Course Content: Doing business in sourcing country :

Forms of doing business (JV/ Partnering/ Wholly owned subsidiary, other forms)

Different entry modes Vs. Degree of Control

Factors influencing entry mode

Determinants of foreign entry mode

Porter’s Diamond

Dimensions and factors affecting doing business

Method of Payment to Foreign Supplier

Drawing up a contract with foreign supplier - INCOTERMS

FORMS OF DOING BUSINESS IN SOURCING COUNTRY:

In marketing products from less developed countries to developed countries point iii) poses major
problems. Buyers in the interested foreign country are usually very careful as they perceive transport,
currency, quality and quantity problems. This is true, say, in the export of cotton and other commodities.
Because, in most agricultural commodities, production and marketing are interlinked, the infrastructure,
information and other resources required for building market entry can be enormous. Sometimes this is
way beyond the scope of private organisations, so Government may get involved. It may get involved not
just to support a specific commodity, but also to help the "public good". Whilst the building of a new road
may assist the speedy and expeditious transport of vegetables, for example, and thus aid in their
marketing, the road can be put to other uses, in the drive for public good utilities. Moreover, entry
strategies are often marked by "lumpy investments". Huge investments may have to be undertaken, with
the investor paying a high risk price, long before the full utilisation of the investment comes. Good
examples of this include the building of port facilities or food processing or freezing facilities. Moreover,
the equipment may not be able to be used for other processes, so the asset specific equipment, locked
into a specific use, may make the owner very vulnerable to the bargaining power of raw material
suppliers and product buyers who process alternative production or trading options. Zimfreeze, Zimbabwe
is experiencing such problems. It built a large freezing plant for vegetables but found itself without a
contract. It has been forced, at the moment, to accept sub optional volume product materials just in
order to keep the plant ticking over.

In building a market entry strategy, time is a crucial factor. The building of an intelligence system and
creating an image through promotion takes time, effort and money. Brand names do not appear
overnight. Large investments in promotion campaigns are needed. Transaction costs also are a critical
factor in building up a market entry strategy and can become a high barrier to international trade. Costs
include search and bargaining costs. Physical distance, language barriers, logistics costs and risk limit the
direct monitoring of trade partners. Enforcement of contracts may be costly and weak legal integration
between countries makes things difficult. Also, these factors are important when considering a market
entry strategy. In fact these factors may be so costly and risky that Governments, rather than private
individuals, often get involved in commodity systems. This can be seen in the case of the Citrus
Marketing Board of Israel. With a monopoly export marketing board, the entire system can behave like a
single firm, regulating the mix and quality of products going to different markets and negotiating with
transporters and buyers. Whilst these Boards can experience economies of scale and absorb many of the
risks listed above, they can shield producers from information about, and from. buyers. They can also
become the "fiefdoms" of vested interests and become political in nature. They then result in giving
reduced production incentives and cease to be demand or market orientated, which is detrimental to
producers.

Normal ways of expanding the markets are by expansion of product line, geographical development or
both. It is important to note that the more the product line and/or the geographic area is expanded the
greater will be the managerial complexity. New market opportunities may be made available by
expansion but the risks may outweigh the advantages, in fact it may be better to concentrate on a few
geographic areas and do things well. This is typical of the horticultural industry of Kenya and Zimbabwe.
Traditionally these have concentrated on European markets where the markets are well known. Ways to
concentrate include concentrating on geographic areas, reducing operational variety (more standard
products) or making the organisational form more appropriate. In the latter the attempt is made to
"globalise" the offering and the organisation to match it. This is true of organisations like Coca Cola and
MacDonald's. Global strategies include "country centred" strategies (highly decentralised and limited
international coordination), "local market approaches" (the marketing mix developed with the specific
local (foreign) market in mind) or the "lead market approach" (develop a market which will be a best
predictor of other markets). Global approaches give economies of scale and the sharing of costs and risks
between markets.

ENTRY STRATEGIES
There are a variety of ways in which organisations can enter foreign markets. The three main ways are
by direct or indirect export or production in a foreign country.

