MEC 35 - Chapter 9WD

CHAPTER IX:
Exporting, Importing and

Global Sourcing
9.1 What is Importing and Exporting?
• Importing – refers to buying of goods and services from foreign
sources and bringing them back into the home country
• Exporting – the sale of products and services in foreign countries that
are sourced or made in the home country
o Distributors – export intermediaries who represent the company in the
foreign market
Why do companies export?
• Easiest way to participate in global trade; less costly investment than
the other entry strategies; much easier to stop that it is to extricate
oneself from the other entry modes
• Export Management Company (EMC) – an independent company that
performs the duties that a firm’s export department would execute
Benefits of Exporting
• Market – company has access to a new market
• Money – gain access to foreign currency
• Manufacturing – can benefit from volume discounts therefore
minimizing manufacturing costs
Risks of Exporting
• Distributor or buyer might switch to or at least threaten to switch to a
cheaper supplier
• Someone might start making the product locally
• Local buyers sometimes believe that a company which only exports to
them isn’t very committed to providing long-term service and support
Specialized Entry Modes: Contractual
• Involves the use of contracts
Two (2) modes:

1. Licensing
2. Franchising
Licensing
• The granting of permission by the licenser to 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
• The licenser is normally paid a royalty on each unit produced and sold
• Low-risk option since there’s typically no up-front investment
Franchising
• 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
• Franchiser provides a bundle of services and products to the franchisee
Specialized Entry Modes: Investment
Two (2) modes:
1. Equity Joint Venture
2. Wholly Owned Subsidiary
Equity Joint Venture
• A contractual, strategic partnership between two or more separate
business entities to pursue a business opportunity together
• Partners in an equity joint venture each contribute capital and
resources in exchange for an equity stake and share in any resulting
profits
Risks of Joint Ventures
• Challenge of finding the right partner – not just in terms of business
focus but also in terms of compatible cultural perspectives and
management practices
• Local partner may gain the know-how to produce its own competitive
product or service to rival the multinational firm
Wholly Owned Subsidiaries
• Firms may want to have a direct operating presence in the foreign
country, completely under their control
• Company can establish a new , wholly owned subsidiary or it can
purchase an existing company in that country
• Requires the highest commitment on the part of the international firm,
because the firm must assume all of the risks
o Vertical Integration – companies may purchase a local supplier for
direct control of the supply
Cautions when purchasing an existing foreign
enterprise
• When making an acquisition, due diligence is important – not only on
the financial side but also on the side of the country’s culture and
business practices
• “Investors should choose wisely”
• Other countries tolerate corruption and corruption makes the world
less flat precisely because it undermines the viability of legal vehicles,
such as licensing, which otherwise lead to a flatter world
o Tax Haven – a country that has very advantageous (low) corporate
income taxes
Conclusion
1. How much of your resources are you willing to commit?
2. How much control do you wish to retain?
Other factors to consider:

1. Cultural and linguistic differences
2. Quality and training of local contacts and/or employees
3. Political and economic issues
4. Experience of the partner company
9.2 Countertrade
• Where companies trade goods and services for other goods and services;
actual monies are involved only to a lesser degree
• A resourceful way for exporters to sell their products and services to
foreign company or countries that would be unable to pay for them using
hard currency alone
Why?
• Some government mandate countertrade on very large-scale deals or if the
deal is in a certain industry
• Can mitigate the risk of price movements or currency-exchange-rate
fluctuations
9.2 Countertrade
• Counterpurchase – seller receives cash contingent on the seller buying
local products or services in the amount of or a percentage of the cash
Disadvantages:
• Risk of receiving inferior goods
9.3 Global Sourcing and its Role in Business
• 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 equity
• Large companies often have a staff devoted to overseeing the
company’s overseas sourcing process and suppliers, managing the
relationships, and handling legal, tax and administrative issues
Judging Quality from Afar
• International Organization of Standardization (ISO) certification – this
certifies a company’s products and services have met quality standards
and that the company has quality management processes in place
• Some companies require that their suppliers be certified before they
will source products or services from them
Companies have learned to manage for quality and consistency:

1. Unannounced inspections
2. Avoid disruption in getting goods
3. Evaluate supplier performance
Trends in Sourcing: Considering Carbon
Costs
• Carbon footprint – measure of impact that activities like
transportation and manufacturing have on the environment,
especially climate change
Outsourcing
• The company delegates an entire process to an outsource vendor; the vendor
takes control of the operation and runs the operations as it sees fit
Reasons:
1. Reduce costs by moving labor to a lower-cost country
2. Speeds up the pace of innovation
3. Funds development projects
4. Liberating expensive home-country based engineers and salespeople from
routines tasks
5. Puts a standard business practice out to bid, in order to lower costs and let
the company respond with flexibility
Outsourcing
• Hidden costs: the risks involved
• Contract manufacturing – companies have less control over manufacturing than they did when they
owned the factories
Managing Outsourced Services
1. Scope of Services
• Frequency of service
• Quality expected
• Timing required
2. Cost of Service
3. Communications
• Dispute-resolution procedures
• Reporting and governance
• Key contacts
4. Performance-improvement objectives
Who are the main actors in export and
import?
• Documentation – official forms that must be presented to satisfy the import
and export regulations of countries and for payment to be processed
• Exporter and Importer
• Carrier - the entity handling the physical transportation of the goods
• Customs – administration offices in both the home country and the country
to which the item is being exported are involved in the transaction
• Freight Forwarder – typically prepares the documentation, suggests
shipping methods, navigates trade regulations, and assists with details like
packing and labeling
What’s needed for import and export
transactions?
• Bill of Lading – the contract between the exporter and the carrier
• Commercial or customs invoice – the bill for the goods shipped from the
exporter to the importer or buyer
• Export declaration – this provides the contact information for both the exporter
and the importer as well as a description of the items being shipped
• Certificate of origin – declares the country from which the product originates
• License – permission to export goods due to national security or product scarcity
• Letter of credit – legal document issued by a bank at the importer’s request; the
importer promises to pay a specified amount of money when the bank receives
documents about the shipment
How companies receive or pay for goods and
services
• Draft/bill of exchange – document by which the exporter tells the importer to pay
a specified amount at a specified time
• Sight Draft – paid on receipt of the draft when it is seen
• Time Draft – payable at a later time, typically 30, 60, 90 or 120 days in the future
as specified by the time draft
• Factoring – the exporter sells the draft at a discount to an intermediary (often a
bank) that will pay the exporter immediately and then collect the full amount
from the importer at the specified later date
• Cash in Advance
• Open Account – direct contrast to cash in advance; an arrangement in which the
exporter ships the goods and then bills the importer
Basics of Export Financing
• Secured Financing – financing against collateral
Common Sources:
1. A loan from a commercial bank
2. A loan from an intermediary
3. A loan from a supplier
4. A loan from the corporate parent
5. Government or other organizational financing

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CHAPTER IX:

Exporting, Importing and

Two (2) modes:

Other factors to consider:

Companies have learned to manage for quality and consistency:

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