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Editor's Notes

• #2: Chapter 13: Exporting, Importing, and Countertrade
• #3: When you think of international business, you might think of companies exporting their products to foreign markets. You already know that exporting has become easier than ever thanks to the decline in trade barriers promoted by the WTO and regional agreements like NAFTA and the EU. Because it’s easier, we’ve seen the volume of exporting increasing in recent years.
• #4: Today, firms of all sizes engage in exporting, and face the challenges of identifying export opportunities, dealing with the problems of doing business in foreign markets, working through the process of export financing and getting insurance, and learning how to protect themselves against foreign exchange risk. We’ve touched on some of these areas in earlier chapters, but in this chapter, we’ll look at the process of exporting and importing in more depth. We’ll also explore countertrade, which you’ll recall involves paying for exports with other goods or services—a barter-like arrangement. We’ll begin our discussion by examining the advantages and disadvantages of exporting.
• #5: Why do firms export? Well, by exporting, firms can quickly increase the size of their market. Rather than simply relying on the domestic market for their revenues, by exporting, firms can increase their profits by viewing the world as their market. You know from the Opening Case for example, that export sales are critical to the survival of Vellus Products. Despite the opportunity however, we know that while many large firms are proactive about exporting, smaller firms often wait for export opportunities to come to them. They take a reactive approach to the process. Sometimes, this lack of initiative by smaller companies occurs because the firms don’t really know just how great the opportunities are, nor how to pursue them. In some cases, a bad export experience in the past, can keep a firm from pursuing new export opportunities. Novice exporters sometimes fail to realize just what’s involved in the exporting process, and then react negatively when something goes wrong.
• #6: Some of the pitfalls that firms make when they begin exporting include doing a poor market analysis, having a poor understanding of competitive conditions, using a marketing effort that fails to recognize both the need to customize a product or to make appropriate distribution arrangements and promotional campaigns, and simply having a general lack of understanding of the skills required to enter a foreign market. Some firms are also surprised at the amount of paperwork involved in exporting.
• #7: How can firms improve their export performance? Well, firms can start by finding out more about the opportunities that exist. Working with an export management company can also be helpful. Finally, it’s important to develop an export strategy that works. Let’s look at each of these point more closely.
• #8: To improve the chance for success, firms should take advantage of export assistance programs that are offered by governments. The type of assistance offered varies by country. Germany and Japan for example, have developed extensive institutional structures for promoting exports. You may have heard of Japan’s Ministry of International Trade and Industry or MITI for instance. Japanese firms can also take advantage of the knowledge and contacts of the sogo shosha, the country’s great trading houses that have offices and contacts all over the world. In Germany, trade associations, government agencies, and commercial banks all provide export assistance to firms.
• #9: In the U.S., exporters can collect information from the U.S. Department of Trade where they can get a “best prospects” list and also participate in the various trade events the Department of Commerce organizes. FCX Systems received considerable support from the U.S. Department of Commerce and the Development Office of West Virginia to help establish its export program. You can learn more about FCX Systems in the Management Focus in your text. The Small Business Association, or SBA, is another good source of information for U.S. exporters. The president of Landmark Systems believes that the SBA was vital to his company’s export success. You can learn more about the export experiences of Landmark Systems in the Management Focus in your text.
• #10: Rather than trying to learn the export process themselves, some companies prefer to hire another company to handle their exporting. Export management companies, or EMCs, are export specialists that act as the export marketing department or international department for their clients. EMCs usually work in two different ways. One way involves setting up the exporting operations for a firm with the understanding that the client will take over once things are established. The other way involves setting up the exporting process for the client, and then continuing to manage it for the firm. While the advantage of hiring an EMC is that the EMC is a specialist that should be able to avoid many of the pitfalls of exporting, in reality, the quality level of EMCs varies, so firms need to be careful with their selection process.
• #11: Another way that firms can reduce the risks associated with exporting is to choose their export strategy carefully. It can be helpful to hire an EMC or other experienced export consultant to help identify the best opportunities and navigate the paperwork and regulations involved in the process. Firms can also minimize risk by entering the market on a small scale initially, and then expanding once the market is a proven thing. 3M follows this type of strategy. It initially enters a market on a small scale, and then adds in additional products once the market has proven to be successful. 3M also hires locals to promote its products. You can learn more about 3M’s strategy in the Management Focus in your text.
