Modes of 

International trade
• When an organization has made a decision to enter
an overseas market,
• there are a variety of options open to it.
• These options vary with cost
• Cost because there is profit margin.
• risk because there are risks in international trade
settlements
• the degree of control which can be exercised over
the settlement of the trade to mitigate the risk..
• MODES TO ENTER THE INTERNATIONAL MARKET
• • EXPORTING
• • FRANCHISING
• •LICENSING
• • JOINT VENTURING
• •COUNTERTRADE
• •TURNKEY CONTRACTS
• • CONTRACT MANUFACTURING
• • MERGERS & ACQUISITIONS
• • THIRD COUNTRY LOCATION
• Exporting
• ●Exporting is the most traditional and well
established form of operating in foreign markets.
• Exporting can be defined as
• the marketing of goods produced in one country
• into another.
• Whilst no direct manufacturing is required in an
overseas country,
• significant investments in marketing are required.
•  Exporting methods:--
• These are of two types
• direct export or indirect export.
• In direct exports
• one can use an agent, distributor, or overseas
subsidiary, or act via a Government agency.
• Indirect methods offer : Contracts - in the
operating market or worldwide.
• Advantages of exporting
• Manufacturing is home based thus,
• it is less risky than overseas based
• Gives an opportunity to "learn" overseas markets
• before investing in Export venture.
• Reduces the potential risks of operating overseas.
• FRANCHISING
• Parties to such transactions
• Franchisor & Franchisee.
• In terms of distribution
• the franchisor is a supplier
• who allows an operator, or a franchisee,
• to use the supplier's trademark and distribute the
supplier's goods.
• In return, the operator pays the supplier a fee.
• A number of countries, including the United States, and Australia,
have laws that regulate franchising.
• Franchising is the practice of using another firm's successful
business model.
•  For the franchisor, the franchise is like an alternative to building
‘Chain Stores’
• to distribute goods that avoids the investments and liability of a
chain.
• The franchisor's success depends on the success of the
franchisees.
• The franchisee is said to have a greater incentive than employee .
•  LICENSING
• Licensing is defined as "the method of foreign operation
whereby a firm in one country agrees to permit a company in
another country to use the manufacturing, processing,
trademark, know-how or some other skill provided by the
licensor".
• Licensing involves little expense and involvement.
• The only cost is signing the agreement and policing its
implementation.
• It is quite similar to the "franchise" operation.
• Coca Cola/Foreign Liquers is an excellent example of licensing.
• Advantages of Licensing.
• Good way to start in foreign operations
• and open the door to low risk manufacturing
relationships
• Linkage of parent and receiving partner interests
• means both get most out of marketing effort
• Capital not tied up in foreign operation
•  Disadvantages of Licensing.
• Limited form of participation - to length of agreement,
specific product, process or trademark.
• Potential returns from marketing and manufacturing may
be lost.
• Partner develops know-how and so license is short.
• Licensees become competitors - overcome by having cross
technology transfer deals and
• Requires considerable fact finding, planning,
investigations.
• JOINT VENTURES
• Joint ventures can be defined as
• "an enterprise in which two or more
investors share ownership
• and control over property rights and operation."
• It is a very common strategy of
• entering the foreign market.
• FDI/Joint ventures abroad.
• Any form of association which implies collaboration
• for more than a transitory period is a joint venture.
• A joint venture may be brought about by a foreign
investor showing an interest in local company,
• A local firm acquiring an interest in an existing foreign
