,International Management
Chapter 16: Exporting, Importing, and Countertrade
Introduction
Exporting is relevant for both small and large companies.
Gradual decline of trade barriers (under the GATT umbrella) and regional trade agreements have increased exporting.
Modern communication and transportation technologies alleviate the logistical problems with exporting.
These have jointly reduced costs, distance, and cycle times associated with exporting.
The Promise and Pitfalls of Exporting
The great promise of exporting is: increasing revenue and profit base.
Exporters can achieve economies of scale and sales volume through exporting, thus lowering unit costs.
Exporting can happen as a way to deal with weak local domestic demand.
Larger companies are found to be proactive about exporting as they systematically seek opportunities abroad.
Small and medium-sized companies are more reactive and only consider exporting when domestic markets become
saturated or local productive capacity is excessive.
Reasons these firms are not proactive is due to ignorance and unfamiliarity with foreign markets and opportunities, as
well as intimidation by the complexities and mechanisms of exporting to countries with different language, culture,
legal systems, and currencies.
Novice exporters tend to underestimate the time and resources needed to export successfully, which leads them into
negative experiences.
Improving Export Performance
Novice exporters have a number of ways to avoid common pitfalls in exporting.
Specifically, information gathering from sources to increase foreign market knowledge.
International Comparisons
Overcoming ignorance is done through collecting information through trade associations, government agencies, and
commercial banks (for example in Germany) and trading houses, for example the sogo shosha in Japan, which
continuously collect information on foreign export opportunities to help local exporters.
In the USA, firms are “information disadvantaged” as the country lacks the institutional structure for promoting exports
due to historically relying on local and continental markets.
Information Sources
Sources provide information on the marketability, competition, comparative prices, and distribution channels, as well
as names of sales representatives in potential markets.
Trade events help potential exporters make foreign contacts and explore opportunities.
Most organizations provide business counselling, financing, and technical assistance.
Other organizations are also becoming more helpful, such as commercial banks and large accounting firms.
Both are now more willing than before to offer export assistance.
Also, large successful exporters are now willing to help newer ones.
Service Providers
,Most of these are quite ambiguous I must say…
There are private export-import service providers that can help exporters in their work.
First, freight forwarders combine smaller shipments into a single large shipment to minimize shipment costs.
Then, Export Management Companies (EMCs) offer services to first-time exporters, and usually they offer a full menu
of services.
Then, export trading companies export products for foreign companies working with them.
Then, export packers who help companies with packaging and regulations relating to that.
Then, customs brokers help companies with customs duties.
Then, confirming houses and export agents (confusing).
Then, piggyback marketing is an arrangement where one firm distributes the products of another firm as part of an
assortment — perhaps as part of the export contract — but the main exporter does not produce or have those
products in-house.
Finally, the EPZ or export processing zones are duty-free zones that have good infrastructure for exporting logistics
such as warehousing and packaging stations; they receive shipments there as well.
Export Strategy
A good export strategy can also minimize the risks related to exporting.
For instance, 3M’s strategy of entering on a small scale, adding additional product lines once export operations
succeed, and hiring locals to promote the products.
Can also opt for a franchising approach.
Some steps can help novice exporters succeed early on, such as hiring an EMC to deal with information gathering and
paperwork.
Focusing on one or a handful of markets, as too many markets focused on may lead to not being established in any of
them.
Enter on a small financial scale to reduce the cost of potential failure.
Doing so also gives time to the firm to learn about the foreign market before investing heavily.
Giving a lot of attention and care to building long-lasting relationships with local customers and distributors.
Importantly, retaining the option of local production is crucial, as once exports reach a sufficient volume to justify
cost-efficient local production, this should be done.
Often it is best to think of exporting as a means, not an end in itself, but a step towards foreign production.
Exporting Tools and Guides to Export Readiness
A company’s overall export readiness is a function of product readiness plus company readiness.
Company readiness entails: competitive capabilities in domestic market, motivation for going international,
commitment of owners and top management to active exporting, experience and training, and skills, knowledge, and
resources to export.
Export and Import Financing
Naturally, exporters and importers do not trust each other due to the distance in space, time, language, culture, and
legal system, and weak international contract enforcement.
There are financial tools to mitigate that risk, which are: letter of credit, draft or bill of exchange, and bill of lading.
Lack of Trust
Lack of trust is also due to the inability to track the other party in case of defaulting.
, Importers and exporters have different payment order preferences: importers want to receive the goods before paying,
and exporters want to receive payment before shipment.
