Chapter 14
The 14 steps of a typical export import transaction:
(1) The French importer places an order with the US exporter and ask the American if he would be willing to ship under the letter of credit. (2) The US exporter agrees to ship under the letter of credit and specifies relevant information such as prices and delivery terms. (3) The French importer applies to the Bank of Paris for a letter of credit to be used in favor of the US exporter for the merchandise the importer wishes to buy. (4) The Bank of Paris issues a letter of credit in the French importer's favor and send it to the US exporter's bank, the Bank of New York. (5) The Bank of New York advises the exporter of the opening of the letter of credit in his favor. (6) The US exporter ships the goods to the French importer on a common carrier. And official of the carrier gives the exporter a bill of lading. (7) The US exporter presents a 90-day time draft drawn on the Bank of Paris in accordance with its letter of credit and the bill of lading to the Bank of New York. The exporter endorses the bill of lading so title to the goods is transferred to the Bank of New York. (8) The Bank of New York sends a draft and bill of lading to the Bank of Paris. The Bank of Paris accepts the draft, taking possession of the documents and promising to pay the now-accepted draft in 90 days. (9) The Bank of Paris returns the accepted draft to the Bank of New York. (10) The Bank of New York tells the US exporter that it has received the accepted bank draft, which is payable in 90 days. (11) The exporter sells the draft to the Bank of New York at a discount from its face value and receive the discounted cash value of the draft in return. (12) The Bank of Paris notifies the French importer of the arrival of the documents. She agrees to pay the Bank of Paris in 90 days. The Bank of Paris release of the documents so the importer can take possession of the shipment. (13) in 90 days, the Bank of Paris receives the importer's payment, so it has funds to pay the maturing draft. (14). In 90 days, the holder of the matured acceptance (in this case, the Bank of New York) presents it to the Bank of Paris for payment. The Bank of Paris pays.
Types of countertrade
(1)Barter: a direct exchange of goods and/or services between two parties without a cash transaction --The most restrictive countertrade arrangement --Used primarily for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy (2)Counterpurchase: a reciprocal buying agreement --Occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made (3)Offset: similar to counterpurchase - one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale --This party can fulfill the obligation with any firm in the country to which the sale is being made (4)Switch Trading: occurs when a specialized third-party trading house buys a firm's counterpurchase credits and sells them to another firm (5)Compensation or Buybacks: occur when a firm builds a plant in a country—or supplies technology, equipment, training, or other services to the country—and agrees to take a percentage of the plant's output as a partial payment for the contract
The Four GlobalEDGE Diagnostic Tools
(1)Core (Company Readiness to Export): assists firms in self-assessment of their exporting proficiencies, evaluates both the firm's and the intended product's readiness to be taken internationally, and systematically identifies the firm's strengths and weaknesses within the context of exporting. The CORE tool also serves as a to tutorial in exporting, and is been the most successful and most widely used of the tools created by the International Business Center. (2)Partner (International Partner Selection): assists in the analysis and evaluation of potential international partners. It covers a wide variety of types of partnerships: joint ventures, licenses, franchisees, contract manufacturers, and R & D partnerships. It is based on a multi dimensional sets of criteria that includes trust and relationship factors as well as operational criteria and contains individually identified strengths and weaknesses of each partner. (3)Distributor (Foreign Distributor Selection): helps exporting firms evaluate and compare foreign distributor or agent candidates, given the type of product being sold and the market characteristics, and indicates areas that may require ongoing training and management throughout the life of the relationship. (4)Freight (Freight Forwarder Selection): assists companies in selecting the most appropriate international freight forwarder for their type of volume of business based on six sets of criteria; -it evaluate each candidate, -highlights the candidate's strengths and weaknesses, and -compares the various candidates.
