Chapter 8 Importing, Exporting, and Sourcing SUMMARY A. A company’s first business dealings outside the home country often take the form of exporting or importing. Companies should recognize the difference between export marketing and export selling. By attending trade shows and participating in trade missions, company personnel can learn a great deal about new markets. B. Governments use a variety of programs to support exports, including tax incentives, subsidies, and export assistance. Governments also discourage imports with a combination of tariffs and nontariff barriers. C. A quota is one example of a nontariff barrier. Export-related policy issues include the status of foreign sales corporations (FSCs) in the United States, Europe’s Common Agricultural Policy (CAP), and subsidies. Governments establish free trade zones and special economic zones to encourage investment. D. The Harmonized Tariff System (HTS) has been adopted by most countries that are actively involved in export-import trade. Single-column tariffs are the simplest; two-column tariffs include special rates such as those available to countries with normal trade relations (NTR) status. Governments can also impose special types of duties. These include antidumping duties imposed on products whose prices government officials deem too low and countervailing duties to offset government subsidies. E. Key participants in the export-import process include foreign purchasing agents, export brokers, export merchants, export management companies, manufacturers’ export agents, export distributors, export commission representatives, cooperative exporters, and freight forwarders. F. A number of export-import payment methods are available. A transaction begins with the issue of a pro forma invoice or some other formal document. A basic payment instrument is the letter of credit (L/C) that assures payment from the buyer’s bank. Sales may also be made using a bill of exchange (draft), cash in advance, sales on open account, or a consignment agreement. G. Exporting and importing are directly related to management’s sourcing decisions. Concern is mounting in developed countries about job losses linked to outsourcing jobs, both skilled and unskilled, to low-wage countries. A number of factors determine whether a company makes or buys the products it markets as well as where it makes or buys those products. LEARNING OBJECTIVES 1 Understand the difference between export selling and export marketing 2 Identify the stages a company goes through, and the problems it is likely to encounter, as it gains experience as an exporter 3 Describe the various national policies that pertain to exports and imports 4 Explain the structure of the Harmonized Tariff System 5 Describe the various organizations that support and facilitate the export process 6 Compare and contrast home-country and market-country export organization considerations 7 Discuss the various payment methods that are typically used in trade financing 8 Identify the factors that global marketers consider when making sourcing decisions DISCUSSION QUESTIONS 8-4. What is the difference between export marketing and export selling? Answer: Export selling basically presents an extension strategy whereby products are offered for sale outside the home country without adaptation. The mindset of export selling is, “Here’s the product, take it or leave it.” One symptom of export selling would be providing sales literature in the home country language only. Export marketing, by contrast represents willingness to adapt one or more of the marketing mix elements as required by the characteristics of the target market. 8-5. Describe the stages a company typically goes through as it learns about exporting. Answer: The chapter outlines seven stages: 1. The firm is unwilling to export. 2. The firm fills unsolicited export orders but does not pursue unsolicited orders. 3. The firm explores the feasibility of exporting. 4. The firm exports to one or more markets on a trial basis. 5. The firm is an experienced exporter to one or more markets. 6. The firm pursues country- or region-focused marketing based on certain criteria (e.g., all countries where English). 7. The firm evaluates global market potential before screening for the “best” target markets to include in its marketing strategy and plan. 8-6. Governments often pursue policies that promote exports while limiting imports. What are some of those policies? Answer: First and foremost, governments can impose duties on imports. In addition, most governments utilize nontariff trade barriers that serve as deterrents or obstacles to imports from other countries. NTBS include quotas, discriminatory procurement policies, restrictive customs procedures, arbitrary monetary policies, and restrictive regulations. 8-7. What are the various types of duties that export marketers should be aware of? Answer: Ad valorem duties are expressed as a percentage of the customs value of particular goods. For example, China has imposed a 60 percent duty pm 35mm imports; the U.S. imposes a 25 percent duty on light trucks imported from Japan. Specific duties are expressed as a specific amount (in the importing country’s currency) per some unit of measurement. For example, prior to NAFTA, the specific duty on Mexican tomato imports into the United States was 1.4 cents per pound; after NAFTA passed, the duty was lowered to 1 cent per pound. Antidumping duties are imposed on products from producers that have set export prices at unfairly low prices. Pasta makers in Italy and Turkey were assessed antidumping duties after the International Trade Administration ruled the companies were selling pasta below fair value and injuring American producers. Countervailing duties are designed to offset government subsidies in the exporting country. 8-8. How is the current economic crisis affecting financing for global trade? Answer: The global financial crisis is undermining the ability of firms of all sizes to get the financing they depend on for trade. Compounding the problem is the fact that the trade fiancé is drying up in key emerging markets. 