Cavusgil, Knight and Riesenberger - aykancandemir.com · •Importing or global sourcing: ......

International Business: The New Realities

by

Cavusgil, Knight and Riesenberger

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Learning Objectives

1. An overview of foreign market entry strategies

2. Internationalization of the firm

3. Exporting as a foreign market entry strategy

4. Managing export-import transactions

5. Payment methods in exporting and importing

6. Export-import financing

7. Identifying and working with foreign intermediaries

8. Countertrade

14-2 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Foreign Market Entry Strategies

• Importing or global sourcing: Procurement of

products and services from foreign sources

• Exporting: Producing products or services in one

country (often the producer’s home country), and

selling and distributing them to customers in other

countries

• Countertrade: International transaction in which all

or partial payments are made in kind rather than

cash


Foreign Market Entry Strategies (cont.)

• In contrast to home-based international operations

(e.g., exporting), foreign direct investment (FDI)

involves establishing a presence in the foreign

market by investing capital and securing ownership

of a factory, subsidiary, or other facility there.

• Collaborative ventures include joint ventures in

which the firm makes similar equity investments

abroad, but in partnership with another company.


Foreign Market Entry Strategies (cont.)

• With licensing, the firm allows a foreign partner to

use its intellectual property in return for royalties or

other compensation.

• Franchising is common in retailing. McDonalds,

Dunkin’ Donuts, Century 21 Real Estate, and many

other firms have used franchising to internationalize

worldwide.


Factors to Consider When Choosing a Foreign Market Entry Strategy

• Goals and objectives of the firm, such as desired

profitability, market share, or competitive positioning

• Degree of control desired regarding decisions,

operations, and assets involved in a venture

• The firm’s financial, organizational, and

technological resources and capabilities

• The types of risk inherent in each proposed foreign

venture


Factors to Consider When Choosing Entry Strategy (cont.)

• Conditions in the target country, such as legal,

cultural, and economic circumstances, as well as

distribution and transportation systems

• Nature and extent of competition from existing

rivals and from firms that may enter the market later

• Availability and capabilities of partners in the

market


Additional Factors to Consider

• The value-adding activities the firm is willing to

perform in the market and the activities it will

delegate to local partners

• Long-term strategic importance of the market

• Characteristics of the product or service


Classification of Entry Strategies

Based on Degree of Control for Focal Firms


Characteristics of Company Internationalization

• Push and pull factors serve as initial triggers. Usually

a combination of triggers, inside and outside the firm, is

responsible for initial international expansion.

• Initial internationalization may be accidental. Foreign

expansion is often unplanned, or is the result of chance

events, such as a meeting with a foreign distributor.

• Risk and return must be balanced. Managers weigh

the potential returns of internationalization against the

initial costs, in terms of money, time, and other company

resources. International ventures typically take longer

than domestic ones to reach profitability.


Characteristics of Internationalization (cont.)

• An ongoing learning experience. The firm’s

internationalization can stretch over many years and

involve many national settings, providing ample

opportunities for managers to learn and adapt how they

do business.

• Firms may evolve through stages of

internationalization. Historically, most firms have opted

for a gradual approach, partly due to limited resources

and partly due to lack of appropriate knowledge on how

to do international business.

• However, recently some firms—born globals—have

internationalized quickly.


Typical Stages of Company Internationalization


Overview of Exporting

• Usually the firm’s first foreign entry strategy.

• Low risk, low cost, and flexible.

• Popular among SMEs.

• When we talk about trade, trade deficits, trade

surpluses, etc., we’re talking about exporting.

• Most exports involve merchandise.

• Export channels:

• Independent distributor or agent

• Firm’s own marketing subsidiary abroad


International Sales Intensity of Various U.S.-Based Industries


Services Are Also Exported

• Examples are architecture, education, banking,

insurance, entertainment, and information.

• However, many pure services cannot be exported

because they cannot be transported.

• Retailers offer their services by establishing retail

stores abroad via FDI. Retailing requires direct

contact with customers.

• Overall, most services are delivered to foreign

customers via entry strategies other than exporting.


Advantages of Exporting


Disadvantages of Exporting

• Requires firm to acquire new capabilities and redirect

organizational resources;

• Sensitive to tariffs and other trade barriers;

• Sensitive to exchange rate fluctuations;

• Compared to FDI, firm has fewer opportunities to learn

about customers, competitors, and the marketplace.


