International Business

An Asian Perspective
By
Charles W.L. Hill
Chow-Hou Wee
Krishna Udayasankar
 Chapter 15

Exporting, Importing,
and Countertrade

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
 Why Export?
 Exporting is a way to increase market size and profits
 increasing thanks to lower trade barriers under the WTO and
regional economic agreements such as the EU and NAFTA
 Large firms often proactively seek new export
opportunities, but many smaller firms export reactively
 often intimidated by the complexities of exporting
 Exporting firms need to
 identify market opportunities
 deal with foreign exchange risk
 navigate import and export financing
 understand the challenges of doing business in a foreign market

15-3
 What Are The
Pitfalls Of Exporting?
 Common pitfalls include
 poor market analysis
 poor understanding of competitive conditions
 a lack of customization for local markets
 a poor distribution program
 poorly executed promotional campaigns
 problems securing financing
 a general underestimation of the differences and
expertise required for foreign market penetration
 an underestimation of the amount of paperwork and
formalities involved

15-4
 How Can Firms Improve
Export Performance?
 Many firms are unaware of export opportunities
available
 Firms need to collect information
 Firms can get direct assistance from some
countries and/or use an export management
companies
 both Germany and Japan have developed extensive
institutional structures for promoting exports
 Japanese exporters can use knowledge and contacts of
sogo shosha - great trading houses
 U.S. firms have far fewer resources available

15-5
 What Are Export
Management Companies?
 Export management companies (EMCs) are export
specialists that act as the export marketing department
or international department for client firms
 EMCs normally accept two types of assignments
1. They start export operations with the understanding that
the firm will take over after they are established
 not all EMCs are equal—some do a better job than others
2. They start services with the understanding that the EMC
will have continuing responsibility for selling the firm’s
products
 but, firms that use EMCs may not develop their own export
capabilities

15-6
 How Can Firms Reduce
The Risks Of Exporting?
 To reduce the risks of exporting, firms should
 hire an EMC or export consultant to identify
opportunities and navigate paperwork and regulations
 focus on one, or a few, markets at first
 enter a foreign market on a small scale in order to
reduce the costs of any subsequent failures
 recognize the time and managerial commitment
involved
 develop a good relationship with local distributors and
customers
 hire locals to help establish a presence in the market
 be proactive
 consider local production

15-7
 How Can Firms Overcome The
Lack Of Trust in Export Financing?
 Because trade implies parties from different
countries exchanging goods and payment the issue
of trust is important
 Exporters prefer to receive payment prior to
shipping goods, but importers prefer to receive
goods prior to making payments
 To get around this difference of preference, many
international transactions are facilitated by a third
party - normally a reputable bank
 By including the third party, an element of trust is
added to the relationship

15-8
 How Can Firms Overcome The
Lack Of Trust in Export Financing?
The Use Of A Third Party

15-9
 What Is A Letter Of Credit?
A letter of credit is issued by a bank at the
request of an importer and states the bank
will pay a specified sum of money to a
beneficiary, normally the exporter, on
presentation of particular, specified
documents
main advantage is that both parties are likely to
trust a reputable bank even if they do not trust
each other

15-10
 What Is A Draft?
 A draft (also called a bill of exchange) is an order
written by an exporter instructing an importer, or
an importer's agent, to pay a specified amount of
money at a specified time
 the instrument normally used in international
commerce for payment
 A sight draft is payable on presentation to the
drawee while a time draft allows for a delay in
payment - normally 30, 60, 90, or 120 days

15-11
 What Is A Bill Of Lading?
 The bill of lading is issued to the exporter by
the common carrier transporting the
merchandise
 It serves three purposes
1. It is a receipt - merchandise described on document
has been received by carrier
2. It is a contract - carrier is obligated to provide
transportation service in return for a certain charge
3. It is a document of title - can be used to obtain
payment or a written promise before the
merchandise is released to the importer

15-12
How Does An International
Trade Transaction Work?
A Typical International Trade Transaction