8-9. What is the difference between an L/C and other forms of export-import financing? Why do sellers often require letters of credit in international transactions? Answer: A letter of credit constitutes an agreement whereby an importer’s bank assumes the obligation of payment on behalf of the importer. The seller is assured of payment because the bank guarantees payment as long as the seller complies with the terms in the L/C. A documentary collection is a negotiable bill of exchange that can be transferred from one party to another. When a bill of exchange is used, banks are involved but do not bear financial risk. Other forms of payment include cash in advance (usually via wire transfer), sales on open account, and sales on a consignment basis. OVERVIEW Many nations export a significant amount of their economic output; Switzerland’s exports constitute a whopping 51 percent of GDP! U.S. exports have historically been dominated Boeing, Caterpillar, GE, and other large Fortune 500 companies. In 2010, for example, GE exported American-made products valued at $17 billion. In Germany, by contrast, where exports make up 50 percent of GDP, small businesses are the export powerhouses. In response to the ongoing economic crisis, U.S. President Barack Obama created a National Export Initiative and established the President’s Export Council. The Council is currently headed by Boeing CEO James McNerney. President Obama’s goal is to double U.S. exports by 2015; doing so will require boosting exports 15 percent annually (see Exhibit 8-1). As President Obama noted, “The more American companies export, the more they produce. And the more they produce, the more people they hire—and that means more jobs.” A wide range of resources is available to would be exporters, including 19 U.S. Export Assistance Centers (USEACs) and a government-sponsored Web site (www.export.gov). This chapter provides an overview of import–export basics. We begin by explaining the difference between export selling and export marketing. Next is a survey of organizational export activities. An examination of national policies that support exports and/or discourage imports follows. After a discussion of tariff systems, we introduce key export participants. The next section provides an overview of organizational design issues as they pertain to exporting. ANNOTATED LECTURE/OUTLINE EXPORT SELLING AND EXPORT MARKETING: A COMPARISON • (Learning Objective #1) To better understand importing and exporting, it is important to distinguish between export selling and export marketing. Export selling does not involve tailoring the product, the price, or the promotional material to suit the requirements of global markets. The only marketing mix element that differs is the “place”; that is, the country where the product is sold. Export marketing targets the customer in the context of the total market environment. The export marketer does not simply take the domestic product “as is” and sell it to international customers. To the export marketer, the product offered in the home market represents a starting point. It is modified as needed to meet the preferences of international target markets. Export marketing is the integrated marketing of goods and services that are destined for customers in international markets. Export marketing requires: 1. An understanding of the target market environment 2. The use of marketing research and identification of market potential 3. Decisions concerning product design, pricing, distribution and channels, advertising, and communications: the marketing mix. After the research effort has zeroed in on potential markets, there is no substitute for a personal visit to size up the market firsthand and begin the development of an actual export-marketing program. A market visit should do several things. First, it should confirm (or contradict) assumptions regarding market potential. A second major purpose is to gather the additional data necessary to reach the final go or no-go decision regarding an export-marketing program For example, an export manager or international marketing manager may have a list of potential distributors provided by the U.S. Department of Commerce. He or she may have corresponded with distributors on the list and formed some tentative idea of whether they meet the company’s international criteria. It is difficult, however, to negotiate a suitable arrangement with international distributors without actually meeting face-to-face to allow each side to appraise the capabilities and character of the other party. A third reason for a visit to the export market is to develop a marketing plan in cooperation with the local agent or distributor. Agreement should be reached on necessary product modifications, pricing, advertising and promotion expenditures, and a distribution plan. If the plan calls for investment, agreement on the allocation of costs must also be reached. One way to visit a potential market is through a trade show or a state- or federally sponsored trade mission. Each year hundreds of trade fairs, usually organized around a product category or industry, are held in major markets. (Exhibit 8-2) Perhaps most important, attending a trade show enables company representatives to learn a great deal about competitors’ technology, pricing, and depth of market penetration. ORGANIZATIONAL EXPORT ACTIVITIES Exporting is becoming increasingly important as companies in all parts of the world step up their efforts to supply and service markets outside their national boundaries. Research has shown that exporting is essentially a developmental process that can be divided into the following distinct stages: • (Learning Objective #2) 1. The firm is unwilling to export; it will not even fill an unsolicited export order. This may be due to perceived lack of time (“too busy to fill the order”) or to apathy or ignorance. 2. The firm fills unsolicited export orders but does not pursue unsolicited orders. Such a firm is an export seller. 3. The firm explores the feasibility of exporting (this stage may bypass Stage 2). 4. The firm exports to one or more markets on a trial basis. 5. The firm is an experienced exporter to one or more markets. 6. After this success, the firm pursues country- or region-focused marketing based on certain criteria (e.g., all countries where English is spoken or all countries where it is not necessary to transport by water). 7. The firm evaluates global market potential before screening for the “best” target markets to include in its marketing strategy and plan. All markets—domestic and international—are regarded as equally worthy of consideration. However, commitment is the most important aspect of a company’s international orientation. Before a firm can reach Stage 4, it must receive and respond to unsolicited export orders. The quality and dynamism of management are important factors that can lead to such orders. One study noted that export procedural expertise and sufficient corporate resources are required for successful exporting. An interesting finding was that even the most experienced exporters express lack of confidence in their knowledge about shipping arrangements, payment procedures, and regulations. The study also showed that, although profitability is an important expected benefit of exporting, other advantages include increased flexibility and resiliency and improved ability to deal with sales fluctuations in the home market. Although research generally supports the proposition that the probability of being an exporter increases with firm size, it is less clear that export intensity—the ratio of export sales to total sales—is positively correlated with firm size. Table 8-1 lists some of the export-related problems that a company typically faces. NATIONAL POLICIES GOVERNING EXPORTS AND IMPORTS • (Learning Objective #3) It is hard to overstate the impact of exporting and importing on the world’s national economies. In 1997, for example, total imports of goods and services by the United States