Exporting
Exporting is the most traditional and well established form of operating in foreign markets. Exporting can
be defined as the marketing of goods produced in one country into another. Whilst no direct
manufacturing is required in an overseas country, significant investments in marketing are required. The
tendency may be not to obtain as much detailed marketing information as compared to manufacturing in
marketing country; however, this does not negate the need for a detailed marketing strategy.

The advantages of exporting are:

 manufacturing is home based thus, it is less risky than overseas based
 gives an opportunity to "learn" overseas markets before investing in bricks and mortar
 reduces the potential risks of operating overseas.

The disadvantage is mainly that one can be at the "mercy" of overseas agents and so the lack of
control has to be weighed against the advantages. For example, in the exporting of African horticultural
products, the agents and Dutch flower auctions are in a position to dictate to producers.

Exporting methods include direct or indirect export. In direct exporting the organisation may use an
agent, distributor, or overseas subsidiary, or act via a Government agency. In effect, the Grain Marketing
Board in Zimbabwe, being commercialised but still having Government control, is a Government agency.
The Government, via the Board, are the only permitted maize exporters. Bodies like the Horticultural
Crops Development Authority (HCDA) in Kenya may be merely a promotional body, dealing with
advertising, information flows and so on, or it may be active in exporting itself, particularly giving
approval (like HCDA does) to all export documents. In direct exporting the major problem is that of
market information. The exporter's task is to choose a market, find a representative or agent, set up the
physical distribution and documentation, promote and price the product. Control, or the lack of it, is a
major problem which often results in decisions on pricing, certification and promotion being in the hands
of others. Certainly, the phytosanitary requirements in Europe for horticultural produce sourced in Africa
are getting very demanding. Similarly, exporters are price takers as produce is sourced also from the
Caribbean and Eastern countries. In the months June to September, Europe is "on season" because it can
grow its own produce, so prices are low. As such, producers are better supplying to local food processors.
In the European winter prices are much better, but product competition remains.

According to Collett (1991)) exporting requires a partnership between exporter, importer,

government and transport. Without these four coordinating activities the risk of failure is increased.
Contracts between buyer and seller are a must. Forwarders and agents can play a vital role in the
logistics procedures such as booking air space and arranging documentation. A typical coordinated
marketing channel for the export of Kenyan horticultural produce is given in figure below:
In this case the exporters can also be growers and in the low season both these and other exporters may
send produce to food processors which is also exported.

The export marketing channel for Kenyan horticultural products.

Exporting can be very lucrative, especially 'if it is of high value added produce. For example in 1992/93
Zimbabwe exported 5 338,38 tonnes of flowers, 4 678,18 tonnes of horticultural produce and 12 000
tonnes of citrus at a total value of about US$ 22 016,56 million. In some cases a mixture of direct and
indirect exporting may be achieved with mixed results. For example, the Grain Marketing Board of
Zimbabwe may export grain directly to Zambia, or may sell it to a relief agency like the United Nations,
for feeding the Mozambican refugees in Malawi. Payment arrangements may be different for the two
transactions.

Nali products of Malawi gives an interesting example of a "passive to active" exporting mode.

CASE STUDY: Nali Producers - Malawi

Nali group, has, since the early 1970s, been engaged in the growing and exporting of spices. Spices are
also used in the production of a variety of sauces for both the local and export market. Its major success
has been the growing and exporting of Birdseye chilies. In the early days knowledge of the market was
scanty and thus the company was obtaining ridiculously low prices. Towards the end of 1978 Nali chilies
were in great demand, yet still the company, in its passive mode, did not fully appreciate the competitive
implications of the business until a number of firms, including Lonrho and Press Farming, started to grow
and export.

Again, due to the lack of information, a product of its passivity, the firm did not realise that Uganda, with
their superior product, and Papua New Guinea were major exporters, However, the full potential of these
countries was hampered by internal difficulties. Nali was able to grow into a successful commercial
enterprise. However, with the end of the internal problems, Uganda in particular, began an aggressive
exporting policy, using their overseas legations as commercial propagandists. Nali had to respond with a
more formal and active marketing operation. However it is being now hampered by a number of
important "exogenous" factors.

The entry of a number of new Malawian growers, with inferior products, has damaged the Malawian chili
reputation, so has the lack of a clear Government policy and the lack of financing for traders, growers
and exporters.
The latter only serves to emphasise the point made by Collett, not only do organisations need to be
aggressive, they also need to enlist the support of Government and importers.

