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CHAPTER FOURTEEN
EXPORT AND IMPORT
OBJECTIVES
14-1 Explain the principles and practices of exporting
14-2 Articulate the motivations and methods of exporting
14-3 Understand export startup and expansion
14-4 Explain the principles and practices of importing
14-5 Articulate the motivations and methods of importing
14-6 Describe the problems and pitfalls that challenge international traders
14-7 Differentiate the resources and assistance that help international traders
14-8 Define the standards of an export plan
14-9 Distinguish the principles and practices of countertrade
CHAPTER OVERVIEW
The first part of Chapter Fourteen is devoted to an examination of export and import
strategies. Next, the roles of a wide variety of third-party intermediaries are discussed.
The chapter concludes with a discussion of the major issues related to export financing,
including the use of countertrade as a form of payment mechanism.
CHAPTER OUTLINE
OPENING CASE: SpinCent: The Decision to Export
SpinCent is a small Pennsylvania exporter of laboratory and industrial centrifuges. The
company was initially a passive exporter. However, a struggling U.S. economy provided
the incentive for the company to focus on international markets. The Asia market became
a prime target for the organization. Management looked to develop long-term beneficial
relationships with a distribution network in the region. The company did its homework
and spent time in the region identifying market potential, competition, price points, and
recruiting a sales force. The company discovered that exporting to the region provided
more opportunities than risks. They now do a steady stream of business overseas,
experiencing low-cost/high-reward endeavor. Successful planning and a commitment to
goals are advocated by the organization.
I. INTRODUCTION
Export and import are, by far, the most common modes of international business. The
scale and scope of firms that trade steadily increases. The popularity of export and
import follows from their key advantages. Both are straightforward, low-cost, and
quick means to engage foreign markets. Both impose minimum business risk and
require relatively low resource commitment. Moreover, whether large or small,
international trade helps companies improve productivity, increase profits, and
diversify risk.
II. EXPORTING: PRINCIPLES AND PRACTICES
A. Exporting
Exporting is the sale of goods or services produced by a firm based in one
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country to customers that reside in another country. Service exports occur across
a range of industry sectors. However, the sometimes hazy standards of a service
make it a bit tougher to define what qualifies as an export. Technically, a service
need not physically leave a country to qualify as an export. Rather, it need only
earn foreign currency.
B. Who Are Exporters?
Types of exporters include (1) non-exporter, (2) sporadic exporter, and (3)
regular exporter.
1. Non-Exporter. This sort of company commands little to no knowledge
about exporting and often has no interest in international trade.
2. Sporadic Exporter. This type of company takes a passive approach to
assessing international trade options. It fills an unsolicited order from the
occasional foreign buyer, but prefers to focus on the domestic market.
3. Regular Exporter. The company that aggressively pursues exports sales as
a productive, profitable, strategic activity is a regular exporter. It’s
experienced with the technicalities of international trade. Regular exporters
look to international markets for growth, invest resources to expand export
operations, and proactively respond to export signals.
C. The Matter of Advantages
1. Ownership advantages are the firm’s specific assets, international
experience, and the ability to develop either low-cost or differentiated
products within the context of its value chain.
2. Location advantages refer to the combination of sales opportunity and
investment risk that creates favorable locations in foreign markets.
3. Internalization advantages are the benefits of retaining a core
competency within the company and threading it through the value chain
rather than opting to license, outsource, or sell it. In general, companies
that have low levels of ownership advantages either do not enter foreign
markets or, if they do, they enter through low-risk modes.
D. Characteristics of Exporters
While the largest companies are routinely the largest exporters from their
countries, smaller firms play an important part in overall export activity. In the
United States, SMEs account for 97.8 percent of all exporters and 97.2 percent
of all importers. Too, SMEs claim 33.7 percent and 31.6 percent of the total
value of export and import, respectively. Unquestionably, firm size helps explain
who exports. It does not, however, determine who exports. Rather than size,
research finds that characteristics such as core competencies, competitive prices,
efficient production, executive leadership, and effective marketing better predict
export activity than does firm size. In summary, firm size influences a
company’s inclination to initiate or escalate exporting. Oftentimes, however,
other features matter far more than firm size.
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III. EXPORTING: MOTIVATION AND METHODS
Study of export scenarios identifies many motivators. Ultimately, the export decision
centers on improving profitability, boosting productivity, and achieving
diversification.