passed the $1 trillion mark for the first time; in 2011, the combined total was $2.7 trillion. European Union imports, counting both intra-EU trade and trade with non-EU partners, totaled more than $3 trillion. Trends in both exports and imports reflect China’s pace-setting economic growth in the Asia-Pacific region. Exports from China have grown significantly; they are growing even faster now that China has joined the WTO. As shown in Table 8-2, Chinese apparel exports surpass those of other countries by a wide margin. One word can summarize national policies toward exports and imports: contradictory. For centuries, nations have combined two opposing policy attitudes toward the movement of goods across national boundaries. On the one hand, nations directly encourage exports; the flow of imports, on the other hand, is generally restricted. Government Programs that Support Exports To see the economic boost that can come from a government-encouraged export strategy, consider Japan, Singapore, South Korea, and the so-called greater-China or “China triangle” market, which includes Taiwan, Hong Kong, and the People’s Republic of China. Japan totally recovered from the destruction of World War II and became an economic superpower as a direct result of export strategies devised by the Ministry for International Trade and Industry (MITI). The four tigers – Singapore, South Korea, Taiwan, and Hong Kong—learned from the Japanese experience and built strong export-based economies of their own. Although Asia’s “economic bubble” burst in 1997 as a result of uncontrolled growth, Japan and the tigers are moving forward in the twenty-first century at a more moderate rate. Any government concerned with trade deficits or economic development should focus on educating firms about the potential gains from exporting. Governments commonly use four activities to support and encourage firms that engage in exporting. These are tax incentives, subsidies, export assistance, and free trade zones. Tax incentives treat earnings from export activities preferentially either by applying a lower rate to earnings from these activities or by refunding taxes already paid on income associated with exporting. From 1985 until 2000, the major tax incentive under U.S. law was the foreign sales corporation (FSC), through which American exporters could obtain a 15 percent exclusion on earnings from international sales. However, in 2000, the World Trade Organization ruled that any tax break that was contingent on exports amounted to an illegal subsidy. Accordingly, the U.S. Congress has set about the task of overhauling the FSC system; failure to do so would entitle the EU to impose up to $4 billion in retaliatory tariffs. Governments also support export performance by providing outright subsidies, which are direct or indirect financial contributions or incentives that benefit producers. Subsidies can severely distort trade patterns when less competitive but subsidized producers displace competitive producers in world markets. Agricultural subsidies are particularly controversial because, although they protect the interests of farmers in developed countries, they work to the detriment of farmers in developing areas such as Africa and India. The EU has undertaken an overhaul of its Common Agricultural Policy (CAP). The third support area is governmental assistance to exporters. Companies can avail themselves of a great deal of government information concerning the location of markets and credit risks. Assistance may also be oriented toward export promotion. Government agencies at various levels often take the lead in setting up trade fairs and trade missions designed to promote sales to foreign customers. The export/import process can entail red tape and bureaucratic delays. In an effort to facilitate exports, countries are designating certain areas as free trade zones (FTZ) or special economic zones (SEZ). These are geographic entities that offer manufacturers simplified customs procedures, operational flexibility, and a general environment of relaxed regulations. Governmental Actions to Discourage Imports and Block Market Access Measures such as tariffs, import controls, and nontariff barriers are designed to limit the inward flow of goods. Tariffs can be thought of as the “three Rs” of global business: rules, rate schedules (duties), and regulations of individual countries. . Duties on individual products or services are listed in the schedule of rates (Table 8-3). One global trade expert defines duties are “taxes that punish individuals for making choices of which their governments disapprove.” Developed under the auspices of the Customs Cooperation Council (now the World Customs Organization), the Harmonized Tariff System (HTS) went into effect in January 1989 and has since been adopted by the majority of trading nations. Under this system, importers and exporters have to determine the correct classification number for a given product or service that will cross borders. • (Learning Objective #4) THE CULTURAL CONTEXT The High Cost of U.S. Sugar Subsidies and Quotas A turf war has been raging over one of the humblest commodities traded on world markets: sugar. On one side are small-scale farmers in some of the poorest regions of the world; desperate to increase their incomes and improve their living standards, these farmers want to export more sugar cane. On the other side are farmers in some of the richest nations in the world who are equally intent on preserving a system of quotas and subsidies to support production of sugar cane and sugar beets. Caught in the middle are processed food and beverage companies that use sugar in baked goods, ice cream, soft drinks, and a range of other products. Consumers are also affected: Sugar subsidies and quotas result in higher prices for popular food and beverage products. The issue has become more prominent in recent years as prices for sugar and other agricultural commodities have been extremely volatile. The debate over agricultural policy is at the heart of the struggle. Worldwide, agricultural subsidies amount to hundreds of billions of dollars each year. The U.S. government pays approximately $50 billion in farm aid each year; in May 2002, President George W. Bush signed a new farm bill that actually increased support to some farmers. Not surprisingly, the Europeans pointed to the bill as evidence that the United States is hypocritical on trade issues. U.S. sugar cane and sugar beet producers rank first in contributions to political campaigns, ahead of both tobacco farmers and dairy farmers. Florida, the key sugar producing state, is a crucial swing state in national elections. In spite of the progress made in simplifying tariff procedures, administering a tariff is an enormous problem. People who work with imports and exports must familiarize themselves with the different classifications and use them accurately. Even a tariff schedule of several thousand items cannot clearly describe every product traded globally. The introduction of new products and new materials used