firm or
• By both the foreign and local entrepreneurs jointly
forming a new enterprise.
• Advantages of joint venture
• Sharing of RISK.
• Joint financial strength.
• May be only means of entry in some countries.
•  Disadvantages of joint venture
• Partners do not have full control of management.
• May be impossible to recover capital if need be.
• Partners may have different views on expected
benefits.
• COUNTER TRADE
• • Largest indirect method of exporting is countertrade.
• Countertrade means exchanging goods or services
• which are paid for, in whole or part,
• with other goods or services,
• rather than with money.
• • A monetary valuation can however be used in
counter trade
• for accounting purposes.
• Countertrade also occurs
• when countries lack sufficient hard currency,
• or when other types of market trade are impossible.
• In 2000, India and Iraq agreed on an "oil for wheat and
rice" barter deal.
• Countertrade is a system of international trading that
helps governments reduce imbalances in trade between
them and other countries.
• It involves the direct or indirect exchange of goods for
other goods instead of currency.
• TURNKEY CONTRACTS
• • An agreement under which a contractor completes a project,
then hands it over in fully operational form to the client, which
needs to do nothing but ""turn a key"",
• here the contractor builds an item to the buyer's exact
specifications,
• or when an incomplete product is sold with the assumption that
the buyer would complete it.
• Many turnkey contracts involve government/public sector as buyer.
• The advantage of a turnkey project is that a single contractor
oversees all aspects of construction from beginning to end.
• CONTRACT MANUFACTURING
• • Contract manufacturing is the outsourcing of part
of the manufacturing process of a product
• to a third-party.
• A company may outsource the manufacture of certain
components for the product
• or outsource the assembly of the product.
• MERGERS & ACQUISITIONS
• • This strategy is also known as an expansion strategy.
• • M&As have been imp & powerful driver of
globalization.
• • Between 1980 – 2000 the value of cross border grew at
an average annual rate of 40%.
• • A large no. of foreign firms have entered India through
acquisition.
• • Example: Automobiles, Pharmacy, banking, telecom
etc.
Components of international Trade-sourceDr. Jean-Paul Rodrigue
• Transaction costs. The costs related to the economic
exchange behind trade. It can include the gathering of
information, negotiating, and enforcing contracts, 
letters of credit and transactions, including 
monetary exchange rates if a transaction takes place in
another currency. 
• Tariff and non-tariff costs. Levies imposed by governments
on a realized trade flow. They can involve a direct monetary
cost according to the product being traded or standards to
be abided to for a product to be allowed entry into a foreign
market
• Transport costs. The full costs of shipping goods from the
point of production to the point of consumption.
Containerization, intermodal transportation, and economies
of scale have reduced transport costs significantly.
• Time costs. The delays related to the lag between an order
and the moment it is received by the purchaser. Long-
distance international trade is often related to time delays
that can be compounded by custom inspection delays.
Supply chain management strategies are able to mitigate
effectively time constraints, namely through the inventory in
transit concept.
Payment Methods in
International trade
 International Payment Methods
1Clean Payment
a)Advance Payment
b)Open Account
2Bills for collection
3.DocumentaryCredit
 Cash In Advance
• Time of Payment-
• Advance i.e
Before Shipment of goods-
• Goods Available to Buyer
After Payment
• Risks to Seller
None
• When Appropriate
Seller has negotiating strength to demand cash in advance
 Open Account