It is interesting to note that Korey5 1986 warned that direct modes of market entry may be less and less
available in the future. Growing trading blocks like the EU or EFTA means that the establishment of
subsidiaries may be one of the only ways forward in future. Indirect methods of exporting include the use
of trading companies (very much used for commodities like cotton, soya, cocoa), export management
companies, piggybacking and countertrade.

Indirect methods offer a number of advantages including:

 Contracts - in the operating market or worldwide
 Commission sates give high motivation (not necessarily loyalty)
 Manufacturer/exporter needs little expertise
 Credit acceptance takes burden from manufacturer.

Piggybacking
Piggybacking is an interesting development. The method means that organisations with little exporting
skill may use the services of one that has. Another form is the consolidation of orders by a number of
companies in order to take advantage of bulk buying. Normally these would be geographically adjacent or
able to be served, say, on an air route. The fertilizer manufacturers of Zimbabwe, for example, could
piggyback with the South Africans who both import potassium from outside their respective countries.

Countertrade
By far the largest indirect method of exporting is countertrade. Competitive intensity means more and
more investment in marketing. In this situation the organisation may expand operations by operating in
markets where competition is less intense but currency based exchange is not possible. Also, countries
may wish to trade in spite of the degree of competition, but currency again is a problem. Countertrade
can also be used to stimulate home industries or where raw materials are in short supply. It can, also,
give a basis for reciprocal trade.

Estimates vary, but countertrade accounts for about 20-30% of world trade, involving some 90 nations
and between US $100-150 billion in value. The UN defines countertrade as "commercial transactions in
which provisions are made, in one of a series of related contracts, for payment by deliveries of goods
and/or services in addition to, or in place of, financial settlement".

Countertrade is the modem form of barter, except contracts are not legal and it is not covered by GATT.
It can be used to circumvent import quotas.

Countertrade can take many forms. Basically two separate contracts are involved, one for the delivery of
and payment for the goods supplied and the other for the purchase of and payment for the goods
imported. The performance of one contract is not contingent on the other although the seller is in effect
accepting products and services from the importing country in partial or total settlement for his exports.
There is a broad agreement that countertrade can take various forms of exchange like barter, counter
purchase, switch trading and compensation (buyback). For example, in 1986 Albania began offering
items like spring water, tomato juice and chrome ore in exchange for a contract to build a US $60 million
fertilizer and methanol complex. Information on potential exchange can be obtained from embassies,
trade missions or the EU trading desks.

Barter is the direct exchange of one good for another, although valuation of respective commodities is
difficult, so a currency is used to underpin the item's value.

Barter trade can take a number of formats. Simple barter is the least complex and oldest form of
bilateral, non-monetarised trade. Often it is called "straight", "classical" or "pure" barter. Barter is a direct
exchange of goods and services between two parties. Shadow prices are approximated for products
flowing in either direction. Generally no middlemen are involved. Usually contracts for no more than one
year are concluded, however, if for longer life spans, provisions are included to handle exchange ratio
fluctuations when world prices change.

Closed end barter deals are modifications of straight barter in that a buyer is found for goods taken in
barter before the contract is signed by the two trading parties. No money is involved and risks related to
product quality are significantly reduced.

Clearing account barter, also termed clearing agreements, clearing arrangements, bilateral clearing
accounts or simply bilateral clearing, is where the principle is for the trades to balance without either
party having to acquire hard currency. In this form of barter, each party agrees in a single contract to
purchase a specified and usually equal value of goods and services. The duration of these transactions is
commonly one year, although occasionally they may extend over a longer time period. The contract's
value is expressed in non-convertible, clearing account units (also termed clearing dollars) that effectively
represent a line of credit in the central bank of the country with no money involved.

Clearing account units are universally accepted for the accounting of trade between countries and parties
whose commercial relationships are based on bilateral agreements. The contract sets forth the goods to
be exchanged, the rates of exchange, and the length of time for completing the transaction. Limited
export or import surpluses may be accumulated by either party for short periods. Generally, after one
year's time, imbalances are settled by one of the following approaches: credit against the following year,
acceptance of unwanted goods, payment of a previously specified penalty or payment of the difference in
hard currency.