in manufacturing processes creates new problems. Often, determining the duty rate on a particular article requires assessing how the item is used or determining its main component material. Two or more alternative classifications may have to be considered. A product’s classification can make a substantial difference in the duty applied. A nontariff barrier (NTB) is any measure other than a tariff that is a deterrent or obstacle to the sale of products in a foreign market. Also known as hidden trade barriers, NTBs include quotas, discriminatory procurement policies, restrictive customs procedures, arbitrary monetary policies, and restrictive regulations. A quota is a government-imposed limit or restriction on the number of units or the total value of a particular product or product category that can be imported. Generally, the quotas are designed to protect domestic producers. Discriminatory procurement policies can take the form of government rules, laws or administrative regulations requiring that goods or services be purchased from domestic companies. Customs procedures are considered restrictive if they are administered in a way that makes compliance difficult and expensive. Discriminatory exchange rate policies distort trade in much the same way as selective import duties and export subsidies. Restrictive administrative and technical regulations may take the form of antidumping regulations, product size regulations, and safety and health regulations. TARIFF SYSTEMS Tariff systems provide either a single rate of duty for each item applicable to all countries or two or more rates, applicable to different countries or groups of countries. Tariffs are usually grouped into two classifications. The single-column tariff is the simplest type of tariff. It is a schedule of duties in which the rate applies to imports from all countries on the same basis. The two-column tariff (Table 8-4), column 1 includes “general” duties plus “special” duties indicating reduced rates determined by tariff negotiations with other countries. Rates agreed upon by “convention” are extended to all countries that qualify for normal trade relations (NTR; formerly most-favored nation or MFN) status within the framework of the WTO. Column 2 shows rates for countries that do not enjoy NTR status. EMERGING MARKETS BRIEFING BOOK Clothing Factory Tragedies in Bangladesh About 80 percent of Bangladesh’s export earnings come from its network of more than 5,000 garment-manufacturing operations. However, the garment industry has been roiled by a series of tragedies that have highlighted the often dangerous conditions facing workers. In 2010, dozens of Bangledeshis were killed in two separate fires in factories that made clothing for Western clients such as JCPenney and the Gap. In November 2012, 112 garment workers were killed when a fire broke out at Tarzreen Fashions, a clothing manufacturer in Dhaka, Bangladesh. Tazreen’s clients included Walmart and other well-known global retail brands. In April 2013, tragedy struck another factory in Dhaka (see Exhibit 8-5). More than 500 people – most of them women – were killed. This time, however, fire was not the cause. Rather, the eight-story Rana Plaza building in Dhaka collapsed. The building housed garment factories that employed 5,000 garment workers. The Workers Rights Consortium, the International Labor Organization, the Interfaith Center for Corporate Responsibility, and other groups that monitor labor issues are stepping up pressure on the companies that participate in the global garment supply chain. Too often, the activists charge, Western retailers pay lip service to concerns about factory safety; in reality, critics say, the retailers continue to focus on low prices rather than the welfare of workers. As the head of the Cambodian garment manufacturers association told the Financial Times, “The buyer and consumer must be willing to pay more.” A preferential tariff is a reduced tariff rate applied to imports from certain countries. The United States is now a signatory to the GATT customs valuation code. GATT prohibits the use of preferential tariffs, with three major exceptions: 1. Historical preference arrangements such as the British Commonwealth 2. Preference schemes that are part of a formal economic integration treaty, such as free trade areas or common markets. 3. Industrial countries are permitted to grant preferential market access to companies based in less-developed countries. Under the code, the primary basis of customs valuation is "transaction value". Transaction value is defined as the actual individual transaction price paid by the buyer to the seller of the goods being valued. Customs Duties Customs duties are divided into two categories. They may be calculated either as a percentage of the value of the goods (ad valorem duty), as a specific amount per unit (specific duty), or as a combination of both of these methods. As noted, an ad valorem duty is expressed as a percentage of the value of the goods. In countries adhering to GATT conventions on customs valuation, the customs value is the value of cost, insurance, and freight (CIF) at the port of importation. A specific duty is expressed as a specific amount of currency per unit of weight, volume, length, or other units of measurement. Specific duties are usually expressed in the currency of the importing country. Other Duties and Import Charges Dumping is the sale of merchandise in export markets at unfair prices. To offset the impact of dumping and to penalize guilty companies, most countries have introduced legislation providing for the imposition of antidumping duties. Countervailing duties (CVDs) are additional duties levied to offset subsidies granted in the exporting country. Several countries apply a system of variable import levies to certain categories of imported agricultural products. If prices of imported products would undercut those of domestic products, the effect of these levies is to raise the price of imported products to the domestic price level. Temporary surcharges are used to provide additional protection for local industry and, in particular, in response to balance-of-payments deficits. KEY EXPORT PARTICIPANTS • (Learning Objective #5) Export participants include: purchasing agents, export brokers, and export merchants, who have no assignment of responsibility. Others, including export management companies, manufacturers’ export representatives, export distributors, and freight forwarders, are assigned responsibilities by the exporter. Foreign purchasing agents are variously referred to as buyer for export, export commission house, or export confirming house. They operate on behalf of, and are compensated by, an overseas customer known as a “principal”. The export broker receives a fee for bringing together the seller and the overseas buyer. Their fee is usually paid by the seller, but sometimes, the buyer pays it. The broker takes no title to the goods and assumes no financial responsibility. Export merchants are sometimes referred to as jobbers. These are marketing