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ECP 6701Competitive Strategies in Expanding Markets

Export and Import Strategies

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Readings

Daniels, Radebaugh, Sallivan, International Business, Chapter 17

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Objectives

Identify the key elements of export and import strategies

Compare direct and indirect selling of exports Discuss the role of trade intermediaries Identify methods of export payments and the

financing of receivables. Readings.

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Introduction

Characteristics of Exporters– The probability of a company’s being an exporter

increases with the size of the company– Export intensity is not positively correlated with

company size– The largest exporters in the United States also are

among the largest industrial corporations – Smaller exporters make smaller shipments; larger

exporters make larger shipments

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Export Shipments of Various Sizes as Percentages of Total Dollar Value of Exports

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Why companies export

Exporting– Expands sales and profits– Achieves economies of scale and reduces the unit

costs of production.– Is less risky than DFI because it does not require

the same degree of capital.– Allows companies to diversify sales location.

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Phases of export development

As companies learn more about the process of exporting,– they tend to export to more countries– they tend to export to more dissimilar countries which are

located further away– they tend to export a larger percentage of their sales.

The following figure summarizes the various phases of exporting.

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Phases of Export Development

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Export Strategy

– Entry mode depends on ownership advantages of the company, location advantages of the market, and internalization advantages of integrating transactions within the company

– Companies that have lower levels of ownership advantages either do not enter foreign markets or use low-risk strategies such as exporting

– Strategic considerations affect the choice of exporting as an entry mode

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Designing an Export Strategy

In designing an export strategy, a company must– Assess export potential – Get expert counseling– Select market or markets– Set goals and get the product to market

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The Import Strategy

Importers need to be concerned with procedural and strategic issues

An import broker is an intermediary that helps an importer clear customs

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The Import Strategy

The Role of Customs Agencies– Customs agencies assess and collect duties and ensure

import regulations are adhered to.– Drawback provisions allow U.S. exporters to apply for a

refund of 99 percent of the duty paid on imported components.

Documentation– Importers must submit to customs documents that

determine whether the shipment is released and what duties are assessed.

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Export Intermediaries

Companies use external specialists for exporting before developing internal capabilities

Companies may market their products either directly or indirectly through external specialists or intermediary organizations

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Export Intermediaries

Direct Selling– Direct selling involves sales representatives, agents,

distributors, or retailers– A sales representativesales representative usually operates on a

commission basis– A distributor distributor is a merchant who purchases the

products from the manufacturer and sells them at a profit

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Export Intermediaries

Indirect Selling– Commission agents work for the buyer

– Export Management Companies (EMCs) provide export services for a specific exporter or group of exporters

– Export Management Companies

EMCs in the United States are mostly small, entrepreneurial ventures that tend to specialize by product, function, or market area

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Export Trading Companies (ETCs)

ETCs tend to operate on the basis of demand rather than supply

ETCs can be formed by

– Competitors can be exempt from antitrust laws– State and local governments– Money-center banks– Major corporations

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Foreign Freight Forwarders

A foreign freight forwarder is an export or import specialist dealing in the movement of goods from producer to consumer– The typical freight forwarder is the largest export

intermediary in terms of value and weight handled

Air and Ocean Freight– Ocean freight is dominant in terms of total weight of

products traded, but air freight is significant in terms of value of products shipped

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Foreign Freight Forwarders

Documentation: An export license is used to determine whether products can be shipped to specific countries– Key export documents include

pro forma invoice commercial invoice bill of lading shipper’s export declaration and export packing list

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Export Financing

Financial issues relating to exporting:

– Product price– Method of payment– Financing of receivables– Insurance

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Product Price

Export pricing is influenced by:– Exchange rates– Transportation costs– Duties– Multiple distribution channels– Insurance costs– Banking costs

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Methods of payment

Methods of payments are– Cash in advance– Letter of credit– Documentary collection or draft– Open account– Countertrade

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Export Financing

Financing receivables for US exporters

– Ex-Im Bank provides direct loans to importers or guarantees to financial institutions

– The Small Business Administration (SBA) guarantees long-term financing to small exporters

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Letter-of-Credit Relationships

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An Irrevocable Export Letter of Credit

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Export Financing

A letter of creditletter of credit obligates the buyer’s bank to pay the exporter

A revocable letter of creditrevocable letter of credit may be changed by any of the parties to the agreement

An irrevocable letter of creditirrevocable letter of credit requires all parties to agree to a change in the documents

A confirmed irrevocable letter of creditconfirmed irrevocable letter of credit adds an obligation to pay for the exporter’s bank

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Countertrade

CountertradeCountertrade refers to any one of a number of different arrangements by which goods and services are traded for each other

Countertrade often takes place because of a foreign-exchange shortage

BarterBarter occurs when goods are traded for goods In offset tradeoffset trade, the exporter sells goods for cash but

then undertakes to promote exports from the importing country in order to help it earn foreign exchange

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An Offset Transaction

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Summary

The likelihood that a company is becoming an exporter increases with company size, but the percentage of sales exported is not correlated with size.

Companies export to increase sales revenues, use excess capacity, and diversify sales.

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Summary

As a company establishes its export business plan, it must assess export potential, do the appropriate research, and determine how to get its goods abroad.

Importers need to be concerned with procedural and strategic issues.

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Summary

Exporters may engage in direct or in indirect exporting.

Trading companies and export management companies can be used to engage in indirect exporting.

Freight forwarders specialize in moving goods from one country to another.

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Summary

There are four major financial issues related to exporting: the price of the product, the method of payment, financing of receivables, and insurance.

Countertrade and offset trade are special cases of exporting and importing used when countries face foreign exchange problems.