Trading specialists have also initiated the practice of buying clearing dollars at a discount for the purpose
of using them to purchase saleable products. In turn, the trader may forfeit a portion of the discount to
sell these products for hard currency on the international market. Compared with simple barter, clearing
accounts offer greater flexibility in the length of time for drawdown on the lines of credit and the types of
products exchanged.

Counter purchase is where the customer agrees to buy goods on condition that the seller buys some of
the customer's own products in return (compensatory products). Alternatively, if exchange is being
organised at national government level then the seller agrees to purchase compensatory goods from an
unrelated organisation up to a pre-specified value (offset deal). The difference between the two is that
contractual obligations related to counter purchase can extend over a longer period of time and the
contract requires each party to the deal to settle most or all of their account with currency or trade
credits to an agreed currency value.

Where the seller has no need for the item bought he may sell the produce on, usually at a discounted
price, to a third party. This is called a Switch Deal. In the past a number of tractors have been brought
into Zimbabwe from East European countries by switch deals.

Compensation (buy-backs) is where the supplier agrees to take the output of the facility over a
specified period of time or to a specified volume as payment. For example, an overseas company may
agree to build a plant in Zambia, and output over an agreed period of time or agreed volume of produce
is exported to the builder until the period has elapsed. The plant then becomes the property of Zambia.

One problem is the marketability of products received in countertrade.

Disadvantages of Countertrade:
 Not covered by GATT so "dumping" may occur
 uality is not of international standard so costly to the customer and trader
  Variety is tow so marketing of what is limited
 Difficult to set prices and service quality
 Inconsistency of delivery and specification,
 Difficult to revert to currency trading - so quality may decline further and therefore product is
harder to market.

Shipley and Neale7 (1988) therefore suggest the following:

 Ensure the benefits outweigh the disadvantages
 Try to minimise the ratio of compensation goods to cash - if possible inspect the goods for
specifications
 Include all transactions and other costs involved in countertrade in the nominal value specified for the
goods being sold
 Avoid the possibility of error of exploitation by first gaining a thorough understanding of the customer's
buying systems, regulations and politics,
 Ensure that any compensation goods received as payment are not subject to import controls.
Despite these problems countertrade is likely "to grow as a major indirect entry method, especially in
developing countries.

Foreign production
Besides exporting, other market entry strategies include licensing, joint ventures, contract manufacture,
ownership and participation in export processing zones or free trade zones.

Licensing: Licensing is defined as "the method of foreign operation whereby a firm in one country
agrees to permit a company in another country to use the manufacturing, processing, trademark, know-
how or some other skill provided by the licensor".

It is quite similar to the "franchise" operation. Coca Cola is an excellent example of licensing. In
Zimbabwe, United Bottlers have the licence to make Coke.

Licensing involves little expense and involvement. The only cost is signing the agreement and policing its
implementation.

Licensing gives the following advantages:

 Good way to start in foreign operations and open the door to low risk manufacturing relationships
 Linkage of parent and receiving partner interests means both get most out of marketing effort
 Capital not tied up in foreign operation and
 Options to buy into partner exist or provision to take royalties in stock.

The disadvantages are:

 Limited form of participation - to length of agreement, specific product, process or trademark
 Potential returns from marketing and manufacturing may be lost
 Partner develops know-how and so licence is short
 Licensees become competitors - overcome by having cross technology transfer deals and
 Requires considerable fact finding, planning, investigation and interpretation.
Those who decide to license ought to keep the options open for extending market participation. This can
be done through joint ventures with the licensee.

Franchising:

Under franchising, an independent organisation called the franchisee operates the business under
the name of another company called the franchisor.

In such an arrangement the franchisee pays a fee to the franchisor.

Franchising is a form of Licensing but the Franchisor can exercise more control over the
Franchisee as compared to that in Licensing.

In Franchising agreement Franchisee has to pay a fixed amount and royalty based on sales.
Franchisee should agree to adhere to follow the franchisor’s requirements. Franchisor helps the
franchisee in establishing the manufacturing facilities. Franchisor allows the franchisee some
degree of flexibility.

