1. Copyright © 2014 Pearson Education Inc.

2. International Business: The New Realities, 3 rd Edition by Cavusgil, Knight, and Riesenberger Chapter 14 Copyright © 2014 Pearson Education Inc.

3. 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. The firm receives other products in payment. Copyright © 2014 Pearson Education Inc.

4. Foreign Market Entry Strategies (cont’d) 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. Copyright © 2014 Pearson Education Inc.

5. Foreign Market Entry Strategies (cont’d) 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 others have used franchising to internationalize worldwide. Copyright © 2014 Pearson Education Inc.

6. 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 Copyright © 2014 Pearson Education Inc.

7. Factors to Consider When Choosing Entry Strategy (cont’d) 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 Copyright © 2014 Pearson Education Inc.

8. Factors to Consider When Choosing Entry Strategy (cont’d) The value-adding activities the firm is willing to perform itself 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 Copyright © 2014 Pearson Education Inc.

9. Classification of Entry Strategies Based on Degree of Control for Focal Firms Copyright © 2014 Pearson Education Inc.

10. 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 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. Copyright © 2014 Pearson Education Inc.

11. Characteristics of Internationalization (cont’d) 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 opted for a gradual approach partly due to limited resources and a lack of appropriate knowledge on how to do international business. (However, recently, some firms – born globals – internationalize pretty quickly.) Copyright © 2014 Pearson Education Inc.

12. Typical Stages of Company Internationalization Copyright © 2014 Pearson Education Inc.

13. Overview on 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 exporting. Most exports involve merchandise. Export channels: o Independent distributor or agent; or o Firm’s own marketing subsidiary abroad Vellus Products Inc. is an SME producer of grooming products for dogs that exports to countries worldwide. Copyright © 2014 Pearson Education Inc.

14. Services are Exported as Well Examples: architecture, education, banking, insurance, entertainment, 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. Copyright © 2014 Pearson Education Inc.

15. Advantages of Exporting Copyright © 2014 Pearson Education Inc.

17. 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. Copyright © 2014 Pearson Education Inc.

18. A Systematic Approach to Exporting. Copyright © 2014 Pearson Education Inc.

19. A Systematic Approach to Exporting Copyright © 2014 Pearson Education Inc.

20. A Systematic Approach to Exporting Copyright © 2014 Pearson Education Inc.

21. A Systematic Approach to Exporting Copyright © 2014 Pearson Education Inc.

22. Export Intermediation Options Indirect Exporting: Contracting with an intermediary in the firm’s home country to perform all export functions, often an export management or trading company. Common among firms new to exporting. Direct Exporting: Contracting with intermediaries in the foreign market, such as distributors or agents, to perform export functions. They 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. Copyright © 2014 Pearson Education Inc.

23. Alternative Organizational Arrangements for Exporting Copyright © 2014 Pearson Education Inc.

24. Country Realities The performance of Germany’s economy is impressive, with exports leading the way. Top export destinations include emerging markets such as China, India, and Brazil. In such markets, demand for German-made products is at an all time high, especially for high-value goods such as cars, heavy machinery, and power plants. Exporting helps reduce German unemployment, which recently declined to its lowest level in 20 years – about 7% percent. Exporting helps Germany weather poor economic conditions in Europe. Copyright © 2014 Pearson Education Inc.

25. Importing The United States imports enormous amounts of goods from China. As one of the largest U.S. importers, Walmart alone accounts for about 10% of the country’s imports of toys and other products from China, worth more than $20 billion a year. Copyright © 2014 Pearson Education Inc.

26. United States: Top Trading Partners Sum of merchandise exports and imports, in billions of U.S. dollars Copyright © 2014 Pearson Education Inc.

27. China: Top Trading Partners Sum of merchandise exports and imports, in billions of U.S. dollars Copyright © 2014 Pearson Education Inc.

28. European Union: Top Trading Partners Sum of merchandise exports and imports, in billions of U.S. dollars Copyright © 2014 Pearson Education Inc.

31. 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. Copyright © 2014 Pearson Education Inc.

32. 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. Copyright © 2014 Pearson Education Inc.

33. 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. Copyright © 2014 Pearson Education Inc.

