Chapter 13: Exporting and Global Sourcing

Disadvantages of Exporting

- Compared to FDI, exporting offers fewer opportunities to learn about customers, competitors, and other aspects of foreign markets. - Firm must acquire and dedicate new capabilities in international sales contracts and transactions, international financing methods, and logistics and documentation, all of which can strain organizational resources. - Exposes the firm to tariffs and other trade barriers as well as fluctuating exchange rates.

Types of Exporting Intermediaries

- Foreign Distributor - Manufacturer's Representative - Trading Company - Export Management Company (EMC)

Advantages of Exporting

- Increase sales volume; improve market share. - Generate better profit margins. - Increase economies of scale. - Diversify customer base. - Stabilize sales fluctuations. - Minimize the cost of foreign market entry. - Minimize risk. - Maximize flexibility. - Leverage the capabilities of foreign distributors and other business partners located abroad.

2 export channels

- Independent distributor or agent - Firm's own marketing subsidiary abroad

Export Documentation

- Quotation or pro forma invoice - Commercial invoice - Bill of lading - Shipper's export declaration - Certificate of origin - Insurance certificate

Global Supply Chain Management

- Sourcing from numerous suppliers scattered around the world requires efficient supply-chain management - Third party logistics providers (3PLs) as well as independent logistics service providers - includes both upstream (supplier) and downstream (customer) flows

Government Intervention on Exporting

- sometimes require exporters to obtain a license for reasons of national security and foreign policy - usually don't allow firms to export nuclear materials or harmful biological agents that can be used to create weapons - impose sanctions on trade with certain countries as part of their foreign policy - may forbid the export of certain types of essential goods, such as petroleum products, if they are in short supply in the home country

A Systematic Approach to Exporting (Steps)

1. Assess global market opportunity 2. Organize for exporting 3. Acquire needed skills and competencies 4. Implement exporting strategy

4 key factors determine the cost of financing for export sales

1. Creditworthiness of the exporter 2. Creditworthiness of the importer 3. Riskiness of the sale 4. Timing of the sale

five reasons to consider countertrade

1. The alternative may be no trade at all, as in the case of mandated countertrade. 2. Countertrade can help the firm get a foothold in new markets, leading to new customer relationships. For example, in the mining industry, certain types of minerals are available only in developing economies. Mining rights may be available only to firms willing to countertrade. 3. Many firms use countertrade creatively to develop new sources of supply. The firm may develop new suppliers in the process. 4. Firms have used countertrade as a way of repatriating profits frozen in a foreign subsidiary operation's blocked accounts. Otherwise unable to access its funds, the firm will scout the local market for products it can successfully export. General Motors' former Motors Trading subsidiary was created to generate trade credits—that is, sell its vehicles in return for contributing to exports of merchandise originating from that country. 5. Firms may succeed in developing managers comfortable with a trading mentality.

five problems in countertrade

1. The goods the customer offers may be poor quality, with limited sales potential. 2. It is often difficult to put a market value on goods that the customer offers, because they are typically commodities or low-quality manufactured products. In addition, the buyer may not have the opportunity to inspect the goods or analyze their marketability. 3. Each party to the transaction will tend to pad its prices, anticipating that their counterpart will do the same. The seller may then experience difficulty re-selling the commodities it receives as payment. In a typical scenario, General Electric (GE) will place the products it receives as payment in countertrade (furniture, tomato paste) with a broker who sells them in world markets for a commission. Consequently, GE will build the cost of disposing of the goods into the price it quotes to the buyer. The buyer, anticipating that GE will quote a price on the high end, will pass the extra cost on to its customers. Thus, the resulting transaction between GE and the buyer is inefficient. 4. Countertrade is usually complex, cumbersome, and time-consuming. Deals are often difficult to bring to fruition. 5. Government rules can make countertrade highly bureaucratic and often prove frustrating for the exporting firm.

Letter of Credit Cycle

1. sales contract 2. request to open a letter of credit 3. letter of credit issued 4. letter of credit confirmed 5. products (exporter to importer) 6. documents (exporter to EX bank) 7. documents (EX bank to IM bank) 8. payment (IM bank to EX bank) 9. payment (importer to IM bank)

Two Key Decisions Regarding Global Sourcing

1: Outsource or Not? Decide whether each value-adding activity should be conducted in-house or by an independent supplier. Known as the 'make or buy' decision. Firms usually internalize activities that are part of their core competence or that involve the use of valuable intellectual property. 2: Where in the World Should Value-Adding Activities Be Located? Firms configure their value-chain activities in specific countries to cut costs, reduce transit time, access favorable factors of production, and access competitive advantages.

