CHAPTER THIRTEEN

EXPORT AND IMPORT STRATEGIES

OBJECTIVES
To introduce the ideas of export and import
To identify the elements of export and exporting strategies
To compare direct and indirect selling of exporting
To identify the elements of import and import strategies
To discuss the types and roles of third-party intermediaries in exporting
To discuss the role of countertrade in international business
CHAPTER OVERVIEW
The first part of Chapter Thirteen is devoted to an examination of export and import
strategies. Table 13.1 identifies the steps to consider when developing an export (or
import business plan. !ext" the roles of a wide variety of third-party intermediaries are
discussed. The chapter concludes with a discussion of the ma#or issues related to export
financing" including the use of countertrade as a form of payment mechanism.
CHAPTER OUTLINE
OPENING CASE: Grieve Corporatio!A S"a## B$%ie%% E&port Strate'(
$ small firm located near Chicago" %rieve Corporation manufactures laboratory and
industrial ovens" furnaces" and heat processing systems for the &.'. mar(et. %rieve began
losing business as (i foreign competitors began to penetrate the &.'. mar(et and (ii its
customers began to move overseas and started sourcing locally. )ith the help of the
*nternational Trade $dministration of the &.'. +epartment of Commerce" %rieve was
able to identify potential $sian distributors. +uring a business trip to $sia" the president
of %rieve met with potential candidates and successfully recruited exclusive agents for
each country visited. ,nce %rieve had gained sufficient experience in the $sian mar(et"
export activities were expanded to other regions. -oving into international mar(ets has
proved to be a ma#or factor in the firm.s continued growth and success.
Tea)*i' Tip: /eview the 0ower0oint slides for Chapter Thirteen and select those
you find most useful for enhancing your lecture and class discussion. 1or additional
visual summaries of (ey chapter points" also review the figures and tables in the text.
I. INTRODUCTION
)hereas exporting represent goods and services flowing out of a country" importing
represent goods and services flowing into a country. 2xports result in receipts and
imports result in payments. $lthough export and import activities are a natural
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extension of distribution strategy" they also include elements of product" promotion
and pricing factors" and decisions. 5oth exporting and importing entail a lower level
of ris( than foreign direct investment" but while exporting offers less control over the
mar(eting function" importing offers less control over the production function. This
chapter will focus primarily on the issue of a company.s motivations for and
development of an export strategy (1igure 13.1.
II+ EXPORT STRATEG,
$ firm.s choice of entry mode depends on various factors" such as the ownership
advantages of the firm" the location advantages of the mar(et and the
internalization advantages of specific assets" international experience and6or the
ability to develop differentiated products. *n general" firms that possess few
ownership advantages either do not enter foreign mar(ets" or they use the lower-
ris( entry modes of exporting and licensing. 'till in all" the decision to export must
fit a company.s overall strategy and ta(e into account global concentration (the
presence of relatively few ma#or players" synergies (the gains from sharing
corporate expertise on a global basis and strategic motivations (the firm.s
competitive reasons to enter a given mar(et.
A+ Strate'i) A-vata'e% o. E&port%
Companies export in order to increase sales revenues" achieve economies of
scale in production" diversify mar(ets" and minimi7e ris(. $ll of these
ob#ectives are ultimately motivated by the potential for greater profitability.
Companies can often sell their products at a greater profit abroad than at home
due to differences in the competitive environment or differences in stages in the
product life cycle in foreign mar(ets. %overnment actions at home and abroad
in such areas as tax policy can also affect profitability and stimulate exporting.
B. Characteristics of Exporters
/esearch conducted on the characteristics of exporters has resulted in two basic
conclusions8 (i the probability of exporting increases with si7e of company
revenues and (ii export intensity (the percentage of total revenues generated by
exports is not positively correlated with company si7e. 1actors such as the ris(
profile of management and the nature of industry competition are #ust as
important as firm si7e.
