International Business Strategy, Management & the New Realities by Cavusgil, Knight and Riesenberger

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International Business Strategy, Management
the New Realities by Cavusgil, Knight and
Riesenberger

• Chapter 13
• Exporting and Countertrade

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Overview of Foreign Market Entry Strategies

• International transactions that involve the
  exchange of products Home based international
  trade activities such as global sourcing,
  exporting, and countertrade.
• Equity or ownership-based international business
  activities Include FDI and equity-based
  collaborative ventures.
• Contractual relationships Include licensing and
  franchising.

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1. Exchange of Products

• Global sourcing Strategy of buying products and
  services from foreign sources. Also known as
  importing, global procurement, or global
  purchasing.
• Exporting Strategy of producing products or
  services in one country (often the producers
  home country), and selling and distributing them
  to customers in another country.
• Countertrade Refers to a transaction in which
  all or part of the payment is received in the
  form of products or commodities.

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2. Equity or Ownership-Based IB Activities

• Typically involve foreign direct investment (FDI)
  and equity-based collaborative ventures.
• In contrast to home-based international
  operations (e.g., exporting), the firm
  establishes 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

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3. Contractual Relationships

• Usually licensing or franchising
• 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.

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Factors Relevant to Choice of Foreign Market
Entry Strategy

• The goals and objectives of the firm, such as
  desired profitability, market share, or
  competitive positioning
• The firms financial, organizational, and
  technological resources and capabilities
• Unique conditions in the target country, such as
  legal, cultural, and economic circumstances, as
  well as distribution and transportation systems
• Risks inherent in each proposed foreign venture
• The nature and extent of competition from
  existing and potential rivals
• The characteristics of the product or service to
  be offered to customers in the market (e.g.,
  glass, yogurt, tires, copy machines)

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Exporting

• The firm manufactures in one country (usually the
  home country) conducts marketing, distribution,
  and customer service activities in a foreign
  export market.
• Export channels
• Independent distributor or agent, or
• Firms own marketing subsidiary abroad
• Exporting is low risk, low cost, and flexible.
• Popular among SMEs.

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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, that is, via FDI. This is
  because retailing requires direct contact with
  customers.
• Overall, most services are delivered to foreign
  customers via entry strategies other than
  exporting.

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Advantages of Exporting

• Increase sales and profits
• Increase economies of scale
• Diversify customer base, reducing dependence on
  the home market
• Stabilize fluctuations in sales associated with
  economic cycles or seasonality
• Low cost entry strategy
• Minimal risk
• Maximal flexibility
• Develop useful foreign relationships

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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

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A Systematic Approach to Exporting

• (1) Assess Global Market Opportunity. Screen for
  the most attractive export markets identify
  qualified distributors Estimate industry market
  potential and company sales potential.
• (2) Organize for Exporting. Assess company
  resource needs. Establish timetable for
  achieving export goals. Decide on distribution
  strategy.

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Indirect versus Direct Exporting

• Indirect Exporting Contracting with
  intermediaries in the firms home country to
  perform export functions, such as an Export
  Management Company (EMC) or a Trading Company.
  These intermediaries assume responsibility for
  finding foreign buyers, shipping products, and
  getting paid.
• Direct Exporting Contracting with
  intermediaries located in the foreign market to
  perform export functions, such as distributors or
  agents. They perform downstream value-chain
  activities in the target market.

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Company-Owned Foreign Subsidiary

• Handles downstream value-chain activities, such
  as marketing, physical distribution, promotion,
  and customer service activities, directly in the
  market.
• Preferred method if
• target market is big
• target market is complex
• firm needs to closely control local operations
• firm needs to control its intellectual property

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A Systematic Approach to Exporting (contd)

• (3) Acquire Needed Skills and Competencies. Gain
  new capabilities in areas such as product
  development, distribution, logistics, finance,
  contract law, currency management, foreign
  languages, cross-cultural skills.
• (4) Implement Exporting Strategy. Devise needed
  on-the-ground tactics. Adapt products and
  marketing as needed.

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Export Documentation

• The official forms and other paperwork required
  to
• transport exported goods and clear customs.
• Quotation or pro forma invoice issued on request
  by potential customers to advise a potential
  buyer about the price and description of the
  exporters product or service.
• Commercial invoice actual demand for payment
  issued by the exporter when a sale is concluded.
• Packing list indicates exact contents of a
  shipment, particularly when there are many goods

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Export Documentation (cont.)

• Bill of lading basic contract between exporter
  and shipper. Authorizes the shipping company to
  transport the goods to the buyers destination.
  
• Shipper's export declaration lists the contact
  information of the exporter and the 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 being shipped, indicating the country
  where the product originated.
• Insurance certificate protects the exported
  goods against damage, loss, pilferage (theft)
  and, in some cases, delay.

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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.

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Methods of Payment

• Cash in Advance. Risky from the buyers
  standpoint Unpopular with foreign buyers Tends
  to discourage sales.
• Open Account. Exporter simply bills the customer,
  who is expected to pay under agreed terms at some
  future time. Best between buyer/seller with an
  established relationship.
• Letter of Credit. Contract between the banks of
  the buyer and the seller. Essentially risk-free.
  Immediately establishes trust between the parties.

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Sources of Export Financing

• Commercial banks
• Distribution channel intermediaries
• Buyers
• Suppliers
• Government assistance programs (e.g.,
  Export-Import Bank, Small Business Administration)

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Sources of Information to Identify Potential
Intermediaries

• Country and regional business directories such as
  Kompass (Europe), Bottin International
  (worldwide), Japanese Trade Directory, as well as
  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
  the exporters country, such as JETRO, the Japan
  External Trade Organization.

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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.

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Examples of Countertrade

• Caterpillar received caskets from Colombian
  customers and wine from Algerian customers in
  return for selling them 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.

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Nature of Countertrade

• Accounts for between 10 and 1/3 of all world
  trade.
• Common in large-scale government procurement.
• Occurs mainly when a developing country cannot
  obtain sufficient hard currency.
• Enables developing-country firms to generate
  otherwise unobtainable sales.
• Risky (e.g., may involve inferior goods,
  hard-to-price goods leads to price padding
  complex, cumbersome, and time-consuming)

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Types of Countertrade

• Barter Direct exchange of goods without any
  money.
• Compensation deals Involve payment both in goods
  and cash.
• Counterpurchase Seller sells its product at a
  set price for cash, but also agrees to buy 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
  produced by the facility.