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INTERNATIONAL BUSINESS

MANAGEMENT (BUSI 1346)

Trade & Financial Flows

Lecture 3, Week 4w/c 11 October 2010Dr Michael Wynn-Williams wm97@gre.ac.uk

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SOME POINTS TO REMEMBER

ExportsAre measured fob (free-on-board)

ImportsAre measured cif (cost-insurance-freight)

Exports are receipts of forex into a country, imports are debits

Normally, cif/fob ratio is 1.03

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UNDERSTANDING THE CIF/ FOB FOB to Dover – domestic tax CIF from Calais – for comparison with

domestic rivals

England France

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OPPORTUNITY AND RISKS OF EXPORTING

Opportunity Increase revenueAvoid risk of operating abroadAccess to economies of scaleLow cost expansionLarge firms proactive in exporting

RisksLoss of control and responsivenessSMEs lack overseas contacts and

knowledge – globalisation is changing this Intimidated by mechanics of exporting

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CHARACTERISTICS OF EXPORTERS

Probability of being an exporter increases with company size defined by revenues

Companies with risk-taking managers are more likely to export

Leading firms influence the probability

Export intensity, the % of revenues coming from exports, is related more to firm-specific factors (management etc.) than firm size

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EXPORT STRATEGY STEPS1. Assess the firm’s export potential

2. Obtain expert counseling on exporting Local agent Special financing

3. Select one market to gain experience

4. Formulate immediate and long-term export objectives

5. Build strong and enduring relationships with local distributors & customers

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EXPORT OPTIONS Direct selling

Sells through sales representativesSells to distributorSells to foreign retailer, or end user

Indirect sellingExport management companies (EMC)Export trading companies (ETC)

Internet and E-commerceExample: Amazon.Com

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CLASS TASK You are the sales director of a British

pharmaceutical company Your company has developed a new

antibiotic drug The drug can be sold cheaply if it

produced at high volumes Why should you look at exporting? What would be your export

strategy to these countries?USANorth Korea

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EXPORT AND IMPORT FINANCING Financial devices evolved to cope with

the lack of trust

Lack of trust between international trading partners due to several factorsParties have never metLanguage, cultural and legal system

differencesDifficulties in tracking down a party in case of

default

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PREFERENCE OF THE EXPORTER & IMPORTER

Chinese exporterBritish importer

1 Importer pays for the goods

2 Exporter ships the goods after being paid

Exporter’s preference

Chinese exporterBritish importer

1 Exporter ships the goods

2 Importer pays after the goods are received

Importer’s preference

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COMPROMISE : THE USE OF A THIRD PARTY

4 Banks pays exporter

6 Importer pays banks

5 Bank gives merchandise to importer

3 Exporter ships “to the bank”, trusting bank’s promise to pay

1 Importer obtains bank’s promise to pay on importer’s behalf

2 Bank promises to pay on behalf of importer

British importer

Chinese exporter

Bank

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TOOLS FOR TRADE

Letter of Credit (L/C) Bank guarantee on behalf of importer to exporter

assuring payment when exporter presents specified documents

Bill of Lading Issued to exporter, by carrier. Serves as receipt,

contract and document of title

Draft (Bill of Exchange): sight and time (Usance Bills) Written order by exporter, telling an importer to pay a

specified amount of money at a specified time

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IMPORTS AND IMPORTERS Imports

Industrial and consumer goods and services

Part of the firm’s global supply chain

ImportersThose looking for any productThose looking at foreign sourcing to

get their products at the cheapest prices

Those looking for foreign sourcing as a part of their global supply chain

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COUNTER TRADE Trade carried out wholly or partially in goods rather

than money

Barter: Direct exchange of goods and services between two parties without a cash transaction

Counterpurchase: Reciprocal buying agreement

Offset: purchase goods/services with a specified percentage of the proceeds from original sale

Switch trading: A third-party trading house buys the firm’s counterpurchase credits and sells them to another that can better use them

Compensation or buybacks: Take certain percentage of plant’s output as partial payment for the contract

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SUMMARY Examine why companies export Identify key elements of export strategies Compare direct and indirect selling of

exports Understand tools used to aid export and

import transactions

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SOURCES DRS Chapter 13

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SEMINAR QUESTIONS Organise tutorial into three groups Each group to be assigned one

company BAE Systems – military products Greenwich Business Training

videos Jaguar Motor Cars

Develop examples of the different options for exporting. (Direct/ Indirect/ electronic)

What are the problems of using Banks as the intermediary? How can these be resolved?