C+ Sta'e% o. E&port Deve#op"et
1irms tend to move through three phases of export development8 pre-
engagement, initial exporting, and advanced exporting. $s they do so" they tend
to (i export to more countries and (ii expect exports to grow as a percentage of
total sales. *n addition" they also tend to (iii diversify their mar(ets to more
distant countries and (iv move into environments that are increasingly different
from those of their home countries. (1igure 13.9.
D+ Pit.a##% o. E&porti'
The operational mista(es associated with exporting can be very costly. -ost
new exporters stumble once or twice before experiencing consistent success.
2xport specific problems include8
1ailure to obtain :ualified export counseling in developing a plan to guide
export expansion
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*nsufficient commitment to exporting by top management to overcome the
initial difficulties and financial re:uirements of exporting.
-isestimating the complexity and costs of shipping and customs clearance
to export transactions.
0oor selection of overseas agents or distributors
Chasing orders from around the world instead of establishing a profitable
operations and management growth.
!eglecting export mar(ets and customers when the domestic mar(et booms.
1ailure to treat international distributors on an e:ual basis with domestic
counterparts.
&nwillingness to modify products to meet other countries. regulations or
cultural preferences
1ailure to print service" sales" and warranty messages in locally understood
languages.
1ailure to consider use of an export management company or other
mar(eting intermediary when the company does not have personnel to
direct specialist export functions
1ailure to prepare for disputes with customers< at that point no court system
can be called upon as a last resort (other than international arbitration"
which is seldom a viable alternative for small or midsi7e exporters.
E+ De%i'i' a E&port Strate'( [See Figure 13.3, Table 13.1]
To design an effective export strategy" managers must8
$ssess the company.s export potential by examining its opportunities and
resources.
,btain expert counseling on exporting. -any governments provide export
assistance for companies in their countries. 5an(s can provide speciali7ed
help with such things as letters of credit (=6Cs" covered in detail in chapter
14.
'elect a mar(et or mar(ets.
1ormulate and implement an export strategy.
III+ IMPORT STRATEG,
The import process involves strategic and procedural issues that basically mirror
those of the export process.
A+ Strate'i) A-vata'e% o. I"port%
There are two basic types of imports8 industrial and consumer goods to
independent individuals and companies and intermediate goods and services that
are part of the firm.s global supply. The three basic types of importers are those
that8
loo( for any product around the world that will generate a positive cash
flow
loo( to foreign sourcing as a means to minimi7e product costs
use foreign sourcing as part of their global supply chain strategy.
$n import broker is a certified specialist who obtains re:uired government
permissions and other clearances before forwarding the necessary documents to
the carrier(s of the goods.
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A+ T*e Ro#e o. C$%to"% A'e)ie%
Customs reflect a country.s import and export procedures and restrictions. The
primary duties of a customs agency are the assessment and collection of all
duties" taxes and fees on imported products" the enforcement of customs and
related laws and the administration of certain navigation laws and treaties.
!ational customs agencies are increasingly involved in dealing with smuggling
operations and preventing foreign terrorist attac(s. $ customs bro(er can help an
importer minimi7e duties by (i valuing products in such a way that they :ualify
for more favorable treatment" (ii :ualifying for duty refunds through drawbac(
provisions" (iii deferring duties by using bonded warehouses and foreign trade
7ones and (iv limiting liability by properly mar(ing an import.s country of
origin.
B+ I"port Do)$"etatio
The import documentation process can be both complicated and cumbersome.
)ithout proper documentation" customs agencies will not release shipments.
+ocuments are of two types8 (i those that determine whether customs will
release the shipment and (ii those that contain the information necessary for
duty assessment and data gathering purposes. $t a minimum" the re:uired
documents would include an entry manifest" a commercial invoice and a pac(ing
list.
POINT/COUNTERPOINT:
A Dirt( Di#e""a!E&porti' Ha0ar-o$% Wa%te
POINT: $n estimated 9? million computers become obsolete each year in the &.'." with
more than 9?? tons of this potentially ha7ardous material being exported to developing
countries li(e China" *ndia" 5angladesh" or 0a(istan for re-use" recycling" or disposal.