34. The Categories Incoterms Code Ex worksEXW Free carrierFCA Free alongside shipFAS Free on boardFOB Cost & freightCFR Cost, insurance & freightCIF Carriage paid toCPT Carriage and insurance paid toCIP Delivered at placeDAP Delivered at TerminalDAT Delivered duty paidDDP E Terms F Terms C Terms D Terms

35. Waterways FAS FOB CFR CIF Other EXW FCA CPT CIP DAT DAP DDP

36. The Steps of Global Logistics Main International Transportation 4 Handling Inbound Customs Clearance Duties Final Transportation Unloading Packing Loading Preliminary Transportation Customs Clearance for Export Handling Outbound Insurance 1 2 3 5 6 7 8 9 10 11

37. E Terms: Departure z EXW (named place) Under E-terms, the seller minimizes his risk by only making the goods available at his own premises. Goods Seller’s Risk Seller’s Cost PRE -CARRIAGE MAIN CARRIAGEON-CARRIAGE SELLERBUYER Export Clearance Import Clearance

38. EXW = Ex Works z The seller fulfills his obligation to deliver when he has made the goods available at his premises to the buyer. z The seller is not responsible for loading the goods on the vehicle provided by the buyer z The seller is not responsible for clearing the goods for export, unless agreed. z The buyer bears all costs and risks involved in taking the goods from the seller’s premises to the desired destination.

39. Group F: Main Carriage Not Paid by Seller z FAS - Free Alongside Ship z FCA - Free CArrier z FOB - Free On Board Under F-terms, the seller arranges and pays for pre-carriage in the country of export. Including export clearance under FCA and FOB

40. FAS (…named port of shipment) Goods Seller’s Risk Seller’s Cost PRE-CARRIAGE MAIN CARRIAGEON-CARRIAGE BUYER Export Clearance Import Clearance SELLER Buyer export documents nominates carrier, contracts carriage pays freight Seller delivers goods alongside ship evidence of delivery

41. Free Alongside Ship The seller delivers when the goods are placed alongside the buyer's vessel at the named port of shipment The FAS term requires the seller to clear the goods for export, and requires the buyer to clear the gooods for import. If the parties wish the buyer to clear the goods for export, this should be made clear by adding explicit wording to this effect in the contract of sale.

42. FOB (…named port of shipment) Goods Seller’s Risk Seller’s Cost PRE-CARRIAGE MAIN CARRIAGEON-CARRIAGE SELLERBUYER Export Clearance Import Clearance Buyer nominates carrier, contracts carriage pays freight Seller clears export customs, delivers and loads goods on ship evidence of delivery

43. Free on Board The seller must advance government tax in the country of origin as commitment to load the goods on board a vessel designated by the buyer. Cost and risk are divided when the goods are actually on board of the vessel. The seller must clear the goods for export. The seller must instruct the buyer the details of the vessel and the port where the goods are to be loaded

44. The seller pays for transportation of goods to the port of shipment, loading cost. The buyer pays cost of marine freight transportation, insurance, unloading and transportation cost from the arrival port to destination. The passing of risk occurs when the goods are in buyer account. The buyer arranges for the vessel and the shipper has to load the goods and the named vessel at the named port of shipment with the dates stipulated in the contract of sale as informed by the buyer.

45. FCA (…named place) Goods Seller’s Risk Seller’s Cost PRE-CARRIAGE MAIN CARRIAGEON-CARRIAGE SELLERBUYER Export Clearance Import Clearance Buyer nominates carrier, contracts carriage pays freight Seller clears export customs, delivers goods to carrier evidence of delivery

46. Free Carrier The seller to deliver goods to a named airport, terminal, or other place where the carrier operates. Costs for transportation and risk of loss transfer to the buyer after delivery to the carrier.

47. Group C: Main Carriage Paid by Seller z CFR - Cost & Freight z CIF - Cost, Insurance & Freight z CPT - Carriage Paid To z CIP - Carriage & Insurance Paid to Under C-terms, the seller arranges and pays for the main carriage but without assuming the risk of the main carriage.

48. CFR (…named port of destination) Goods Seller’s Risk PRE-CARRIAGE MAIN CARRIAGEON-CARRIAGE SELLERBUYER Export Clearance Import Clearance Seller’s Cost

49. Cost and Freight Seller must pay the costs and freight to bring the goods to the port of destination. Risk is transferred to the buyer once the goods are loaded on the vessel. Insurance for the goods is NOT included.