A. Profitability
Exporting opens opportunities to increase profits. Often, companies sell their
products for higher prices abroad than at home. Foreign markets may lack
competitive alternatives. Or, they may be in different stages of the product’s life
cycle.
B. Productivity
Exporting helps companies improve productivity, creating options to use scarce
resources, such as capital and labor, more efficiently. Productivity is often linked to
increasing economies of scale; exploiting capacity or spreading costs over more
customers improves efficiency. Hence, selling more products to more people in more
markets drives productivity gains.
C. Diversification
Exporting diversifies activities, thereby fortifying a firm’s adaptability to business
cycles and disruptive innovations.
IV. EXPORT: START-UP AND EXPANSION
Research studies how, when, and why a company initiates and develops exporting.
Two views of export shape interpretation: the deliberate, sequential dynamic of
incremental internationalization and the instant internationalization of the born global.
A. Profitability
This view, developed in the 1980s and 1990s, sees physical distance, cultural
ties, and market circumstances fundamentally shaping how a company
approaches and engages export. Specifically, export activity follows a sequential
process that leads a company to sell initially from its home market to
geographically and psychologically proximate countries. From there, it
methodically expands, systematically exporting to more dissimilar and distant
countries.
B. The Born-Global Phenomenon
The international entrepreneurship literature reports that that some firms initiate
exporting as a born global (also known as an “instant international,”
micronational, or “international new venture”). Rather than methodically
engaging a sequence of increasingly dissimilar foreign markets, born globals step
onto the world stage immediately upon their founding or soon after. They regard
their home as just one of many opportunities in the world.
C. The Influence of Time and Place
Neither the incremental-international nor born-global perspective definitively
represents how companies initiate and increase exporting. Company practices
confirm that each credibly interprets elements of the export process. Trade data
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suggest an increasing interaction between the incremental-international and
born-global perspectives.
D. The Wildcard of Serendipity
Exporters are often proactive decision-makers. Sometimes, however, serendipity
—making fortunate discoveries by accident—initiates export activity.
E. Approaches to Exporting
Generally, the ease of exporting reflects how a company chooses to serve foreign
customers. As we now see, there are several options.
1. Direct Exporting. Exporting directly involves independent representatives,
distributors, or retailers outside of the exporter’s home country.
2. Indirect Exporting. Indirect exports are products sold to an intermediary in
the home market, which then exports those products to other countries.
3. Passively Filling Orders from Domestic Buyers Who Then Export the
Product. In this mode, a company supplies inputs to other firms who then
use that as a component in making a product that they then export.
F. Which Approach When?
Several factors shape an SME’s preferred approach to export, notably its mix of
ownership, location, and internalization advantages.
1. The Influence of Technology. Technology influences the relative merits
of the various export approaches. The Internet makes direct exporting
increasingly efficient and effective by providing immediate, low-cost
means that lets regular exporters, particularly born globals, easily access
more markets.
2. Mix-and-Match. The four approaches to exporting are not mutually
exclusive; company and market circumstances moderate whether
managers opt to apply one or a mix.
POINT-COUNTERPOINT:
Exporting E-Waste: A Fair Solution
POINT: E-waste—trash composed of computers, monitors, electronics, game consoles,
hard drives, television, smartphones, and other items—inexorably increases as the
Information Age rolls on. In 2006, nearly 66 million used electronic components were
collected for reuse or recycling in the United States; most were exported. By 2016,
e-waste was pushing several hundred million pieces, representing more than 4 million
tons.
Disposal costs for hazardous waste in developing countries are fractions of the cost in
wealthier countries, and exporting the waste allows manufacturers to take responsibility
for their products from cradle to grave. Entrepreneurs in developing countries can create
value by recovering, recycling, and reusing scarce resources. Certainly, callous
companies dump useless, toxic e-waste around the world. And, yes, some of it pollutes
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landfills, poisons waterways, and fouls the air. Overall, though, exporting e-waste works
for citizens, consumers, companies, and countries.
COUNTERPOINT: Hazardous waste exports have created dangerous recycling industries
in many countries. Electronic waste is a mixture of more than a thousand chemicals,
many of which are toxic. Recyclers in developing countries also often have appalling
and dangerous working conditions for their employees and create harmful contaminated
water runoffs and air pollution in the process. As of 2015, 182 states
and the European Union had ratified the Basel Convention, which adopts aggressive
measures limiting the export of hazardous wastes. Haiti and the United States have signed
the Convention but not ratified it.