intermediaries that identify market opportunities in one country or region and make purchases in other countries to fill these needs. Export management company (EMC) is an independent marketing intermediary that acts as the export department for two or more manufacturers (“principals”) whose product lines do not compete with each other. Manufacturer’s export agents (MEA) can act as an export distributor or as export commission representative. However, the MEA does not perform the functions of an export department and the scope of market activities is usually limited to a few countries. An export distributor assumes financial risk. The export distributor usually represents several manufacturers and is therefore sometimes known as a combination export manager. The export commission representative assumes no financial risk. The commission representative is assigned all or some foreign markets by the manufacturer. The cooperative exporter, sometimes called a mother hen, piggyback exporter, or export vendor, is an export organization of a manufacturing company retained by other independent manufacturers to sell their products in some or all foreign markets. Freight forwarders are licensed specialists in traffic operations, customs clearance, and shipping tariffs and schedules; simply put, they can be thought of as travel agents for freight. ORGANIZING FOR EXPORTING IN THE MANUFACTURER’S COUNTRY • (Learning Objective #6) Home-country issues include deciding whether to assign export responsibility inside the company or to work with an external organizations specializing in a product or geographic area. Most companies handle export operations within their own in-house export organization. The possible arrangements for handling exports include the following: • A part-time activity performed by domestic employees • Through an export partner that takes possession of the goods before they leave the country • Through an export department that is independent of the domestic marketing structure • Through an export department within an international division • For multidivisional companies, each of the preceding options is available. A company that assigns a sufficiently high priority to its export business will establish an in-house organization. The company that chooses not to perform its own marketing and promotion in-house has numerous external export service providers from which to choose. These include export trading companies (ETCs), export management companies (EMCs), export merchants, export brokers, combination export managers, manufacturers’ export representatives or commission agents, and export distributors. (All discussed earlier.) ORGANIZING FOR EXPORTING IN THE MARKET COUNTRY In addition to deciding whether to rely on in-house or external export specialists in the home country, a company must also make arrangements to distribute the product in the target market country. Every exporting organization faces one basic decision: To what extent do we rely on direct market representation as opposed to representation by independent intermediaries? Two major advantages to direct representation in a market: 1) control and 2) communications. Direct market representation enables decisions concerning program development, resource allocation, or price changes to be implemented unilaterally. Direct representation means that the possibilities for feedback and information from the market are much greater. Direct representation does not mean that the exporter is selling directly to the consumer or customer; in most cases, direct representation involves selling to wholesalers or retailers. In smaller markets, it is usually not feasible to establish direct representation because the low sales volume does not justify the cost. Finding “good” distributors can be the key to export success. TRADE FINANCING and METHODS OF PAYMENT • (Learning Objective #7) The appropriate method of payment for an international sale is a basic credit decision. A number of factors must be considered, including currency availability in the buyer's country, creditworthiness of the buyer, and the buyer and seller’s relationship. There are often fewer collections problems on international sales, provided the proper financial instruments are used. The reason is simple: A letter of credit can be used to guarantee payment for a product. The basics of trade financing: The export sale begins when the exporter-seller and the importer-buyer agree to do business. The agreement is formalized when the terms of the deal are set down in a pro forma invoice, contract, or fax, or some other document. Documentary Credit Documentary credits (also known as letters of credit) are widely used as a payment method in international trade. A letter of credit (L/C) is essentially a document stating that a bank as substituted its creditworthiness for that of the import-buyer. The importer-buyer’s bank is the “issuing” bank; the importer-buyer is, in essence, asking the issuing bank to extend credit. The actual payment process is set in motion when the exporter-seller physically ships the product. Once the documents are negotiated, the confirming bank, requests payment from the issuing bank. Comparing shipping documents, comparing it to the L/C, and if there are no discrepancies, the money is transferred to the exporter-seller’s account. Documentary Collections (Sight or Time Drafts) After an exporter and importer have established a good working relationship, it may be possible to move to a documentary collection or open-account method of payment. A documentary collection is a method of payment that uses a bill of exchange, also known as a draft. A bill of exchange is a negotiable instrument that is easily transferable from one party to another. Drafts are different from L/Cs; a draft is a payment instrument that transfers all the risk of nonpayment onto the exporter/seller. Banks are involved as intermediaries but they do not bear financial risk. Because a draft is negotiable, a bank may be willing to buy the draft from the seller at a discount and thus assume the risk. Also, because bank fees for drafts are lower than those for L/Cs, drafts are frequently used when the monetary value of an export transaction is relatively low. The draft is presented to the importer; payment takes place in accordance with the terms specified in the draft. In the case of a sight draft (also known as a D/P or documents against payment), the importer-buyer is required to make payment when presented with both the draft and the shipping documents. Time drafts can take two forms. An arrival draft specifies that payment is due when the importer/buyer receives the goods; a date draft requires payment on a particular date. Cash in Advance A number of conditions may prompt the exporter to request cash in advance. Examples include times when credit risks abroad are high, when exchange restrictions delay the return of funds, or when the exporter is unwilling to sell on credit terms. Because of competition and restrictions, the volume of business handled on a cash-in-advance