Global Business Today Ninth Edition Chapter 14
Exporting, Importing, and Countertrade
Chapter Outline
OPENING CASE: Growing Through Exports
INTRODUCTION
THE PROMISE AND PITFALLS OF EXPORTING
Management Focus: FCX Systems
IMPROVING EXPORT PERFORMANCE
An International Comparison
Information Sources
Management Focus: Exporting with a Little Government Help
Utilizing Export Management Companies
Export Strategy
Management Focus: Export Strategy at 3M
EXPORT AND IMPORT FINANCING
Lack of Trust
Letter of Credit
Draft
Bill of Lading
A Typical International Trade Transaction
EXPORT ASSISTANCE
Export-Import Bank
Export Credit Insurance
COUNTERTRADE
The Popularity of Countertrade
Types of Countertrade
The Pros and Cons of Countertrade
SUMMARY
Global Business Today Ninth Edition Chapter 14
CRITICAL THINKING AND DISCUSSION QUESTIONS
CLOSING CASE: MD International
Learning Objectives
1. Explain the promises and risks associated with exporting.
2. Identify the steps managers can take to improve their firm’s export performance.
3. Identify information sources and government programs that exist to help exporters.
4. Recognize the basic steps involved in financing exporting.
5. Describe how countertrade can be used to facilitate exporting.
Chapter Summary
This chapter focuses on the “nuts and bolts” of exporting and importing. The promise and pitfalls
of exporting are discussed, along with a discussion of the role of export management companies in
the internationalization process. The chapter also provides a nice discussion of export financing.
In this section, the author discusses the financial devices that have evolved to facilitate exporting
including: the letter of credit, the draft (or bill of exchange), and the bill of lading. The section
ends by providing an example of a typical international trade transaction. This example illustrates
the complex nature of international trade transactions. Finally, the chapter explores countertrade,
its growth and the pros and cons of this type of transaction.
Opening Case: Growing Through Exports
Summary
The opening case explores the potential of exporting for small businesses. Some 97 percent of all
U.S. exporters in 2012 were classified as small businesses, yet together, these companies were
responsible for some $460 billion in foreign sales. Despite the profit potential however, many
small firms find that exporting is challenging. One of the biggest concerns for small companies is
ensuring that they get paid. Discussion of this feature can revolve around the following questions:
QUESTION 1: Discuss the potential of exports for small companies. What challenges do small
companies face, but larger companies might be able to avoid?
Global Business Today Ninth Edition Chapter 14
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
266
However, it can be daunting especially for companies that lack international experience.
Companies not only have to deal with the process of getting their goods to the market and the final
customer, they also have to deal with regulations and ensuring that they are paid in a timely way.
Larger companies can also capitalize on foreign market potential, yet they may not face the same
obstacles as smaller companies. Students may note for example, that larger companies are more
likely to have international experience or will at least carry more weight in negotiations with
customers and vendors. Similarly, larger companies may be able to have more flexible payment
terms than smaller companies.
QUESTION 2: According to the Small Business Exporters Association, one of the biggest
concerns of small U.S. exporters is getting paid. How can small companies minimize the risk
associated with payment?
Chapter Outline with Lecture Notes, Video Notes, and Teaching Tips
INTRODUCTION
A) This chapter is concerned with the nuts and bolts of exporting (and importing). Exporting is
not just for large enterprises, many small firms have benefited significantly from the moneymaking
opportunities of exporting too.
B) The volume of export activity in the world economy is increasing as exporting has become
easier. The gradual decline in trade barriers under GATT and now the WTO along with regional
economic agreements such as the European Union and the North American Free Trade Agreement
have significantly increased export opportunities.
C) Despite the opportunities for exporting, it remains a challenge for many firms. The firm
wishing to export must identify export opportunities, avoid a host of unanticipated problems that
are often associated with doing business in a foreign market, familiarize itself with the mechanics
Global Business Today Ninth Edition Chapter 14
of export and import financing , learn where it can get financing and export credit insurance, and
learn how it should deal with foreign exchange risk.