Improving exporting performance: Service providers
-Freight forwarder -Export management companies (EMC) handle all aspects of exporting -Export trading company -Export packaging company -Customs brokers -Confirming houses (buying agents) -Export agents, merchants, remarketers -Piggyback marketing
Improving exporting performance: Export strategy
-Hire an EMC to help identify opportunities and navigate paperwork and regulations -Start by focusing initially on just one or a few markets -Enter a foreign market on a small scale in order to reduce the costs of any subsequent failures -Recognize time and managerial commitment involved in building export sales -Devote a lot of attention to building strong and enduring relationships with local distributors and/or customers -Hire local personnel to establish firm in foreign market -Be proactive about seeking export opportunities -Exporter should retain the option of local production
Identify the steps managers can take to improve their firm's export performance.
-Increase their knowledge of foreign market opportunities -Consider a number of service providers -Review various exporting strategies that can increase the probability of successful exporting -Use the four globalEDGE Diagnostic Tools that can help exporters -International comparisons -Information sources -Service providers -Export strategy -GlobalEDGE Diagnostic Tools
The chapter made the following points: 10
A bill of lading is issued to the exporter by the common carrier transporting the merchandise. It serves as a receipt, a contract, and a document of title.
bill of lading
A document issued to an exporter by a common carrier transporting merchandise. It serves as a receipt, a contract, and a document of title.
The chapter made the following points: 8
A draft is the instrument normally used in international commerce to effect payment. It is an order written by an exporter instructing an importer or an importer's gent to pay a specified amount of money at a specified time.
The chapter made the following points: 7
A letter of credit is issued by a bank at the request of an importer. It statesthat the bank promises to pay a beneficiary, normally the exporter, on presentation of documents specified in the letter.
time draft
A promise to pay by the accepting party at some future date
Benefiting from countertrade
A subsea oil and gas tree is lowered into a testing pool at a GE plant in Montrose, United Kingdom. Large, diverse, global companies like GE can benefit from countertrade agreements.
Improving exporting performance: To improve their success, exporters should....
Acquire more knowledge of foreign market opportunities Consider using an export management company Adopt a successful export strategy
Export-Import Bank (Ex-Im Bank)
Agency of the US government whose mission is to provide aid in financing and facilitate exports and imports.
bill of exchange
An order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time.
draft
An order written by an exporter telling an importer what and when to pay.
Introduction
Both large and small firms can benefit from exporting The volume of export activity in the world economy is increasing as exporting has become easier -Regional economic agreements such as the European Union and the North American Free Trade Agreement -The decline in trade barriers under the WTO -Modern communication and transportation technologies have alleviated logistical problems
Describe how countertrade can be used to facilitate exporting.
Countertrade denotes range of barterlike agreements; it's principle is to trade goods and services for other goods and services when they cannot be treated for money. Countertrade is an alternative means of structuring an international sale when conventional means of payment are difficult, costly, or nonexistent. A government may restrict the convertibility of its currency to preserve its foreign exchange reserves so they can be used to service international debt commitments and purchase crucial imports.
The chapter made the following points: 12
Countertrade includes a range of barterlike agreements. It is primarily used when a firm exports to a country whose currency is not freely convertible and may lack the foreign exchange reserves required to purchase the imports.
Pros and cons of countertrade
Countertrade is a way for firms to finance an export deal when other means are not available -Firms that are unwilling to engage in countertrade may lose an export opportunity to a competitor that will Countertrade may be required by the government of a country to which a firm is exporting goods or services Countertrade can be unattractive -Most firms prefer to be paid in hard currency -It may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrade -Japan's sogo shosha are masters at countertrade
The chapter made the following points: 9
Drafts are either sight drafts or time drafts. time drafts are negotiable instruments.
Summary:
Explained the promises and risks associated with exporting. Identified the steps managers can take to improve their firm's export performance. Identified information sources and government programs that exist to help exporters. Recognized the basic steps involved in export financing. Described how countertrade can be used to facilitate exporting.
export management company (EMC)
Export specialists that act as an export marketing department for client firms.