basis is small (e.g., Compressor Control Corporation makes oil field equipment and can require cash in advance because no competitors offer a competing product). Sales on Open Account Goods sold on open account are paid for after delivery (e.g., intra-corporate sales to branches of an exporter use open-account terms). Open-accounts prevail when exchange controls are minimal and exporters have long-standing relations with buyers. For example, Tile Connection in Florida imports tile; owner Jimmy Fand sends payables electronically on their due day. The main objection to open-account sales is the absence of tangible obligation. If an open-account transaction is dishonored, the legal procedure may be more complicated. In 1995, the Export-Import Bank expanded insurance coverage on open-account transactions to limit export risk. ADDITIONAL EXPORT/IMPORT ISSUES In the post-September 11 business environment in the United States, national security concerns have resulted in increased security for imports. A number of initiatives have been launched to ensure that international cargo cannot be used for terrorism. The Customs Trade Partnership Against Terrorism (C-TPAT) has as its goal to secure voluntary cooperation of supply chain participants in an effort to reduce inspection delays. Organizations that have achieved certified C-TPAT status are entitled to priority status for CBP inspections. Another issue is duty drawback. This refers to refunds of duties paid on imports that are incorporated into other goods and then re-exported. SOURCING • (Learning Objective #8) In global marketing, the issue of customer value is inextricably tied to the sourcing decision: whether a company makes or buys its products as well as where it makes or buys its products. Outsourcing is shifting production jobs or work assignments to another company to cut costs. When the outsourced work moves to another country, the terms global outsourcing or offshoring are sometimes used. In today’s competitive marketplace, companies are under intense pressure to lower costs; one way to do this is to locate manufacturing and other activities in low-wage countries. In theory, this situation bestows great flexibility on companies. The first wave of non-manufacturing outsourcing primarily affected call centers. These are sophisticated telephone operations that provide customer support and other services to in-bound callers from around the world. The decision of where to locate key business activities depends on other factors besides cost. There are no simple rules to guide sourcing decisions. Several factors may figure into the sourcing decision: management vision, factor costs and conditions, customer needs, public opinion, logistics, country infrastructure, the political environment, and exchange rates. Management Vision Some chief executives are determined to retain some or all manufacturing in their home country. (E.g., Swatch manufactures mass-market products in high-wage countries). Top managers at Canon chose to maintain a strategic focus on high value-added products rather than the manufacturing location, keeping 60 percent in Japan. Factor Costs and Conditions Factor costs are land, labor, and capital costs. German hourly compensation costs for production workers in manufacturing are a fraction of those in the United States. Those in Mexico are only 15 percent of those in the United States. Labor costs in non-manufacturing jobs are also dramatically lower in some parts of the world. For example, a software engineer in India may receive an annual salary of $12,000 as compared to $80,000 in the U.S. The other factors of production are land, materials, and capital. The cost of these factors depends upon their availability and relative abundance. Often, the differences in factor costs will offset each other so that, on balance, companies have a level field in the competitive arena. The application of advanced computer controls and other new manufacturing technologies has reduced the proportion of labor relative to capital for many businesses. Company managers and executives should also recognize the declining importance of direct manufacturing labor as a percentage of total product cost. Customer Needs Although, outsourcing can help reduce costs, sometimes customers are seeking something besides the lowest possible price. Dell Computer recently rerouted some of its call center jobs back to the United States from India after complaints from key business customers. Logistics In general, the greater the distance between the product source and the target market, the greater the time delay for delivery and the higher the transportation cost. Manufacturers can take advantage of intermodal services that allow containers to be transferred between rail, boat, air, and truck carriers. Country Infrastructure In order to present an attractive setting for a manufacturing operation, it is important that a country’s infrastructure be sufficiently developed to support a manufacturing and distribution. Infrastructure requirements will vary by company and by industry, but minimally, they will include power, transportation and roads, communications, service and component suppliers, a labor pool, civil order, and effective governance. A country needs support services or infrastructure to support a high volume of business activities (e.g., Hong Kong, Taiwan, and Singapore do). Many countries lack this support (e.g., Lebanon, Uganda, and El Salvador). A challenge in the new Russian market is an inadequate infrastructure. Political Factors Political risk is a deterrent to investment in local sourcing. The difficulty of assessing political risk is inversely proportional to a country's stage of economic development. All other things being equal, the less developed a country the more difficult it is to predict political risk. The political risk of the Triad countries, for example, is quite limited as compared to that of a less-developed country in Africa, Latin America, or Asia. Market access is another type of political factor. If a country or a region limits market access because of local content laws, balance-of-payments problems, or any other reason, it may be necessary to establish a production facility within the country itself. Foreign Exchange Rates In deciding where to source a product or locate a manufacturing activity, a manager must take into account foreign exchange rate trends in various parts of the world. Exchange rates are so volatile today that many companies pursue global sourcing strategies as a way of limiting exchange-related risk. The dramatic shifts in price levels of commodities and currencies are a major characteristic of the world economy today. Such volatility argues for a sourcing strategy that provides alternative country options for supplying markets. CASES Case 8-1: Can the United States Double its Exports by 2015? Overview: Only about 1 percent of America’s businesses—300,000 out of 30 million total firms—export. And, nearly two-thirds of those companies export to just one country. For many of these firms, exporting