V. IMPORTING: PRINCIPLES AND PRACTICES
Importing is the purchase of a good or service by a buyer in Country X—the importer
—from a seller in Country Y—the exporter. Effectively, importing is the reverse of
exporting. The import of services has subtle characteristics. The standard to keep in
mind is that the import of a service consists of any transaction that (1) does not result
in ownership and (2) is rendered by nonresidents to residents.
A. Characteristics of Importers
Wide-ranging research has assessed the characteristics of exporters; for various
reasons, however, importers receive less attention. Still, data indicate that
importers are also likely to be exporters, and that these firms account for the bulk
of the world’s exports and imports. On fundamental points, the characteristics of
exporters apply to importers.
VI. IMPORTING: MOTIVATION AND METHODS
Several reasons motivate importing: (1) Specialization of labor, (2) Global rivalry, (3)
Local unavailability, (4) Diversification, and (5) Top management’s outlook.
A. Import Drivers
1. Specialization of Labor. The specialization of labor is a powerful force to
improve productivity. It benefits the import potential and performance of
SMEs and large firms.
2. Input Optimization. Companies import goods from foreign suppliers in
order to lower costs. This is imperative in industries where competitive
rivalry imposes persistent cost pressures
3. Local Unavailability. The WTO identifies the expanded scope of choice as
the chief benefit of import. Importing lets local markets improve the variety
of their offerings, providing consumers with products that are either
unavailable locally or that can serve as competitive substitutes to local
options.
4. Diversification. Importers, like exporters, diversify by tapping international
markets to develop options. Diversification through importing lets
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companies find higher-quality, lower-cost products and services, thereby
making it less vulnerable to the dictates of a local supplier or business cycle.
B. Who Are Importers
1. Input Optimizers. This type of importer uses foreign sourcing to optimize,
in terms of price or quality, the inputs fed into its supply chain.
2. Opportunistic. This type of importer looks for products around the world
that it can import and profitably sell to local citizens.
3. Arbitrageurs. In theory, a good sold in one market should sell for the same
price in another.
VII. IMPORTING AND EXPORTING: PROBLEMS AND PITFALLS
Companies identify many problems that complicate international trade. The types,
characteristics, and impact of trade barriers vary considerably. Regular, as well as
sporadic, exporters struggle with various barriers. Let’s take a look at persistent
concerns. [see Table 14.1].
A. Financial Risks. Financial constraints may be the greatest impediment to
international trade.
B. Customer Management. Customers around the world are increasingly
demanding a greater range of services from their vendors. Customers may
require the installation and setup of equipment, which may require service
engineers in the foreign market.
C. International Business Expertise. International traders, like most managers
dealing with foreign markets, must understand local business practices. Ordinary
as well as idiosyncratic problems include limited knowledge of local rivals,
unfamiliarity with local regulations, uncertainty about the prevailing
price-to-quality standards, difficulty optimizing transportation and insurance
options, and questions about market channels, promotion tactics, and consumer
behavior. Firms that struggle to interpret export markets typically exit
international trade.
D. Marketing Challenges. Firms may experience higher shipping costs and
logistical problems, as well as problems with distribution networks and poor
marketing/distribution connections in the foreign market.
E. Top Management Commitment. Exporting and importing put tough demands
on management. Rare is the firm that eagerly adjusts its customary practices for
foreign business standards. As a result, top management often emphasize
domestic sales, duly noting the intention to export down the road.
F. Government Regulation. Despite attempts to reduce international trade
barriers, there remains a myriad of governmental restrictions and regulations that
can delay or inhibit trade.
G. Trade Documentation. A battery of documentation is still required for
international trade. [see Table 14.2].
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VIII. EXPORTING AND IMPORTING: RESOURCES AND ASSISTANCE
Many firms find themselves in situations where assistance can meaningfully
influence the productivity and profitability of their international activities. They can
enlist aid from various public or private agents.
A.Public Agencies
In the United States, as in most countries, public agencies help firms initiate and
develop exports and imports.
1. Agents and Services. In the United States, SMEs can start at the nearest
Commercial Service office, the trade promotion arm of the U.S. Department
of Commerce’s International Trade Administration. U.S. government
agencies provide information and share advice on the practicalities and
technicalities of exporting.
B.Private Agents
Companies routinely enlist private agents to help navigate international trade.
