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This week you will learn how a firm can achieve its objectives through exporting, importing, and countertrade.

You will also:

•Understand the ways in which a firm finances its import and export activities.

•Explore various contractual and investment entry modes.

•And examine the strategic factors in selecting an entry mode.

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This chart shows the top 10 exporters to the United States in terms of the value of goods sold. Companies typically begin exporting to:

•Expand sales when the domestic market is saturated.

•Diversify sales to better match cash inflows with cash outflows.

•Gain valuable experience through a relatively low-risk and low-cost method of conducting international business.

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There are four steps to creating an export strategy for international markets.

Step 1 is to identify a potential market.

•Research a target market to discover whether sufficient demand exists. A novice exporter may focus on one or a few markets that are best understood in cultural terms.

Step 2 is to match needs to abilities.

•This involves a frank assessment of a company’s ability to satisfy the needs of a p y y yprospective market.

Step 3 is to initiate meetings.

•Schedule meetings with potential distributors, buyers, and others to build trust and cooperation. Negotiations between the parties will hammer out details of the working relationship.

Step 4 is to commit resources.

•After agreements are finalized, employ the company’s resources to clearly define the export program’s objectives for at least the next 3 to 5 years.

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A company can use intermediaries to deliver its products to foreign markets or f th t ti iti it lfperform the export activities itself.

Direct exporting involves selling directly to buyers in a target market.

• A sales representative does not take title to merchandise and generally represents only one company’s products.

• A distributor takes ownership of merchandise when it enters their country and sells locally using its own distribution channels.

Indirect exporting is selling to intermediaries who resell to the target marketIndirect exporting is selling to intermediaries who resell to the target market.

• An agent represents companies in the target market and tends to receive a commission on sales.

• An export management company (EMC) exports on behalf of an indirect exporter and operates contractually as an agent or distributor. The typical EMC will gather market information, formulate promotional strategies, research customer credit, arrange shipping, and coordinate export documents. While the EMC offers a deep understanding of the target market,documents. While the EMC offers a deep understanding of the target market, this can hinder development of a client’s own exporting skills.

• An export trading company (ETC) provides more services than those directly related to exporting. The typical ETC offers its client import, export, and countertrade services, access to distribution channels, storage facilities, new trade and investment projects, and manufacturing services.

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Companies new to international business often make export and import blunders.

•Common reasons for this include a failure to conduct adequate market research or a failure to obtain adequate export advice.

•To avoid committing such blunders, a company might choose to hire a freight forwarder, which is a specialist in export-related activities such as customs clearing, tariff schedules, shipping fees, and insurance. A freight forwarder can also pack merchandise for export and will accept responsibility for getting a shipment from the port of export to the port of importshipment from the port of export to the port of import.

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Countertrade is the selling of products that are paid for with other goods or services. It is used to access markets that are otherwise off-limits because of a lack of hard currency. There are five basic types of countertrade.

•Barter is an exchange of products directly for other goods or services without using money.

•Counterpurchase is the sale of products to a nation by a company that promises to make a future specific purchase from that nation.

•Offset is an agreement that a company will offset a hard-currency sale to a nation with a future hard-currency purchase of an unspecified product from that nation.

•Switch trading is when one company sells to another its obligation to make a purchase in a given country.

•Buyback is the export of industrial equipment in return for products produced by that equipmentthat equipment.

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International trade poses risks for both exporters and importers. Exporters risk not receiving payment after delivery, whereas importers fear that delivery might not occur once payment is made. Let’s examine four key methods of export and import financing.

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Open account financing is riskiest for the exporter, whereas advance payment is riskiest for the importer.

•In open account, an exporter ships merchandise and later invoices the importer. This method is often used when two parties are familiar with each other, or for sales between two subsidiaries within an international company. This method creates the risk of nonpayment for exporters while removing the risk of non-shipment for importers.

•In advance payment an importer pays for merchandise before it is shipped This•In advance payment, an importer pays for merchandise before it is shipped. This method is often used when two parties are unfamiliar with each other, the value of the transaction is small, or the buyer has a poor credit rating. This method creates the risk of non-shipment for importers but eliminates the risk of nonpayment for exporters.

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In the documentary collection financing method, a bank acts as an intermediary in a transaction without accepting financial risk. It is typically used in ongoing business relationships between two parties.

•A draft (or bill of exchange) is a document ordering the importer to pay the exporter a specific sum of money at a specific time.