Teaching Tip: The UK Trade and Investment office
{http://www.ukti.gov.uk/export.html?guid=none}is devoted to helping companies develop their
export business. Click on “How We Can Help” and then on “Country Report” to see the types of
information available in a typical report on a specific country.
Teaching Tip: Export.gov {http://www.export.gov/index.asp} covers the basics of exporting. You
can click on various topics related to getting ready to export, developing an export plan, finding
leads and so on. The site is well worth a visit, and could be used as the basis for an in-class export
project.
Teaching Tip: Your students may wonder how firms U.S. firms find buyers in foreign countries.
To find foreign customers, exporters often use ‘”trade leads” that are provided by organizations
dedicated towards the activity of matching “buyers” and “sellers” in an international context. An
example of a site that provides trade leads is the Export.gov at {http://www.export.gov/index.asp}.
THE PROMISE AND PITFALLS OF EXPORTING
A) The potential benefits from exporting can be great. Regardless what country a firm is based in,
the rest of the world is a much larger market than the domestic market. While larger firms may be
proactive in seeking out new export opportunities, many smaller firms are reactive and only pursue
international opportunities when the customer calls or knocks on the door.
B) Many novice exporters have run into significant problems when first trying to do business
abroad, souring them on following up on subsequent opportunities.
Teaching Tip: A great web site to visit to determine whether a company is ready to export is the
International Trade Centre, run by UNCTAD/WTO {http://www.intracen.org/}.
C) Common pitfalls include poor market analysis, poor understanding of competitive conditions,
lack of customization for local markets, poor distribution arrangements, bad promotional
campaigns, and a general underestimation of the differences and expertise required for foreign
market penetration.
Video Note: The risks involved with relying on export markets for revenues have been highlighted
during the recent global recession. To explore this issue, consider the video in the International
Business Library on Pinterest (http://www.pinterest.com/mheibvideos/) Global Trade Freezes
Amid Economic Downturn.
D) Exporters also must deal with a tremendous amount of paperwork and other formalities
associated with exporting.
Management Focus: FCX Systems
Global Business Today Ninth Edition Chapter 14
Summary
This feature explores FCX Systems’ move into the export market. FCX Systems, which
manufactures power converters for the aerospace industry, realized that to continue to grow, the
company would have to seek opportunities in foreign markets. The company initially used an
international distribution company to help with the process, but began handling its exports on its
own in 1994. Today, the company is the recipient of numerous accolades for its exporting success,
and has recently, after numerous years of trying, begun to find success in China, a market it
believes will be important in the future. The following questions can be helpful in directing the
discussion.
Suggested Discussion Questions
1. FCX Systems’ entry into foreign markets was not an easy one. Reflect on the challenges facing
small companies like FCX Systems as they pursue foreign opportunities. Why did FCX believe
that foreign markets could be more profitable than its domestic market?
2. Why did FCX initially sign on with an in international distribution company? What made FCX
decide to go it alone? How important was government assistance to FCX’s success?
Global Business Today Ninth Edition Chapter 14
Teaching Tip: To learn more about FSX Systems, go to {http://www.fcxinc.com/}.
Lecture Note: Companies that are new to exporting are often overwhelmed by the process. To
provide assistance to new exporters, the U.S. Commerce Department has created an office devoted
to the export process. Similarly, the World Trade Center is encouraging companies to explore
opportunities in foreign markets. To see an example, consider
{http://www.businessweek.com/ap/2012-07-25/global-trade-prospects-subject-of-charleston-talks}
and also go to the web site {http://www.wtcno.org/about-us/}.
IMPROVING EXPORT PERFORMANCE
A) There are a number of ways in which inexperienced exporters can gain information about
foreign market opportunities and avoid some of the common pitfalls that tend to discourage and
frustrate novice exporters.
An International Comparison
B) One big impediment to exporting is the simple lack of knowledge of the opportunities available.
The way to overcome ignorance is to collect information. Both Germany and Japan have
developed extensive institutional structures for promoting exports. In addition, Japanese exporters
can take advantage of the knowledge and contacts of sogo shosha, the country’s great trading
houses.