+isposal costs for ha7ardous waste in developing countries are fractions of the cost in
wealthier countries" and exporting the waste allows manufacturers to ta(e responsibility
for their products from cradle to grave.
COUNTERPOINT: @a7ardous waste exports have created dangerous recycling
industries in many countries. 2lectronic waste is a mixture of more than a thousand
chemicals" many of which are toxic. /ecyclers in developing countries also often have
appalling and dangerous wor(ing conditions for their employees and create harmful
contaminated water runoffs and air pollution in the process. $s of mid-9??>" 134
countries had ratified the 5asel Convention which adopts aggressive measures limiting
the export of ha7ardous wastes. The &nited 'tates" which generates approximately A?B
of the world.s ha7ardous waste" is the only industrial country in the world that has yet to
endorse the 5asel Convention.
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IV+ THE EXPORT PROCESS
Direct exports represent products sold to an independent party outside of the
exporter.s home country< indirect exports are first sold to an intermediary in the
domestic mar(et" who then sells the products in the export mar(et. )hile services
are more li(ely to be exported on a direct basis" goods are exported via both avenues.
A. Indirect Selling
Indirect selling" i.e." selling products to or through an independent domestic
intermediary" is carried out via a variety of third-party intermediaries--
independent (unrelated firms that facilitate international trade transactions by
assisting both importers and exporters. They may perform any or all of the
following functions8
'timulate sales" obtain orders and do mar(et research.
-a(e credit investigations and perform payment-collection activities.
@andle foreign traffic and shipping.
$ct as support for the company.s overall sales" distribution" and advertising
staff.
The ma#or types of indirect intermediaries are the export management
compan !E"C#" the export trading compan !E$C#" and export agents"
merchants" or remar(eters.
B+ E&port Maa'e"et Co"paie%
$n export management compan %E"C& is a firm that either acts as a
manufacturer.s agent or buys merchandise from manufacturers for international
distribution. 2-Cs generally operate on a contractual basis" provide exclusive
representation in a well-defined foreign territory and act as the export arm of a
manufacturer. ,ften" export management companies are small and speciali7e
according to product" function and6or mar(et area.
C+ E&port Tra-i' Co"paie%
$n export trading compan %E$C& is somewhat li(e an export management
company" but its primary purpose in becoming involved in international trade as
an independent bro(er is to match domestic exporters to foreign customers.
2xport trading companies that are based in the &nited 'tates may be exempt
from antitrust provisions in order to allow them to penetrate foreign mar(ets by
collaborating with other &.'. firms.
D+ 1orei' Tra-i' Co"paie%
)hile the original functions of a trading compan were to handle the
paperwor(" financing" transportation and storage services related to import and
export transactions" many have expanded the scope of their operations to include
production and processing facilities and operations" as well as fully integrated
mar(eting systems. *n 1;;>" three large Capanese trading companies (-itsubishi"
-itsui" and *tochu were the top three companies on Fortunes %lobal >?? list.
+ue to the implementation of new accounting rules that significantly lowered
trading companies. revenues" by 9??3 none of these companies remained
anywhere near the top of Fortunes list.
E+ Dire)t Se##i'
Direct selling' i.e." exporting through sales representatives to distributors"
foreign retailers" or final end users" gives exporters greater control over the
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mar(eting function and offers the potential to earn higher profits as well.
