When a firm decides to export to another country, it needs to address the following:
- Market opportunities – which can it identify?
- Foreign exchange risk – how can it protect itself?
- Import and export financing – does it understand the banking systems?
- Challenges of doing business in a foreign market – does it know what it will face?
Opportunities and Risks
Exporting is a means to increase a company’s overall market size. This usually occurs when a company has reached a certain saturation or limit in its domestic market and it needs to expand. This is why large firms tend to aggressively explore new export possibilities. While it is true that many small firms export, they tend to be more reactive and let opportunities come to them. Many companies, especially small, tend to underestimate the potential of the export market, and are overwhelmed by the intricacies, laws, and regulations surrounding exportation.
Common pitfalls of exporting are:
- Insufficient or inadequate market research and analysis
- Lack of understanding of competitive conditions
- An absence of product customization for foreign markets
- Inferior distribution or marketing program
- Ineffective or poor marketing campaigns
- Difficulty finding financing
- Miscalculation of the amount of expertise needed to enter a foreign market
- An underestimation of the differences in a foreign market
- A perception that the way of doing things back home is superior and will work abroad
- An underestimation of the bureaucracy and red tape involved
Export Expertise
However, if the proper groundwork is done, firms can avoid many of the aforementioned perils of exporting. For example, some countries offer exportation advice and help to local companies.
Another means is via export management companies (EMCs). These are companies that provide all the services a firm needs to export. They can work as the export department for a company or simply on behalf of the exporter.
Financing
Transferring of funds internationally, to parties with which one has never done any prior business is often complicated, as there will likely be a lack of trust between them. To overcome this lack of trust, reputable international banks are included in the transaction.
1. Importer receives bank’s promise to pay on behalf of importer
2. Bank promises to pay exporter on behalf of importer
3. Exporter makes shipment to the bank, trusting the bank to pay
4. Bank pays the exporter
5. Bank sends shipment to importer
6. Importer pays the bank
A letter of credit can be issued by a bank on behalf of the importer. This states that the bank will pay a certain amount to another party (usually the exporter), upon receipt of certain documents. A letter of credit instills trust as a bank is involved.
A draft, or bill of exchange, is the means normally employed for international payment. A draft is a document from an exporter that instructs an importer (or an importer’s agent) to pay a certain amount of money at a certain time. There are two types of drafts: Sight drafts and time drafts. Sight drafts demand payment upon presentation, while time drafts request payment in 30, 60, 90, or 120 days.
A bill of lading is a document from the common carrier which transports the good to the exporter. It is a receipt, a contract, and a document of title.
Financial Export Assistance
Companies that wish to export can look to their government for guidance and assistance in their financial matters.
Countertrade
At times, standard goods-for-cash payment structures do not work, are cumbersome, expensive, or simply impossible. In these cases, companies can adopt countertrade.
Countertrade involves the exchange of goods in barters or other ways in exchange for money. For example, if a nation’s currency is not exchangeable or no good overseas, they may offer a commodity or other product in place of cash.
Countertrade was common in the USSR in the 1960s when its currency was nonconvertible. It was their only means of purchasing foreign goods. Countertrade grew in the 1980s as many other nations did not have the foreign reserves required to make imports. Countertrade increased yet again during the Asian financial crisis in 1997, as many currencies became devalued and had severely limited buying power.
One example of countertrade was when the USSR paid Coca-Cola in vodka. Poland did the same with Coca-Cola but paid in beer.
Countertrade can be separated into five variants: Barter, Counterpurchase, Offset, Buyback or Compensation, and Switch Trading.
Countertrade and its variants can be beneficial when it offers a company a means to finance an export transaction in the absence of other means. Companies that do not wish to engage in countertrade activities can lose export opportunities to other domestic competitors that may be willing to enter such agreements. Some governments may require that exports undertake countertrade when dealing with certain other countries.
However, countertrade can often result in firms ending up with quantities of unusual products that they find be difficult to resell or dispose of. In such cases firms may have to establish in-house trading and distribution divisions to deal with the countertrade goods.
For this aspect, and other aspects of countertrade, Taxadvice can assist you. Countertrade is best handled by large, diversified, multi-national corporations that have existing distribution channels and networks, but with proper assistance it is also a very useful instrument for smaller companies.