Advantages/Disadvantages of Letter of Credit

A contract between the banks of the buyer and the seller. Largely risk-free, it helps establish instant trust - Requires following a strict protocol, specified in the contract. Can involve much paperwork

Define: Offshoring

A natural extension of global sourcing, it refers to the relocation of a business process or entire manufacturing facility to a foreign country - MNEs shift production of goods or processes to foreign countries to enhance their competitive advantages - Common in the service sector, including banking, software writing, legal services, and customer service activities

Define: Incoterms (International Commerce Terms)

A system of universal, standard terms of sale and delivery - Commonly used in international sales contracts and price lists to specify how the buyer and the seller share the cost of freight and insurance, and at which point the buyer takes title to the goods

Define: Commercial invoice

Actual demand for payment issued by the exporter when a sale is concluded

Define: countertrade

An international business transaction in which all or partial payments are made in kind rather than cash (Similar to barter)

Examples of Exported Services

Architecture, education, banking, insurance, entertainment, information

Define: Contract Manufacturing

Arrangement in which the focal firm contracts with an independent supplier to manufacture goods according to well-defined specifications

Business Process Outsourcing (BPO) Activities

Back-office activities, including internal, upstream business functions such as payroll and billing, and Front-office activities, which includes down-stream, customer- related services such as marketing or technical support.

Define: Foreign Distributor

Based in the foreign market. Works under contract for the exporter, takes title to, and distributes the exporter's products in a national market or territory, often performing marketing functions such as sales, promotion, and after-sales service

Define: Export Management Company (EMC)

Based in the home market. Acts as an export agent on behalf of a client company

Define: Bill of lading

Basic contract between exporter and shipper - authorizes the shipping company to transport the goods to the buyer's destination

Advantages/Disadvantages of Cash in Advance

Best for Seller. - Risky from the buyer's standpoint, and thus unpopular; tends to discourage sales.

Sources of Export Financing

Commercial banks. Distribution channel intermediaries. Buyers. Suppliers. Government assistance programs (e.g., Export-Import Bank, Small Business Administration).

Common Dispute Areas with Intermediaries

Compensation arrangements Pricing practices Advertising and promotion practices and the extent of advertising support After-sales service Return policies Adequate inventory levels Incentives for promoting new products Adapting the product for local customers

Define: Manufacturer's Representative

Contracted by the exporter to represent and sell its merchandise or services in a designated country or territory

Define: Indirect Exporting

Contracting with an intermediary in the firm's home country to perform all export functions, often an Export Management Company or a Trading Company. Common among firms new to exporting.

Define: Direct Exporting

Contracting with intermediaries in the foreign market to perform export functions, such as distributors or agents. They perform downstream value-chain activities in the target market.

Benefits of Global Sourcing

Cost Efficiency, due to lower wages abroad, leading to improve profitability. Ability to Achieve Strategic Goals - Faster corporate growth. - Access to qualified personnel. - Improved productivity and service, especially when a task is outsourced to a firm specialized in that task. - Business process redesign. - Increased speed to market. - Access to new markets. - Technological flexibility.

Sources of Information to Identify Potential Intermediaries

Country and regional business directories such as Kompass (Europe), Japanese Trade Directory, and Foreign Yellow Pages. Trade associations e.g., National Furniture Manufacturers Association; National Association of Automotive Parts Manufacturers. Government ministries and agencies e.g., Austrade in Australia, Export Development Canada, U.S. Department of Commerce. Commercial attachés in embassies and consulates abroad. Branch offices of government agencies located in exporter's country, such as the Japan External Trade Organization.

Advantages/Disadvantages of Open Account

Easy for the exporter, who simply bills the buyer, who is expected to pay at some future time as agreed. - Risky unless there is strong established relationship between exporter and buyer

Define: Trading Company

Engages in import and export of a variety of commodities, products, and services

Global Sourcing from Subsidiaries versus Independent Suppliers

Global sourcing from independent suppliers involves outsourcing production to a third-party provider abroad. Captive sourcing is sourcing from the firm's own production facilities located abroad. Production is carried out at a foreign facility that the focal firm fully or partly owns through direct investment.