This is solved by involving a trusted third party — usually a reputable bank — accepted by both parties.
Letter of Credit
The L/C is issued by a bank at the request of the importer.
It states that upon presentation of specific documentation, the bank will pay the exporter the pre-specified amount.
The bank usually does a credit check on the importer before issuing the L/C.
As long as conditions of shipment are met, the bank will pay the exporter.
L/C is a financial contract between banks and exporters.
After shipment, the exporter will draw a draft (or bill of exchange) against the bank; the bank honors the draft and pays
the exporter’s bank, who then pays the exporter.
As for the importer, they can pay the bank at a later time at interest.
The importer may not like this option as it is still a financial liability which could harm their borrowing ability for other
purposes.
Draft (Bill of Exchange)
An instrument used in international commerce to effect payment.
Simply, it is an order written by the exporter instructing the importer or bank to pay.
The business or person issuing a draft is called a ‘maker’.
The business or bank paying or receiving the draft is called the ‘drawee’.
Unlike domestic payments, which are done through an invoice after delivery of goods or services.
There are two types of drafts: the sight draft, which is to be paid upon being seen by the drawee, and the time draft,
which specifies a later period to be paid in — 30, 60, 90, or 120 days usually.
If the draft is accepted by a bank it is called a banker’s acceptance; if accepted by a business it is called a trade
acceptance.
Time drafts are negotiable financial instruments, meaning they can be sold at a discount of face value — for example,
the bank can buy it today at €97,000 and give that lump sum to the exporter, and in 120 days the bank collects the
€100,000. This is usually the case when the exporter needs cash liquidity to finance other activities.
Bill of Lading
Issued by the exporter to the transporting carrier, it is a receipt, a contract, and a document of title.
As a receipt, it confirms that the merchandise is received by the carrier.
As a contract, it obligates the carrier to deliver the merchandise.
As a document of title, it can be used to obtain payment from the importer or bank, or as a written promise of payment
before the release of the merchandise.
Export Assistance
There are two forms of US-based government-backed assistance to exporters: financing aid from the Export-Import
Bank and export credit insurance.
Export-Import Bank
The EXIM bank guarantees make commercial banks more willing to lend money to foreign buyers to buy from local
exporters.
The foreign borrowers use the loans to pay US suppliers and repay it to the EXIM bank.
Chapter 16: Exporting, Importing, and Countertrade
Introduction
Exporting is relevant for both small and large companies.
Gradual decline of trade barriers (under the GATT umbrella) and regional trade agreements have increased exporting.
Modern communication and transportation technologies alleviate the logistical problems with exporting.
These have jointly reduced costs, distance, and cycle times associated with exporting.
The Promise and Pitfalls of Exporting
The great promise of exporting is: increasing revenue and profit base.
Exporters can achieve economies of scale and sales volume through exporting, thus lowering unit costs.
Exporting can happen as a way to deal with weak local domestic demand.
Larger companies are found to be proactive about exporting as they systematically seek opportunities abroad.
Small and medium-sized companies are more reactive and only consider exporting when domestic markets become
saturated or local productive capacity is excessive.
Reasons these firms are not proactive is due to ignorance and unfamiliarity with foreign markets and opportunities, as
well as intimidation by the complexities and mechanisms of exporting to countries with different language, culture,
legal systems, and currencies.
Novice exporters tend to underestimate the time and resources needed to export successfully, which leads them into
negative experiences.
Improving Export Performance
Novice exporters have a number of ways to avoid common pitfalls in exporting.
Specifically, information gathering from sources to increase foreign market knowledge.
International Comparisons
Overcoming ignorance is done through collecting information through trade associations, government agencies, and
commercial banks (for example in Germany) and trading houses, for example the sogo shosha in Japan, which
continuously collect information on foreign export opportunities to help local exporters.
In the USA, firms are “information disadvantaged” as the country lacks the institutional structure for promoting exports
due to historically relying on local and continental markets.
Information Sources
Sources provide information on the marketability, competition, comparative prices, and distribution channels, as well
as names of sales representatives in potential markets.
Trade events help potential exporters make foreign contacts and explore opportunities.
Most organizations provide business counselling, financing, and technical assistance.
Other organizations are also becoming more helpful, such as commercial banks and large accounting firms.
Both are now more willing than before to offer export assistance.
Also, large successful exporters are now willing to help newer ones.
Service Providers
,Most of these are quite ambiguous I must say…
There are private export-import service providers that can help exporters in their work.
First, freight forwarders combine smaller shipments into a single large shipment to minimize shipment costs.