Information Sources
C) Despite institutional disadvantages, U.S. firms can increase their awareness of export
opportunities. The most comprehensive source of information is the U.S. Department of
Commerce.
Teaching Tip: Students may want to explore the U.S. Department of Commerce’s web site
{http://www.commerce.gov/}. The Small Business Administration (SBA) also has an extensive
web site {http://www.sba.gov/} with information about exporting to different countries, contacts
and leads, and so on.
Management Focus: Exporting with a Little Government Help
Summary
This feature describes the challenges faced by small firms as they seek to expand their sales
through exports. The feature notes that there are a number of agencies, institutions, and export
management companies that provide assistance to small exporters. The following questions can be
helpful in directing the discussion.
Suggested Discussion Questions
Global Business Today Ninth Edition Chapter 14
1. Foreign market expansion can be a daunting prospect, especially for a small company with no
international experience. Discuss how Novi, Inc became such a success story in such a short time.
What lessons can other companies learn from Novi’s experiences?
2. As a small business owner facing saturated domestic markets, how would you approach foreign
markets? Develop a strategic plan outlining how you would research markets, get your product to
potential customers, handle the financing side of the business, and grow your sales. Include
information on what resources are available to help with this process.
Utilizing Export Management Companies
D) Export management companies are export specialists that act as the export marketing
department or international department for client firms.
E) EMCs normally accept two types of export assignments. They start exporting operations for a
firm with the understanding that the firm will take over operations after they are well established;
and EMCs start services with the understanding that the EMC will have continuing responsibility
for selling the firm’s products.
F) In theory, the advantage of EMCs is that they are experienced specialists who can help the
neophyte exporter identify opportunities and avoid common pitfalls. However, studies have
revealed a large variation in the quality of EMCs. Therefore, an exporter should carefully review a
number of EMCs, and check references from an EMC’s past client, before deciding on a particular
EMC.
Teaching Tip: The FITA Directory of Export Management Companies {http://fita.org/index.html}
provides information on export management companies, and also trade leads and international
market research.
Export Strategy
Global Business Today Ninth Edition Chapter 14
G) In addition to utilizing EMCs, a firm can reduce the risks associated with exporting if it is
careful about its choice of exporting strategy.
H) Firms can take several steps to help improve their export success.
• First, particularly for the novice exporter, it does to help to hire an EMC, or at least an
experienced export consultant, to help with the identification of opportunities and navigate
through the tangled web of paperwork and regulations so often involved in exporting.
• Second, it often makes sense to initially focus on one, or a handful, of markets.
• Third, it may make sense to enter a foreign market on a fairly small scale in order to reduce
the costs of any subsequent failure.
• Fourth, the exporter needs to recognize the time and managerial commitment involved in
building export sales, and should hire additional personnel to oversee this activity.
• Fifth, in many countries it is important to devote a lot of attention to building strong and
enduring relationships with local distributors and / or customers.
• Sixth, it is important to hire local personnel to help the firm establish itself in a foreign
market.
• Finally, it is important for the exporter to keep the option of local production in mind.
Management Focus: Exporting Strategy at 3M
Summary
This feature explores the Minnesota Mining and Manufacturing Company’s (3M) export strategy.
3M generates more than 60 percent of its revenues from outside the United States. The company
often uses exports to establish an initial presence in a foreign market, only building foreign
production facilities once sales volume rises to a level where local production is justified.
Discussion of the feature can begin with the following questions:
Suggested Discussion Questions
1. Discuss why 3M initially enters markets on a small scale. How does the firm’s strategy fit with
the philosophy that exporting is not an end in itself, but merely a step on the road toward
establishment of foreign production?
2. Explain the three principles that make 3M so successful. Why was it important for 3M to hire
local personnel?
Global Business Today Ninth Edition Chapter 14
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
272
do. Second, 3M likes to learn about a market by selling a single product. Only after it has proven
to be successful, will the company enter the market on a larger scale. Third, 3M believes strongly
because locals are more familiar with the market, local employees are essential to its success. 3M
believes that local employees have a better idea of how to sell in their own country than
Americans.