)hereas a sales representative usually operates on a commission basis" a
distributor is a merchant who purchases goods from a manufacturer and resells
them at a profit. Companies evaluating potential foreign sales representatives or
distributors usually examine8
The si7e and capabilities of its sales force
*ts sales record
$n analysis of its territory
*ts current product mix
*ts facilities and e:uipment
*ts mar(eting policies
*ts customer profile
The principles it represents and the importance of the in:uiring company to
its overall business
*ts promotional strategies
1+ Dire)t Se##i' T*ro$'* t*e Iteret
2lectronic commerce is increasingly important in exportingDEB of revenues
from worldwide trade in 9??9 were derived from e-commerce and such trade is
expected to exceed 9?B of global trade in 9??E. 2-commerce is easy to engage"
provides faster and cheaper delivery of information" generates :uic( feedbac(
on new products" improves customer service" accesses a global audience" levels
the field of competition" and supports electronic data interchange (2+* with
both suppliers and customers.
G+ E&port Do)$"etatio
+irect selling re:uires the exporter to complete many documents that regulate
international trade. +epending on the situation" these documents may include8
$ pro forma invoiceDan invoice from the exporter to the importer that
outlines the selling terms" price" and delivery if the goods are actually
shipped.
$ commercial invoiceDa bill for the goods from the buyer to the seller.
$ bill of ladingDa receipt for goods delivered to the common
carrier for transportation.
$ cons(lar invoiceDsometimes re:uired by countries as a means of
monitoring imports.
$ certificate of originDindicates where the products originate and usually
is validated by an external source.
$ shipper)s export declarationDused by the exporter.s government to
monitor exports and to compile trade statistics.
$n export packing listDitemi7es the material in each individual pac(age"
indicates the type of pac(age" and is attached to the outside of the pac(age.
H+ 1orei' 1rei'*t 1or2ar-er%
$ forward freight forwarder is a foreign trade specialist who deals in the
movement of goods from producer to customer" and is the largest export
intermediary in terms of value and weight of products managed. 2ven export
management companies may use the speciali7ed services of foreign freight
forwarders. The typical freight forwarder is the largest export intermediary in
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terms of the weight and value of cargo handled. 'ome may speciali7e in the type
of mode used" others in the geographical area served. The movement of goods
across a variety of modes from origin to destination is (nown as intermodal
transportation. Three recent trends leading to a preference for air freight over
ocean freight are8 (i the need for more fre:uent shipments" (ii lighter-weight
shipments and (iii high-value shipments.
LOO3ING TO THE 1UTURE:
T*e Te)*o#o'( o. Tra-e
$lthough global trade continues to increase" the process of trade continues to get more
complex. The heightened importance of national and international security" the formation
of complex national" regional" and global trade arrangements" and the increasing list of
international regulations ma(es international trade more of a challenge than ever before.
,n the other hand" advances in transportation and communications systems steadily
facilitate export growth and ma(e it easier for companies to reach international mar(ets.
2lectronic data interchange allows companies to synchroni7e their importing and
exporting activities with other companies in real time. *t also allows companies to
connect with their foreign customers in new ways. Traditional trade intermediaries li(e
2-Cs and 2TCs are growing in technological sophistication" and new intermediaries li(e
1ederal 2xpress and &0' are improving the efficiency and effectiveness of export and
import operations. These intermediaries often allow exporters to integrate mechanisms
li(e online shopping" online order trac(ing" consolidated billing" product returns"
warranty claims" parts exchanges" and reverse logistics.
I+ So$r)e% o. A%%i%ta)e
%overnment agencies such as the +epartment of Commerce in the &nited 'tates
are particularly useful resources for export assistance. Table 13.9 outlines types
of trade information available by source" including government agencies" trade
associations and trade groups" and export intermediaries. *n Capan" offices such
as the 'mall and -edium 2nterprise $gency" $gency of *ndustrial 'cience and
Technology" and the -inistry of *nternational Trade and *ndustry (-*T* all are
available to assist exporters. $gencies in the &nited 'tates such as the 2x-*m
5an( and 'mall 5usiness $dministration can help international traders obtain
financing for their activities. -ost states and several cities fund and operate
export financing programs as well.
V+ COUNTERTRADE
Co(ntertrade involves a reciprocal flow of goods and services. *t provides a means
to complete a transaction when a firm (or government does not have sufficient
convertible currency to pay for imports" or it simply does not have sufficient funds.