Eg. McDonalds, Subway, KFC

Advantages of Franchising are:

• Low financial risks
• Low-cost way to assess market potential
• Avoid tariffs, NTBs, restrictions on foreign investment
• Maintain more control than with licensing
• Franchisee provides knowledge of local market

Disadvantages of Franchising are:

• Limited market opportunities/profits
• Dependence on franchisee
• Potential conflicts with franchisee
• Possibility of creating future competitor

Management Service Contract

A management service contract is an agreement between two companies whereby one company
provides managerial assistance, technical expertise and specialized services to the second
company for a certain period of time.Services rendered against monetary compensation/
commission. Generally for long term

Eg. Schools, sports facilities, hospitals, office buildings, malls and large businesses have on-site
cafeterias, restaurants.

Advantages :
• Focus firm’s resources on its area of contracts
• Minimal financial exposure
Disadvantages:
• Potential returns limited by contract expertise. Only limited parties can go in for management
service contract
• May unintentionally transfer proprietary knowledge and techniques to contractee

Turnkey Projects

A turnkey project is a contract under which a firm (generally international firms) agrees to fully
design, construct and equip a manufacturing/business/service facility and turn the project over to
the purchaser when its ready for operation, for a remuneration.

Once it is finished, the management goes to local personnel in exchange of a substantial fee.

Eg.: Airports, dams, electric power stations, roads, factory complexes: steel mills, refineries,
chemical plants and automobile plants

Advantages :
 • Company can focus its resources on its area of expertise
• Avoid all long-term operational risks as project is handed over to the purchaser after completion
Disadvantages:
• Financial risks like Cost overruns
• Construction risks like:
• Delays
• Problems with suppliers

Foreign Direct Investment (FDI) with Strategic Alliance

Strategic alliance is a cooperative and collaborative approach to achieve the larger goals.
Role of alliances are:

Many complicated issues are solved through alliances

They provide the parties each other’s strengths

Helps in developing new products with the interaction of 2 or more industries

Meet the challenges of technological revolution.

Managing heavy outlay

Become strong to compete with a multinational company.
It can be of following two types:

• Merger & Acquisition

• Joint Venture

Merger & Acquisition

Merger : The combining of two or more companies, generally by offering the stockholders of one
company securities in the acquiring company in exchange for the surrender of their stock.
Acquisition : When one company takes over another and clearly established itself as the new owner,
the purchase is called an acquisition.
Eg.: HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion

Joint ventures
Joint ventures can be defined as "an enterprise in which two or more investors share ownership and
control over property rights and operation".

Joint ventures are a more extensive form of participation than either exporting or licensing. In Zimbabwe,
Olivine industries has a joint venture agreement with HJ Heinz in food processing.

Joint ventures give the following advantages:

 Sharing of risk and ability to combine the local in-depth knowledge with a foreign partner with know-
how in technology or process
 Joint financial strength
 May be only means of entry and
 May be the source of supply for a third country.
They also have disadvantages:
 Partners do not have full control of management
 May be impossible to recover capital if need be
 Disagreement on third party markets to serve and
 Partners may have different views on expected benefits.
If the partners carefully map out in advance what they expect to achieve and how, then many problems
can be overcome.

Ownership/ Wholly Owned Subsidiary:

The most extensive form of participation is 100% ownership and this involves the greatest commitment
in capital and managerial effort. The ability to communicate and control 100% may outweigh any of the
disadvantages of joint ventures and licensing. However, as mentioned earlier, repatriation of earnings
and capital has to be carefully monitored. The more unstable the environment the less likely is the
ownership pathway an option.

Factors to be considered while selecting any Entry Mode:

These forms of participation: exporting, licensing, joint ventures or ownership, are on a continuum rather
than discrete and can take many formats. Anderson and Coughlan8 (1987) summarise the entry mode as
a choice between company owned or controlled methods - "integrated" channels - or "independent"
channels. Integrated channels offer the advantages of planning and control of resources, flow of
information, and faster market penetration, and are a visible sign of commitment. The disadvantages are
that they incur many costs (especially marketing), the risks are high, some may be more effective than
others (due to culture) and in some cases their credibility amongst locals may be lower than that of
controlled independents. Independent channels offer lower performance costs, risks, less capital, high
local knowledge and credibility. Disadvantages include less market information flow, greater coordinating
and control difficulties and motivational difficulties. In addition they may not be willing to spend money
on market development and selection of good intermediaries may be difficult as good ones are usually
taken up anyway.