Export and Import Financing: Lack of trust
Exporters and importers have to trust someone who may be very difficult to track down if they default on an obligation Each party has a different set of preferences regarding the configuration of the transaction -Exporters prefer to be paid in advance, while importers prefer to pay after shipment arrives Problems arising from the lack of trust can be solved by using a third party who is trusted by both - normally a reputable bank
Countertrade
Exporters can use countertrade when conventional means of payment are difficult, costly, or nonexistent -A range of barter-like agreements that facilitate the trade of goods and services for other goods and services when they cannot be traded for money **Example: General Electric won a contract for a $150 million electric generator project in Romania by agreeing to market $150 million of Romanian products in markets to which Romania did not have access. **Example: Philip Morris shipped cigarettes to Russia, for which it received chemicals that can be used to make fertilizer. Philip Morris shipped the chemicals to China, and in return, China shipped glassware to North America for retail sale by Philip Morris.
Recognize the basic steps involved in exporting financing.
Financial devices have evolved to cope with this problem in the context of international trade: the letter of credit, the draft (or bill of exchange), and the bill of lading. Use the 14 steps of a typical export import transaction.
The chapter made the following points: 5
Firms engaged in international trade must do business with people they cannot trust and people who may be difficult to track down if they default on an obligation. Due to the lack of trust, each party to attain international transaction has a different set of preferences regarding the configuration of the transaction.
globalEDGE Diagnostic Tools
Four diagnostic tools that focus on helping companies export -CORE -PARTNER -DISTRIBUTOR -FREIGHT
The popularity of countertrade
In the 1960s the Soviet Union and the Communist states of Eastern Europe, whose currencies were generally nonconvertible, turned to countertrade to purchase imports Many developing nations that lacked the foreign exchange reserves required to purchase necessary imports turned to countertrade during the 1980s -There was a notable increase in the volume of countertrade after the Asian financial crisis of 1997
Export Assistance: Export Credit Insurnce
Insures exporter against risk that foreign importer will default on payment Provided by Foreign Credit Insurance Association Provides coverage against commercial risks and political risks
Export and Import Financing: Letter of credit
Issued by a bank at the request of an importer stating the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents This system is attractive because both parties are likely to trust a reputable bank even if they do not trust each other
letter of credit
Issued by a bank, indicating that the bank will make payments under specific circumstances.
MITI
Japan's Ministry of Intentional Trade and Industry
Sogo Shosha
Japanese trading companies; a key part of the keiretsu, the large Japanese industrial groups.
Improving exporting performance: International Comparisons
Many firms fail to consider export opportunities simply because they lack knowledge of the opportunities available -Both Germany and Japan have developed extensive institutional structures for promoting exports -Japanese exporters can also take advantage of the knowledge and contacts of sogo shosha, Japan's trading houses -U.S. has not developed an institutional structure for promoting exports similar to Germany or Japan
The chapter made the following points: 4
Many of the pitfalls associated with exporting can be avoided if a company hires an experienced export service provider (e.g., export management company) and if it adopts the appropriate export strategy.
Export and Import Financing: Draft
Most export transactions involve a draft: an order written by an exporter instructing an importer, or an importer's agent, to pay a specified amount of money at a specified time -Also called a bill of exchange A sight draft is payable on presentation to the drawee while a time draft allows for a delay in payment - normally 30, 60, 90, or 120 days -Time drafts are negotiable
The chapter made the following points: 2
Neophyte exporters often become discouraged or frustrated with the exporting process because they encounter many problems, delays, and pitfalls.
The chapter made the following points: 1
One big impediment to exporting is ignorance of foreign market opportunities.
The pitfalls of exporting
Poor market analysis Poor understanding of competitive conditions Failure to customize the product offering to foreign customers Lack of an effective distribution program Poorly executed promotional campaign Problems securing financing Voluminous paperwork, complex formalities, potential delays and errors
Identify information sources and government programs that exist to help exporters.
