export and import strategies...13

8/13/2019 Export and Import Strategies...13

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Export and Import Strategies

I. INTRODUCTION

Whereas exports represent goods and services flowing out of a country, imports represent

goods and services flowing into a country. Exports result in receipts and imports result in

payments. Although export and import activities are a natural extension of distribution

strategy, they also include elements of product , promotion and pricing factors and

decisions. Both exporting and importing entail a lower level of risk than foreign direct

investment , but while exporting offers less control over the marketing function, importing

offers less control over the production function.

II. EXPORT STRATEGY

A firm’s choice of entry mode depends on various factors, such as the ownership

advantages of the firm, the location advantages of the market and the internalization

advantages of specific assets, international experience and/or the ability to develop

differentiated products. In general, firms that possess few ownership advantages either do

not enter foreign markets, or they use the lower-risk entry modes of exporting and

licensing. Still in all, the decision to export must fit a company’s overall strategy and take

into account global concentr ation , global synergies and global strategic motivations .

A. Characteristics of Exporters

Research conducted on the characteristics of exporters has resulted in two basic

conclusions:

(i) the probability of exporting increases with size of company revenues and

(ii) export intensity (the percentage of total revenues generated by exports) is not

positively correlated with company size. Factors such as the risk profile of management

and the nature of industry competition are just as important as firm size.

B. Why Companies Export

Companies export in order to increase sales revenues, achieve economies of scale in

production, diversify markets and minimize risk.

C. Stages of Export Development



Firms tend to move through three phases of export development: pre-engagement, initial

exporting and advanced exporting . As they do so, they tend to

(i) export to more countries and

(ii) expect exports to grow as a percentage of total sales.

In addition, they also tend to (i) diversify their markets to more distant countries and (ii)

move into environments that are increasingly different from those of their home

countries.

D. Potential Pitfalls of Exporting

The operational mistakes associated with exporting can be very costly. In addition, events

such as 9/11 can bring international trade activities to a complete halt in the affected

region.

E. Designing an Export Strategy

To design an effective export strategy, managers must:

assess the company’s export potential

obtain expert counseling on exporting

select target markets

formulate and implement an effective export strategy.

III. IMPORT STRATEGY

The import process involves strategic and procedural issues that basically mirror those of

the export process. There are two basic types of imports: extra company imports from

independent (unrelated) upstream sources and intercompany imports from a firm’s

upstream global supply chain that represent intermediate goods and services. The three

basic types of importers are those that:

look for any product around the world that will generate a positive cash

flow

Look to foreign sourcing as a means to minimize product costs



use foreign sourcing as part of their global supply chain strategy.

An import broker is a certified specialist who obtains required government permissions

and other clearances before forwarding the necessary documents to the carrier(s) of the

goods.

A. The Role of Customs Agencies

Customs reflect a country’s import and export procedures and restrictions. The primary

duties of a customs agency are the assessment and collection of all duties, taxes and fees

on imported products, the enforcement of customs and related laws and the

administration of certain navigation laws and treaties. National customs agencies are

increasingly involved in dealing with smuggling operations and preventing foreign

terrorist attacks. A customs broker can help an importer minimize duties by (i) valuing

products in such a way that they qualify for more favorable treatment, (ii) qualifying for

duty refunds through drawback provisions, (iii) deferring duties by using bondedwarehouses and foreign trade zones and (iv) limiting liability by properly marking an

import’s country of origin.

B. Import Documentation

The import documentation process can be both complicated and cumbersome. Without

proper documentation, customs agencies will not release shipments. Documents are of

two types: (i) those that determine whether customs will release the shipment and (ii)

those that contain the information necessary for duty assessment and data gathering

purposes. At a minimum, the required documents would include an entry manifest, a

commercial invoice and a packing list.

IV. THIRD-PARTY INTERMEDIARIES

Thi rd-party intermediaries are independent (unrelated) firms that facilitate international

trade transactions by assisting both importers and exporters. They may perform any or all

of the following functions:

stimulate sales, obtain orders and conduct market research

perform credit investigations and payment-collection activities

handle foreign traffic arrangements and shipping details

provide support for a client’s sales, distribution and promotion staff.



Di rect exports represent products sold to an independent party outside of the exporter’s

home country; indirect exports are first sold to an intermediary in the domestic market,

who then sells the products in the export market. While services are more likely to be

exported on a direct basis, goods are exported via both avenues.

A. Direct Selling

Direct selling , i.e., exporting through sales representatives to distributors, foreign

retailers, or final end users, gives exporters greater control over the marketing function

and offers the potential to earn higher profits as well. Whereas a sales representative

usually operates on a commission basis, a distributor is a merchant who purchases goods

from a manufacturer and resells them at a profit.

B. Direct Exporting through the Internet and Electronic Commerce

Electronic commerce allows companies both large and small to engage in direct

marketing quickly, easily and inexpensively. It is especially important for small and

medium-size firms that wish to reach distant markets.

C. Indirect Selling

Indirect selling , i.e., selling products to or through an independent domestic

intermediary, is carried out via export management companies and export trading

companies.

