MODULE 9: EXPORTING, IMPORTING, AND GLOBAL SOURCING

A major part of international business is, of course, importing and exporting. An increase in the
level of exports and imports is, after all, one of the symptoms of a flattening world. In a flat world,
goods and services can flow fluidly from one part of the globe to another.

Exporting vs Importing
Exporting is defined as the sale of products and services in foreign countries that are sourced
or made in the home country. Importing is the flipside of exporting. Importing refers to buying
goods and services from foreign sources and bringing them back into the home country. Importing
is also known as global sourcing.

Exporting is an effective entry strategy for companies that are just beginning to enter a new foreign
market. It’s a low-cost, low-risk option compared to the other strategies. These same reasons
make exporting a good strategy for small and midsize companies that can’t or won’t make
significant financial investment in the international market. Distributors are export intermediaries
who represent the company in the foreign market. Often, distributors represent many companies,
acting as the “face” of the company in that country, selling products, providing customer service,
and receiving payments. In many cases, the distributors take title to the goods and then resell
them. Companies use distributors because distributors know the local market and are a cost-
effective way to enter that market.

Why Do Companies Export?

Companies export because it’s the easiest way to participate in global trade, it’s a less costly
investment than the other entry strategies, and it’s much easier to simply stop exporting than it is
to extricate oneself from the other entry modes. An export partner in the form of either a distributor
or an export management company can facilitate this process.

Export Management Company (EMC)

An Export Management Company (EMC) is an independent company that performs the duties
that a firm’s own export department would execute. The EMC handles the necessary
documentation, finds buyers for the export, and takes title of the goods for direct export. In return,
the EMC charges a fee or commission for its services.
Benefits of Exporting
1. Market – company will have access to new markets, which can give added revenues.
2. Money – earning more revenue, and gaining access to foreign currency, which benefits
companies located in certain regions of the world.
3. Manufacturing – the cost to manufacture a given unit will decrease for manufacturing at higher
volumes and buying source materials in higher volumes, thus benefitting from volume discounts.

Specialized Entry Modes: Contractual

Contractual modes involve the use of contracts rather than investment.
1. Licensing
Licensing is defined as the granting of permission by the licenser to the licensee to use intellectual
property rights, such as trademarks, patents, brand names, or technology, under defined
conditions. The possibility of licensing makes for a flatter world, because it creates a legal vehicle
for taking a product or service delivered in one country and providing a nearly identical version of
that product or service in another country. Under a licensing agreement, the multinational firm
grants rights on its intangible property to a foreign company for a specified period of time. The
licenser is normally paid a royalty on each unit produced and sold. For a multinational firm, the
advantage of licensing is that the company’s products will be manufactured and made available
for sale in the foreign country (or countries) where the product or service is licensed. The
multinational firm doesn’t have to expend its own resources to manufacture, market, or distribute
the goods. This low cost, of course, is coupled with lower potential returns, because the revenues
are shared between the parties.
2. Franchising
Similar to a licensing agreement, under a franchising agreement, the multinational firm grants
rights on its intangible property, like technology or a brand name, to a foreign company for a
specified period of time and receives a royalty in return. The difference is that the franchiser
provides a bundle of services and products to the franchisee.
For example, McDonald’s expands overseas through franchises. Each franchise pays
McDonald’s a franchisee fee and a percentage of its sales and is required to purchase certain
products from the franchiser. In return, the franchisee gets access to all of McDonald’s products,
systems, services, and management expertise.
Specialized Entry Modes: Investment
Beyond contractual relationships, firms can also enter a foreign market through one of two
investment strategies:
1. Joint Ventures
An equity joint venture is a contractual, strategic partnership between two or more separate
business entities to pursue a business opportunity together. The partners in an equity joint venture
each contribute capital and resources in exchange for an equity stake and share in any resulting
profits.
2. Greenfield Ventures
Firms may want to have a direct operating presence in the foreign country, completely under their
control. To achieve this, the company can establish a new, wholly owned subsidiary (i.e., a
greenfield venture) from scratch, or it can purchase an existing company in that country. Other
companies may purchase a local supplier for direct control of the supply. This is known as vertical
integration.

COUNTERTRADE
Some countries limit the profits (currency) a company can take out of a country. As a result, many
companies resort to countertrade, where companies trade goods and services for other goods
and services; actual monies are involved only to a lesser degree, if at all.
Example: Philippines importing palm oil worth P1 billion from Malaysia, in return for setting up a
hydropower project in the country.

Why Do Companies Engage in Countertrade?

One reason that companies engage in this practice is that some governments mandate
countertrade on very large-scale deals or if the deal is in a certain industry.
Note: Barter is the structure of countertrade

GLOBAL SOURCING
Global sourcing refers to buying the raw materials, components, or services from companies
outside the home country. In a flat world, raw materials are sourced from wherever they can be
obtained for the cheapest price (including transportation costs) and the highest comparable
quality.
Outsourcing versus Global Sourcing
In outsourcing, the company delegates an entire process (e.g., accounts payable) to an outsource
vendor. The vendor takes control of the operation and runs the operation as it sees fit. The
company pays the outsource vendor for the end result; how the vendor achieves those end results
is up to the vendor.

Who Are the Main Actors in Export and Import?

The main parties involved in export and import transactions are the exporter, the importer, the
carrier and customs administration offices.
1. Exporter - is the person or entity sending or transporting the goods out of the country.
2. Importer - is the person or entity buying or transporting goods from another country into the
importer’s home country.
3. Carrier - is the entity handling the physical transportation of the goods. Well known carriers
across the world are United Parcel Service (UPS), FedEx, and DHL.
4. Customs administration offices in both the home country and the country to which the item
is being exported are involved in the transaction.

What’s Needed for Import and Export Transactions?

1. The bill of lading - is the contract between the exporter and the carrier (e.g., UPS or FedEx),
authorizing the carrier to transport the goods to the buyer’s destination. The bill of lading acts as
proof that the shipment was made and that the goods have been received.
2. Commercial or Customs Invoice - is the bill for the goods shipped from the exporter to the
importer or buyer. Exporters send invoices to receive payment, and governments use these
invoices to determine the value of the goods for customs-valuation purposes.
3. Export Declaration - given to customs and port authorities. The declaration provides the
contact information for both the exporter and the importer (i.e., buyer) as well as a description of
the items being shipped, which the Bureau of Customs and Border Protection uses to verify and
control the export. The government also uses the information to compile statistics about exports
from the country.
4. Certificate of origin - as its name implies, declares the country from which the product
originates. These certificates are required for import duties. These import duties are lower for
countries that are designated as a “most favored nation.”
5. Letter of Credit - is a legal document issued by a bank at the importer’s (or buyer’s) request.
The importer promises to pay a specified amount of money when the bank receives documents
about the shipment.