Once in a market, companies have to decide on a strategy for expansion. One may be to concentrate on
a few segments in a few countries - typical are cashewnuts from Tanzania and horticultural exports from
Zimbabwe and Kenya - or concentrate on one country and diversify into segments. Other activities
include country and market segment concentration - typical of Coca Cola or Gerber baby foods, and
finally country and segment diversification. Another way of looking at it is by identifying three basic
business strategies: stage one - international, stage two - multinational (strategies correspond to
ethnocentric and polycentric orientations respectively) and stage three - global strategy (corresponds
with geocentric orientation). The basic philosophy behind stage one is extension of programmes and
products, behind stage two is decentralisation as far as possible to local operators and behind stage three
is an integration which seeks to synthesize inputs from world and regional headquarters and the country
organisation. Whilst most developing countries are hardly in stage one, they have within them
organisations which are in stage three. This has often led to a "rebellion" against the operations of
multinationals, often unfounded.

Organisations are faced with a number of strategy alternatives when deciding to enter foreign markets.
Each one has to be carefully weighed in order to make the most appropriate choice. Every approach
requires careful attention to marketing, risk, matters of control and management. A systematic
assessment of the different entry methods can be achieved through the use of a following matrix:

Matrix for comparing alternative methods of market entry

Entry mode
Evaluation Indirect Direct Marketing Counter Licensing Joint Wholly EPZ
criteria export export subsidiary trade venture owned
operation
a) Company
goals
b) Size of
company
c) Resources
d) Product
e) Remittance
f) Competition
g) Middlemen
characteristics
h) Environmental
characteristics
i) Number of
markets
j) Market
k) Market
feedback
l) International
market learning
m) Control
n) Marketing
costs
o) Profits
p) Investment
q) Administration
personnel
r) Foreign
problems
s) Flexibility
t) Risk

Determinants of foreign mode of entry

1. Firm’s Size: managerial capabilities and resources of the firm.
2. Multinational Experience
3. Industry Growth: in the target country.
4. Global Industry Concentration: global competition demands global strategy.
5. Technical Intensity: probably other firm has got the required technology.
6. Advertising Intensity
7. Country Risk
8. Cultural Distance
9. Market Potential
10. Market Knowledge
11. Value of Firm-Specific Assets: protection of technology and know-how.
12. Contractual Risk: Prevent opportunism from partners.
13. Tacit Nature of Know-how
14. Venture Size
15. Intent to conduct joint R&D
 16. Global Strategic Motivation: Competitors.
17. Global Synergies: Hierarchical control over affiliates.

Dimensions & Factors affecting doing business abroad:

Trading with foreign suppliers raises a number of issues you may not be familiar with from trading within
your country. Typically, these include language differences, new payment methods and increased
paperwork requirements.

However, with a little research and planning these challenges are easily overcome. Widening your
purchasing to the international market can give you a significant competitive advantage. Using foreign
suppliers can lower your input costs and give you access to specialized goods and materials that may not
be available in your country.

This topic outlines the differences you need to take into account when starting to trade abroad. It takes
you through the key steps in finding and selecting foreign suppliers, and explains what to look for in
terms of payment methods and drawing up contracts.
• The challenges of sourcing abroad
• Finding foreign suppliers
• Choosing a foreign supplier
• Methods of paying foreign suppliers
• Building solid relationships with foreign suppliers
• Drawing up contracts with foreign suppliers

The challenges of sourcing abroad

Trading with foreign businesses differs from trading within your country. New challenges are raised by
the distances involved, by variations between countries, and by rules that govern international trading.

Legal considerations
It's not safe to assume that the same rules will apply abroad as in your country. Factors to consider
include:
• whether there are import or export restrictions at either end of the transaction
• whether technical standards in your supplier's country meet Canadian requirements
• who is liable if a product causes harm or loss
• whether your imported goods infringe any intellectual property rights
• who bears insurance costs at each stage of transit
A well-drafted written contract will help to avoid disagreements or disputes.