Teaching Tip: To learn more about 3M and its international strategy, go to {http://www.3m.com/}.
EXPORT AND IMPORT FINANCING
A) Mechanisms for financing exports and imports have evolved over the centuries in response to a
problem that can be particularly acute in international trade: the lack of trust that exists when one
must put faith in a stranger.
Lack of Trust
B) Firms engaged in international trade face a problem – they have to trust someone who may be
very difficult to track down if they default on an obligation.
C) Due to the lack of trust, each party to an international transaction has a different set of
preferences regarding the configuration of the transaction. Figures 14.1 and 14.2 show the
Draft
F) A draft, sometimes referred to as a bill of exchange, is the instrument normally used in
international commerce for payment. A draft is simply 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. A
sight draft is payable on presentation to the drawee while a time draft allows for a delay in
payment – normally 30, 60, 90, or 120 days.
Global Business Today Ninth Edition Chapter 14
Bill of Lading
G) The bill of lading is issued to the exporter by the common carrier transporting the merchandise.
It serves three purposes: it is a receipt, a contract, and a document of title.
A Typical International Transaction
H) The entire process for conducting an export transaction is summarized in Figure 14.4.
EXPORT ASSISTANCE
A) Prospective U.S. exporters can draw on two forms of government-backed assistance to help
their export programs. They can get financing aid from the Export-Import Bank and export credit
insurance from the Foreign Credit Insurance Association.
Export-Import Bank
B) The Export-Import Bank (Eximbank) is an independent agency of the U.S. government. Its
mission is to provide financing aid that will facilitate exports, imports, and the exchange of
commodities between the U.S. and other countries.
Teaching Tip: Students can explore the Export-Import Bank in more depth at
{http://www.exim.gov/}.
Lecture Note: Eximbank’s lending is down in 2014 as private lending increased. To learn more go
to {http://www.businessweek.com/news/2014-10-29/export-import-bank-support-declines-amid-
private-lending-growth}.
Export Credit Insurance
C) In the U.S., export credit insurance is provided by the Foreign Credit Insurance Association
(FCIA). FCIA provides coverage against commercial risks and political risks.
COUNTERTRADE
A) Countertrade is an alternative means of structuring an international sale when conventional
means of payment are difficult, costly, or nonexistent. Countertrade denotes a whole range of
barter like agreements; its principle is to trade goods and service for other goods and services when
they cannot be traded for money. The text provides several examples of countertrade.
The Popularity of Countertrade
B) In the modern era, countertrade arose in the 1960s as a way for the Soviet Union and the
Communist states of Eastern Europe, whose currencies were generally nonconvertible, to purchase
imports. During the 1980s, the technique grew in popularity among many developing nations that
Global Business Today Ninth Edition Chapter 14
lacked the foreign exchange reserves required to purchase necessary imports. There was a notable
increase in the volume of countertrade after the Asian financial crisis of 1997.
Types of Countertrade
C) Countertrade can be categorized into five distinct types of trading arrangements: barter,
counterpurchase, offset, switch trading, and compensation or buyback.
Barter
D) Barter is a direct exchange of goods and/or services between two parties without a cash
transaction. Barter is viewed as the most restrictive countertrade arrangement. It is used primarily
for one-time-only deals in transactions with trading partners who are not creditworthy or
trustworthy.
Counterpurchase
E) Counterpurchase is a reciprocal buying agreement. It occurs when a firm agrees to purchase a
certain amount of materials back from a country to which a sale is made.
Offset
F) Offset is similar to counterpurchase insofar as one party agrees to purchase goods and services
with a specified percentage of the proceeds from the original sale. The difference is that this party
can fulfill the obligation with any firm in the country to which the sale is being made.
Switch Trading
G) Switch trading refers to the use of a specialized third-party trading house in a countertrade
arrangement. When a firm enters a counterpurchase or offset agreement with a country, it often
ends up with what are called counterpurchase credits, which can be 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.
Compensation or Buybacks
H) A buyback occurs when a firm builds a plant in a country—or supplies technology, equipment,
training, or other services to the country—and agrees to take a certain percentage of the plant’s
output as a partial payment for the contract.