•Time of Payment
•As agreed; i.e. 30 days
•Goods Available to Buyer
•Before Payment
•Risks to Seller
•Buyer defaults on payment obligation
•Delays in availability of foreign exchange and
transferring of funds from buyer’s country
 Open Account
•When Appropriate
• Seller has absolute trust that buyer will accept
shipment
• and pay at agreed time
• Seller is confident that importing country will not
impose regulations
• deferring or blocking transfer of payment
• Seller has sufficient liquidity
• or access to outside financing to extend deferred
payment terms
 Documentary Collection
Characteristics
Allows exporters/seller to retain ownership of the goods
until they receive payment
or are reasonably certain they will receive it

Bankacts as agent for exporter/seller by holding the title

documents

Bank assumes no risk but must act in good faith and

exercise reasonable care
The terms are called D/P TERMS.
 Documentary Collection - D/P
Time of Payment
 On presentation of sight draft by a bank to buyer
Goods Available to Buyer
• After payment
Risks to Seller
•Buyer’s nonacceptance of shipment
•Payment delays due to unavailability of foreign
exchange in buyer’s country
•Payment blocked due to political actions in
buyer’s country
 Documentary Collection - D/P
When Appropriate
•Seller is confident that
•buyer will accept shipment
•Seller is confident that
•importing country will not impose
regulations
•deferring or blocking transfer of payment
 Documentary Collections - D/A
Time of Payment
At maturity of accepted draft
Goods Available to Buyer
Before payment
Risks to Seller
•Buyer’s default on payment obligation
•Delays in availability of foreign exchange and
•transferring of funds from buyer’s country
•Payment blocked due to political events in buyer’s
country
 Documentary Collections - D/A

When Appropriate
•Seller has confidence that buyer will accept
shipment
• and pay on agreed date
•Seller is confident that
•importing country will not impose regulations
•deferring or blocking the transfer of payment
 Letter of Credit
•Letters of Credit (L/Cs) are legal instruments issued
by banks (on behalf of their customers)
•with the conditional obligation to make payment
to the beneficiary of the L/C
Documentary (Trade) Letters of Credit are used to
facilitate payments in import and export transactions
Standby Letters of Credit are “Standing By” for an
event of default or non-performance before they can
be drawn on
 Letter of Credit – Key Parties
• Applicant
• Buyer/Importer
•Advising Bank
• Beneficiary •authenticates LC
• Seller/Exporter •Confirming Bank
•Issuing Bank •Guarantees payment
•Guarantees • if Issuing Bank
payment defaults
 INCOTERMS

•Incoterms
• A widely-used terms of sale, are a set of
•11 internationally recognized rules
• which define
• the responsibilities of sellers and buyers. 
•Incoterms specifies who among seller and buyer
•is responsible for
• paying for and managing the shipment,
•insurance, documentation,
• customs clearance, and other logistical activities. 
• Primary importance in INCOTERMS rule is that
• each Incoterms rule clarifies the
• Tasks, costs and risks to be borne by
• buyers and sellers in these transactions. 
• Familiarizing yourself with Incoterms will help
• improve smoother transactions by clearly defining
• who is responsible for what
• and each step of the transaction.  
• The Incoterms rules are updated from time to time every ten
years since it came to effect from 1936
• by International chamber of commerce.
• The last revision was made in 2020.
• INCOTERM rules are grouped into two categories reflecting
• modes of transport in a trade transaction.
• Of the 11 rules, there are seven for ANY mode(s) of
transport and
• four for SEA or LAND or INLAND WATERWAY
transport.   
• Incoterms Clarify Responsibilities of Parties to a Sales
Transaction
• For example, in each Incoterm rule
• a statement is provided as to seller’s responsibility
• to provide the goods and commercial invoice
•  in conformity with the contract of sale.
• Likewise, a corresponding statement is provided
which stipulates that
• the buyer pay the price of goods as provided in the contract
of sale. 
•Each Incoterm rule has a statement
•stipulating which party is responsible
•for obtaining any export license or
• other official authorization required for
•export and for carrying out the customs
formalities necessary for
• the export to proceed.
•Similarly, each rule has a corresponding statement as to
• which party is responsible for
•obtaining any import license or other official
authorization
•required for import and for carrying out
• the customs formalities required for
•the import of goods.
•These statements also specify which party bears
•the cost of handling these tasks. 
•Similarly, each Incoterm rule specifies
•which party to the transaction, is obligated to
• contract for the carriage of the goods
•Another point addressed in each Incoterm rule
is which party, if any,
•is obligated, to provide for
•cargo insurance coverage.  
• These statements also specify
• which party bears the cost of the handling these
tasks.
• Each rule also contains statements, among others,
• as to which party is responsible for
• packing the goods for transport overseas and
• for bearing the costs of any pre-shipment
inspections
•A final example is cargo delivery.
•Each Incoterm rule specifies the seller’s obligations as for
•cargo delivery and clarifies
•when delivery takes place.
• Each rule also specifies
•when the risk of loss or damage to the goods being
exported
• pass from the seller to the buyer
• by reference to the delivery provision.  
• The seven Incoterms® 2020 rules for any mode(s) of transport
are: 
•     EXW - Ex Works (insert place of delivery)
•     FCA  - Free Carrier (Insert named place of delivery) 
•     CPT  - Carriage Paid to (insert place of destination) 
•     CIP -  Carriage and Insurance Paid To (insert place of
destination)  
•     DAP - Delivered at Place (insert named place of destination)  
•     DPU - Delivered at Place Unloaded (insert of place of
destination)  
•     DDP - Delivered Duty Paid (Insert place of destination).  
• The four Incoterms® 2020 rules for Sea and Inland
Waterway Transport are: 
•      FAS - Free Alongside Ship (insert name of port of
loading) 
•      FOB - Free on Board (insert named port of loading) 
•      CFR - Cost and Freight (insert named port of
destination) 
•      CIF -  Cost Insurance and Freight (insert named port
of destination) 
• What Is Cost, Insurance, and Freight (CIF)?
• Cost, insurance, and freight (CIF) is an
• international shipping agreement, which represents
• the charges paid by a seller to cover the
• costs, insurance, and freight of a buyer's order
• while the cargo is in transit. 
• Cost, insurance, and freight only applies to goods
transported via a waterway, sea, or ocean.
• The goods are exported to the buyer's port named in the
sales contract.
• Until the goods are delivered to the buyer's destination
port,
• the seller bears the costs of any loss or damage to the
product.
• Further, if the product requires additional 
customs duties,
• export paperwork, or inspections or rerouting, the seller
must cover these expenses.
 What Is Free Alongside Ship (FAS)?

