting

business across international borders.1 To protect the interestso all the parties, it must do the ollowing:

4 It must speciy exactly who the parties to the contract are, sinceonly they can enorce it. I there are aliated companies, agentsor representatives involved in the transaction, the contractshould include them as parties.

4 It must speciy the law that governs the contract. The businesslaws o Canada and your target market will inevitably bedierent, so a contracts clauses may have varying interpretationsdepending on which countrys laws are applied to it. I the

contract dictates the governing law, there will be less roomor dispute over the meaning o the contracts language.

4 The contract must be comprehensive. It must include alltheessential terms that the parties have agreed on, since leavingone out may lead to disputes. There should be no externalverbal agreements, or example, and all schedules, appendicesand annexes reerred to in the contract should be attachedto it.

4 All the essential terms set out in the contract must be clearlywritten and readily understood by all parties. Using ambiguous

language invites disagreement and litigation.

CONTRACTS AND INCOTERMSIt is likely that many o the clauses in an international contractwill use Incoterms. These are ormal terms that speciy certainexporter and importer responsibilities in international trade

transactions, especially in the area o logistics. Incoterms arewidely used because they are globally accepted and can removemany o the uncertainties associated with international business.They dene the meaning o terms in the ollowing areas:

4 Costs: Who is responsible or the expenses associated with ashipment at any specic time during transit? Examples couldbe export packing costs, international transport costs orcustoms duties.

4 Control: Who owns the shipment at any specic time duringits transit?

4 Liability: Who is responsible or the shipment at any specictime during its transit?

A new set o Incoterms, Incoterms 2010, went into eect onJanuary 1, 2011. More inormation about them is availableon the Incoterms website.

1 This section is adapted from the EDC publication Commercial Contract Terms, available from the Publications/Guides page of the EDC web site.
http://www.iccwbo.org/incoterms/id3045/index.htmlhttp://www.edc.ca/EN/Knowledge-Centre/Publications/Pages/default.aspxhttp://www.edc.ca/EN/Knowledge-Centre/Publications/Pages/default.aspxhttp://www.edc.ca/EN/Knowledge-Centre/Publications/Pages/default.aspxhttp://www.iccwbo.org/incoterms/id3045/index.html


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ESSENTIAL CONTRACT TERMSAND CLAUSESThe essential terms o an international commercial contract areoutlined below. Incoterms are preerred wherever applicable.

4 Parties to the contract and the contract purposesBe sure o the ollowing:

The contract must clearly identiy the parties to the contractand their ull legal names. These legal names not thetrade names should be used in the signature line andelsewhere in the contract.

There must be a clear statement o obligation or yourbuyer to purchase and pay or the goods or services, and orthe seller (you) to sell and deliver them.

There must be a detailed description o the goods orservices involved.

The contract must clearly describe the extent and limits oeach partys obligations.

4 Price and currencyThis should clearly identiy:

the currency o the transaction;

whether the price is xed or adjustable and, i the latter,how adjustments will be made; and

the total amount to be paid (xed or adjusted).

4 Payment termsThese should cover the ollowing:

the due date by which ull payment must be made;

the dates or milestone events that trigger progress

payments, i any; the amount o each progress payment, i any;

any discounts to the buyer or early payment;

any bonuses to the seller or early completion o the contract;

the interest charges or late payment;

the documentation that will trigger payment, such astransportation documents or commercial invoices;

the payment term, such as net 30 days;

whether there are holdback payments; and

the method o payment, such as open account or lettero credit.

4 Delivery termsThese should cover the ollowing:

the responsibilities o each party regarding the costs ocarriage, insurance, import and export clearance, packingand documentation;

the responsibilities o each party regarding the transer orisk or damages to goods during the shipments transit romseller to buyer;


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the mode o delivery and the responsibility or the costs odelivery, stated in Incoterms such as EXW (ex works), FOB(ree on board) or CIP (carriage and insurance paid);

the delivery point, such as the U.S. port o entry;

the delivery schedule, which is important because it canaect penalties or compensation or late delivery; and

the number o shipments.