Countertrade transactions can be divided into two basic types8 (i barter (based on
clearing arrangements used to avoid money-based exchange and (ii buybac(s"
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offsets and counterpurchase (all of which are used to impose reciprocal
commitments.
A+ Barter
Barter occurs when goods or services are traded for other goods and services"
i.e." it represents a non-monetary transaction. (Barter is not only the oldest form
of countertrade, it is the oldest form of any type of trade transaction.
B+ B$(4a)5%
B(backs are products the exporter receives as payment that are related to or
originate from the original export. These arrangements are :uite common in the
sale of technology" licenses" and even complete Fturn(eyG factories.
C+ O..%et Tra-e
*ffset trade occurs when the exporter sells goods or services for cash but then
helps the importer find opportunities to earn hard currency. +irect offsets
include generated business that directly relates to the export< indirect offsets
include generated business unrelated to the export. 1igure 13.3 shows how one
might structure an offset transaction.
CLOSING CASE: A#i4a4a+)o"
Alibaba.com i a !eb i"e "#a" $acili"a"e "ra%ac"io% be"!ee% im&or"er a%'
e(&or"er arou%' "#e !orl'. O"#er !eb i"e "#a" #a)e crea"e' imilar o%li%e
mar*e"&lace i%clu'e !!!.global.*i"a.%e" $ocue' o% &ro'uc" $rom +orea,
!!!."ra'e,I%'ia.com $or I%'ia% &ro'uc", a%' !!!.euro&age.com $or Euro&e.
T#ee elec"ro%ic "ra'i%g )e%ue #a)e c#a%ge' "#e mec#a%ic o$ im&or"i%g a%'
e(&or"i%g a%' o&e%e' u& "reme%'ou o&&or"u%i"ie, e&eciall- $or maller
e%"er&rie. T#e im&ac" #a bee% e&eciall- 'rama"ic $or mall C#i%ee
ma%u$ac"urer, !#o %o! #a)e rea'- acce "o a global mar*e" $or "#eir &ro'uc".
.ue"io%
1. List, in separate columns, the benefits and costs of using sites like Alibabas to trade
internationall. !hat does our analsis sa to companies like "rieve #in our
opening case$ as the think about their export strateg%
Benefits
=ow cost
$ccess to many suppliers6buyers
Huic( transaction time
-ore transparency in transaction
=ower ris( of fraud
2asy to ma(e contacts with '-2s
Costs
=istings are free
'earches are free
0ersonali7ed )eb pages cost additional
Certification costs some
1>>
Companies li(e %rieve need to ma(e web sites such as $libaba.com a central part of
their export strategy. The benefits of using these services overwhelm the costs.
9. &s it reasonable to speculate that eventuall most trade bet'een small- and medium-
si(ed firms might take place in the context of sites like Alibaba.com% &f so, does that
influence our inclination to consider importing and exporting%
)ith the rapid growth of the use of these sites and the corresponding increase in
trade among '-2s" it is very reasonable to speculate that eventually most trade
between '-2s might ta(e place in this context. -y inclination to consider
importing and exporting rises dramatically with powerful tools such as these at my
disposal.
3. )isit '''.alibaba.com, '''.trade-india.com, and '''.europages.com. *ompare
and contrast these !eb sites.
$libaba has a Chinese emphasis and focus" while Trade-*ndia is of course directed to
*ndia and 2uropages to 2urope. ,f the three" $libaba has the most broad appeal" but
all are very useful. Trade-*ndia gives more direct access to product catalogs for
some companies" but does not have the certification and authentication features of
$libaba. $lso" the $libaba contact templates are much more user friendly than both
Trade-*ndia and 2uropages. 2uropages is available in many different languages"
while the others are more limited and are mostly in 2nglish.