• Free alongside ship (FAS) is a contractual term

• used in the international export business
• and it stipulates that
• the seller must arrange for goods to be delivered to
a designated port and
• next to a specific vessel for easier transfer.
• Free alongside ship is one of a number of
internationally recognized commercial terms
• used by export and import businesses
 What Is Ex Works (EXW)?

• Ex works is an Incoterms (International

Commercial Terms), published by the
International Chamber of Commerce.and
describes that
• a seller makes a product available
• at a designated location,
• and the buyer of the product must cover the
• transport costs.
•Once buyers have their goods,
• they are responsible for other risks, such as
•loading the goods onto trucks,
•transferring them to a ship or plane,
•and meeting customs regulations.
 What Is Ex Works (EXW)?

• Ex works (EXW) is an international trade term and describes as

under :----
• The seller has to make a product available at a designated location,
• and the buyer of the product must cover the transport costs.
• Once buyers have their goods in hand ,
• they are responsible for other risks, such as
• loading the goods onto trucks,
• transferring them to a ship or plane,
• and meeting customs regulations
• This is  standardized international trade term and is published by
• the International Chamber of Commerce.
 Cost and Freight (CFR)

• Cost and freight (CFR)

• a legal term used in foreign trade contracts.
• The contract specifies that the sale includes
• cost and freight the seller is required to arrange
• for the carriage of goods by sea to a port of destination
and
• provide the buyer with the documents necessary
• to obtain them from the carrier..
•With a cost and freight sale,
• the seller is not responsible for
• procuring marine insurance against the
•risk of loss or damage to the cargo
•during transit.
•Cost and freight is a term used strictly for
•cargo transported by sea or inland waterways.
 What Is Delivered Ex Quay?

• Delivered ex quay (DEQ) was a legal term as

defined by the Incoterms, the International
Commercial Terms published by the International
Chamber of Commerce.
• These terms, all with three-letter abbreviations,
relate to common contractual practices in
international trade and are used as standard items
to define certain contract terms.
• Delivered ex quay (DEQ) was a contractual obligation
whereby
• the seller was required to deliver goods to the wharf at the
destination port.
• Under DEQ, the seller bore all risks and costs until
delivery.
• Delivered ex quay items were denoted as either duty paid
or unpaid.
• Under the DES contractual obligation, the seller makes the
goods available aboard a ship at the destination port.
•THANK YOU