15-13
 Where Can Firms
Get Export Assistance?
1. Financing aid is available from the Export-
Import Bank (Eximbank) or equivalent agency
in different countries
 provides financing aid to facilitate exports, imports,
and the exchange of commodities between the U.S.
and other countries
 achieves its goals though loan and loan guarantee
programs
2. Export credit insurance - provides coverage
against commercial risks and political risks
 protects exporters against the risk that the importer
will default on payment

15-14
 What Is Countertrade?
 Countertrade refers to a range of barter-like
agreements that facilitate the trade of goods and
services for other goods and services when they
cannot be traded for money
 emerged as a means purchasing imports during
the1960s when the Soviet Union and the Communist
states of Eastern Europe had nonconvertible currencies,
 grew in popularity in the 1980s among many
developing nations that lacked the foreign exchange
reserves required to purchase necessary imports
 notable increase after the 1997 Asian financial crisis

15-15
 What Are The Forms
Of Countertrade?
 There are five distinct versions of countertrade
1. Barter - a direct exchange of goods and/or services
between two parties without a cash transaction
 the most restrictive countertrade arrangement
 used primarily for one-time-only deals in transactions with
trading partners who are not creditworthy or trustworthy
2. Counterpurchase - a reciprocal buying agreement
 occurs when a firm agrees to purchase a certain amount of
materials back from a country to which a sale is made
3. Offset - similar to counterpurchase insofar as one party
agrees to purchase goods and services with a specified
percentage of the proceeds from the original sale
 difference is that this party can fulfill the obligation with any firm in the
country to which the sale is being made

15-16
 What Are The Forms
Of Countertrade?
4. A buyback occurs when a firm builds a plant in a
country—or supplies technology, equipment, training, or
other services to the country—and agrees to take a
certain percentage of the plant’s output as a partial
payment for the contract
5. Switch trading - the use of a specialized third-party
trading house in a countertrade arrangement
 when a firm enters a counterpurchase or offset agreement with a
country, it often ends up with counterpurchase credits which
can be used to purchase goods from that country
 switch trading occurs when a third-party trading house buys the
firm’s counterpurchase credits and sells them to another firm
that can better use them

15-17
 What Are The
Pros Of Countertrade?
Countertrade is attractive because
it gives a firm a way to finance an export deal
when other means are not available
it give a firm acompetitve edge over a firm that
is unwilling to enter a countertrade agreement
In some cases, a countertrade arrangement
may be required by the government of a
country to which a firm is exporting goods
or services
15-18
 What Are The
Cons Of Countertrade?
 Countertrade is unattractive because
 it may involve the exchange of unusable or poor-quality
goods that the firm cannot dispose of profitably
 it requires the firm to establish an in-house trading
department to handle countertrade deals
 Countertrade is most attractive to large, diverse
multinational enterprises that can use their
worldwide network of contacts to dispose of
goods acquired in countertrade deals

15-19
 Review Question
Which of the following is not a common pitfall
of exporting?

a) a product offering that is customized to the local

market
b) a poor understanding of competitive conditions in
he foreign market
c) poor market analysis
d) problems securing financing
15-20
 Review Question
A _______ is an order written by an exporter
instructing an importer to pay a specified
amount of money at a specified time.

a) letter of credit
b) draft
c) bill of lading
d) confirmed letter of credit

15-21
 Review Question
Which type of countertrade arrangement
involves the use of a specialized third-party
trading house?

a) a buyback
b) an offset
c) a counterpurchase
d) switch trading

15-22
 Review Question
Which of the following is not a purpose of the
bill of lading?

a) It is a contract
b) It is a document of title
c) It is a form of payment
d) It is a receipt

15-23
 Review Question
________ is the most restrictive countertrade
arrangement.

a) counterpurchase
b) switch trading
c) barter
d) offset

15-24
 Review Question
Countertrade is attractive for all of the following
reasons except

a) It may involve the exchange of unusable or poor-

quality goods that the firm cannot dispose of
profitably
b) It can give a firm a way to finance an export deal
when other means are not available
c) It can be a strategic marketing weapon
d) It can give a firm an advantage over firms that are
unwilling to engage in countertrade arrangements

15-25