• #12: Firms also need to recognize that developing a successful export business takes time and commitment, and that additional personnel may be necessary. Building strong relationships within the importing country can also help a company avoid the pitfalls of exporting. As you can see in the Management Focus in your text, Red Spot Paint and Varnish found that developing personal relationships with client firms in the importing country was important to its export success. Finally, keep in mind that exporting might not be the best option in some cases. Local production may make more sense in certain situations. Sometimes exporting turns out to be a good way to test a market before making a bigger commitment.
• #13: Once a firm makes the decision to export, it’ll be faced with the decision of how the exports should be paid for. Remember, when you sell your product to someone in another country, you take on the risk of whether you’ll get paid on time, and whether the currency that you’ll be paid in will be worth what you think it’ll be worth. Because the buyer is in another country, the typical methods you use to get a delinquent account to pay up, might not work! From the firm’s perspective, the best way to be paid would probably be cash in advance, in the exporter’s currency! However, since requiring these terms is likely to put the exporter at a competitive disadvantage, the firm has to be more flexible. To deal with these issues, various mechanisms have evolved to handle export financing, and the issues of trust that are associated with it. Let’s begin with the issue of trust.
• #14: Exporters have to trust that the importer will actually be true to his word, that he’ll pay according to the agreed upon terms in a timely manner. Remember, that it can be very difficult to track down an importer who has defaulted on an agreement, especially since the importer lives in a different country, speaks a different language, abides by a different system of law, and so on. The importer, of course has similar concerns. If he sends payment in advance to the exporter, what guarantee does he have that he’ll get what he bought, on time, and in good condition? He would probably prefer that the goods be shipped to him prior to sending payment. So, because of the different needs of the importer and the exporter, a system using a third party, a reputable bank, has evolved.
• #15: As you can see in this process for conducting an export transaction, the third party bank plays a major role. Let’s talk about what’s going on in this transaction.
• #16: Rather than dealing directly with each other, the importer and exporter deal with the trustworthy third party, the bank, using a latter of credit. A letter of credit is issued by a bank at the request of an importer. The letter states that the bank will pay a specified sum of money to the exporter upon the presentation of specified documents. It’s sort of a promise to pay. Once the exporter sees the letter, and knows that he’ll get paid, he ships the goods, and requests payment from the bank. The bank makes payment.
• #17: A draft, which is sometimes called a bill of exchange, is the instrument that’s usually used for payment. It’s simply an order written by the exporter instructing the importer or importer’s agent to pay a specified amount of money at a specified time. There are two types of drafts. A sight draft is payable immediately, while a time draft allows for a delay in payment.
• #18: A third document, called a bill of lading, is also included in the process. The bill of lading is issued to the exporter by the carrier that’s transporting the goods. It acts as a receipt, a contract, and as a document of title.
• #19: Where can companies get assistance to finance their exports? In the U.S., they can get financial aid from the Export Import Bank, and credit insurance from the Foreign Credit Insurance Association. Let’s look more closely at each of these organizations.
• #20: The Export Import Bank, which is also called the Eximbank, is an independent agency of the U.S. government that provides financial aid to facilitate exports, imports, and the exchange of commodities between the U.S. and other countries.
• #21: The Foreign Credit Insurance Association, or FICA, provides export credit insurance to cover against commercial and political risk.
• #22: Suppose there’s great potential for your product in a certain market, but that you’ve been having trouble exporting because the government of that country restricts the convertibility of its currency. Do you walk away? You might, but you also might see whether another form of payment is an option. Countertrade refers to a range of barter like agreements that facilitate the exchange of goods and services for other goods and services when they can’t be traded for money. Boeing sold jets to Saudi Arabia and got paid in oil using a countertrade arrangement. Similarly, Venezuela traded iron ore for Caterpillar’s earth moving equipment.