Prospective US exporters can get financing aid from the: -Export-Import Bank and -export credit insurance from the foreign credit insurance association (similar programs are available in most countries).
Export Assistance: Export-Import Bank
The Export Import Bank (Ex-Im Bank) is a wholly owned U.S. government corporation Established in 1934 Designed to supplement, not compete, with capital lending Provides financing aid that will facilitate exports, imports, and the exchange of commodities between the U.S. and other countries Has a direct lending operation to lend dollars to foreign borrowers for use in purchasing U.S. exports **Fred Hochber, chair and president of the U.S. Export-Import Bank, speaks during its annual conference.
Improving exporting performance: Information sources
The U.S. Department of Commerce is the most comprehensive source of information for U.S. firms -U.S. and Foreign Commercial Service and International Trade Administration -Firms can get a "best prospects" list of potential foreign distributors -Firms can also participate in trade fairs or get assistance from the Small Business Administration
The promise of exporting
The benefits from exporting can be great--the rest of the world is a much larger market than the domestic market Larger firms may be proactive in seeking out new export opportunities, but many smaller firms take a reactive approach to exporting Unfamiliarity and intimidation may explain why exporters still account for only a tiny percentage of U.S. firms Many novice exporters have run into significant problems when first trying to do business abroad, souring them on following up on subsequent opportunities
Export and Import Financing: Bill of lading
The bill of lading is issued to the exporter by the common carrier transporting the merchandise It serves three purposes -a receipt -a contract -a document of title
Explain the promises and risks associated with exporting.
The great promise of exporting is that large revenue and profit opportunities are to be found in foreign markets for most firms in most industries. The international market is normally so much larger. Exporting can enable a firm to achieve economies of scale, thereby lowering its unit costs. Firms are often intimidated by the complexities and mechanics of exporting to countries where business practices, language, culture, legal systems, and currency are very different from those in the home market. Common pitfalls include: - poor market analysis, - poor understanding of comparative conditions in the foreign market, - a failure to customize the product offering to the needs of foreign customers, - a lack of an effective distribution program, - a poorly executed promotional campaign, problems securing finances , and -culture and language barriers
The chapter made the following points: 13
The main attraction of countertrade is that it gives a firm a way to finance an export deal when other means are not available. A firm that insists on being paid in hard currency may be at a competitive disadvantage vice versa one that is willing to engage in countertrade.
The chapter made the following points: 14
The main disadvantage of countertrade is that the firm may receive unusable or poor-quality goods that cannot be disposed of profitability.
The chapter made the following points: 6
The problems arising from lack of trust between exporters and importers can be solved by using a third party that is trusted by both, normally a reputable bank.
The chapter made the following points: 3
The way to overcome ignorance is to gather information. In the United States, a number of institutions, the most important of which is the U.S. Department of Commerce, can help firms gather information in the matchmaking process. Export management companies can also help identify export opportunities.
Summary:
This chapter examined the steps that firms must take to establish themselves as exporters.
The chapter made the following points: 11
U.S exporters can draw on two types of government-backed assistance to help finance their exports: -loans from the Export-Import Bank and -export credit insurance from the Foreign Credit InsuranceAssociation.
Export Assistance
U.S. exporters can draw on two forms of government-backed assistance to help their export programs (1)They can get financing aid from the Export-Import Bank (2)They can get export credit insurance from the Foreign Credit Insurance Association
switch trading
Use of a specialized third-party trading house in a countertrade arrangement
sight draft
a draft payable on presentation to the drawee
counterpurchase
a reciprocal buying agreement
buyback
agreement to accept a percentage of a plant's output as payment for contract to build a plant
offset
agreement to purchase goods and services with a specified percentage of proceeds from an original sale in that country from any firm in the country
barter
the direct exchange of goods or services between two parties without a cash transaction
countertrade
the trade of goods and services for other goods and services