A Systematic Approach to Exporting

Screen for the most attractive markets; identify qualified distributors; estimate industry market potential and company sales potential

Assess firm’s resource needs; establish timetable for achieving export goals; decide on distribution strategy

Acquire new abilities in such areas as product development, logistics, finance, contracts, currency management, foreign languages, cross-cultural skills

Devise needed on-the-ground tactics; adapt products and marketing as needed


Export Intermediation Options

• Indirect exporting: Contracting with an intermediary, often an

export management company or a trading company, in the

firm’s home country to perform all export functions; common

among firms new to exporting

• Direct exporting: Contracting with intermediaries, such as

distributors or agents, in the foreign market to perform export

functions; perform downstream value-chain activities in the

target market

• Company-owned foreign subsidiary: Similar to direct

exporting, except the exporter owns the foreign intermediation

operation; the most advanced option


Alternative Organizational Arrangements for Exporting


United States: Top Trading Partners

Sum of merchandise exports and imports, in billions of U.S. dollars


Canada: Top Trading Partners



China: Top Trading Partners



European Union: Top Trading Partners



Export Documentation

The official forms and other paperwork required to

transport exported goods and clear customs

• Quotation or pro forma invoice: Issued on request

to advise a potential buyer about the price and

description of the exporter’s product or service

• Commercial invoice: Actual demand for payment

issued by the exporter when a sale is concluded

• Bill of lading: Basic contract between exporter and

shipper; authorizes the shipping company to

transport the goods to the buyer’s destination


Export Documentation (cont.)

• Shipper's export declaration: Lists the contact

information of the exporter and buyer, full description,

declared value, and destination of the products being

shipped

• Used by governments to collect statistics

• Certificate of origin: The "birth certificate" of the

goods, showing country where the product originated

• Insurance certificate: Protects the exported goods

against damage, loss, pilferage, and, sometimes,

delay


Incoterms (International Commerce Terms)

• A system of universal, standard terms of

sale and delivery.

• Commonly used in international sales

contracts and price lists to specify how

the buyer and the seller share the cost

of freight and insurance, and at which

point the buyer takes title to the goods.


Examples of INCOTERMS


Methods of Payment

METHOD ADVANTAGES DISADVANTAGES

Cash in

Advance

Best for the seller

Risky from the buyer’s

standpoint, and thus unpopular;

tends to discourage sales

Open

Account

Easy for the exporter,

who simply bills the

buyer, who is expected to

pay at some future time

as agreed.

Risky unless there is strong

established relationship

between exporter and buyer

Letter of

Credit

A contract between the

banks of the buyer and

the seller. Largely risk-

free, it helps establish

instant trust.

Requires following a strict

protocol, specified in the

contract; can involve much

paperwork


Letter of Credit Cycle


Sources of Export Financing

• Commercial banks

• Distribution channel intermediaries

• Buyers

• Suppliers

• Government assistance programs (e.g., Export-

Import Bank, Small Business Administration)


Sources of Information to Identify Potential Intermediaries

• Country and regional business directories such as Kompass

(Europe), Bottin International (worldwide), Japanese Trade Directory,

and Foreign Yellow Pages

• Trade associations such as the National Furniture Manufacturers

Association or the National Association of Automotive Parts

Manufacturers

• Government ministries and agencies such as Austrade in

Australia, Export Development Canada, and the U.S. Department of

Commerce

• Commercial attachés in embassies and consulates abroad

• Branch offices of government agencies located in exporter’s

country, such as the Japan External Trade Organization


Working with Foreign Intermediaries

• The exporter relies on intermediaries for much of

the marketing, physical distribution, and customer

service activities in the export market.

• The exporter should cultivate mutually beneficial,

bonding relations; respond to the intermediary’s

needs; demonstrate commitment; and build trust.

• Intermediaries prefer handling good, profitable

products, and desire various types of support.


Common Dispute Areas With Intermediaries

• Compensation arrangements

• Pricing practices

• Advertising and promotion practices and the extent

of advertising support

• After-sales service

• Return policies

• Adequate inventory levels

• Incentives for promoting new products

• Adapting the product for local customers


Criteria for Evaluating Export Intermediaries


Countertrade

• An international business transaction in which all or

partial payments are made in kind rather than cash;

similar to barter.

• Used when conventional means of payment are difficult,

costly, or nonexistent

• Accounts for between 10% and 33% of all world trade

• Common in large-scale government procurement

• Risky • May involve inferior or hard-to-price goods

• May lead to price padding

• Can be complex, cumbersome, and time consuming


Types of Countertrade

• Barter: Goods are directly exchanged without the

transfer of any money

• Compensation deal: Payment in goods and cash

• Counterpurchase: Entails two distinct contracts

• In the first, the seller agrees to a set price for goods and

receives cash from the buyer.

• In the second, the seller agrees to purchase goods from

the buyer.

• Buy-back agreement: Seller agrees to supply

technology or equipment to construct a facility and

receives payment in the form of goods it produces


Examples of Countertrade

• Boeing traded aircraft for oil in Saudi Arabia.

• Caterpillar received caskets in Colombia and wine in

Algeria in exchange for earthmoving equipment.

• Goodyear traded tires for minerals, textiles, and

agricultural products.

• Coca-Cola received tomato paste from Turkey, oranges

from Egypt, and beer from Poland in exchange for Coke.


Overview of Countertrade



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