Chapter 16

How can firms improve export performance

- Firms can get direct assistance from some countries and/or use an export management company - Germany and Japan have institutional structures in place for promoting exports - The U.S. has less resources

How can firms reduce the risk of exporting?

- Hire and EMC or export consultant to identify opportunities and navigate paperwork and regulations - Focus on one, or a few markets at first - Enter a foreign market on a small scale to reduce costs of failures - Recognize the time and managerial commitment involved - Develop a good relationship with local distributors and customers - Hire locals to help establish a presence in the market - Be proactive - Consider local production

Exporting firms need to:

- Identify market opportunities - Deal with foreign exchange risk - Navigate import and export financing - Understand the challenges of doing business in a foreign market

Cons of countertrade:

- It may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably - It requires the firm to establish an in-house trading department to handle countertrade deals

Why is trust in financing important when exporting?

- Many exporters prefer to receive payment prior to shipping goods - Importers pre

Pitfalls of exporting:

- Poor market analysis - Poor understanding of competitive conditions - A lack of customization for local markets - A poor distribution program - Poorly executed promotional campaigns - Problems securing financing - A general underestimation of the differences and expertise required for foreign market penetration - An underestimation of the amount of paperwork and formalities involved

The U.S. can get export information from:

- The U.S. Department of Commerce - The International Trade Administration - The United States and Commercial Service Agency - The Small Business Administration (SBA) - Local and state governements

Countertrade:

- emerged as a means purchasing imports during the 1960's when the USSR and Communist states of Eastern Europe had nonconvertible currencies - Also sued during financial crises by nations that lack the hard currency to purchase necessary imports - Has increased after the 1997 Asian financial crisis

Pros of Countertrade

- gives firms a way to finance an export deal when other means are not available - it gives a firm a competitive edge over a firm that is unwilling to enter a countertrade agreement - when countertrade arrangements may be required by the government of a country to which a firm is exporting to, it can become a strategic marketing weapon

What is a bill of lading?

- it is the receipt (Merchandise described on document has been received by carrier) - It is a contract (carriers is obligated to provide transportation service in return for a certain charge) - It is a document of title (can be used to obtain payment or a written promise before the merchandise is released to the importer)

The five distinct versions of countertrade:

1. Barter 2. Counterpurchase 3. Offset 4. Switch trading 5. Compensation or buy back

Export management companies have two type of assignments:

1. EMC's start export operations with the understanding that the firm will take over after they are established 2. EMC's start services with the understanding that the EMC will have continuing responsibility for selling the firm's products (certain firms that use EMCs may not develop their own export capabilities)

Where can the U.S. firms get export assistance?

1. Financing aid is available from the Export-Import Bank (Ex-Im Bank) - it achieves its goals through loan and loan guarantee programs 2. Export credit insurance is available from the Foreign Credit Insurance Association (FCIA) - It provides coverage against commercial risks (such as the importer defaulting on payment) and political risks (such as actions of government)

There are two type of drafts:

1. Sight draft 2. Time draft

What is 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 - It is what is normally used in international commerce for payment - Also called a bill of exchange - The party to whom the draft is presented is called the drawee

What is a letter of credit?

Is a letter that states that the bank will pay a specified sum of money to a beneficiary ( normally the exporter) on presentation of particular specified documents - Issued by a bank at the request of an importer - Main advantage is that both parties are likely to trust a reputable bank

Sogo shosha

Japan's great trading house. They have offices all over the world and are proactively seeking export opportunities for their affiliated companies (large and small)

U.S. Department of commerce

Source of information for firms who are looking for export opportunities

How can firms overcome the lack of trust in export financing?

To get around the difference in preference between importers and exporters, many international transactions are facilitated by a third party, typically a reputable bank. - This adds an element of trust to the relationships

1. Barter

a direct exchange of goods and/or services between two parties without a cash transaction - Most restrictive countertrade arrangement - Used for one-time-only deals in transactions with trading partners who are not creditworthy or trustworthy

What is countertrade?

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

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

Time draft

allows for delay in payment - Normally 30, 60, 90, or 120 days - Once a time draft has been accepted, it becomes a negotiable instrument that can be sold at a discount from its face value - when time draft is drawn and accepted by a bank, it is called a Bankers Acceptance - when it is drawn on and accepted by a business firm, it is called a Trade Acceptance

Japanese Ministry of International Trade and Industry (MITI)

an institution that is always on the lookout for export opportunities

What are Export Management Companies (EMC's)

are export specialists that act as the export marketing department or international department for clients firms

Large firms proactively seek:

exporting opportunities

Exporting is a way to:

increase market size and profits - The international market is normally larger than a firm's domestic market - Expanding the market and achieving economies of scale lowers unit costs - Lower trade barriers under the WTO and regional economic agreements such as the EU and NAFTA make it easier than ever!

Sight draft

is payable on presentation to the drawee

5. Buyback

occurs when a firm builds a plant in a country or supplies technology, equipment, training, or other services to the country - Agrees to take a certain percentage of the plant's output as a partial payment for the contractt

Smaller firms export:

re-actively (usually intimidated by the complexities of exporting)

3. Offset

similar to counterpurchase - one party agrees to purchase goods and services with a specified percentage of proceeds from the original sale - Difference is that this party can fulfill the obligation with any firm in the country to which the sale is being made

One big impediment to exporting is

the lack of knowledge of the opportunities available

4. Switch trading

the use of a specialized third-party trading house in a countertrade arrangement - Ending up with counterpurchase credits after counterpurchase or offset agreement which can e used to purchase goods from that country - Switch trading occurs when a third-party trading house buys the firm's counterpurchase credits and sells them to another firm that can better use them