Other considerations
There is a range of other factors you should bear in mind:
• Language differences matter. It's not just a question of communication - make sure any
labeling or other printed materials are error-free.
• Payment methods for international transactions are a bit more complicated.
• Shipping procedures are also more complex, given the increased distances and the need to
cross borders.
• Understanding the business and social practices of your supplier's country can help build
trust and develop relationships.
• Think about how many suppliers you need. If you have too few you risk suffering supply-chain
disruption if they have problems. If you have too many your managerial burden will increase.

The origin of your goods can affect the level of duty you pay. Some goods attract a preferential rate of
duty, so you need to check where your supplier's raw materials have come from. Visiting suppliers is the
best way of doing this.
Finding foreign suppliers
As with finding a domestic supplier, careful research is key to identifying foreign suppliers. You will have
to identify countries to trade with, as well as individual suppliers within those countries.

Identifying suitable countries

For most goods and materials you can choose to import from a wide range of countries. Expect a trade-
off between prices and levels of regulation and protection.

Suppliers in developing countries may be cheaper but it may be more difficult to resolve any problems.
Factors that should influence your decision include:
• familiarity with the country - knowing your target country and having contacts within your
sector there makes doing business easier
• communication - if you (or your employees) don't speak the local language, check that English
is widely spoken by businesses, or whether there are translators and interpreters available
• level of development - it's generally easier to trade with developed countries than with
developing ones
• how far away the country is - this affects shipping costs, the length of your trading cycle, and
the ease of visiting suppliers if necessary
• levels of existing trade with your country - high volumes suggest other businesses have
successfully chosen the route you're considering

Identifying suitable suppliers

There are many sources of information about potential suppliers, including:
• Strategic Information Centre
• trade associations for your sector
• other importers in your sector
• banks' trade services departments
• overseas trade visits and exhibitions
• your target countries' embassy in Canada
• membership organizations for businesses trading between your country and your source
countries
• Trade-services suppliers

Remember you may need secondary suppliers to help with the trading process, such as freight
forwarders or import agents to handle shipping and customs-related formalities and documentation.

Choosing a foreign supplier

You should have the same priorities in mind when selecting a foreign supplier. You need to get the right
price and quality, while making sure the supplier can be relied upon to meet high standards consistently.

The reliability of your supplier is crucial. While a competitive price is also important, make sure that low
prices don't come with unacceptable compromises on quality or on the level of service you'll receive.

The main stages in the supplier-selection process are:

• drawing up a shortlist
• comparing the short-listed suppliers on the basis of value for money, reliability and
creditworthiness
• visiting the suppliers, if possible, to see their operations
• deciding which of the suppliers to work with
Value for money
Make sure that you're happy with the price and quality the supplier is offering. Get a written quotation.
Ask for a sample based on your specification to make sure the supplier is capable of producing what you
need.

Reliability
It's important to research supplier reliability. If possible, visit the supplier. Look at their work and their
production system.

Find out as much as you can about the supplier. Talk to:
• any references (of a selective country, say India) the supplier can give you
• In that case Indian importers with experience in the market
• trade associations and other importers in your sector
• member organizations for Indian businesses trading with the market

You should also check the reliability of any sub-contractors your supplier may be outsourcing work to.

Creditworthiness
Financial checks of foreign suppliers can be difficult due to a lack of accessible financial information. See
if your bank's international trade team can carry out a status query - a query into the company's
financial standing on your behalf.
Be cautious - avoid advance payment or long-term contracts until you trust the supplier.

Methods of paying foreign suppliers

There are four main methods for paying foreign suppliers for the goods you import from them - or for
receiving payment if you're exporting abroad:
• Advance payment. The supplier only ships goods once payment has been received.
• Letters of credit. The importer's bank guarantees to pay when presented with a set of specified
export documents by the supplier - the bank guarantee increases the cost of this method.
• Documentary collection. When goods are shipped, the supplier sends the export documents
to the importer's bank. These documents are only given to the importer when payment has been
made.
• Open account trading. The supplier ships goods to the importer, and asks for payment within
an agreed period.

Minimize payment-related risks

For importers, the risk decreases as you move down the list above. Advance payment is the riskiest -
there is a chance you'll pay but never receive the goods. Open account trading is the least risky - you
only pay after receiving the goods.