•A bill of lading is a contract between the exporter and shipper that specifies the merchandise destination and its shipping costs.

•Documentary collection reduces the risk of non-shipment because the bill of lading is proof of shipment. However, the risk of nonpayment increases because the importer does not pay until it receives all necessary documents from the exporter.

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This diagram shows how the documentary collection process actually works.

Exporter/Importer contract to sell/buy goods or services# Exporter’s bank gives draft to exporter# Exporter ships goods# Exporter delivers documents to its bank# Exporter’s bank

send documents to importer’s bank# Importer delivers payment to importer’s bank (often a line of credit)# Importer’s bank hands over Bill of Lading to importer#

Importer’s bank pays exporter’s bank# Exporter’s bank pays exporter.

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In the letter of credit financing method, the importer’s bank issues a document stating that the bank will pay the exporter when the exporter fulfills the terms of the document. It is typically used when an importer’s credit rating is questionable, when an exporter needs to obtain financing, and when a market’s regulations require it. There are three main types of letters of credit.

•An irrevocable letter of credit allows the bank issuing the letter to modify its terms only after obtaining the approval of both exporter and importer.

•A revocable letter of credit can be modified by the issuing bank without•A revocable letter of credit can be modified by the issuing bank without obtaining approval from either the exporter or the importer.

•And a confirmed letter of credit is guaranteed by both the exporter’s bank and the importer’s bank.

•The letter of credit method reduces the risk of non-shipment for the importer because there is proof of shipment before payment. And although the risk of nonpayment increases, it is the importer’s bank that accepts this risk.p y , p p

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This diagram shows how the letter of credit process actually works.

Exporter/Importer contract to sell/buy goods or services# Importer arranges for letter of credit which the importer’s bank delivers to exporter’s bank #Exporter’s bank informs exporter of letter of credit# Exporter ships goods# Exporter delivers documents to its bank#

Exporter’s bank checks documents and pays exporter # Exporter’s bank send documents to importer’s bank# Importer bank delivers payment to Exporter’s bank# Importer’s bank hands over Bill of Lading to importer#bank# Importer s bank hands over Bill of Lading to importer#

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Let’s now turn our attention to several widely used contractual entry modes.

•Licensing is when a company owning intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specific period of time. Licensors receive royalty payments based on a percentage of revenue generated by property such as patents, copyrights, designs, formulas, trademarks, and brand names.

•Licensing can allow a company to finance an international expansion, reduce international expansion risks reduce the likelihood of counterfeit production andinternational expansion risks, reduce the likelihood of counterfeit production, and help licensees upgrade their production technologies.

•Yet, licensing may restrict a licensor’s future activities, reduce the global consistency of a product’s quality and marketing, and amount to “lending” strategically important property to future competitors.

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Another contractual entry mode is franchising, which is when one company (the franchiser) supplies another (the franchisee) with intangible property and assistance over an extended period of time. Franchisers typically receive compensation as flat fees or royalty payments for use of an asset, which is commonly a brand name or trademark.

•Franchising is a low-cost and low-risk entry mode into new markets, allows for rapid geographic expansion, and makes use of local managers’ cultural knowledge.ow edge.

•Yet, managing franchisees across several nations can become cumbersome, and such agreements may reduce organizational flexibility for franchisees.

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Another contractual entry mode is a management contract, which is when one company supplies another with managerial expertise for a specific period of time. The supplier of expertise is compensated with either a lump-sum payment or a fee based on sales. Management contracts are used to transfer specialized knowledge of technical managers and business management skills.

•Management contracts allow a firm to risk few assets when going international, let a nation upgrade its utilities when lacking financing, and help advance the skills of a nation’s workforce.s s o a at o s wo o ce.

•Yet, management contracts can endanger the lives of home-country managers when abroad in unstable markets, and can create new competitors in target markets by transferring valuable skills.

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Another contractual entry mode is a turnkey project, which is when a company designs, constructs, and tests a production facility for a client. These projects are often large-scale utility projects in host countries. They usually transfer special process technologies or facility designs to a client.

•Turnkey projects let a firm specialize in its core competency to exploit international opportunities, and allow a nation to obtain the latest infrastructure from the world’s leading companies.

•Yet turnkey projects may be awarded for political reasons rather than for•Yet, turnkey projects may be awarded for political reasons rather than for technological know-how, and can create future international competitors.

