Module B
Key Terms
• Terms of Sale – the conditions of sale that stipulate the point at which costs and risks are
borne by the buyer
• Incoterms – a series of 11 internationally standardized terms that describe the conditions
of sale and the responsibilities of the buyer and seller in international trade transactions
• Letter of credits (L/C) – a document issued by the buyer’s bank in which the bank
becomes an intermediary in the sale, promising to pay the seller a specified amount under
specified conditions
• Confirmed L/C – a correspondent bank in the seller’s country confirms that it will honor
the issuing bank’s letter of credit
• Irrevocable L/C – once the seller has accepted the credit, the consumer cannot alter or
cancel it without the seller’s consent
• Air waybill – issued by the carrier be presented as proof that the shipment has been made
• Pro forma invoice – the exporter’s formal quotation, a description of the merchandise,
price, delivery time, proposed method of shipment, terms of sale, and ports of exit and
entry
• Export draft – unconditional order drawn by the seller on the buyer instructing the buyer
to pay the amount of the order on presentation (sight draft) or at an agreed future date
(time draft)
• Banker’s acceptance – a bank assumes responsibility for making payment at maturity of
the draft
• Factoring – the sale of an exporter’s accounts receivable on ordinary goods, with the
balance of the payment due upon delivery or soon after.
• Forfaiting – the sale of an exporter’s accounts receivable on capital goods, commodities,
and other high-value goods, with the payment due at least 180 days out, extending to as
long as five years
• U.S. Export-Import (Ex-Im Bank) – the principal government agency that provides
loans, guarantees, and insurance programs to support U.S. exporters.
• Overseas Private Investment Corporation (OPIC) – a government corporation formed
to stimulate private investment in developing countries that offers investors insurance
against expropriation, currency inconvertibility, and damages from wars or revolutions
• Free trade zone (FTZ) – an area designated by a government as outside its customs
territory
• Customs drawbacks – rebates on customs duties
• Shipper’s export declaration (SED) – a form required by the Department of Commerce
to control exports and supply export statistics
• Export bill of lading (B/L) – serves three purposes:
o it is a contract for carriage between the shipper and the carrier
o a receipt from the carries for the goods shipped
o a certificate of ownership
• Conformité Européene (CE) mark – indicates that merchandise conforms to European
health, safety, and environmental requirements
• Customhouse brokers – whose functions parallel those of foreign freight forwarders but
on the import side of the transaction
• Bonded warehouse – a foreign trade zone where merchandise can be stored without
paying duty and wait for the rest of the year, abandon them, or send them to another
country
• Harmonized Tariff Schedule of the United States (HTSA or HTSUS) – the U.S.
version of the global tariff code, the Harmonized System
Class Notes
Internalization process
• Modes of Entry
o Exporting
▪ Indirect Exporting
▪ Direct Exporting
o Licensing
▪ Incl. Franchising, OEM, Private Labeling
▪ Strategic Alliances (SA)
• Collaborations between companies
• Joint ventures (JV)
▪ Foreign Direct Investment (FDI)
• Wholly Owned Manufacturing Subsidiary
o The company investment capital in plant and machinery
o Aspects
▪ Risks/Control
▪ Marketing – Market Penetration
▪ Organizational/Structural issues
▪ Intellectual Property/Knowledge Transference
▪ Finance – Trade Finance
• The Exporting Modes of Entry
o Exporting
▪ Indirect exporting via piggybacking, consortia, export management
companies, trading companies
▪ Direct exporting, using market country agent or distributor
▪ Direct exporting, using own sales subsidiary
▪ Direct marketing, including mail order and telemarketing
• The Licensing Modes of Entry
o Licensing
▪ Technical licensing
▪ Contract manufacture
▪ Original equipment manufacture
▪ Management contracts
▪ Turkey contracts
▪ Franchising
• The SA and FDI Modes of Entry
o Strategic alliance
▪ Distribution alliance
▪ Manufacturing alliance
▪ R&D alliance
▪ Joint venture
o Wholly owned manufacturing subsidiary
▪ Assembly
▪ Full-fledged manufacturing
▪ Research and development
▪ Acquisition
o The Role of Entry Barriers
▪ Entry Barriers – any obstacle making it more difficult for a firm to enter a
product/service market
• Tariff Barriers
o Customs duties enforced on imported products (final
products or intermediate products)
o Different tariff rates for different countries and different
products
o May be adjusted by political influence from trade
associations
• Non-Tariff Barriers
o Include all other entry barriers
o E.g. transportation costs, slow customs procedures, etc.
▪ Most Entry Barriers
• Artificial Entry Barriers
o Limited distribution access
o Bureaucratic inertia
o Government regulations
o Limited access to technology
o Local monopolies
• Natural Entry Barriers
o Intense competition among several differentiated brands
o Strong brand names charging a premium price over generic
brands
o Pro-domestic sentiment favoring local brands
• Barriers and Mode of Entry
o When barriers are low, the firm will be likely to enter via exporting.
o When barriers are high, alternative modes of entry have to be chosen:
▪ License a local producer
▪ Create a joint venture
▪ Engage in a distribution alliance
▪ Invest in a wholly owned subsidiary
• The Exporting Option
o Indirect Exporting
▪ Export management companies (EMC) perform all the transactions
relating to foreign trade for the firm in overseas markets, going to fairs,
and contracting distributors
• The advantage that the firm avoids the overhead costs and