4 Warranties, penalties and compensationThese clauses should cover the ollowing:

compensation to the other party i the seller or buyer doesnot perorm according to its contractual obligations;

any other applicable penalties;

warranty obligations; and

late-interest provisions to cover late payment by the buyer.

4 Force majeureForce majeure applies to events that lie outside the control othe contracting parties and that may aect their ability to meettheir contractual obligations. Clauses in this area should speciy:

descriptions o events constituting orce majeure;

the time rame within which the other party must benotied o such an event;

the steps to be taken to resolve a delay that is excusableowing to orce majeure; and

the options available to the parties i there is a long delay inullling the contract owing to orce majeure, such ascontract termination or a change in the scope and price othe contract.

4 Settlement o disputesThese clauses should cover the ollowing:

the process or settling disputes, such as negotiation,arbitration or litigation;

i arbitration is used, the country and place where it willoccur, the rules o arbitration that will apply and how thecosts o arbitration will be divided;

i litigation is used, the country and place where the litigationwill occur, and the court in which it will be heard; and

a time rame or resolving disputes.

4 Contract eectivenessThese clauses should establish:

the conditions and/or events under which the contract

becomes eective, such as on contract signing or on thereceipt o an advance payment; and

how the above conditions and/or events may aect thecontract schedule.

4 Termination or cancellation o the contractThese clauses should establish:

which party has the right to terminate the contract andunder what conditions it may do so;

any payment and perormance obligations or either party

upon termination o the contract; a denition o loss due to contract termination and the

consequences o loss; and

a mechanism to avoid disputes in this area.


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4 Title transer

These clauses should establish:

when the title to the goods will transer rom the seller to thebuyer, such as transer on ull payment or transer whenthe goods are received by the buyer; and

any legal requirements that will apply in this area.

4 Governing law and governing languageThis clause should:

establish the legal system under which the provisions o thecontract will be interpreted; and

ensure that a suitable translation will be provided i thecontract is not in English (or French, i applicable), and alsospeciy whether the translation or the original o the contractwill prevail i a dispute arises.

4 Required documentation and eventsThis should speciy the documents and procedures or eachevent in the contract, such as:

documents required or delivery; and

required technical documentation, i any.

BONDINGProviding bonds, in the orm o letters o guarantee, letters ocredit or surety bonds, is necessary or doing business in manyoreign markets.

A bond is a guarantee o perormance issued by a bank onbehal o you, the seller. It guarantees that i you dont perormaccording to your contractual or warranty commitments, yourbank will pay the value o the bond to your buyer. In eect, thebond insures your buyer against any losses that may occur i youail to meet your contract terms.

I your contract requires bonding, it should:

4 indicate the reason or issuing the bond;

4 state the date o issue;

4 state the validity period, the expiry date and the triggersor expiry;

4 establish the means, i any, or increasing or decreasing

the value o the bond;4 ensure that the bond, i it is a letter o guarantee o a

letter o credit, conorms to the International Chambero Commerces Uniorm Customs and Practices rulesor Documentary Credits;

READ THE CONTRACT VERY, VERY CAREFULLY!

You and your legal team should careully scrutinize the contracts

wording or potential risks such as harsh late delivery penalties,onerous indemnity clauses, or clauses related to transer o intellectualproperty to the buyer. I possible, strike out such conditions orrenegotiate them. Also, look or unexpected additional costs suchas insurance requirements, perormance guarantees, warrantiesand delivery conditions.


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4 ensure that the bond, i it is a surety bond, conorms to arecognized orm o standard security bond; and

4 ensure that the bond corresponds to the actual requirementso the contract.

BONDING COLLATERAL ANDWRONGFUL CALLSObtaining a perormance bond can have a major impact onyour working capital and cash position, since the bond issuer normally your nancial institution will want 100 per centcollateral or each dollar o bonding it issues. You can providethis either as cash, on a dollar-or-dollar basis, or rom securitypledged rom your line o credit. In both cases, issuing thebond reduces the assets you can use or unding your

business operations.

Perormance bonds, moreover, are payable on the demand oyour buyer. I a buyer decides that you have not met the contractconditions, they can call the bond that is, the buyer candemand that your nancial institution immediately pay outthe value o the bond to the buyer.