Strategies for Minimizing Risk in Global Sourcing

Go offshore for the right reasons. The best rationale is strategic, such as enhancing the quality of offerings, improving productivity, and freeing up core resources. Get employees on board. Poorly planned sourcing projects creates unnecessary tension with existing employees. Choose carefully between a captive operation and a contract with outside suppliers. Choose suppliers carefully. There are many options to choose from. A sourcing broker can help. Emphasize communications and collaboration with suppliers. Minimize problems by developing clear and effective relations with suppliers. Safeguard interests in terms of maintaining the firm's reputation, building a stake for the supplier, keeping open options for finding alternate partners if needed, and withholding key intellectual property.

Define: Quotation or pro forma invoice

Issued on request to advise a potential buyer about the price and description of the exporter's product or service

Global sourcing can lead to three major problems in the home country

Job losses Reduced national competitiveness Declining living standards

Governments should strive to do what to mitigate the potential harm of global sourcing?

Keep the cost of doing business low (via appropriate economic and fiscal policies). Ensure a strong educational system, that supplies engineers, scientists, and knowledge workers. Maximize worker flexibility to help those who lose jobs find other positions.

Transportation Modes

Land transportation is via highways and railroads Ocean transportation is via large container ships. Air transportation involves commercial or cargo aircraft. Ocean and air transport are common in international business because of the long distances. Ocean transport is the cheapest and most common. Ocean transport was revolutionized by the development of 20- and 40-foot shipping containers.

Define: Shipper's export declaration

Lists the contact information of the exporter and buyer, full description, declared value, and destination of the products being shipped - Used by governments to collect statistics

Risks in Global Sourcing

Lower-than-expected cost savings. Environmental factors, such as exchange rate fluctuations, trade barriers, and labor strikes. Weak legal environment, which can affect protection of intellectual property. Inadequate or low-skilled workers. Overreliance on suppliers. Risk of creating competitors. Erosion of morale and commitment among home-country employees, due to outsourcing jobs.

Risks associated with countertrade

May involve inferior or hard-to-price goods; may lead to price padding; Can be complex, cumbersome, and time-consuming

Define: Business Process Outsourcing (BPO)

Outsourcing of business functions to independent suppliers such as accounting, human resource functions, IT services, and customer service

Corporate Social Responsibility

Protecting the environment Promoting human rights Labor practices and working conditions abroad

Define: Insurance certificate

Protects the exported goods against damage, loss, pilferage and, sometimes, delay

Define: Company-Owned Foreign Subsidiary

Similar to direct exporting, except the exporter owns the foreign intermediation operation; the most advanced option

Drivers of Global Sourcing

Technological advances in communications, especially the Internet and international telephony. Falling costs of international business. Entrepreneurship and rapid economic transformation in emerging market countries.

Define: Certificate of origin

The "birth certificate" of the goods, showing country where the product originated.

Features of Global Supply Chain Management

The costs of physically delivering a product to an export market may account for as much as 40% of the total cost. Firms use information and communications technologies (ICTs) to streamline operations, reducing costs and increasing distribution efficiency. Logistics involves physically moving goods through the supply chain. Incorporates information, transportation, inventory, warehousing, materials handling and similar activities associated with the delivery of raw materials, parts, components, and finished products.

Define: Global Supply Chain

The firm's integrated network of sourcing, production, and distribution, organized on a world scale, and located in countries where competitive advantage can be maximized

Advantage & Disadvantage of Direct Exporting

The main advantage of direct exporting is that it gives the exporter greater control over the export process and potential for higher profits, as well as allowing a closer relationship with foreign buyers and the marketplace. However, the exporter also must dedicate substantial time, personnel, and corporate resources to developing and managing export operations

Define: Export Documentation

The official forms and other paperwork required to transport exported goods and clear customs

Define: letter of credit

a contract between the banks of the buyer and seller that ensures payment from the buyer to the seller upon receipt of an export shipment

Define: Riskiness of the sale

a function of the value and marketability of the good being sold, the extent of uncertainty surrounding the sale, the degree of political and economic stability in the buyer's country, and the likelihood the loan will be repaid

Define: license

a permission to export

Types of Countertrade

barter, compensation deal, counter-purchase, buy-back agreement

What amount of all world trade does countertrade account for?

between 10% and 1/3

factors firm should keep in​ consideration when selecting a transportation​ mode

cost, transit​ time, and predictability

Define: Ex works (EXW)

delivery takes place at the seller's premises or another named place - minimal obligation for the seller; buyer bears all costs and risks involved in claiming the goods from the seller's premises

