MMITModes of International Business

Exporting/Importing

International vs. DomesticOPPORTUNITIES

1. Seek opportunities for growth through market diversification

2. Gain new ideas about products, services, and business methods

3. Better serve key customers that have relocated abroad

4. Be closer to supply sources, benefit from global sourcing advantages, or gain flexibility in the sourcing of products

International vs. DomesticOPPORTUNITIES

5. Gain access to lower-cost or better-value factors of production

6. Develop economies of scale in sourcing, production, marketing, and R&D

7. Confront international competitors more effectively or thwart the growth of competition in the home market

FDI Based Explanations: Dunning’s Eclectic Paradigm

Three conditions determine whether or not a company will internalize via FDI:

1. Ownership-specific advantages – knowledge, skills, capabilities, relationships, or physical assets that form the basis for the firm’s competitive advantage

2. Location-specific advantages – advantages associated with the country in which the MNE is invested, including natural resources, skilled or low cost labor, and inexpensive capital

3. Internalization advantages – control derived from internalizing foreign-based manufacturing, distribution, or other value chain activities

Factors Relevant to Choice of Foreign Market Entry Strategy

1. The goals and objectives of the firm, such as desired profitability, market share, or competitive positioning;

2. The particular financial, organizational, and technological resources and capabilities available to the firm;

3. Unique conditions in the target country, such as legal, cultural, and economic circumstances, as well as distribution and transportation systems;

4. Risks inherent in each proposed foreign venture in relation to the firm’s goals and objectives in pursuing internationalization;

5. The nature and extent of competition from existing rivals, and from firms that may enter the market later;

6. The characteristics of the product or service to be offered to customers in the market.

Participants in International Business

1. The focal firm – initiator of IB transaction, including MNEs and SMEs

2. Distribution channel intermediary – specialist firm providing logistics and marketing services in the international supply chain

3. Facilitator – a firm providing special expertise in legal advice, banking, customs clearance, market research, and similar areas

Types of Focal Firms

Multi-National Enterprise Joint-Venture SME Born Global Firm NGOs

Foreign Market Entry Strategies of Focal Firms

Cross-border business transactions can be grouped into three categories:

1. Trade: buying and selling of products2. Contractual exchange of services or

intangibles: buying and selling of services

3. Equity ownership in foreign operations: establishing foreign presence through direct investment

MODES of International Business Activities

Exporting (importing) Global sourcing (out-s, in-s, offshore) Contract manufacturing Licensing and Franchising (mgmt.

contract) Foreign Direct Investment (FDI) Strategic Alliances (Joint Venture) Portfolio Investment

Exporting

Advantages Relatively low financial

exposure Permit gradual market entry Acquire knowledge about

local market Avoid restrictions on foreign

investment

Disadvantages Vulnerability to tariffs and

NTBs Logistical complexities Potential conflicts with

distributors

Export Documentation

quotation or pro forma invoice commercial invoice is the actual demand for

payment issued by the exporter. It includes a description of the goods, the exporter’s address, delivery address, and payment terms.

A packing list, indicates the exact contents of the shipment.

The bill of lading is the basic contract between exporter and shipper.

The shipper's export declaration ("ex-dec”) lists the contact information of the exporter and the buyer (or importer), as well as a full description, declared value, and destination of the products being shipped.

The certificate of origin indicates the country where the product originates.

insurance certificate

Incoterms

Who pays for what?

Load to truck

Export- duty payment

Transport to exporter's port

Unload from truck at the origin's port

Landing charges at origin's port, Loading

Transport to import's port

Landing charges at importer's port, Unloading

Unload onto trucks from the importers' port

Transport to destination Insurance

Entry -Customs clearance

Entry -Taxation

EXW No No No No No No No No No No No No

Main Carriage NOT Paid By Seller (Free… Carrier/Alongside Ship/On Board)

FCA Yes Yes Yes No No No No No No No No No

FAS* Yes Yes Yes Yes No No No No No No No No

FOB* Yes Yes Yes Yes Yes No No No No No No No

Main Carriage Paid By Seller (Cost and Freight … and Insurance… / Carriage Paid to … and Insurance… )

CFR* Yes Yes Yes Yes Yes Yes No No No No No No

CIF* Yes Yes Yes Yes Yes Yes No No No Yes No No

CPT Yes Yes Yes Yes Yes Yes No No No No No No

CIP Yes Yes Yes Yes Yes Yes No No No Yes No No

Arrival (Delivery Duty….. Unpaid/Paid)

DEQ* Yes Yes Yes Yes Yes Yes Yes No No Yes No No

DDU Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No

DDP Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

* for ship only (+ named Port), others for all carriers (+ named Place)

Methods of Payment -- Export Cash in Advance Letter of Credit Draft Open Account

Global Sourcing

Importing Outsourcing Contract Manufacturing

Contract Manufacturing

Hiring firm approaches Contract Manufacturer with Design or Formula

Type of outsourcing Bidding Process $ 233 billion business Wistron, HTC

Countertrade20

Payments are made in kind rather than cash.

The focal firm is engaged simultaneously in exporting and importing.

Also known as “two-way” or “reciprocal” trade

Used when conventional means of payment are difficult, costly, or nonexistent. Hard currency unavailable Developing country doesn’t have expertise to

sell in foreign markets

Examples of Countertrade Transactions

22

Caterpillar received caskets from Columbian customers and wine from Algerian customers in return for selling them earthmoving equipment.

Goodyear traded tires for minerals, textiles, and agricultural products.

Coca-Cola sourced tomato paste from Turkey, oranges from Egypt, and beer from Poland in order to contribute to national exports in the countries it conducts business,.

Control Data Corporation accepted Christmas cards from the Russians in a countertrade deal.

Pepsi-Cola acquired the rights to distribute Hungarian motion pictures in the West in a countertrade transaction.

Types of Countertrade23

Barter refers to the direct exchange of goods without any money. Or a mixture of goods and cash is a compensation deal.

Back-to-back transaction, offset agreements, or counterpurchase involves two distinct contracts, contingent on each other.

Buy-back agreement, the seller agrees to supply technology or equipment to construct a facility and receives payment in the form of goods produced by the facility.