The Pros and Cons of Countertrade
I) Countertrade’s main attraction is that it can give a firm a way to finance an export deal when
other means are not available. If a firm is unwilling to enter a countertrade agreement, it may lose
an export opportunity to a competitor that is willing to make a countertrade agreement.
Global Business Today Ninth Edition Chapter 14
J) In some cases, a countertrade arrangement may be required by the government of a country to
which a firm is exporting goods or services.
K) The drawbacks of countertrade are substantial. Countertrade contracts may involve the
exchange of unusable or poor-quality goods that the firm cannot dispose of profitably.
L) Countertrade is most attractive to large, diverse multinational enterprises that can use their
worldwide network of contacts to dispose of goods acquired in countertrading.
Critical Thinking and Discussion Questions
1. A firm based in Washington State wants to export a shipload of finished lumber to the
Philippines. The would-be importer cannot get sufficient credit from domestic sources to pay for
the shipment but insists that the finished lumber can be quickly resold in the Philippines for a
profit. Outline the steps the exporter should take to effect this export to the Philippines.
2. You are the assistant to the CEO of a small textile firm that manufactures high-quality,
premium-priced, stylish clothing. The CEO has decided to see what the opportunities are for
exporting and has asked you for advice as to the steps the company should take. What advice
would you give the CEO?
3. An alternative to using a letter of credit is export credit insurance. What are the advantages and
disadvantages of using export credit insurance rather than a letter of credit for exporting (a) a
luxury yacht from California to Canada, and (b) machine tools from New York to Ukraine?
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
276
4. How do you explain the popularity of countertrade? Under what scenarios might its use
increase still further by the year 2020? Under what scenarios might its use decline?
5. How might a company make strategic use of countertrade schemes as a marketing weapon to
generate export sales revenues? What are the risks associated with pursuing such a strategy?
Closing Case: Vellus Products
Summary
The closing case explores the success of MD International in Latin America. MD International is
an export intermediary for U.S. medical equipment manufacturers. The company has been able to
capitalize on falling trade barriers, as well as expanding health care programs in the Latin
American region. MD International currently represents more than 30 companies and sells to
some 600 regional distributors. Discussion of the case can revolve around the following
questions:
QUESTION 1: How does an intermediary like MD International create value for the
manufacturers who use it to sell medical equipment in foreign markets? Why do they want to use
MD International rather than export directly themselves?
Global Business Today Ninth Edition Chapter 14
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
277
ANSWER 1: Companies like MD International that act as intermediaries between sellers in one
country and buyers in another provide many valuable services for their clients. Manufacturers can
expand their sales through MD International without committing the time and other resources that
would be required to develop a market for their products in Latin America. MD International has
knowledge of the market and its regulations, can provide assistance with financing strategies, has
relationships with buyers in the region, and so on. All of these areas of expertise take time and
money to develop. By hiring MD International manufacturers can access the expertise they need,
yet still concentrate on what they do best – manufacturing.
QUESTION 2: Why did MD International focus on Latin America? What are the benefits of this
regional approach? What are the potential drawbacks?
QUESTION 3: What would it take for MD International to start exporting to other regions such as
Asia or Europe? Given this, would you advise Al Merritt to continue his regional focus going
forward, or to add other regions?
QUESTION 4: How important has government assistance been to MD International? Do you
think helping firms like MD International represents good use of taxpayer money?
Global Business Today Ninth Edition Chapter 14
together buyers and sellers which in turn helps the export sales of U.S. manufacturers creating
more jobs for U.S. workers.
Teaching Tip: Students can learn more about MD International at
{http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=6554362}.
Continuous Case Concept
One of the issues that the world’s automakers must contend with as they search the world for the
most efficient suppliers and locate production in the most optimal location, is importing and
exporting, and the costs involved in the process. China and India have attracted significant
attention recently as both production locations and a growth markets. For suppliers, the
globalization of the industry implies that supplier operations become international too, and
consequently introduces new risks and concerns.
