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CHAPTER 12
EXPORTING, IMPORTING, AND COUNTERTRADE
Chapter Outline
OPENING CASE: Megahertz Communications
INTRODUCTION
THE PROMISE AND PITFALLS OF EXPORTING
IMPROVING EXPORT PERFORMANCE
An International Comparison
Information Sources
Utilizing Export Management Companies
Exporting Strategy
Management Focus: Exporting Strategy at 3M
Management Focus: Red Spot Paint and Varnish
EXPORT AND IMPORT FINANCING
Lack of Trust
Letter of Credit
Draft
Bill of Lading
A Typical International Trade Transaction
EXPORT ASSISTANCE
Export-Import Bank
Credit Insurance
COUNTERTRADE
The Growth of Countertrade
Types of Countertrade
The Pros and Cons of Countertrade
CHAPTER SUMMARY
INTERNET EXCERCISES
CRITICAL THINKING AND DISCUSSION QUESTIONS
CLOSING CASE: Artais Weather Clock
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Learning Objectives
1. Understand the opportunities and risks associated with exporting.
2. Become familiar with the different steps companies can take to improve their export performance.
3. Learn about the different information sources and government programs that exist to support exporters.
4. Understand the basic steps involved in financing exporting.
5. Learn how countertrade can be used to facilitate exporting.
Chapter Summary
This chapter focuses on the “nuts and bolts” of exporting and importing. The promise and pitfalls of
exporting are discussed, along with a discussion of the role of export management companies in the
internationalization process. The chapter also provides a nice discussion of export financing. In this
section, the author discusses the financial devices that have evolved to facilitate exporting including: the
letter of credit, the draft (or bill of exchange), and the bill of lading. The section ends by providing an
example of a typical international trade transaction. This example illustrates the complex nature of
international trade transactions. Finally, the chapter explores countertrade, its growth and the pros and cons
of this type of transaction.
OPENING CASE: Megahertz Communications
Summary
The opening case describes Megahertz Communications’ export strategy. Megahertz Communications is
one of Great Britain’s leading independent broadcasting system builders. Though the company found
success in foreign markets easy at first, preshipment financing remains a challenge. The following questions
can be helpful in directing the discussion.
QUESTION 1: What was Megahertz International’s export strategy for the Middle East, Africa, and
Eastern Europe?
ANSWER 1: The company’s export strategy was simple. The company aimed to provide a turnkey
solution to emerging broadcast and media entities in the target market, offering to custom design,
manufacture, install, and test broadcasting systems. The strategy proved to be so successful that the British
government picked Megahertz to receive a Small Business Export Award.
QUESTION 2: What challenges has Megahertz faced with its export business? How has the company
minimized these difficulties?
ANSWER 2: An ongoing problem for Megahertz is preshipment financing. The company has found that
banks are very cautious when it comes to working capital. The banks worry that Megahertz may not get
paid on time, or at all, or that currency fluctuations may reduce the value of payments to Megahertz.
Megahertz has, as a partial solution to this problem, turned to lending companies that specialize in financing
international trade.
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Chapter Outline With Lecture Notes and Teaching Tips
INTRODUCTION
A) This chapter is concerned with the “nuts and bolts” of exporting (and importing). Exporting is not just
for large enterprises, many small firms have benefited significantly from the moneymaking opportunities of
exporting too.
B) The volume of export activity in the world economy is increasing as exporting has become easier. The
gradual decline in trade barriers under GATT and now the WTP along with regional economic agreements
such as the European Union and the North American Free Trade Agreement have significantly increased
export opportunities.
C) Despite the opportunities for exporting, it remains a challenge for many firms. The firm wishing to
export must identify export opportunities, avoid a host of unanticipated problems that are often associated
with doing business in a foreign market, familiarize itself with the mechanics of export and import
financing, learn where it can get financing and export credit insurance, and learn how it should deal with
foreign exchange risk.
Teaching Tip: The International Business Training site (http://www.i-b-t.net/?source=bdc ) provides a
wealth of information for companies that are exporting. The site has an online library that contains articles
such as “Create an Export Plan.”
Teaching Tip: Your students may wonder how firms U.S. firms find buyers in foreign countries. To find
foreign customers, exporters often use '"trade leads" that are provided by organizations dedicated towards
the activity of matching "buyers" and "sellers" in an international context. An example of a site that
provides trade leads is the National Trade Data Bank at { http://www.stat-usa.gov/ }. This service is
available on a subscription basis.
