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Export and Import Strategies

I.

INTRODUCTION

Whereas exports represent goods and services flowing out of a country, imports represent goods and services flowing into a country. Exports result in receipts and imports result in payments. Although export and import activities are a natural extension of distribution strategy, they also include elements of product, promotion and pricing factors and decisions. Both exporting and importing entail a lower level of risk than foreign direct investment, but while exporting offers less control over the marketing function, importing offers less control over the production function.

II.

EXPORT STRATEGY

A firms choice of entry mode depends on various factors, such as the ownership advantages of the firm, the location advantages of the market and the internalization advantages of specific assets, international experience and/or the ability to develop differentiated products. In general, firms that possess few ownership advantages either do not enter foreign markets, or they use the lower-risk entry modes of exporting and licensing. Still in all, the decision to export must fit a companys overall strategy and take into account global concentration, global synergies and global strategic motivations.
A. Characteristics of Exporters

Research conducted on the characteristics of exporters has resulted in two basic conclusions: (i) the probability of exporting increases with size of company revenues and (ii) export intensity (the percentage of total revenues generated by exports) is not positively correlated with company size. Factors such as the risk profile of management and the nature of industry competition are just as important as firm size.
B. Why Companies Export

Companies export in order to increase sales revenues, achieve economies of scale in production, diversify markets and minimize risk.
C. Stages of Export Development

Firms tend to move through three phases of export development: pre-engagement, initial exporting and advanced exporting. As they do so, they tend to (i) export to more countries and (ii) expect exports to grow as a percentage of total sales. In addition, they also tend to (i) diversify their markets to more distant countries and (ii) move into environments that are increasingly different from those of their home countries.
D. Potential Pitfalls of Exporting

The operational mistakes associated with exporting can be very costly. In addition, events such as 9/11 can bring international trade activities to a complete halt in the affected region.
E. Designing an Export Strategy

To design an effective export strategy, managers must: assess the companys export potential obtain expert counseling on exporting select target markets formulate and implement an effective export strategy.

III.

IMPORT STRATEGY

The import process involves strategic and procedural issues that basically mirror those of the export process. There are two basic types of imports: extra company imports from independent (unrelated) upstream sources and intercompany imports from a firms upstream global supply chain that represent intermediate goods and services. The three basic types of importers are those that: flow Look to foreign sourcing as a means to minimize product costs look for any product around the world that will generate a positive cash

use foreign sourcing as part of their global supply chain strategy.

An import broker is a certified specialist who obtains required government permissions and other clearances before forwarding the necessary documents to the carrier(s) of the goods.
A. The Role of Customs Agencies

Customs reflect a countrys import and export procedures and restrictions. The primary duties of a customs agency are the assessment and collection of all duties, taxes and fees on imported products, the enforcement of customs and related laws and the administration of certain navigation laws and treaties. National customs agencies are increasingly involved in dealing with smuggling operations and preventing foreign terrorist attacks. A customs broker can help an importer minimize duties by (i) valuing products in such a way that they qualify for more favorable treatment, (ii) qualifying for duty refunds through drawback provisions, (iii) deferring duties by using bonded warehouses and foreign trade zones and (iv) limiting liability by properly marking an imports country of origin.
B. Import Documentation

The import documentation process can be both complicated and cumbersome. Without proper documentation, customs agencies will not release shipments. Documents are of two types: (i) those that determine whether customs will release the shipment and (ii) those that contain the information necessary for duty assessment and data gathering purposes. At a minimum, the required documents would include an entry manifest, a commercial invoice and a packing list.

IV.

THIRD-PARTY INTERMEDIARIES

Third-party intermediaries are independent (unrelated) firms that facilitate international trade transactions by assisting both importers and exporters. They may perform any or all of the following functions: stimulate sales, obtain orders and conduct market research perform credit investigations and payment-collection activities handle foreign traffic arrangements and shipping details provide support for a clients sales, distribution and promotion staff.

Direct exports represent products sold to an independent party outside of the exporters home country; indirect exports are first sold to an intermediary in the domestic market, who then sells the products in the export market. While services are more likely to be exported on a direct basis, goods are exported via both avenues.
A. Direct Selling

Direct selling, i.e., exporting through sales representatives to distributors, foreign retailers, or final end users, gives exporters greater control over the marketing function and offers the potential to earn higher profits as well. Whereas a sales representative usually operates on a commission basis, a distributor is a merchant who purchases goods from a manufacturer and resells them at a profit.
B. Direct Exporting through the Internet and Electronic Commerce

Electronic commerce allows companies both large and small to engage in direct marketing quickly, easily and inexpensively. It is especially important for small and medium-size firms that wish to reach distant markets.
C. Indirect Selling

Indirect selling, i.e., selling products to or through an independent domestic intermediary, is carried out via export management companies and export trading companies.
D. Export Management Companies