D. Export Management Companies

An export management company [EMC] is a firm that either acts as a manufacturer’s

agent or buys merchandise from manufacturers for international distribution. EMCs

generally operate on a contractual basis, provide exclusive representation in a well-

defined foreign territory and act as the export arm of a manufacturer. Often, export

management companies specialize according to product, function and/or market area.

E. Export Trading Companies

An export tr ading company [ETC] is somewhat like an export management company, but its primary purpose in becoming involved in international trade as an independent

broker is to match domestic exporters to foreign customers. Export trading companies

that are based in the U.S. may be exempt from antitrust provisions in order to allow them

to penetrate foreign markets by collaborating with other U.S. firms.

F. Non-U.S. Trading Companies



While the original functions of a trading company were to handle the paperwork,

financing, transportation and storage services related to import and export transactions,

many have expanded the scope of their operations to include production and processing

facilities and operations, as well as fully integrated marketing systems. (There are no U.S.

trading companies that rank among the Fortune Global 500 companies; only Japan, SouthKorea, Germany and China have firms on that list.) The Japanese sogo shosha (trading

company) traces its roots to the zaibatsu (large, family-owned businesses composed of

financial and manufacturing companies linked together by a large holding company),

which subsequently evolved into the keiretsu (large, interlocking financial,

manufacturing and trading company networks). South Korean trading companies are part

of a larger corporate group known as the chaebol . Companies within a chaebol are very

dependent on family patriarchs and are tightly linked to one another via a high degree of

intercompany transactions.

G. Foreign Freight Forwarders

A fr eight forwarder is a foreign trade specialist who deals in the movement of goods

from producer to customer. Even export management companies may use the specialized

services of foreign freight forwarders. The typical freight forwarder is the largest export

intermediary in terms of the weight and value of cargo handled. Some may specialize in

the type of mode used, others in the geographical area served. The movement of goods

across a variety of modes from origin to destination is known as intermodal

transportation. Three recent trends leading to a preference for air freight over ocean

freight are: (i) the need for more frequent shipments, (ii) lighter-weight shipments and

(iii) high-value shipments.

H. Export Documentation

An export l icense allows the exporter to ship goods to particular countries. Other key

export documents are the:

pro forma invoice

commercial invoice

consular invoice

bill of lading

certificate of origin

shipper’s export declaration



export packing list.

V. EXPORT FINANCING

From the exporter’s point of view, four major issues relate to export financing: (i) the

price of the product, (ii) the method of payment, (iii) the financing of receivables and (iv)

insurance.

A. Product Price

Export prices must factor in exchange rate fluctuations, transportation costs, relevant

duties, the costs of multiple wholesale channels, insurance fees, bank charges,

antidumping laws, etc.

B. Method of Payment

The flow of money across national borders requires the use of special documents and

may be very complicated. In descending order of security for the exporter, the basic

methods of payment for exports are:

cash in advance

a letter of credit (obligates the buyer’s bank to pay the exporter)

a revocable letter of credit may be changed by any of the

parties to the agreement

an irrevocable letter of credit requires all parties to the

agreement to consent to the change in the document

a confi rmed letter of credit adds a guarantee of payment to an

additional bank (usually an interbank agreement).

a draft or bil l of exchange

a documentary draf t instructs the importer to pay the exporter

if specified documents are presented

a sight draft requires payment to be made immediately



a time draf t requires payment to be made at some specific

date in the future.

an open account (the exporter bills the importer but does not

require formal payment documents — generally limited to members

of the same corporate group).

C. Financing Receivables

The increased distances and time involved in exporting often create cash flow problems

for an exporter. Further, because exporting is risky, banks may be unwilling to provide

financing for export transactions. However, exporters can get access to funds through

factoring , i.e., the discounting of a foreign account receivable, and forfaiting , i.e., a

longer-term instrument that includes a guarantee from a bank in the importer’s country.

In addition, exporters can apply for guarantees from government agencies (such as the

Ex-Im Bank ) in order to get banks to lend them money until payment is received.

D. Insurance

The two types of insurance most often used for export transactions are: (i) transportation

risks (e.g., devastating weather conditions or rough handling by carriers) and (ii) political,

commercial and foreign-exchange (environmental) risks. While private insurers will

covers these types of risks for established exporters with a proven record, government

agencies tend to be the most important insurers of export shipments.

VI. COUNTERTRADE

Countertrade involves a reciprocal flow of goods and services. It provides a means to

complete a transaction when a firm (or government) does not have sufficient convertible

currency to pay for imports, or it simply does not have sufficient funds. Countertrade

transactions can be divided into two basic types: (i) barter (based on clearing

arrangements used to avoid money-based exchange) and (ii) buybacks, offsets and

counterpurchase (all of which are used to impose reciprocal commitments).

A.

Barter

Barter occurs when goods or services are traded for other goods and services, i.e., it

represents a non-monetary transaction. ( Barter is not only the oldest form of

countertrade, it is the oldest form of any type of trade transaction.) Buybacks represent

counter-deliveries the exporter receives as payment that in fact are related to or originate

from the original export.



B. Offset Trade

Offset trade occurs when the exporter sells goods or services for cash but then helps the

importer find opportunities to earn hard currency. Direct offsets include generated

business that directly relates to the export; indirect off sets include generated businessunrelated to the export.