Define: Free on Board (FoB)

delivery takes place when the goods pass the ship's rail at the name port of shipment, the port of origin in the seller's home country - buyer bears all the costs and risks of loss or damage upon delivery; seller clears goods for export

How are most services delivered to foreign customers?

either through local representatives or agents or in conjunction with other entry strategies such as FDI, franchising, or licensing - the internet

What's usually a firm's first foreign entry strategy, and why?

exporting - Low risk, low cost, and flexible

Define: creative destruction

firms' innovative activities tend to make mature products obsolete over time - a concept first proposed by the Austrian economist Joseph Schumpeter

Define: relational assets

high-quality, enduring business and social relationships with key intermediaries and facilitators abroad that provide competitive advantages

3 Export Intermediation Options

indirect exporting, direct exporting, and company-owned foreign subsidiary

Define: Timing of the sale

influences the cost of financing

Define: Price competitiveness

keeps foreign pricing in line with that of competitors

Define: Global sourcing (outsourcing)

low-control strategy in which the focal firm sources from independent suppliers through contractual agreements, as opposed to the high-control strategy of buying from company-owned subsidiaries - frequently represents the firm's initial involvement in international business - increases management's awareness about other international opportunities. Based on experience it gains through such inward internationalization, the firm may progress to exporting, direct investment, or other forms of outward internationalization

Define: Product adaptation

modifying a product to make it fit the needs and tastes of the buyers in the target market

Define: Marketing communications adaptation

modifying advertising, selling style, public relations, and promotional activities to suit individual markets

Define: Creditworthiness of the exporter

obtaining financing from banks and other lenders at reasonable interest rates

Define: Distribution strategy

often hinges on developing strong and mutually beneficial relations with foreign intermediaries

What major tasks does a firm with a company-owned foreign subsidiary undertake directly in the foreign market?

participating in trade fairs, conducting market research, searching for distributors, and finding and serving customers

Define: Compensation deals

payment in both goods and cash

Advantage of Indirect Exporting

provides a way to penetrate foreign markets without the complexities and risks of more direct exporting - novice international firm can start exporting with no incremental investment in fixed capital, low startup costs, and few risks, but with prospects for incremental sales

Define: Counter-purchase (back-to-back transaction or offset agreement)

requires two distinct contracts. In the first, the seller agrees to a set price for goods and receives cash from the buyer. However, this first deal is contingent on a second contract wherein the seller also agrees to purchase goods from the buyer (or produce and assemble a certain proportion of goods in the buyer's country) for the same cash amount as the first transaction or a set percentage of it. If the two exchanges are not of equal value, the difference can be paid in cash. - common in the defense industry, where a government purchasing military hardware might require a defense contractor to purchase some local products or contribute to local employment.

Define: 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

Define: Cost, Insurance, and Freight (CIF)

seller pays the cargo insurance and delivery of goods to the name port of destination. from the destination port, buyer is responsible for customs clearance and other costs and risks - seller pays for freight and insurance to transport the goods to port, then responsibility transfers to buyer

Define: transformational outsourcing

suggests that just as the firm achieves gains in efficiency, productivity, quality, and revenues by leveraging offshore talent, it also obtains the means to turn around failing businesses, speed up innovation, restructure operations, and fund otherwise-unaffordable development projects

Define: Creditworthiness of the importer

the ability of the buyer to obtain sufficient funds to purchase the goods

Define: barter

the oldest form of trade - the direct exchange of goods without any money

Define: Cost efficiency

the traditional rationale for sourcing abroad - takes advantage of the large wage gap between advanced economies and emerging markets

When is countertrade used?

when conventional means of payment are difficult, costly, or nonexistent

Define: internalization and externalization

whether each value-adding activity should be conducted in house or by an external, independent supplier - make or buy decision

foreign intermediaries expect exporters to provide

■ Good, reliable products for which there is a ready market ■ Products that provide significant profits ■ Opportunities to handle other product lines ■ Support for marketing communications, advertising, and product warranties ■ A payment method that does not unduly burden the intermediary ■ Training for intermediary staff and the opportunity to visit the exporter's facilities (at the exporter's expense) to gain first hand knowledge of the exporter's operations ■ Help establishing after-sales service facilities, including training of local technical representatives and the means to replace defective parts, as well as a ready supply of spare parts, to maintain or repair the products