THE PROMISE AND PITFALLS OF EXPORTING
A) The potential benefits from exporting can be great. Regardless what country a firm is based in, the rest
of the world is a much larger market than the domestic market. While larger firms may be proactive in
seeking out new export opportunities, many smaller firms are reactive and only pursue international
opportunities when the customer calls or knocks on the door.
Teaching Tip: The Import Export Coach (http://www.importexportcoach.com/consulting.htm) is an
example of a firm that provides consulting services to companies that export. The site contains a number of
links to “free” information on exporting. It is well worth a visit.
B) Many novice exporters have run into significant problems when first trying to do business abroad,
souring them on following up on subsequent opportunities.
Teaching Tip: A wonderful site for small and medium sized companies to visit as they begin their export
business is {http://www.ibrc.bschool.ukans.edu/resources/articles/articles.htm}. The site contains many
articles designed to assist companies with their export strategy.
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C) Common pitfalls include poor market analysis, poor understanding of competitive conditions, lack of
customization for local markets, poor distribution arrangements, bad promotional campaigns, and a general
underestimation of the differences and expertise required for foreign market penetration.
D) If basic business issues weren’t enough, the tremendous paperwork and formalities that must be dealt
with can be overwhelming to small firms.
IMPROVING EXPORT PERFORMANCE
A) There are a number of ways in which inexperienced exporters can gain information about foreign market
opportunities and avoid some of the common pitfalls that tend to discourage and frustrate novice exporters.
An International Comparison
B) One big impediment to exporting is the simple lack of knowledge of the opportunities available. The
way to overcome ignorance is to collect information.
Information Sources
C) Despite institutional disadvantages, U.S. firms can increase their awareness of export opportunities. The
most comprehensive source of information is the U.S. Department of Commerce.
Utilizing Export Management Companies (EMC)
D) Export management companies are export specialists that act as the export marketing department or
international department for client firms.
E) EMCs normally accept two types of export assignments. EMCs start up exporting operations for a firm
with the understanding that the EMC will have continuing responsibility for selling the firm’s products.
F) In theory, the advantage of EMCs is that they are experienced specialists who can help the neophyte
exporter identify opportunities and avoid common pitfalls. However, studies have revealed a large variation
in the quality of EMCs. Therefore, an exporter should carefully review a number of EMCs, and check
references from an EMC's past client, before deciding on a particular EMC.
Exporting Strategy
G) In addition to utilizing EMCs, a firm can reduce the risks associated with exporting if it is careful about
its choice of exporting strategy. First, particularly for the novice exporter, it does to help to hire an EMC, or
at least an experienced export consultant, to help with the identification of opportunities and navigate
through the tangled web of paperwork and regulations so often involved in exporting. Second, it often
makes sense to initially focus on one, or a handful, of markets. Third, it may make sense to enter a foreign
market on a fairly small scale in order to reduce the costs of any subsequent failure. Fourth, the exporter
needs to recognize the time and managerial commitment involved in building export sales, and should hire
additional personnel to oversee this activity least the existing management of the firm be stretched too thin.
Fifth, in many countries it is important to devote a lot of attention to building strong and enduring
relationships with local distributors and / or customers. Sixth, it is important to hire local personnel to help
the firm establish itself in a foreign market. Finally, it is important for the exporter to keep the option of
local production in mind.
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EXPORT AND IMPORT FINANCING
A) Mechanisms for financing exports and imports have evolved over the centuries in response to a problem
that can be particularly acute in international trade: the lack of trust that exists when one must put faith in a
stranger.
Lack of Trust
B) Firms engaged in international trade face a problem - they have to trust someone who may be very
difficult to track down if they default on an obligation.
C) Due to the lack of trust, each party to an international transaction has a different set of preference
regarding the configuration of the transaction. Figures 12.1 and 12.2 show the preferences for two firms - a
US exporter and a French importer.
D) The problems arising from a lack of trust between exporters and importers can be solved by using a third
party who is trusted by both - normally a reputable bank. Figure 12.3 illustrates this
Teaching Tip: A menu of resources available on the Internet that deal with financing exports and other
international finance issues is available at {http://dylee.keel.econ.ship.edu/intntl/intfin/fin-hom.htm}.