represents a major untapped market opportunity. Even so, the U.S. Small Business Administration (SBA) estimates that there are tens of thousands of small companies that could export but do not. Some reasons have also been offered. One is the limited ambition exhibited by many American business owners; this may result in complacency and a lack of export consciousness. A second barrier is lack of knowledge of market opportunities abroad or misperceptions about those markets. The perceived lack of necessary resources— managerial skill, time, financing, and production capacity—is a third barrier that prevents companies from pursuing export opportunities. Unrealistic fears are a fourth barrier. When weighing export expansion opportunities, managers may express concerns about operating difficulties, environmental differences, and credit risks. Nearly 85 percent of the goods and services produced in the United States are consumed at home. In his 2010 State of the Union address, U.S. President Barack Obama vowed to double U.S. exports by 2015; doing so will require boosting exports 15 percent annually (see Exhibit 8-1). To this end, President Obama created a National Export Initiative (NEI) and established the President’s Export Council. Boeing CEO James McNerney currently heads the Council. As President Obama noted, “The more American companies export, the more they produce. And the more they produce, the more people they hire—and that means more jobs.\ Discussion Questions 8-10. What is key critical thinking issue raised in this case? Answer: If there is apathy among U.S. business owners, how can the government ‘force’ them to export their goods to foreign countries? The government will need to make it worth their while by providing subsidies and other help to make this happen. 8-11. Assess the prospects for achieving President Obama’s goal of doubling U.S. exports by 2015. Answer: Obama has set a goal that he may not be able to reach. U.S. business owners that do not export at this time can not be included in this analysis. Existing exporters will need to work closely with the National Export Initiative (NEI) and the President’s Export Council to see what opportunities exist for their products and services. 8-12. Why is it the case that many small business owners in the United States traditionally gave little thought to exporting? Answer: One is the limited ambition exhibited by many American business owners; this may result in complacency and a lack of export consciousness. A second barrier is lack of knowledge of market opportunities abroad or misperceptions about those markets. The perceived lack of necessary resources—managerial skill, time, financing, and production capacity—is a third barrier that prevents companies from pursuing export opportunities. Unrealistic fears are a fourth barrier. When weighing export expansion opportunities, managers may express concerns about operating difficulties, environmental differences, and credit risks. Rounding out the list is management inertia—the simple inability of company personnel to overcome export myopia. 8-13. What would you do to increase tourist visits to the United States? Answer: Student’s answer will vary. Targeting tourists can be studied by the various modes available: cruise ships, destination vacations, etc. To boost tourist visits to the U.S., I would enhance marketing campaigns showcasing diverse attractions and cultural experiences. Simplifying the visa application process and offering more visa waivers could attract more visitors. Additionally, improving infrastructure and investing in destination management to ensure a high-quality visitor experience would further encourage tourism. 8-14. Greece and Egypt have also experienced declines in tourism recently. What are some of the reasons for the decline? Answer: Student answers will vary. Current events in these countries will shape their answers. Greece and Egypt have faced declines in tourism due to economic instability, political unrest, and safety concerns. Economic crises can reduce tourists' spending power and travel plans, while political instability and security issues can deter visitors from choosing these destinations. Additionally, health crises, such as the COVID-19 pandemic, have further impacted travel to these countries. Case 8-2: Asian Shoe Exports to Europe Overview: Europe is famous as a source for fine leather goods such as handbags and shoes. Each year, consumers in Europe buy 2.5 billion pairs of shoes. Shoes from China currently account for about one-third of the market; since 2001, when China joined the WTO, Chinese imports have increased tenfold. Imports from Vietnam have doubled in the same period (see Exhibit 8-1). The flood of shoe imports from China and Vietnam has been a boon for European retailers and value-conscious consumers. Officially, the EU tariffs on Chinese and Vietnamese shoe imports are known as antidumping duties. In general, such tariffs reflect a finding that products are being sold in export markets for less than the selling price in the exporter’s home country. In other words, as explained in the chapter, they are being “dumped.” In economic terms, China and Vietnam—both ruled by Communist governments—are considered “nonmarket economies.” From the EU’s point of view, this means that the two countries’ domestic prices are artificial. In such countries, where many enterprises are state-owned, profitability in the Western sense is less of a priority than job creation. To prove dumping, investigators have only to compare the cost of the imported shoes with the prices of shoes produced in true market economies where the laws of supply and demand determine costs and prices. In such a comparison, the Chinese and Vietnamese appear to have a significant price advantage. 8-15. When tariffs are imposed on European imports of shoes from China and Vietnam, who stands to gain? Who stands to lose? Answer: Gainers include China and Vietnam and other low cost producing economies and countries like the United Kingdom, Ireland, and Sweden that oppose tariffs. The “losers” may include EU consumers where the price of a pair of woman’s boots would include more than $8.00 with the tariffs imposed. When tariffs are imposed on European imports of shoes from China and Vietnam, European shoe manufacturers might gain by facing less competition and potentially increasing their market share. Conversely, consumers and retailers in Europe lose due to higher prices for shoes, and Chinese and Vietnamese exporters suffer from reduced sales and potential market share loss. 8-16. European policymakers object to the fact that some Asian shoe production is government subsidized. But as, an editorial in the Financial Times noted, “If Beijing and Hanoi want to subsidize European consumers to build their shoe collections, let them.” Do you agree? Answer: Student answers will vary depending upon how they feel about low cost consumer goods versus antidumping policies and opinion of strategic issues and industries versus consumers. The editorial's perspective highlights that subsidies can lower costs for European consumers, but they also distort market competition and can harm European producers. While lower prices benefit consumers, long-term reliance on subsidized imports may undermine domestic industries and lead to unfair market conditions. A balanced approach might involve addressing subsidy practices while protecting fair competition and industry interests. 