• Ask students to consider production in China and India. Costs have been rising for
imports, and shipping finished cars out is also becoming more expensive. Hyundai India
for example, recently shifted production of its premium hatchback to Europe to save on
import duties and transportation costs. Is there still any benefit to locating production in
China or India given these rising costs?
• Autos are an important source of exports for Central and Eastern European countries.
Numerous automakers including VW, Toyota, Peugeot, and Skoda have production
facilities in Central and Eastern European countries. What makes these countries attractive
export bases?
• As a supplier, how can you protect yourself when dealing with companies from foreign
countries? Does the fact that you are dealing with Toyota or BMW mitigate the need for
letters of credit? Why or why not?
• The U.S. Small Business Administration offers assistance to individuals wishing to become
registered vehicle importers. What types of assistance are available to suppliers seeking to
sell their products to automakers located in foreign markets?
This exercise works well as a summary for the material discussed in the chapter. The first question
can also be used as an introductory discussion. To extend the material, and incorporate the
discussion of previous chapters, ask students to develop a plan using the various web sites given
within this chapter, or ones they have found on their own, to market their products internationally.
The plan should include a description of their product, the identification of prospective customers
and their locations, a discussion of issues that could affect exporting to those destinations, and the
ways the supplier can protect itself financially.
Global Business Today Ninth Edition Chapter 14
globalEDGE Exercises
The resources for each exercise can be easily located by using the search box at the top of the
globalEDGE website at http://globalEDGE.msu.edu
Exercise 1
Search phrase: Market Potential Index
Resource Name: Market Potential Index (MPI) for Emerging Markets
Website: http://globaledge.msu.edu/mpi
globalEDGE Category: Knowledge Tools
Additional Info:
MPI is an annual ranking study, developed and maintained by the Michigan State University
CIBER to demonstrate how companies can use macro-economic variables to rank the potential of
foreign markets for identification of commercial opportunities. The ranking on the site is generic
to U.S. exporters, but MSU-CIBER has developed several industry specific or company-specific
versions of the index over the years.
Exercise 2
Search phrase: Export Tutorials
Resource Name: Export Tutorials
Website: http://globaledge.msu.edu/reference-desk/export-tutorials
globalEDGE Category: Reference Desk
Additional Info:
Export Tutorials have been developed by the globalEDGE Team based on the most commonly
asked questions about the exporting process from Small to Medium-size Enterprises. Each
question is answered briefly on the page. Links to additional resources for more detailed answers
are also provided.
Additional Readings and Sources of Information
London’s Runway Crisis Puts Pinch on Langoustine Exports
http://www.businessweek.com/news/2014-10-16/london-s-runway-crisis-puts-pinch-on-
langoustine-exports-cities
Namibia Wins New Export Markets for Beef in Russia and China
http://www.businessweek.com/news/2014-10-15/namibia-wins-new-export-markets-for-beef–in–
russia-china
Thirst for U.S. Craft Beers Boosts Demand for British Hops
Global Business Today Ninth Edition Chapter 14
http://www.bbc.com/news/business-29456440
New Export Strategy for Scottish Food and Drink to be Drawn Up
http://www.bbc.com/news/uk-scotland-scotland-business-22338828
Q&A: Gary Locke on Boosting Small Biz Exports
http://www.businessweek.com/smallbiz/content/apr2010/sb20100422_227116.htm
Entrepreneurs’ Fears May Jinx Obama’s Export Push
http://www.businessweek.com/smallbiz/content/apr2010/sb20100421_168829.htm
The Biggest Roadblock to Upping Exports
http://www.businessweek.com/smallbiz/content/mar2010/sb20100318_940081.htm
Cuba says exports of goods, services $9B in 2011
http://www.businessweek.com/ap/2012-04-17/cuba-says-exports-of-goods-services-9b-in-2011
Morocco Grabs Limelight as Companies Focus on Frontiers
http://blogs.wsj.com/frontiers/2014/10/14/morocco-grabs-limelight-as-companies-focus-on-
frontiers/?KEYWORDS=export+strategy
Exporters Fear Credit Crunch
http://online.wsj.com/articles/exporters-fear-credit-crunch-1414009553?KEYWORDS=exporting