An export management company [EMC] is a firm that either acts as a manufacturers agent or buys merchandise from manufacturers for international distribution. EMCs generally operate on a contractual basis, provide exclusive representation in a welldefined foreign territory and act as the export arm of a manufacturer. Often, export management companies specialize according to product, function and/or market area.
E. Export Trading Companies

An export trading company [ETC] is somewhat like an export management company, but its primary purpose in becoming involved in international trade as an independent broker is to match domestic exporters to foreign customers. Export trading companies that are based in the U.S. may be exempt from antitrust provisions in order to allow them to penetrate foreign markets by collaborating with other U.S. firms.
F. Non-U.S. Trading Companies

While the original functions of a trading company were to handle the paperwork, financing, transportation and storage services related to import and export transactions, many have expanded the scope of their operations to include production and processing facilities and operations, as well as fully integrated marketing systems. (There are no U.S. trading companies that rank among the Fortune Global 500 companies; only Japan, South Korea, Germany and China have firms on that list.) The Japanese sogo shosha (trading company) traces its roots to the zaibatsu (large, family-owned businesses composed of financial and manufacturing companies linked together by a large holding company), which subsequently evolved into the keiretsu (large, interlocking financial, manufacturing and trading company networks). South Korean trading companies are part of a larger corporate group known as the chaebol. Companies within a chaebol are very dependent on family patriarchs and are tightly linked to one another via a high degree of intercompany transactions.
G. Foreign Freight Forwarders

A freight forwarder is a foreign trade specialist who deals in the movement of goods from producer to customer. Even export management companies may use the specialized services of foreign freight forwarders. The typical freight forwarder is the largest export intermediary in terms of the weight and value of cargo handled. Some may specialize in the type of mode used, others in the geographical area served. The movement of goods across a variety of modes from origin to destination is known as intermodal transportation. Three recent trends leading to a preference for air freight over ocean freight are: (i) the need for more frequent shipments, (ii) lighter-weight shipments and (iii) high-value shipments.
H. Export Documentation

An export license allows the exporter to ship goods to particular countries. Other key export documents are the:
pro forma invoice commercial invoice consular invoice bill of lading certificate of origin shippers export declaration

export packing list.

V.

EXPORT FINANCING

From the exporters point of view, four major issues relate to export financing: (i) the price of the product, (ii) the method of payment, (iii) the financing of receivables and (iv) insurance.
A. Product Price

Export prices must factor in exchange rate fluctuations, transportation costs, relevant duties, the costs of multiple wholesale channels, insurance fees, bank charges, antidumping laws, etc.
B. Method of Payment

The flow of money across national borders requires the use of special documents and may be very complicated. In descending order of security for the exporter, the basic methods of payment for exports are: cash in advance a letter of credit (obligates the buyers bank to pay the exporter) a revocable letter of credit may be changed by any of the parties to the agreement an irrevocable letter of credit requires all parties to the agreement to consent to the change in the document a confirmed letter of credit adds a guarantee of payment to an additional bank (usually an interbank agreement). a draft or bill of exchange a documentary draft instructs the importer to pay the exporter if specified documents are presented a sight draft requires payment to be made immediately

a time draft requires payment to be made at some specific date in the future.

an open account (the exporter bills the importer but does not require formal payment documentsgenerally limited to members of the same corporate group).

C.

Financing Receivables

The increased distances and time involved in exporting often create cash flow problems for an exporter. Further, because exporting is risky, banks may be unwilling to provide financing for export transactions. However, exporters can get access to funds through factoring, i.e., the discounting of a foreign account receivable, and forfaiting, i.e., a longer-term instrument that includes a guarantee from a bank in the importers country. In addition, exporters can apply for guarantees from government agencies (such as the Ex-Im Bank) in order to get banks to lend them money until payment is received.
D. Insurance

The two types of insurance most often used for export transactions are: (i) transportation risks (e.g., devastating weather conditions or rough handling by carriers) and (ii) political, commercial and foreign-exchange (environmental) risks. While private insurers will covers these types of risks for established exporters with a proven record, government agencies tend to be the most important insurers of export shipments.

VI.

COUNTERTRADE

Countertrade involves a reciprocal flow of goods and services. It provides a means to complete a transaction when a firm (or government) does not have sufficient convertible currency to pay for imports, or it simply does not have sufficient funds. Countertrade transactions can be divided into two basic types: (i) barter (based on clearing arrangements used to avoid money-based exchange) and (ii) buybacks, offsets and counterpurchase (all of which are used to impose reciprocal commitments).
A. Barter

Barter occurs when goods or services are traded for other goods and services, i.e., it represents a non-monetary transaction. (Barter is not only the oldest form of countertrade, it is the oldest form of any type of trade transaction.) Buybacks represent counter-deliveries the exporter receives as payment that in fact are related to or originate from the original export.

B.

Offset Trade

Offset trade occurs when the exporter sells goods or services for cash but then helps the importer find opportunities to earn hard currency. Direct offsets include generated business that directly relates to the export; indirect offsets include generated business unrelated to the export.