ECP 6701 Competitive Strategies in Expanding Markets Export and Import Strategies

Readings Daniels, Radebaugh, Sallivan, International Business, Chapter 17

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.

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

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

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.

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.

Phases of Export Development

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

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

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

The Import Strategy The Role of Customs Agencies Documentation 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.

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

Export Intermediaries Direct Selling Direct selling involves sales representatives, agents, distributors, or retailers A sales representative usually operates on a commission basis A distributor is a merchant who purchases the products from the manufacturer and sells them at a profit

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

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

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

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

Export Financing Financial issues relating to exporting: Product price Method of payment Financing of receivables Insurance

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

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

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

Letter-of-Credit Relationships

An Irrevocable Export Letter of Credit

Export Financing A letter of credit obligates the buyer’s bank to pay the exporter A revocable letter of credit may be changed by any of the parties to the agreement An irrevocable letter of credit requires all parties to agree to a change in the documents A confirmed irrevocable letter of credit adds an obligation to pay for the exporter’s bank

Countertrade Countertrade 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 Barter occurs when goods are traded for goods In offset 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

An Offset Transaction

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.

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.

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.

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.