Chapter 2

TRADING OVERSEAS AND THE ROLE OF THE EXPORT AND SHIPPING

OFFICE

Benefits and Risks of Exporting

1. Increased sales
2. Increased employment of high caliber staff
3. Company becomes more competitive
4. Companies become integrated in international trade encouraging higher
standards and use of high technology
5. Spread of risks
6. Extension of the product life cycle
7. National interest
Ref: page 37 of Export practice and Management Alan Branch

Export Risks

1. Serious cash flow problems i.e. involves longer transaction periods

2. Unsteady exchange rate market discourages short term planning
3. Export market subject to international trade barriers e.g. tariffs and non tariff
barriers
4. Product launch especially in international markets can be expensive
Corruption crime and fraud exposes export trading to increased and unnecessary
costs
Ref: p.38 Alan Branch

Disadvantages of exports
a. Competition that lead to losses especially for domestic producers.
b. Job losses.
c. Increased expenses as a result of more products
d. Stringent facility/credit controls.
e. Increased costs for example in delivery terms.
The Export office Structure
The export department has the responsibility of
a. Obtaining export orders.
b. Ensuring payment is made according to the export contract.
c. Maintaining the public image of the company.
Ref: p. 43and 44 Alan Branch Export Practice and Management

2-1 Entry Strategy Factors

I. Firms need to develop a proper international strategy early on.
II. Of the parts of the marketing mix involved in international sales, distribution is
the one with the longest timeline and is the least likely to be adjusted.
2-2 Indirect Exporting
2-2A EXPORT TRADING COMPANY (ETC)
I. Export trading company purchases goods from a firm in one country and resells
them in a foreign country
II. For the domestic seller, it is a domestic transaction—a sale to a company in the
home country
III. For the foreign party purchasing from the export trading company, it is also a
domestic transaction—a purchase from a company in the same country

IV. Resurrected by Japan to handle its post-World War II exporting, the sogo
shosha
V. Often very large companies
a. Depth of knowledge of markets, products
b. Provide packages of varied logistical services: shipping, insuring,
financing, and expediting international transactions
VI. Some are smaller export trading companies
a. Specialize in one geographical area or one product line
b. Offer same breadth of services as a sogo shosha
2-2B EXPORT MANAGEMENT CORPORATION (EMC)
I. Located in the exporting country and acts as an international manufacturer’s
representative
II. Unlike an export trading company, an export management corporation is an
agent. Agents do not take title of the property being sold
III. EMCs tend to be small
a. Tend to specialize in selling one product line in one country
b. Usually also represent other exporters abroad by selling complimentary
product lines
c. Tend to keep large list of potential buyers
IV. An exporter tends to be more involved in international activity when using an
EMC than when using an ETC. The amount of service the EMC provides
depends upon its relationship with the exporter
V. As an exporter’s international business grows, it may absorb the EMC to
capitalize on its skills and contacts

2-3 Active Exporting

2-3A AGENT
I. Usually a small firm or individual located in the importing country
II. Acts as a manufacturer’s representative for the exporter
III. Does not take title, earns commission on sales
IV. Criteria in choosing an agent:
a. Ability to accurately represent exporter and product
b. Ability to sell
c. Contacts
d. Knowledge of the targeted industry
V. Finding agents by:
Chapter 2: Trading overseas and role of export office 4-3

a. Trade show
b. Trade missions
c. Commercial attachés of the embassies of the exporter’s country
d. Contacts with other successful exporters
VI. Factors which may call for use of an agent:
a. Potential sales are small
b. Product is not a stock item, but is designed for a particular customer
c. Product is very expensive
d. When the company wants reasonable amount of control over prices and
delivery policies
2-3 DISTRIBUTOR
I. Usually a firm in the importing country which buys (takes title of) goods from
the exporter
II. Relationship is characterized by two sets of invoices:
a. One set of international invoices between the exporter and the distributor
(who in this case is actually the importer)
b. Another set of domestic invoices between the distributor and its customers
(who see this as domestic sales of foreign product)
III. Distributor takes more risks than agent (and has higher costs)
a. Inventory carrying costs
b. Usually expected to participate in costs of promotion
i. Advertising
ii. Trade shows
c. Distributor usually has benefits agent does not have (although many
exporting firms try to limit these)
i. More freedom in setting prices
ii. More freedom in negotiating with customers
iii. Is basically only limited by exporter’s copyrights and trademarks
IV. Distributor should be considered a long-term partner
a. It makes substantial investment in inventory
b. It trains its employees
c. Important that exporter and distributor are a good match
V. Finding distributors
a. Trade show
b. Trade missions
c. Commercial attachés of the embassies of the exporter’s country
d. Contacts with other successful exporters
VI. Factors which may call for the use of a distributor:
a. Potential sales are substantial
b. Product is a stock item, not designed for a particular customer
c. Product is moderately priced