For exporters, however, the risk increases as you move down the list. So while you might prefer open
account trading, your overseas supplier may want advance payment. Letters of credit and documentary
collections offer some protection to both parties by involving their banks as intermediaries in the process.

The International Chamber of Commerce has established rules governing documentary credits worldwide.
The Uniform Customs and Practice for Documentary Credits (UCP500) is a set of internationally accepted
rules on the issue and use of letters of credit. These rules are commonly used by banks in commercial
transactions worldwide. As they are incorporated into contracts voluntarily, the rules are flexible, but
once applied to any documentary credit, they are binding on all parties to the credit, unless specifically
modified or excluded by the credit.
Match payments to cash flow needs
Payment methods can have a major impact on your cash flow position. Most banks offer import finance
packages to bridge the period between paying for your imports and receiving payment when you sell
them on to your customers.

Bear in mind that payment methods and terms are frequently a matter of negotiation. For example, you
might offer a supplier a letter of credit in return for an extended 90-day payment period to match your
cash flow requirements.

Building solid relationships with foreign suppliers

Trust is a crucial element of any supplier relationship. While it can take time and planning to build a solid
relationship with foreign suppliers, doing so makes it more likely that you'll do increased business with
them. It may even enable you to negotiate more favorable terms.

Build trust gradually

The key is to build the trading relationship slowly. Initially you should leave nothing to chance. Draw up
written contracts that are clear and unambiguous.

Typically your first contracts with a new supplier will be on a project-by-project or shipment-by-shipment
basis. As the relationship develops you may move to longer contract periods and potentially be able to
negotiate better terms.

An important part of building trust is learning how things work in your supplier's country. Are there
important cultural and social differences, or differences in the way business is done?

Communication
Communication is an obvious potential obstacle when dealing with foreign suppliers. Even simple actions
such as routine telephone calls can be complicated by factors such as time differences and low-quality
phone connections.

Face-to-face meetings are likely to be infrequent, but they can be vital to the trust-building process - so
plan them carefully.

In addition, there are potential language barriers. Which language will you use with your supplier? Do
you have enough foreign-language speakers in your workforce? Do these employees have the skills they'll
need to deal with your suppliers? Would it help to use local interpreters, especially for key meetings, to
avoid misunderstandings?

Monitor, review and adapt

Make sure you monitor key aspects of the new supplier relationship. This will make it easy to identify
areas for possible improvement.

Schedule progress reviews with the supplier. If there have been any problems, decide together how to
resolve them. If everything has been working smoothly and profitably, you may want to extend the level
of business you're doing together.

Drawing up contracts with foreign suppliers

There are many sources of potential confusion between an importer and a foreign supplier, from
language difficulties to differences in business practices.

Drawing up a clear written contract is the best way to avoid problems. If disagreements do arise, they
will be easier to resolve if you have a written contract rather than a verbal agreement.
Your contract should make all aspects of the trading process as clear as possible - what will happen,
when it will happen, and exactly what each party is responsible for at each stage.

There are standard trading practices and systems to help you agree on key issues. Incoterms are an
internationally recognized set of trading terms used in contracts of delivery. Special trade-related
payment methods reduce the risks and uncertainties of international trade.

What to include
Key things to cover in a contract with a foreign supplier include:
• Goods. Specify what goods are being bought, noting any legal or technical rules with which they
must comply.
• Price. How much will you pay? In which currency? At which exchange rate?
• Payment method. When and how will payment be made?
• Delivery. How will the goods be transported to you?
• Trading terms. Use Incoterms to specify exactly who is responsible for shipping costs, duties,
and customs-related formalities.
• Insurance. Be clear about who bears what risks - e.g. loss or damage - at each stage of the
process.
• Potential problems. Include procedures that would be implemented if a dispute arises, e.g. if
one party's error causes delays or losses for the other.
• Service level agreement. Define the level of service your supplier must provide.
• Legal jurisdiction of the contract. If there is a dispute, where would legal proceedings be
heard?

Bear in mind that the contracts you enter into with a supplier will evolve with your trading relationship.
While early contracts might be on a shipment-by-shipment basis, longer-term contracts might follow as
familiarity and trust develop.

Porter’s Diamond
Please refer Power Point Slides

INCOTERMS 2010
Please refer Power Point Slides