Exporting & Counter

Trade
CHAPTER 14
 What we will learn in Chap 14

 Overview of entry strategies

 Characteristics of internationalization
 Exporting as an entry strategy
 Managing transactions
 Payment methods
 Countertrade
Recall Chapter 1 : Entry strategies in global market:
1. Export/Import
2. FDI
3. International Portfolio investment
4. Contractual relationships (licensing, franchising & Collaborative ventures)

Firms often struggle to decide which strategy to opt for an entry into foreign market
Experienced managers consider the following factors
1. Goals and Objectives of firm
2. Degree of control firms wants
3. Available resources (organizational, technological & financial)
4. Degree of risk firm can tolerate
5. Characteristics of product/services offered
6. Conditions in target country
7. Nature and extent of competition in target country
8. Availability and capability of partners
9. Value adding activities the firm is willing to perform
10. Long term strategic importance
Classifying entry strategies based on level of control, resource, flexibility and risk
Nature of Internationalization

We can identify certain patterns and characteristics associated with the process of
international expansion:
1. Push and pull factors serve as triggers
2. Initial international expansion can be accidental or unplanned
3. Risk and return must be balanced
4. Internationalization is an ongoing learning experience
5. Firms may evolve through stages of internationalization
Advantages of Exports

1. Increase overall sales volume, improve market share, more profit margins
2. Reduction of per unit cost
3. Diversify customer base, reducing dependence on local market
4. Stabilize fluctuation in sales associated to economic cycle
5. Minimize cost of foreign market entry
6. Minimize risk and maximize flexibility compared to other strategies
7. Leverage the capability of foreign partners
Disadvantages of Exports

1. Exporting offers fewer opportunities to learn about customers, competitors and

other aspect of foreign market
2. Additional resources required to handle sales contract and transactions, new
financing methods and logistics and documentation
3. Exporting expose firms to tariff and other barriers
A systematic approach to exporting
Alternate organizational arrangements for exporting
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 exporter’s 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
Export Documentation (Contd.)
 Bill of lading: basic contract between exporter and shipper. Authorizes the shipping
company to transport the goods to the buyer’s 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.
Export Documentation (Contd.)
 Incoterms: Universally accepted terms of sale that specify how the buyer and the seller
share the cost and freight and insurance in an international transaction and at which point
the buyer takes the title of the goods:
 Ex-works example ex-warehouse
 Free on board (FOB) Example FOB Karachi
 CFR/CNF (Cost & Freight) example CFR Houston
 CIF (Cost Insurance and freight) example CIF Luanda
Payment methods
 Cash in Advance. Risky from the buyer’s 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
Payment methods
Counter trade

 Barter: Direct exchange of goods without any money.

 Compensation deals: Involve payment both in goods and
cash.
 Counter-purchase: Seller sells its product at a set price
for cash, but also agrees to buy goods from the buyer. The
first deal is contingent on a second deal.
 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.