3. )isit '''.alibaba.com, go to +Advanced ,earch,- and enter the product ou seek in
the relevant box. ,elect re.uired criteria and click on +,earch.- /evie' the list of
companies that .ualif and find a suitable one. Anal(e this process for ease,
usefulness, and potential value.
This process is very easy" useful" and has tremendous potential value. *t ta(es only
seconds to find a long list of potential suppliers. ,ne drawbac( is the urge to contact
too many suppliers to find the best possible terms. The method of contact is made
very easy by the use of templates and drop-down menus that help to standardi7e
re:uests. *f the suppliers will respond to these re:uests in a timely manner" the
process has huge potential value.
0. 1o' transparent do sites like Alibaba.com make the import-export transaction%
!ould ou still 'orr about fraud%
These sights increase transparency and reduce the ris( of fraud. $libaba allows
suppliers to post information about their companies" including video tours of their
facilities. *n addition" $libaba has developed the 2rust3ass designation. *n order to
obtain this designation" companies must pass an authentication and verification test
from a third-party credit agency. $lso available is the F%old 'upplierG designation"
which also re:uires third party verification of trustworthiness. These mechanisms
greatly reduce the ris( of fraud" but do not eliminate it entirely. -echanisms such as
letters of credit should still be used to safeguard transactions from commercial ris(.
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WEB CONNECTION
$eaching $ip+ Iisit www.prenhall.com,daniels for additional information and
lin(s relating to the topics presented in Chapter Thirteen. 5e sure to refer your
students to the on-line study guide" as well as the *nternet exercises for Chapter
Thirteen.
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CHAPTER TERMINOLOG,:
letters of credit (=6Cs" p. 3A?
import bro(er" p. 3A3
export management company"
p. 3AE
ownership advantages" p. 3A>
location advantages" p. 3A>
internali7ation advantages" p. 3A>
direct export" p. 3AA
indirect export" p. 3AA
export trading company" p. 3AE
sales representatives" p. 3A;
distributors" p. 3A;
direct selling" p. 3A;
pro forma invoice" p. 3E?
commercial invoice" p. 3E?
bill of lading" p. 3E?
consular invoice" p. 3E1
certificate of origin" p. 3E1
shipper.s export declaration" p. 3E1
export pac(ing list" p. 3E1
foreign freight forwarder" p. 3E1
intermodal transportation" p. 3E1
countertrade" p. 3E3
offset trade" p. 3E>
barter" p. 3E>
buybac(s" p. 3E>
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ADDITIONAL EXERCISES: E&port a- I"port Strate'ie%
Exercise -..-. /esearch has shown although the largest firms in the world also tend
to be the world.s largest exporters" export intensit is not positively correlated with
the si7e of a firm. 5egin a discussion by as(ing students to explore the reasons for
this. Then" as( students to discuss the levels of export intensity they would expect to
find with respect to a variety of industries. 5e sure they explain their reasoning and
compare differences across industries.
Exercise -../. $ ma#or barrier to international trade activities is the issue of trust.
2ven when importers and exporters are (nown to each other" there is a high degree of
ris( associated with international trade transactions" i.e." exporters want to be sure
they.ll be paid and importers want to be sure they receive the full value of an order.
$s( students to discuss the reasons letters of credit and the various forms of a draft
help both importers and exporters overcome this challenge. &nder what conditions
might each instrument be preferredK
Exercise -.... $ssign each student (or team of students a given product and foreign
country mar(et. Then have the students (or teams consult the 4ational 2rade 5ata
Bank to collect information useful in developing a strategy for exporting the specific
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product to the designated country mar(et. +iscuss the information the students find
and its relevance to exporting in class. 5e sure to compare information across
products and countries.
Exercise -..0. $s( each student (or team of students to choose a product to import
to the &nited 'tates from a foreign country mar(et. $re there regulations regarding
their chosen product that they would have to be aware of before importingK @ave
them loo( up the tariff for the product. Tariffs can be found on the &nited 'tates
*nternational Trade Commission web site (www.usitc.gov.
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