Prominent types include export intermediaries, freight forwarders, customs
brokers, World Trade Centers, and international banks.
1. Export Management Companies. An export management company
(EMC) is a firm that either acts as a manufacturer’s agent or buys
merchandise from manufacturers for international distribution. EMCs
generally operate on a contractual basis, provide exclusive representation in
a well-defined foreign territory and act as the export arm of a manufacturer.
Often, export management companies are small and specialize according to
product, function, and/or market area.
2. 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 United States may be exempt from antitrust provisions
to allow them to penetrate foreign markets by collaborating with other U.S.
firms. The primary difference between ETCs and EMCs is that ETCs tend to
operate on the basis of demand rather than supply.
3. Freight Forwarders. A freight forwarder is a foreign trade specialist who
deals in the movement of goods from producer to customer, and is the largest
export intermediary in terms of value and weight of products managed. Even
export management companies may use the specialized services of foreign
freight forwarders.
4. Third-Party Logistics (3PLs). These entities work with manufacturers,
shippers, and retailers to mitigate the problems associated with logistics in
international trade.
5. Custom Brokers. Customs reflect a country’s 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
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enforcement of customs and related laws, and the administration of certain
navigation laws and treaties.
6. The Costs and Constraints of Private Agents. Besides payments, hiring a
trade intermediary requires an exporter relinquish some, or even
considerable, decision-making control regarding shipping, buyer segments,
price policies, quality of promotion materials, delivery schedules, or
customer service. Longer terms, supportive governments, fading language
barriers, improving communications and connections, harmonizing finance
practices, and efficient electronic exchange steadily diminish the appeal of
fee-based trade agents.
IX. RECONCILING OPPORTUNITY AND CHALLENGE: AN EXPORT PLAN
Going international imposes many demands that, collectively, influence resource
allocation, executive effectiveness, operational flexibility, and financial stability.
Successful exporters, citing the notion that “companies don’t plan to fail, they fail to
plan,” indicate that developing an export plan manages these demands. An export
plan defines a company’s intent to leverage resources and manage constraints in
initiating and developing export activity. An export plan prioritizes markets,
formalizes top management buy-in, organizes trade activities, and forecasts market
scenarios. Traders stress-test an export plan by consulting trade specialists along with
public and private agents.
LOOKING TO THE FUTURE:
Technology Transforms International Trade
Advances in transportation and communications systems steadily facilitate export growth
and make it easier for companies to reach international markets. The Internet
helps individuals engage each other easily and quickly. Online filing of cargo manifests,
customs documents, and transit forms expedites shipments. Improving technologies
create online, software, and logistics platforms that blur the distinction between the big,
global giant and the small, neighborhood start-up. A burst of business software in the past
few years has “created a total revolution in what small businesses are able to accomplish
overseas.” Companies use innovative programs to manage overseas factories with tools
that once were reserved for big MNEs. Improving logistics help SMEs move products
more cheaply and easily to more places. High-tech, low-cost shipping services rob big
firms of a long-running advantage. Now, the no-name, one-person exporter down the
street from you, because of its big-name shipping partners spanning the globe, has many
of the same logistics capabilities commanded by a large MNE, but at a fraction of the
cost. Improving online, software, market, and logistics platforms, by improving the
technology of buying and selling, levels the playing field of international trade.
X. COUNTERTRADE
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Companies and countries often use countertrade to build mutually beneficial
relationships. Countertrade is an umbrella term for several sorts of trade, such as barter or
offset, in which the seller accepts goods or services, rather than currency or credit, as
payment.
1. Costs. Countertrade is an inefficient way of doing business. Companies prefer
straightforward cash or credit to settle a transaction. Negotiating “payment” is not
the only hurdle. Goods may be of poor quality, packaged unattractively, or
difficult to sell and service. Consequently, countertrade deals are prone to price,
financing, and quality problems. Ultimately, countertrade and its variations
threaten free market forces with indirect protectionism and price-fixing.
2. Benefits. Companies and countries in tough binds use it to generate jobs, preserve
foreign-exchange holdings, and develop trade relationships. Countertrade helps
countries reduce their need to borrow working capital and gives them access to
companies’ technological skills and marketing expertise. Companies also benefit;
they can resolve bad debts, repatriate blocked funds, or develop customer
relationships. Accepting countertrade signals a seller’s good faith and flexibility,
often positioning it to gain preferential market access in the future.
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