When this happens, your bank does not judge the validity o thebuyers claim or determine whether you are actually at ault. Itsimply pays out the bond and takes your collateral in restitution.I you have not, in act, violated the contract terms, this is knownas a wrongul call. Unortunately, it may be very dicult or

you to get your cash back even when you prove that the buyerscall was invalid.

EDC can provide you with a variety o bonding solutions orthese problems, not only to help you obtain bonding, but alsoto protect you against wrongul calls. These solutions includethe ollowing:

4 An Account Perormance Security Guarantee protects yournancial institution i your buyer demands payment againstthe guarantee the institution provided on your behal. Becausethe guarantee covers 100 per cent o your nancial institutions

risk, your lender may orego the collateral usually required topost such guarantees. This means theres no drain on yourcash fow.

4 Surety Bond Insurance can protect your surety company in theevent o a call, encouraging it to provide you with the bondingcapacity you need to sell internationally.

4 Perormance Security Insurance covers up to 95 per cento your losses i your oreign buyer demands payment on abank-issued guarantee without a valid reason (a wrongul call).
http://www.edc.ca/EN/Our-Solutions/Bonding-and-Guarantees/Pages/account-performance-security-guarantee.aspxhttp://www.edc.ca/EN/Our-Solutions/Bonding-and-Guarantees/Pages/surety-bond-insurance.aspxhttp://www.edc.ca/EN/Our-Solutions/Insurance/Pages/performance-security-insurance.aspxhttp://www.edc.ca/EN/Our-Solutions/Insurance/Pages/performance-security-insurance.aspxhttp://www.edc.ca/EN/Our-Solutions/Bonding-and-Guarantees/Pages/surety-bond-insurance.aspxhttp://www.edc.ca/EN/Our-Solutions/Bonding-and-Guarantees/Pages/account-performance-security-guarantee.aspx


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CONTRACT CANCELLATIONYour contract should establish penalties or the buyer ithe buyer cancels the contract without just cause. However,it can sometimes be problematic (or very slow) to collectthese penalties when the buyer is in a oreign country.

To cover yoursel against this risk, you can use EDCsContract Frustration Insurance, which will insure you or up

to 90 per cent o your eligible losses resulting rom political andcommercial risks. It protects you rom:

4 contract cancellation;

4 your customers bankruptcy or deault;

4 payment delays caused by blocked unds or transer diculties;

4 hostilities in a customers country;

4 cancellation o export or import permits; and

4 a host governments moratorium on debt.
http://www.edc.ca/EN/Our-Solutions/Insurance/Pages/contract-frustration-insurance.aspxhttp://www.edc.ca/EN/Our-Solutions/Insurance/Pages/contract-frustration-insurance.aspx


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At some point in the negotiation o an export contract, your buyer will want to know what credit terms you are willing

to oer essentially, how long the buyer can wait beore paying you or your goods. This question has implications

beyond the obvious, because your answer may help determine whether you succeed in making the sale.

I your terms are too stringent i you demand cash in advance, or example your buyer may decide to look or another

supplier. At the other extreme, your terms should not be too lenient. I they are, you may have to wait months to get

paid, which wont help your cash fow.

How you negotiate will depend to some degree on knowing the normal practices o the local business culture.

U.S. companies, or example, usually expect open account terms o 30 to 60 days, while buyers in other markets

will preer letters o credit (LCs) and may demand credit terms o up to 180 days. Such lengthy terms are common

in export markets, with capital goods subject to longer terms than consumer goods. When negotiating credit terms,keep in mind that the longer you have to wait or payment, the greater the risk that the buyer may deault.

Note also that the credit term normally begins when your buyer receives your goods. International delivery takes

considerably more time than domestic delivery, so allow or this when deciding on how long a credit term you

can accept.

CHAPTER 6: GETTING PAID

FORMS OF PAYMENTWhen negotiating payment terms, you should keep these basic

principles in mind:4 Your buyers ideal situation is to reduce their risk by receiving

your goods beore paying or them, and by paying as longater delivery as possible. In this case, you are actuallyproviding your buyers with unsecured credit they have thegoods and you do not (yet) have the money. From your pointo view, this is not the best payment solution.