8-17. Antidumping duties can be described as a form of protectionism. As the global economic crisis deepened in 2008 and 2009, many countries began implementing protectionist policies. Was this a positive trend, or were such policies likely to prolong the recession? Answer: Increased tariffs lead to higher retail prices which in turn can decreases consumer purchasing power. Higher tariffs from one country can spur increased sales from the “non-affected” producing country. There is no right or wrong answer to this question, nor is there a definitive agreement about the effectiveness or ineffectiveness of tariffs on national economies. TEACHING TOOLS AND EXERCISES Additional Cases: “ECCO A/S – Global Value Chain Management”. Bo Nielsen; Torban Pedersen; Jacob Pyndt. HBS 908M14. “Sony Ericsson: Marketing the Next Music Phone”. Qui Cheng; Zane Moi. HBS HKU801. Activity: Students should be preparing or presenting their Cultural-Economic Analysis and Marketing Plan for their country and product as outlined in Chapter 1. Out-Of-Class Reading: Wolff, James A., and Timothy L. Pett. “Internationalization of Small Firms: An Examination of Export Competitive Patterns, Firm Size, and Export Performance.” Journal of Small Business Management 38, no. 2 (April 2000) pp. 34-47. Internet Exercise: Find out about the activities of Global Exchange, a human rights group, that offers information on efforts to combat sweatshops: www.globalexchange.org Prepare a short 1-2 page paper outlining the activities of this group. SUGGESTED READINGS Books Branch, Alan E. Elements of Export Marketing Management. London: Chapman and Hall, 1990. Czinkota, Michael P. and Jon Woronoff. Unlocking Japan’s Markets. Chicago: Probus, 1991. Gordon, John S. Profitable Exporting: A Complete Guide to Marketing Your Products Abroad. New York: Wiley, 1993. Porter, Michael. The Competitive Advantage of Nations. New York: Free Press, 1990. Raynauld, Andre. Financing Exports to Developing Countries. Paris, France: Development Centre of the Organization for Economic Cooperation and Development, 1992. Rommel, Gunter, Jurgen Kluge, Rolf-Dieter Kempis, Raimund Diederichs and Felix Bruck, Simplicity Wins: How Germany's Mid-sized Industrial Companies Succeed. Boston: Harvard Business Review Press, 1995. Rossen, Philip J., and Stan D. Reid, eds. Managing Export Entry and Expansion. New York: Praeger, 1987. Schaffer, Matt. Winning the Countertrade War: New Export Strategies for America. New York: John Wiley & Sons, 1989. U.S. Department of Commerce. A Basic Guide to Exporting. Washington, DC: U.S. Department of Commerce, 1992. Venedikian, Harry M. Export-Import Financing. New York: Wiley, 1992. Articles Alden, Vernon R. “Who Says You Can’t Crack the Japanese Market?” Harvard Business Review (January-February 1987), pp. 52-56. Bonaccorsi, Andrea. “On the Relationship Between Firm Size and Export Intensity.” Journal of International Business Studies 23, no. 4 (Fourth Quarter 1992), pp. 605-636. Burpitt, William J., and Dennis A. Rondinelli. “Small Firms’ Motivations for Exporting: To Earn and Learn?” Journal of Small Business Management 38, no. 4 (October 2000) pp. 1-14. Cavusgil, S. Tamer, and V.H. Kirpalani, “Introducing Products into Export Markets: Success Factors.” Journal of Business Research 27, no. 1 (May 1993), 1-15. _____, Shaoming Zou and G. M. Naidu. “Product and Promotion Adaptation in Export Ventures: An Empirical Investigation.” Journal of International Business Studies 24, no. 3 (Third Quarter 1993), pp. 449-464. Dominguez, Luis V., and Carlos G. Gequeira. “Strategic Options for LDC Exports to Developed Countries.” International Marketing Review 8, no. 5 (1991), pp. 27-43. Horlick, Gary N. and Eleanor C. Shea. “The World Trade Organization Antidumping Agreement.” Journal of World Trade 29, no. 1 (February 1995), pp. 5-31. Howard, Donald G. “The Role of Export Management Companies in Global Marketing.” Journal of Global Marketing 8, no. 1 (1994), pp. 95-110. Katsikeas, Constantine S. “Perceived Export Problems and Export Involvement: The Case of Greek Exporting Manufacturers.” Journal of Global Marketing 7, no. 4 (1994), pp. 29-57. Korth, Christopher M. “Managerial Barriers to U.S. Exports.” Business Horizons 34, no. 2 (March/April 1991), pp. 18-26. Kotabe, Masaaki. “Patterns and Technological Implications of Global Sourcing Strategies: A Study of European and Japanese Multinational Firms.” Journal of International Marketing 1, no. 1 (1993), pp. 26-43. Leonidou, Leonidas C. “Empirical Research on Export Barriers: Review, Assessment, and Synthesis.” Journal of International Marketing (3), no. 1 (1995), 29-44. MacCormack, Alan David, Lawrence James Newman III, and Donald B. Rosenfield. “The New Dynamics of Global Manufacturing Site Locations.” Sloan Management Review 35, no. 4 (Summer 1994), pp. 69-80. Mahone, Charlie E. Jr. “Penetrating Export Markets: The Role of Firm Size.” Journal of Global Marketing 7, no. 3 (1994), pp. 133-148. Murphy, Paul R., James M. Daley, and Douglas R. Dalenberg. “Doing Business In Global Markets: Perspectives of International Freight Forwarders.” Journal of Global Marketing 6, no. 4 (1993), pp. 53-68. Namiki, Nobuaki. “A Taxonomic Analysis of Export Marketing Strategy: An Exploratory Study of U.S. Exporters of Electronics Products.” Journal of Global Marketing 8, no. 1 (1994), pp. 27-50. Raven, Peter V. Jim M. McCullough, and Patriya S. Tansuhaj. “Environmental Influences and Decision-Making Uncertainty in Export Channels: Effects on Satisfaction and Performance.” Journal of International Marketing 2, no. 3 (1994), pp. 37-60. Rynning, Marjo-Riitta, and Otto Andersen. “Structural and Behavioral Predictors of Export Adoption: A Norwegian Study.” Journal of International Marketing 2, no. 1 (1994), pp. 73-90. Seringhaus, F. H. Rolf. “A Comparison of Export Marketing Behavior of Canadian and Austrian High-Tech Firms.” Journal of International Marketing 1, no. 4 (1993), pp. 49-70. Simon, Hermann. “Lessons from Germany's Midsize Giants.” Harvard Business Review (March-April 1992), pp. 115-123. Singer, Thomas Owen and Michael R. Czinkota. “Factors Associated with Effective Use of Export Assistance.” Journal of International Marketing 2, no. 1 (1994), pp. 53-72. Swamidass, Paul M. “Import Sourcing Dynamics: An Integrative Perspective,” Journal of International Business Studies 24, no. 4 (Fourth Quarter 1993), pp. 671-692. Venkatesan, Ravi. “Strategic Sourcing: To Make or Not To Make.” Harvard Business Review 70, no. 6 (November-December 1992), pp. 98-107. Solution Manual for Global Marketing Warren J. Keegan, Mark C. Green 9780133545005, 9781292017389
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