Letter of Credit
E) A letter of credit, abbreviated as L/C, stands at the center of international commercial transactions.
Issued by a bank at the request of an importer, the letter of credit states the bank will pay a specified sum of
money to a beneficiary, normally the exporter, on presentation of particular, specified documents.
Draft
F) A draft, sometimes referred to as a bill of exchange, is the instrument normally used in international
commerce for payment. A draft is simply 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. 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.
Bill of Lading
G) The bill of lading is issued to the exporter by the common carrier transporting the merchandise. It
serves three purposes: it is a receipt, a contract, and a document of title.
A Typical International Transaction
H) The entire process for conducting an export transaction is summarized in Figure 12.4.
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EXPORT ASSISTANCE
A) Prospective U.S. exporters can draw on two forms of government-backed assistance to help their export
programs. They can get financing aid from the Export-Import Bank and export credit insurance from the
Foreign Credit Insurance Association.
Export-Import bank
B) The Export-Import Bank (Eximbank) is an independent agency of the U.S. government. Its mission is to
provide financing aid that will facilitate exports, imports, and the exchange of commodities between the
U.S. and other countries.
Teaching Tip: The Eximbank web site is { http://www.exim.gov/}.
Export Credit Insurance
C) In The U.S., export credit insurance is provided by the Foreign Credit Insurance Association (FICA).
FICA provides coverage against commercial risks and political risks.
COUNTERTRADE
A) Countertrade is an alternative means of structuring an international sale when conventional means of
payment are difficult, costly, or nonexistent. Countertrade denotes a whole range of barterlike
agreements; its principle is to trade goods and service for other goods and services when they cannot be
traded for money. The text provides several examples of countertrade.
The Growth of Countertrade
B) In the modern era, countertrade arose in the 1960s as a way for the Soviet Union and the Communist
states of Eastern Europe, whose currencies were generally nonconvertible, to purchase imports. During the
1980s, the technique grew in popularity among many developing nations that lacked the foreign exchange
reserves required to purchase necessary imports. There was a notable increase in the volume of
countertrade after the Asian financial crisis of 1997.
Types of Countertrade
C) Countertrade can be categorized into five distinct types of trading arrangements: barter, counterpurchase,
offset, switch trading, and compensation or buyback. Figure 12.5 summarizes the popularity of each type
of arrangement.
Barter
D) Barter is a direct exchange of goods and/or services between two parties without a cash transaction.
Barter is viewed as the most restrictive countertrade arrangement. It is used primarily for one-time-only
deals in transactions with trading partners who are not creditworthy or trustworthy.
Counterpurchase
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E) Counterpurchase is a reciprocal buying agreement. It occurs when a firm agrees to purchase a certain
amount of materials back from a country to which a sale is made.
Offset
F) Offset is similar to counterpurchase insofar as one party agrees to purchase goods and services with a
specified percentage of the proceeds from the original sale. The difference is that this party can fulfill the
obligation with any firm in the country to which t he sale is being made.
Switch Trading
G) Switch trading refers to the use of a specialized third-party trading house in a countretrade
arrangement. When a firm enters a counterpurchase or offset agreement with a country, it often ends up
with what are called 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.
Buybacks
H) 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.
The Pros and Cons of Countertrade
I) Countertrade’s main attraction is that it can give a firm a way to finance an export deal when other means
are not available. If a firm is unwilling to enter a countertrade agreement, it may lose an export opportunity
to a competitor that is willing to make a countertrade agreement.
J) A countertrade arrangement may be required by the government of a country to which a firm is exporting
goods or services.
K) The drawbacks of countertrade are substantial. Countertrade contracts may involve the exchange of
unusable or poor-quality goods that the firm cannot dispose of profitably. Countertrade is most attractive to
large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods
acquired in countertrading.
Critical Thinking and Discussion Questions
1. A firm based in Washington state wants to export a shipload of finished lumber to the Philippines. The
would-be importer cannot get sufficient credit from domestic sources to pay for the shipment but insists that
the finished lumber can be quickly resold in the Philippines for a profit. Outline the steps the exporter
should take to effect this export to the Philippines.
Answer: The exporter could recommend to the importer that the importer apply to Eximbank for a loan.
Eximbank has a direct lending operation under which it lends dollars to foreign borrowers for use in
purchasing U.S. exports. The foreign borrowers use the loans to pay U.S. suppliers and repay the loan to
Eximbank with interest.
