978-0134200057 Chapter 14 Lecture Notes

Unlock access to all the studying documents.

View Full Document

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

14-1

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.

14-2

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

14-3

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

14-4

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

14-5

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].

14-6

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

14-7

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

14-8

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.

14-9