Then, Export Management Companies (EMCs) offer services to first-time exporters, and usually they offer a full menu
of services.
Then, export trading companies export products for foreign companies working with them.
Then, export packers who help companies with packaging and regulations relating to that.
Then, customs brokers help companies with customs duties.
Then, confirming houses and export agents (confusing).
Then, piggyback marketing is an arrangement where one firm distributes the products of another firm as part of an
assortment — perhaps as part of the export contract — but the main exporter does not produce or have those
products in-house.
Finally, the EPZ or export processing zones are duty-free zones that have good infrastructure for exporting logistics
such as warehousing and packaging stations; they receive shipments there as well.
Export Strategy
A good export strategy can also minimize the risks related to exporting.
For instance, 3M’s strategy of entering on a small scale, adding additional product lines once export operations
succeed, and hiring locals to promote the products.
Can also opt for a franchising approach.
Some steps can help novice exporters succeed early on, such as hiring an EMC to deal with information gathering and
paperwork.
Focusing on one or a handful of markets, as too many markets focused on may lead to not being established in any of
them.
Enter on a small financial scale to reduce the cost of potential failure.
Doing so also gives time to the firm to learn about the foreign market before investing heavily.
Giving a lot of attention and care to building long-lasting relationships with local customers and distributors.
Importantly, retaining the option of local production is crucial, as once exports reach a sufficient volume to justify
cost-efficient local production, this should be done.
Often it is best to think of exporting as a means, not an end in itself, but a step towards foreign production.
Exporting Tools and Guides to Export Readiness
A company’s overall export readiness is a function of product readiness plus company readiness.
Company readiness entails: competitive capabilities in domestic market, motivation for going international,
commitment of owners and top management to active exporting, experience and training, and skills, knowledge, and
resources to export.
Export and Import Financing
Naturally, exporters and importers do not trust each other due to the distance in space, time, language, culture, and
legal system, and weak international contract enforcement.
There are financial tools to mitigate that risk, which are: letter of credit, draft or bill of exchange, and bill of lading.
Lack of Trust
Lack of trust is also due to the inability to track the other party in case of defaulting.
, Importers and exporters have different payment order preferences: importers want to receive the goods before paying,
and exporters want to receive payment before shipment.
This is solved by involving a trusted third party — usually a reputable bank — accepted by both parties.
Letter of Credit
The L/C is issued by a bank at the request of the importer.
It states that upon presentation of specific documentation, the bank will pay the exporter the pre-specified amount.
The bank usually does a credit check on the importer before issuing the L/C.
As long as conditions of shipment are met, the bank will pay the exporter.
L/C is a financial contract between banks and exporters.
After shipment, the exporter will draw a draft (or bill of exchange) against the bank; the bank honors the draft and pays
the exporter’s bank, who then pays the exporter.
As for the importer, they can pay the bank at a later time at interest.
The importer may not like this option as it is still a financial liability which could harm their borrowing ability for other
purposes.
Draft (Bill of Exchange)
An instrument used in international commerce to effect payment.
Simply, it is an order written by the exporter instructing the importer or bank to pay.
The business or person issuing a draft is called a ‘maker’.
The business or bank paying or receiving the draft is called the ‘drawee’.
Unlike domestic payments, which are done through an invoice after delivery of goods or services.
There are two types of drafts: the sight draft, which is to be paid upon being seen by the drawee, and the time draft,
which specifies a later period to be paid in — 30, 60, 90, or 120 days usually.
If the draft is accepted by a bank it is called a banker’s acceptance; if accepted by a business it is called a trade
acceptance.
Time drafts are negotiable financial instruments, meaning they can be sold at a discount of face value — for example,
the bank can buy it today at €97,000 and give that lump sum to the exporter, and in 120 days the bank collects the
€100,000. This is usually the case when the exporter needs cash liquidity to finance other activities.
Bill of Lading
Issued by the exporter to the transporting carrier, it is a receipt, a contract, and a document of title.
As a receipt, it confirms that the merchandise is received by the carrier.
As a contract, it obligates the carrier to deliver the merchandise.
As a document of title, it can be used to obtain payment from the importer or bank, or as a written promise of payment
before the release of the merchandise.
Export Assistance
There are two forms of US-based government-backed assistance to exporters: financing aid from the Export-Import
Bank and export credit insurance.
Export-Import Bank
The EXIM bank guarantees make commercial banks more willing to lend money to foreign buyers to buy from local
exporters.
The foreign borrowers use the loans to pay US suppliers and repay it to the EXIM bank.