• #23: Countertrade began in the 1960s primarily as a way for the U.S. to trade with the Soviet Union and its neighbors. Remember from our discussion of the international monetary system that at that time, these countries had currencies that were inconvertible, and so couldn’t be used for trade. Countertrade became a viable option for trade. During the 1980s, many developing countries turned to countertrade to purchase imports when they didn’t have sufficient foreign exchange reserves. While we’re not sure exactly how much countertrade goes on in the world today - estimates run from as low as two percent of world trade to as high as 10 percent - we do know that its incidence increased after the 1997 Asian crisis. Many Asian countries had only limited hard currency at the time, and had to find alternative methods of payment.
• #24: There are a number of different ways to structure a countertrade agreement including barter, counterpurchase, offset, switch trading, and compensation or buyback. Let’s look at each type.
• #25: Barter, which is the most restrictive form of countertrade, involves a direct exchange of goods and/or services between two parties without a cash transaction. While barter is a relatively simple process, it’s not very common because one party ends up with goods it doesn’t really want, and may even have to wait for the goods. Usually, barter is only used for one-time deals with trading partners that aren’t creditworthy or trustworthy. Counterpurchase is a reciprocal buying arrangement where a firm agrees to purchase a certain amount of materials back from the country to which the sale is made. So, when Rolls-Royce sold jet parts to Finland, it agreed to use some of the proceeds of the sale to buy Finish TVs. In a switch trading arrangement, a third party trading house is involved. The third party buys, at a discount, the counterpurchase credits that a firm has received in a counterpurchase or offset agreement. The third party then sells them, for a profit, to another firm that can use them more efficiently.
• #26: An offset agreement is similar to counterpurchase because one party agrees to purchase goods and services with some percentage of the proceeds of the original sale, but it’s different in that the party can fulfill the obligation with any firm in the country to which the sale is being made. So, it has a little more flexibility than a counterpurchase agreement. A buyback involves building a plant in a foreign country, or supplying technology, equipment, training, or other services, and then agreeing to take a percentage of the plant’s output as a partial payment for the contract. Occidental Petroleum used this type of arrangement in Russia where it built several ammonia plants, and then received ammonia as a partial payment.
• #27: What are the pros and cons of countertrade? Well, the main advantage of countertrade is, as we discussed earlier, that it gives firms a chance to complete an export deal that might not have otherwise happened because of financing difficulties. Firms that are unwilling to make countertrade agreements run the risk of losing export opportunities to those firms that are willing to make the deals. In some cases, countertrade agreements are required by governments. Boeing is currently purchasing aircraft parts from an Indian supplier as part of a deal with Air India to buy Boeing aircraft. If Boeing had been unwilling to make the deal, Airbus would have stepped in.
• #28: Keep in mind however, that a firm that gets into a countertrade agreement may end up with unusable or poor quality goods that are difficult to dispose of at a profit. For this reason, countertrade is usually more attractive to large, diverse MNEs that have a network of contacts around the world that can unload the goods that are acquired in countertrade deals. Japan’s sogo shosha, for example, use their networks to sell countertrade goods. Sinilarly, 3M’s willingness to enter countertrade arrangements gives it a profit advantage over competitors. 3M has even established its own trading company to manage its countertrade deals.
• #29: Now, let’s see how well you understand the material in this chapter. I’ll ask you a few questions. See if you can get them right. Ready? Question 1: An order written by an exporter instructing an importer to pay a specified amount of money at a specified time is A letter of credit A draft A bill of lading A confirmed letter of credit If you picked B, you’re right!
• #30: Question 2: A bill of lading serves all of the following purposes except It is a receipt It is a contract It is a document of title It is a form of payment If you picked D, you’re correct!
• #31: Question 3: The use of a specialized third-party trading house in a countertrade arrangement is called buyback offset counterpurchase switch trading The correct answer is D. Did you get it right?
• #32: Question 4: Which of the following is not an advantage of countertrade? It may involve the exchange of unusable or poor quality goods that the firm can’t dispose of profitably It can give the firm a way to finance an export deal when other means aren’t available It can be a strategic marketing weapon It can give a firm an advantage over firms that are unwilling to engage in countertrade arrangements Did you pick A? I hope so!