50. CIF (…named port of destination) Goods Seller’s Risk PRE-CARRIAGE MAIN CARRIAGEON-CARRIAGE SELLERBUYER Export Clearance Import Clearance Seller’s Cost + Insurance

51. Carriage Paid to... Equivalent of CFR The seller pays for carriage. Risk transfers to buyer upon handing goods over to the first carrier at place of shipment in the country of Export. Buyer fully responsible for arranging carrier payment of freight This term is used for all kind of shipments.

52. Cost and Insurance paid to... The containerized transport/multimodal equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier. The narrowest transportation policy amounting to 110% of the value of the goods.

53. Group D: Arrival z DAP - Delivered At Place z DAT - Delivered at terminal z DDP - Delivered Duty Paid Under D-terms, the seller’s cost/risk is maximized because he must make the goods available at the agreed destination. Including import clearance under DDP

54. DAP (…named place) Goods Seller’s Risk Seller’s Cost PRE-CARRIAGE MAIN CARRIAGEON-CARRIAGE SELLER BUYER Export Clearance Import Clearance

55. Delivered at Place Can be used for any transport mode, or where there is more than one transport mode. The seller is responsible for arranging carriage and for delivering the goods, ready for unloading from the arriving conveyance, at the named place. Duties are not paid by the seller under this term

56. DAT (…named place) Goods Seller’s Risk Seller’s Cost PRE-CARRIAGE MAIN CARRIAGEON-CARRIAGE SELLER BUYER Export Clearance Import Clearance

57. Delivered at Terminal This term means that the seller covers all the costs of transport (export fees, carriage, insurance, and destination port charges) and assumes all risk until after the goods are import duty/taxes/customs costs. The seller is responsible for arranging carriage and for delivering the goods, unloaded from the arriving conveyance, at the named terminal.

58. DDP (…named place) Goods Seller’s Risk Seller’s Cost PRE-CARRIAGE MAIN CARRIAGEON-CARRIAGE SELLER BUYER Export Clearance Import Clearance

59. Delivered Duty Paid Seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination including import duties and taxes. The seller is not responsible for unloading. This term is often used in place of the non- Incoterm "Free In Store (FIS)". This term places the maximum obligations on the seller and minimum obligations on the buyer.

60. Incoterm 2010 Export customs declaration Carriage to port of export Unloading of truck in port of export Loading on vessel in port of export Carriage (Sea/Air) to port of import Insurance Unloading in port of import Loading on truck in port of import Carriage to place of destination Import customs clearance Import taxes EXW Any Mode BuyerBuyerBuyerBuyerBuyerBuyerBuyerBuyerBuyerBuyerBuyer FCA Any Mode SellerSellerBuyerBuyerBuyerBuyerBuyerBuyerBuyerBuyerBuyer FAS SEA & INLAND WATERWAY SellerSellerSellerBuyerBuyerBuyerBuyerBuyerBuyerBuyerBuyer FOB SEA & INLAND WATERWAY SellerSellerSellerSellerBuyerBuyerBuyerBuyerBuyerBuyerBuyer CPT Any Mode SellerSellerSellerSellerSellerBuyerBuyerBuyerBuyerBuyerBuyer CFR SEA & INLAND WATERWAY SellerSellerSellerSellerSellerBuyerBuyerBuyerBuyerBuyerBuyer CIF SEA & INLAND WATERWAY SellerSellerSellerSellerSellerSellerBuyerBuyerBuyerBuyerBuyer CIP Any Mode SellerSellerSellerSellerSellerSellerBuyer/SellerBuyer/SellerBuyerBuyerBuyer DAT Any Mode SellerSellerSellerSellerSellerSellerSellerBuyerBuyerBuyerBuyer DAP Any Mode SellerSellerSellerSellerSellerSellerSellerSellerSellerBuyerBuyer DDP Any Mode SellerSellerSellerSellerSellerSellerSellerSellerSellerSeller Seller/Not including vat/fat.

61. Methods of Payment METHODADVANTAGESDISADVANTAGES Cash in Advance Best for the sellerRisky 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 a 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. Copyright © 2014 Pearson Education Inc.

62. Letter of Credit Cycle Copyright © 2014 Pearson Education Inc.

63. Sources of Export Financing Commercial banks Distribution channel intermediaries Buyers Suppliers Government assistance programs (e.g., Export-Import Bank, Small Business Administration) Copyright © 2014 Pearson Education Inc.

64. 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 14-64 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

65. 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 14-65 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

66. 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. 14-66 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

67. Overview of Countertrade 14-67 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall