MODULE

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MODULE G ALS FLEX Course Material
 To analyze why INTERNATIONAL BUSINESS
companies resort into
exporting and importing. AND TRADE
 To appraise the role and
impact of global
outsourcing into business.
ORGANIZATION
Export, Import and Global Sourcing
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 Introduction
• A major part of international business is importing and
exporting.
• An increase in the level of exports and imports is one of the
symptoms of a flattening world. In a flat world, goods and
services can flow fluidly from one part of the globe to
another.
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 History
• Importing and exporting started during the Roman Empire.
• Trading along the Silk Road flourished during the thirteenth and fourteenth
centuries
• Caravans laden with imports from China and India came over the desert to
Constantinople and Alexandria. From there, Italian ships transported the goods
to European ports.
• Importing and exporting involved intermediaries, due to the long distances
traveled and different native languages spoken
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(J. O. Swahn, The Lore of Spices (Gothenburg, Sweden: Nordbok, 1991

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 Exporting and Importing

• Exporting refers to the sale of goods or services produced by a

company based in one country to customers that reside in a
different country.
• Importing is the converse: the purchase of products by a
company based in one country from sellers that reside in
another.
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 Environmental Factors Influencing Export and Import
Operations
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 Exporting
An effective entry strategy for companies that are just
beginning to enter a new foreign market.
Low-cost, low-risk option compared to the other
strategies.
Requires less expertise, time, and capital than other
modes of entry
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 Exporting (cont)
Operational control
Helps companies expand and diversify sales as well as achieve
economies of scale
Companies can sell into a foreign country either through a
local distributor or through their own salespeople.
Distributors are export intermediaries who represent the
company in the foreign market.
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 Questions to Consider

Companies typically consider the following in evaluating the export option:

• What do we want to gain from exporting?
• Is exporting consistent with our goals?
• Will exporting put undue demands on our resources? If so, how will we meet them?
• Does exporting leverage our core competency?
• Does exporting fit the current configuration of our value chain?
• Do our coordination systems support the needs posed by exporting?
• Are the projected benefits of exporting worth the costs?
• Would our resources be better used to develop new domestic business?
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 Phases of Export Development
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 Designing an Export Strategy

1. Assess the company’s export potential by examining its

opportunities and resources.
2. Obtain expert counseling on exporting.
3. Select a market or markets.
4. Formulate and implement an export strategy.
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 Risks of Exporting

• Distributor or buyer might switch to or at least threaten to switch to a

cheaper supplier in order to get a better price.
• Product Imitation. Another might start making the product locally
and take the market.
• Market Distrust. Local buyers sometimes believe that a company
which only exports to them isn’t very committed to providing long-
term service and support once a sale is complete.
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 Specialized Entry Modes: Contractual

Contractual modes or investment modes. Contractual modes involve the use of contracts rather than investment.

Two main contractual entry modes, licensing and franchising.

Licensing
• The granting of permission by the licenser to the licensee to use intellectual property rights, such as trademarks, patents, brand names,
or technology, under defined conditions.

• Creates a legal vehicle for taking a product or service delivered in one country and providing a nearly identical version of that product or
service in another country.

• Under a licensing agreement, the multinational firm grants rights on its intangible property to a foreign company for a specified period of
time.

• The licenser is paid a royalty on each unit produced and sold.

• Multinational firm usually has no ownership interests, it often provides ongoing support and advice.
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• Considered to be a a low-risk option because there’s typically no up-front investment.

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 Specialized Entry Modes: Contractual

Contractual modes or investment modes. Contractual modes involve the use of contracts rather than
investment.

Two main contractual entry modes, licensing and franchising.

Franchising

• Similar to a licensing agreement, under a franchising agreement, the multinational firm grants rights on its
intangible property, like technology or a brand name, to a foreign company for a specified period of time and
receives a royalty in return. The difference is that the franchiser provides a bundle of services and products
to the franchisee
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 Specialized Entry Modes: Investment

Beyond contractual relationships, firms can also enter a foreign market through
one of two investment strategies: a joint venture or a wholly owned subsidiary.
• Joint Ventures

An equity joint venture is a contractual, strategic partnership between two or more separate business entities to pursue a
business opportunity together.

The partners in an equity joint venture each contribute capital and resources in exchange for an equity stake and share in
any resulting profits. (In a nonentity joint venture, there is no contribution of capital to form a new entity.)

• Wholly Owned Subsidiaries

Firms may want to have a direct operating presence in the foreign country, completely under their control. To achieve this,
the company can establish a new, wholly owned subsidiary (i.e., a greenfield venture) from scratch, or it can purchase an
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existing company in that country

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 Key Questions
When deciding which mode of entry to choose, companies should ask themselves two key questions:

• How much of our resources are we willing to commit?

The fewer the resources (i.e., money, time, and expertise) the company wants (or can afford) to devote, the
better it is for the company to enter the foreign market on a contractual basis—through licensing, franchising,
management contracts, or turnkey projects.

• How much control do we wish to retain? The more control a company wants, the better off it is establishing
or buying a wholly owned subsidiary or, at least, entering via a joint venture with carefully delineated
responsibilities and accountabilities between the partner companies.
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 Regardless of which entry strategy a company chooses, several factors are always important.

• Cultural and linguistic differences.

• Quality and training of local contacts and/or employees.

• Political and economic issues. Policy can change frequently, and companies need to determine what level of
investment they’re willing to make, what’s required to make this investment, and how much of their
earnings they can repatriate.

• Experience of the partner company. Assessing the experience of the partner company in the market—with
the product and in dealing with foreign companies—is essential in selecting the right local partner.
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 Import Strategy

There are three types of importers:

• Those looking for any product around the world to import and
sell.
• Those looking for foreign sourcing to get their products at the
cheapest price.
• Those using foreign sourcing as part of their global supply
chain.
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 Advantages of Importing

• Specialization of Labor
• Global Rivalry
• Local Unavailability
• Diversification of Operating Risks
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 Future: The Technology of Trade

• Advances in transportation and communication increases trade

• Collaborative software allows smaller companies to engage in
international trade more efficiently
• 3rd Party Logistics
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 The Export Process

Principal types of exporting:

• Direct—products sold to an independent party outside of the
exporter’s home country.
• Indirect exports—products sold to an intermediary in the
domestic market, which then sells the goods in the export
market.
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 Indirect Selling

• Export Intermediaries
• Export Management Companies: operate on a contractual basis—
usually as an agent of the exporter.
• Export Trading Companies: operate based on demand rather than
supply. They identify suppliers who can fill orders in overseas markets.
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 Direct Selling

• Direct selling involves sales representatives, distributors, or

retailers.
• Direct Selling to Foreign Retailers and End Users
• Direct Selling over the Internet
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 Freight Forwarders

A foreign freight forwarder is an export or import specialist

dealing in the movement of goods from producer to consumer.
• Primary transportation modes include:
• Surface freight (truck and rail), ocean freight, and airfreight.
• Intermodal transportation—the movement across different modes from
origin to destination.
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 Counter-trade

This 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, in payment for its products.
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 • Companies engage in countertrade for three main reasons: (1) to
satisfy a foreign-government mandate, (2) to hedge against price and
currency fluctuations, and (3) to repatriate profits from countries that
limit the amount of currency that can be taken out of the country.
• Barter is a structure of countertrade that has been around for
thousands of years and continues today. Counterpurchase is a
countertrade structure that involves the seller receiving cash
contingent on the seller buying local products or services in the
amount of (or a percentage of) the cash.
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 Global Sourcing

• Global sourcing refers to buying the raw materials, components, or services from
companies outside the home country. In a flat world, raw materials are sourced
from wherever they can be obtained for the cheapest price (including
transportation costs) and the highest comparable quality.
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 Advantages to Outsourcing

• Reducing costs by moving labor to a lower-cost country

• Speeding up the pace of innovation by hiring engineers in a developing market at much lower cost

• Funding development projects that would otherwise be unaffordable

• Liberating expensive home-country-based engineers and salespeople from routines tasks, so that they can
focus on higher value-added work or interacting with customers

• Putting a standard business practice out to bid, in order to lower costs and let the company respond with
flexibility. If a new method of performing the function becomes advantageous, the company can change
vendors to take advantage of the new development, without incurring the delays of hiring and training new
employees on the process.
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