Chapter 16 – Exporting, Importing, and Countertrade

What are the promises and risks associated with exporting?
By opening up and exporting to an international market, a firm is able to increase its revenue and profit base. As a result, the firm might be able to realize economies of scale and lower their unit costs. The reason many firms avoid exporting internationally is because of ignorance or bad experiences, often due to poor market analysis, poor understanding of competitive conditions in foreign markets, a failure to customize products according to demands of foreign customers, lack of proper distribution and failure to secure financing. Exporting can also be costly due to the amount of time necessary to spend on paperwork as well as necessary differentiation of products to achieve better sales opportunities abroad.
What steps can managers take to improve their firm’s export performance?
– International comparisons
By collecting the necessary information, companies can overcome the lack of knowledge of foreign markets that often prevents firms from exporting.

– Information sources
By using different information sources, firms can gain better knowledge through foreign market research as well as guidance in how to attack a specific foreign market. These information sources can also provide valuable information about marketing and distribution channels as well as trade events and special assistance.

– Service providers
There are several companies that specialize in providing services for firms wanting to start exporting. An EMC, export management company, offers all kinds of options from conducting the full export from production to retailer or distributor, or just one step in the exporting process. Furthermore, there are plenty of different companies that provide similar services.

– Export strategy
Hiring an EMC or at least someone to help navigate all the paperwork and regulations is useful in the beginning as well as focusing on one market or just a handful of markets. It can be a good idea to enter a market on a small scale to reduce costs of failure and allow more time and opportunity to learn about the market. Recognize the time and managerial commitment involved in building export sales.
– Globaledge diagnostic tools

What information sources and government programs exist to help exporters?
– Export-Import Bank
Established to assist financing of U.S exports of products and services.
– Export Credit Insurance
When letters of credit are not an option, the exporter is exposed to the risk of not receiving a payment. It can then buy so called export credit insurance which will cover the major losses of an unreceived payment.
What are the basic steps involved in export financing?
The lack of trust that arises when firms have to trust strangers with their goods and no certainty of payments have made for the creation of some financing instruments. What firms can do, rather than sending goods or money directly, is to take help from a third party, normally a reputable bank, that is trusted by both. This bank then holds the payment until the importer has received and checked the exported goods.

– Letter of credit
The center of commercial transactions. The L/C is issued by the bank upon the request of an importer and states that the bank will pay a specified sum to the exporter once the importer has received its products. The letter of credit helps overcome the lack of trust issues.

– Draft/Bill of exchange
An order written by an exporter to instruct the importer to pay a specified amount to the exporter before a set date. Time drafts allow for a delay in payment, while sight drafts need payment upon presentation.

– Bill of lading
Is issued to the exporter by the one responsible of transportation and functions as a receipt, a contract and document of title.
The typical international trade transaction
Involving the exporter, importer and two reputable banks through which payments are done.

How can countertrade be used to facilitate exporting?
Countertrade is an alternative option when export payments using money is difficult to execute, meaning countertrade is the principle of trading goods and services for other goods and services. The reason countertrade has gained popularity is because it widens the international market, making it possible for firms to trade with countries that otherwise could not enter into trade agreements due to lack of capital.
There are several types of countertrade agreements; barter, counterpurchase, offset, switch trading and compensation or buybacks. These vary in how the payment procedure functions, being either a direct switch of goods and services for other goods and services, buying back material from the importing firm, buying back material from any firm of the same country as the importing firm, receiving credits and using a trading house to sell the counterpurchase credit to or receiving a certain output of a plant as payment.
Countertrade is a good way to overcome the barriers of missing capital, but from a general perspective, capital is always preferred as payment, since the alternative payments might not be what the firm really needs or wants or is of bad quality and therefore not disposable.