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2. You are the assistant to the CEO of a small textile firm that manufactures high-quality, premium-priced,
stylish clothing. The CEO has decided to see what the opportunities are for exporting and has asked you for
advice as to the steps the company should take. What advice would you give the CEO?
Answer: This question is designed to stimulate classroom discussion and/or to encourage your students to
“think” about the export process when completing a written answer for this question. There are a number
of approaches that can be pursued in answering this question. The first step might be to tap into some of the
government information sources that are available, free of charge, to see if international markets are
available for the company’s product. There are also a number of resources on the Internet, mentioned
throughout the text that can assist companies in learning about the foreign market potential of their
products. Another approach would be to contact an export management company for assistance. While this
approach may involve some cost, it may be the fastest way to get “up and running” in regard to initiating an
export program.
3. An alternative to using a letter of credit is export credit insurance. What are the advantages and
disadvantages of using export credit insurance rather than a letter of credit for exporting (a) a luxury yacht
from California to Canada, and (b) machine tools from New York to the Ukraine?
Answer: Exporters prefer to get letters of credit from importers. However, when the importer is in a strong
bargaining position and able to play competing suppliers off against each other, an exporter may have to
forgo a letter of credit. The lack of a letter of credit exposes the exporter to the risk that the foreign
importer will default on payment. The exporter can insure against this possibility by buying export credit
insurance. Students may suggest that in the case of the luxury yacht, should the importer fail to make
payment, the clearly defined laws of Canada would make it easier to go after the importer than would be the
case with the machine tools in the Ukraine, and that therefore a letter of credit is less important for the yacht
exporter. On the other hand, students may note that there is probably more competition in machine tools as
compared to luxury yachts and that the exporter of machine tools may lose the sale if the exporter insists on
a letter of credit.
4. How do you explain the popularity of countertrade? Under what scenarios might its popularity increase
still further by the year 2010? Under what scenarios might its popularity decline by the year 2010?
Answer: This question requires students to speculate on the future state of global trade. As trade between
developing and developed countries, and trade among developing countries continues to grow, many
students will predict that the popularity of countertrade will increase by the year 2010. Some students may
predict a decline in the popularity of countertrade by 2010 as countries from the former Soviet Union and
Eastern European Communist bloc either become members of the EU an adopt the fully convertible euro as
their currency, or develop their own fully convertible currency, which should then facilitate export
transactions for companies from those countries.
5. How might a company make strategic use of countertrade schemes as a marketing weapon to generate
export sales revenues? What are the risks associated with pursuing such a strategy?
Answer: Counterrtrade is an alternative means of structuring an international sale when conventional means
of payment are difficult, costly, or nonexistent. The governments of developing countries sometimes insist
on a certain amount of countertrade. Thus, if a firm is unwilling to enter a countertrade agreement, it may
lose an export opportunity to a competitor that is willing to make a countertrade agreement. Companies
that are willing to entertain countertrade as a means of financing will have an advantage over those firms
that prefer traditional forms of financing. Firms engaging in countertrade must be willing to invest in an in172
house trading department dedicated to arranging and managing countertrade deals, and must be aware of the
quality of the products received in countertrade deals.
Internet Exercises
TEXT EXERCISE 1
Overview
This exercise examines the emergence of small and medium sized American companies as major exporters
to the EU. Such companies now account for more than 60% of total U.S. exporters to the EU. Analysts cite
realistic pricing and aggressive strategy as the reasons for success.
Suggested Use in the Classroom
Students are asked to explore the various resources available to small and medium sized companies to
facilitate their export activities. Students should recognize that there is a host of web sites and
organizations, both profit and nonprofit, available to companies as they expand their foreign business.
Companies can manage their own export activities, or hire an EMC to assists with the process.
TEXT EXERCISE 2
Overview
This exercise explores the implications of the recent ruling by the WTO that a decades old U.S. law called
Foreign Sales Corporation, violates the WTO agreement. According to the WTO, the legislation is
effectively a subsidy. The U.S. is appealing the decision.
Suggested Use in the Classroom
Students are asked to research the current status of the U.S. appeal of the WTO ruling. Then, students
should comment on how companies should respond to the ruling, and whether the U.S. government has any
responsibility to companies that are negatively affected by the WTO decision.