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Answer:

Although franchising and licensing are both contractual entry modes, several key differences set them apart. First, franchising gives a company greater control over the sale of its product in a target market than does licensing. Second, franchising is primarily used in the service sector, whereas licensing is common in manufacturing industries. And third, franchising requires ongoing assistance from the franchiser, but licensing normally involves a one-time transfer of property.

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We now turn our attention to investment entry modes, which entail direct investment and ongoing involvement in a target market or host country.

•Wholly owned subsidiaries are entirely owned and controlled by a single parent company. A subsidiary’s planned operations largely determines whether a company purchases an existing company or builds new from the ground up. For example, a firm that makes high-tech devices may need to build facilities because state-of-the-art operations are nonexistent. The benefits of building new must outweigh the time and resources required for construction, hiring and training outwe g t e t e a d esou ces equ ed o co st uct o , g a d t a gemployees, and launching production.

•A wholly owned subsidiary gives a company total control over day-to-day local operations and valuable technologies, processes, and other intangibles. It also lets a firm coordinate activities of all its various national subsidiaries.

•Yet, it can be an expensive entry mode and involve high risk exposure for a firm’s assets.

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Another investment entry mode is a joint venture, which is a separate company that is created and jointly owned by two or more independent entities to achieve a common objective.

•A joint venture can reduce risk by sharing the investment with other parties, help penetrate international markets that are otherwise off-limits, and provide access to another party’s distribution channels.

•Yet, conflict can develop between partners if objectives change, if one party’s goals are reached early or if trust and cooperation break down Also parties maygoals are reached early, or if trust and cooperation break down. Also, parties may lose all control over the venture’s operations if the local government participates in the venture.

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Joint ventures follow several common configurations.

•In a forward integration joint venture, parties invest together in downstream business activities.

•In a backward integration joint venture, parties invest together in upstream business activities.

•In a buyback joint venture, each partner provides inputs and absorbs outputs.

•And in a multistage joint venture, one partner integrates downstream while the g j , p gother integrates upstream.

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Another investment entry mode is a strategic alliance, which is when two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each. Alliances may be formed for short or long periods, and can be formed between a company and its suppliers, buyers, and competitors.

•A strategic alliance can allow firms to share the cost of an international investment project, tap competitors’ specific strengths, and access distribution channels.

•Yet conflict among partners may undermine cooperation and an alliance may•Yet, conflict among partners may undermine cooperation, and an alliance may create a future competitor in a target market or even globally.

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There are several points to consider when selecting partners for cooperation.

•First, each partner must be firmly committed to the stated goals of the cooperative arrangement. Detailing duties and contributions of each party through prior negotiations helps ensure continued cooperation.

•Second, although the importance of locating a trustworthy partner seems obvious, cooperation should nevertheless be approached with caution. Reference check and validate the bona fides of potential partners.

•Third, each party’s managers should be at ease working with people of other cultures and be comfortable traveling to, and perhaps living in, other cultures.

•And fourth, managers should apply the same stringent evaluation criteria to a potential international cooperative arrangement as they would to any other investment opportunity.

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Firms should consider several strategic factors when selecting an entry mode.

•Cultural differences can reduce managers’ confidence in their ability to control operations in the host country. A lack of cultural familiarity can cause a firm to avoid investment entry and pursue exporting or contractual entry.

•Political instability in a host country increases the risk exposure of assets. Political uncertainty can cause companies to avoid investment entry in favor of other modes. But a target market’s laws can encourage investment if, for example it imposes high tariffs or low quota limits on importsexample, it imposes high tariffs or low quota limits on imports.

•Market size is often a determining factor in entry mode choice. Rising incomes can encourage investment to help a firm better understand the target market and prepare for growing demand. For example, companies are undertaking enormous investments in China, but making far more modest investments or pursuing exporting and contractual entry in smaller markets.

•Low-cost production and shipping can give a company an advantage by helping p pp g g p y g y p git control total costs. If producing in a host country lowers a firm’s total production costs, it can encourage investment, licensing, or franchising.

•As international experience grows, a firm may select entry modes that require deeper involvement, but which also involve greater exposure to risk.

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Next week, you will learn how globalization affects international marketing activities.

You will also:

•Explore how firms develop their international product strategies.

•Understand how companies blend product and promotional strategies for international markets.

•And examine the elements that influence international distribution and pricing p gstrategies.

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