4Yourideal, conversely, is to reduce your risk by receivingpayment as early as possible, preerably beore you ship thegoods. In this case, your buyers are providingyouwith

unsecured credit you have the money, but your buyers dont(yet) have the goods. From the buyers point o view, this isnot the best payment solution.

These two ideals are obviously incompatible, and much ingenuityhas been put into developing payment terms that will achieve acompromise acceptable to both seller and buyer. The mostcommon methods are the ollowing.


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CASH IN ADVANCE

For you, this is the astest and most secure orm o payment.Your buyers, however, must nance the purchase rom companyresources and, i they have to borrow the cash to do this, theymay be penalized by high local interest rates. Your buyers also

have no guarantee that you will deliver the goods as promised.For your buyers, consequently, cash in advance is the leastdesirable method o paying you.

LETTERS OF CREDIT

LCs provide security to both you and your buyers because they usebanks to receive and check shipping documents and to guaranteepayment. An LC can allow the costs o nancing a transaction to beborne by either you or your buyers. Note that an LC is a paymentagainst documents that is, payment is completely independent othe actual delivery o any physical goods.

LCs can be conrmedor unconrmed. For example, a Canadian bankcan conrm an LC issued by a oreign bank, thus guaranteeingthat the Canadian bank will pay you even i the oreign bankdoesnt. This kind o LC is obviously much better or you thanthe unconrmed one.

LCs can also be irrevocable. This means they cant be cancelledor amended without your approval. The most secure orm o LCis one that is both conrmed and irrevocable.

OPEN ACCOUNT

You, the seller, agree to ship the goods to a buyer, who will payor them within 30 to 180 days o either shipment or receipt.This is ideal or your buyer, who receives the goods beorepaying or them. For the same reason, it is also the riskiest orm

o payment or you because it is unsecured. A willingness to bepaid on this basis can help secure a sale or you, but be very surethat the buyers credit is good beore you agree to these terms.

OPEN ACCOUNT WITH RECEIVABLES INSURANCE

This could also be called secured open account. In this ormo payment, a nancial institution provides you with accountsreceivable insurance so youll get your money even i your buyerails to pay. At the same time, because the nancial institutionsecures your payment, you can oer your buyer all the benetso open-account payment with minimal risk to your bottom line.This orm o payment is an excellent option or both buyerand seller.

DOCUMENTARY COLLECTIONSWith documentary collections, your Canadian bank sendsshipping documents to a correspondent bank in your buyersmarket. When the goods arrive at customs, the correspondentbank presents the documents to your buyer, who then paysthe bank beore actually receiving the goods. This is knownas documents against payment (D/P). It is very secure or youand your customer doesnt have to pay until the goods arrive atcustoms, so there is no worry about non-delivery. This orm opayment is also inexpensive compared to an LC.

An alternative is documents against acceptance (D/A). In thisarrangement, the buyer can pay within a specied number odays o the documents being presented by the bank. This isgood or the buyer, who is being provided with credit or up to180 days at your expense. It is risky or you, however, becauseyour buyer receives the goods beore paying or them.


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PROTECTING AGAINST PAYMENT RISKPayment risk can be a threat in the international market andoten stems rom lack o knowledge about a oreign buyerscreditworthiness. To reduce this risk, your company must knowwhat its trading partners are doing, whether they are meetingtheir obligations and when you will receive payment. There arealso various types o insurance that will protect your receivablesi a buyer, or whatever reason, ails to pay you.

CHECKING BUYER CREDIT

First and oremost, you should check a oreign buyers creditstatus very careully beore committing to a sales agreementor any other business relationship. This includes investigatingthe rms creditworthiness, its nancial record, the quality o

its management, its business history and its reputation in thelocal and international marketplace. Local legal or consultingrms may be able to help you, and you may be able to obtainassistance rom the local Canadian Trade Commissioner Serviceoces and rom EDC.

INSURING AGAINST PAYMENT RISK

Your accounts receivable are among the most important assetsyou have on your books, and a customers ailure to pay canjeopardize the very survival o your business. The possibility o

non-payment is distinctly higher when youre selling into aoreign market, with the most likely reasons being these:

4 your buyer g

international trade in canada

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