CLOSING CASE: Artais Weather Check
Summary
The closing case describes Artais Weather Check, Inc.’s export strategy. Artais, a maker of automated
weather observation systems used by airports, increasingly sees foreign markets as key to future growth.
However, like many companies that venture into foreign markets, Artais has found that exporting is not as
easy as it might seem. Discussion of the case can be assisted by the following questions:
QUESTION 1: What is the motivation for Artais’s shift toward a strategy of export-led growth? Why do
you think opportunities for growth might be greater in foreign markets? Do you think that developing
countries are likely to be a major market opportunity for Artais? Why?
ANSWER 1: Artais gets the majority of its revenues from foreign markets. The U.S. market is fairly
small, the largest airports have human weather watchers and the smaller airports cannot afford the
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automated systems. Consequently, to continue to grow, Artais must look toward export sales. Students will
probably be divided as to whether developing markets will be important for Artais. Some students may
suggest that if smaller airports in the U.S. cannot afford the weather systems, it is unlikely that small
airports in developing countries will be in a position to purchase them either. However, they may
recommend that the company target the larger airports in developing countries as a possible source of
export growth.
QUESTION 2: Could Artais have ramped up its foreign sales more rapidly? How?
ANSWER 2: Artais’ export sales were slow to develop, perhaps because the company’s management had
very little international experience and spent several years simply trying to learn about foreign markets and
the mechanics of exporting. Artais could have ramped up its foreign sales more rapidly by hiring managers
with international experience, and by taking advantage of export assistance provided by the U.S.
Government, or by hiring an Export Management Company to help with the process.
QUESTION 3: What potential problems might Artais encounter selling its equipment to nations such as
Egypt and Ecuador? How can the company deal with these problems?
ANSWER 3: Artais has found that it needs to customize its products for foreign markets. To sell in Egypt
for example, its system had to be reprogrammed to relay weather information in Arabic as well as English.
In general, Artais needs to develop its market research program to enable the company to properly enter
each market.
QUESTION 4: Do you think that it is wise for the company to insist on being paid in dollars? What
alternatives are open to the company? What are the risks associated with these alternatives? Should the
company change its policy?
ANSWER 4: Artais has already lost several bids to competitors because it was unwilling to take payment in
a foreign currency from an emerging market country. Students will probably recommend that the company
explore other payment alternatives ranging from countertrade arrangements to protection through the use of
a letter of credit. Most students, noting that foreign sales are critical to the company’s future growth, will
probably suggest that Artais change its policy on payment.
Management Focus: Exporting Strategy at 3M
Summary
This feature explores the Minnesota Mining and Manufacturing Company’s (3M) export strategy. 3M
generates more than half its revenues from outside the U.S. The company often uses exports to establish an
initial presence in a foreign market, only building foreign production facilities once sales volume rises to a
level where local production is justified.
1. Discuss why 3M initially enters on a small scale. How does the firm’s strategy fit with the philosophy
that exporting is not an end in itself, but merely a step on the road toward establishment of foreign
production?
2. Explain the three principles that make 3M so successful.
3. 3M’s Homepage: {http://www.3m.com/}
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Management Focus: Red Spot Paint Varnish
Summary
This feature focuses on Red Spot paint Varnish, a company that produces paints for plastic components
used in automobiles. The company relies on foreign markets for some 15-25% of its annual revenue.
Generating its foreign sales has not been an easy task according to one employee. The company has found it
difficult to hire managers with appropriate international experience and has also struggled with pressures to
achieve quick results.
1. How has the Internet made it easier for companies to not only get extra assistance but also find the
experienced talent necessary to build an international staff?
2. In an era of “time is money,” how can the trusting relationships that are so often critical to the success of
a foreign venture be achieved?
3. Red Spot’s Homepage: {http://www.redspot.com/}
Additional Readings and Sources of Information
The Internet Guide to Small-Business Exporting:
{http://www.businessweek.com/smallbiz/news/columns/97-23/e3530046.htm}
The Biggest M in 3M: McNerney:
{http://www.businessweek.com/bwdaily/dnflash/nov2002/nf20021113_2368.htm
A Basic Guide To Exporting: {www.business.com}
A Big Lift From China: {www.businessweek.com}
The WTO Kibosh on a U.S. Tax Break:
{http://www.businessweek.com/bwdaily/dnflash/sep2002/nf2002093_8143.htm}
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