2-3C ISSUES IN THE AGENT-DISTRIBUTORSHIP DECISION

I. Some countries do not allow agents
a. If they allow agents, they will not allow them to represent foreign
manufacturers
 b. They may require a physical after-sale service presence (which would
require a distributor)
II. Most countries’ judicial systems vary on how they differentiate between agents
and distributors
a. Since most agents are small businesses, many governments place them
under their labor law
b. Distributors, usually being larger, are covered in most countries by
contract law, which is much less restrictive than labor law

2-3d Marketing Subsidiary

I. An exporter opens its own sales or marketing office in a foreign country and
staffs it with its own employees to sell its products
II. Since it is incorporated in the importing country it is the importer of record
III. As far as the foreign government is concerned the “export” is between two legal
companies that are part of the same company at a transfer price
IV. Sales in the foreign country by the marketing subsidiary are considered to be
domestic sales
V. Factors which may call for the use of a marketing subsidiary:
a. When the exporter estimates that the market potential (sales, growth, or
profit) is considerable
b. When the product is technologically driven, with substantial intellectual
property content
2-3E COORDINATING DIRECT EXPORT STRATEGIES
I. Two factors in exporter’s entry decision:
a. Market-driven
b. Company- or product-driven
c. Some firms have a specific strategy they follow for exporting
i. Advantages:
1. Simplifies export management
2. Provides united marketing front
ii. Disadvantages: one-size-fits-all may result in poor match with
market
1. Potentially good market may be given away to an agent
2. Establishing a sales subsidiary may be wasteful in a small
market
3. Firm may miss market opportunities by waiting for enough
resources to establish a subsidiary
4. Other firms decide their exporting strategy on a country-by-
country basis
2-4C FRANCHISING
I. Similar to licensing, except franchisor grants large number of intellectual
property items to franchisee
II. Often used in retailing
a. Consumers like consistency
b. Entrepreneurs like proven business plan
c. Somewhat limited to low-skill service businesses like retailing
Chapter 2: Trading overseas and role of export office 4-5

III.
Generates substantial amounts of piggy-backing by franchisor’s equipment
suppliers
2-4D JOINT VENTURE
I. Exporter invests in foreign country with one or more partners to create a new
corporation
II. Politically-connected local partner helps to prevent seizure of company by local
government, as was common in some countries from the 1950s through the
1970s
2-4E SUBSIDIARY
I. Sometimes called Wholly-Owned Foreign Enterprise or Wholly Foreign-Owned
Enterprise (WFOE, “Woofie”)
II. Advantages:
a. Firm retains control
b. Firm protects trade secrets
c. Firm does not have to share profits
d. Does not rely on any one else for information on customers
e. Can pull out when it wants
f. Creates jobs for host country
g. Favorable duty rates
III. Disadvantages:
a. High costs establishing it
b. High risk exposure
c. Managing in a foreign country with limited understanding of local
customs and culture

2-5 Parallel Imports

I. Parallel imports, or gray market goods, are goods sold outside regular
distribution channels of a company
II. Gray market sometimes develops when there is a price differential between one
country and the next. Someone buys the goods in the lower-priced country and
re-sells them in the higher-priced country in outlets outside the regular channel
and at prices lower than those of the regular channel
III. Best defense is to avoid price discrepancies from country to country
IV. No legal recourse—when a company sells a product it can no longer control it

2-7 FREE TRADE ZONES

I. Although a FTZ is in a country, as far as Customs is concerned, the FTZ is
considered to be “outside” the country
II. Goods can be imported duty-free into the FTZ, then transformed, assembled,
repackaged and shipped elsewhere without ever having been considered to be in
the country where the FTZ is located
III. Products from the FTZ sold to the host country are only subject to duty when
they leave the FTZ
IV. They stimulate foreign investment and create local jobs