Chapter Seven

Export, Import and,

Countertrade

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 Some Successful Exporting Strategy
 It helps to hire at least, someone with experience.
 Focus on one or a few markets.
 Enter markets on a fairly small scale until you ‘learn the
ropes’. Add new lines after initial success. It is to reduce
risks
 Add product lines after export operations begin to be
successful
 Need to recognize the time and managerial commitment.
 Build strong and lasting relationships.
 Hire locals to help firm establish itself.
 Keep the option of local production in mind.

© McGraw Hill Companies, Inc., 2000

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Characteristics of Exporters
 Companies that export:
• More likely to be large (as defined by revenues)
• Are more likely to have risk-taking managers
• Operate in industries where the leading companies are exporters
 Why companies export
• Increased sales revenue most important motivation to export
• Alleviate excess capacity
• Exporting less risky than FDI
• Countercyclical investment diversification
 Stage of export development—three broad phases
• Stage unrelated to size of the company
• Availability of Internet has increased company interest in exporting

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 Phases of Export Development
Pre-engagement
Phase 1 • Companies selling goods and services solely in the
domestic market
• Those companies considering but not currently exporting

Initial Exporting
Phase 2 • Companies that do sporadic, marginal exporting
• Companies that see lots of potential in export markets
• Companies unable to cope with exporting demands

Advanced
Phase 3 • Companies become regular exporters
• Companies gain extensive overseas experience
• Companies may use other strategies for entering markets

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Designing an Export Strategy
 Detailed export business plan is essential for
effective export strategy
• Assess the company’s export potential by examining
its opportunities and resources
• Obtain counseling on exporting
• Select a market or markets
• Formulate and implement an export strategy
-Commitment precedes success in exporting
• Development of an export department is one
indicator of top management commitment
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Import Strategy
Importing—bringing of goods and services into a country
• Results in the importers paying money to the exporter in the foreign
country

Two basic types of imports

• Industrial and consumer goods and services provided to customers unrelated to
exporter
• Intermediate goods and services provided to customers that are part of the firm’s
global supply chain

Why companies import

• Goods & services can be supplied to domestic market at cheaper price and higher
quality
• More efficient than attempting to manufacture every product in every market
• Provide access to products not available in local market

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 Types of Exports Documents
Export license—allows products to be shipped to specific countries
Pro forma invoice—invoice from exporter to importer outlining the selling
terms, price, and delivery if the goods are actually shipped
Commercial invoice—bill for the goods from the buyer to the seller
Bill of lading—receipt for goods delivered to the common carrier for
transportation, a contract for services rendered, and a document of title
Consular invoice—means of monitoring price of imports and to generate
revenue for the embassy that issues it
Certificate of origin—indicates where goods originated
Shipper’s export declaration—used to monitor exports and compile trade
statistics
Export packing list—itemizes materials in each package

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 Terms of Sale
The responsibilities of the buyer and the
seller should be spelled out as they relate to
what is and what is not included in the price
quotation and when ownership of goods
passes from seller to buyer.
Incoterms are the internationally accepted
standard definitions for terms of sale set by
the International Chamber of Commerce
(ICC) since 1936.

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 A. EX- works (EXW)
Prices quoted ex-works (EXW) apply only at the point of
origin, and the seller agrees to place the goods at the
disposal of the buyer at the specified place on the date or
within a fixed period. All other charges are for the account
of the buyer.
 
B. Free carrier (FCA)
One of the new Incoterms is free carrier (FCA), which
covers all modes of transportation except vessel.
The seller is responsible for loading goods into the means
of vessel transportation; the buyer is responsible for all
subsequent expenses. If a port of exportation is named, the
costs of transporting the goods to the named port are
included in the price
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 C. Free alongside ship (FAS)
Free alongside ship (FAS) at a named
port of export means that the exporter
quotes a price for the goods including
charges for delivery of the goods
alongside a vessel at the port. The seller
handles the cost of unloading; however,
all other charges, such as loading,
insuring, and ocean transporting the
goods, are left to the buyer

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 D. Cost and freight (CFR)
Under cost and freight (CFR) to a named overseas
port of import, the seller quotes a price for the goods,
including the charge for the goods and their cost
of transportation to the named port of debarkation.
The cost of insurance and the choice of insurer are
left to the buyer.
E. Cost, Insurance, and Freight (C.I.F.)
C.I.F. (cost, insurance, and freight): the price
includes the charge for the goods, insurance,
transportation, and miscellaneous charges to
the point of debarkation from the vessel at a
named overseas port of import. 11
 Concept of Foreign Exchange and
Balance of Payment
Definitions of 'Foreign Exchange'
-Foreign exchange means foreign currency and includes all
deposits, credit and balances payable in foreign currency as well
as all foreign currency instruments, such as Drafts, Travelers
cheques, Bills of Exchange and promissory notes payable in any
foreign country
 It refers to the process or mechanism by which the currency of
one country is converted into the currency of another country,
thereby it involves the transferring the ownership of money from
one country to another. It is the means and method by which
rights to wealth in a country’s currency are converted into rights
to wealth in another country’s currency
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 Balance of payments (BOP) Accounts
-are an accounting record of all monetary
transactions between a country and the rest of
the world. These transactions include payments
for the country's exports and imports of goods,
services, financial capital, and financial transfers.
-The BoP accounts summarize international
transactions for a specific period, usually a year,
and are prepared in a single currency, typically
the domestic currency for the country concerned.

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 Conti…
The balance of payments of a country is a
systematic record of all economic
transactions between the residents of the
reporting country and residents of foreign
countries during a given period of time
BOP includes the followings
Trade Account Balance
Current Account Balance
Capital Account Balance

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1. Trade Account Balance
It is the difference between exports and imports of goods,
usually referred as visible or tangible items. Trade account
balance tells as whether a country enjoys a surplus or deficit
on trade account.
2. Current Account Balance
It is difference between the receipts and payments on
account of current account which includes trade balance.
The current account includes export of services, interests,
profits, dividends and unilateral receipts from abroad, and
the import of all that Payments to abroad. The deficit; when
payments are more than receipts and the surplus; when the
credits are more than debits.
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 3. Capital Account Balance
It is difference between the receipts and
payments on account of capital account. The
capital account involves inflows and outflows
relating to investments, short term
borrowings/lending, and medium term to
long term borrowing/lending.
The surplus will take place when the credits
are more than debits and the deficit will take
place when the debits are more than credits.

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 Terms of Payment
Terms of sale are typically arranged between the
buyer and seller at the time of the sale.
The type of merchandise, amount of money involved,
business custom, credit rating of the buyer, country of
the buyer, and whether the buyer is a new or old
customer must be considered in establishing the terms
of sale.
The five basic payment arrangements
– 1) cash in advance
– (2) letters of credit
– (3) bills of exchange
– (4) open accounts, and
– (5) consignment
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 1. Cash in Advance
The most favorable term to the exporter is cash
in advance because it relieves the exporter of
all risk and allows for immediate use of the
money.
It is not widely used, however, except for
smaller, first-time transactions or situations in
which the exporter has reason to doubt the
importer’s ability to pay.

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 2. Letters of Credit (L/C)
Export letters of credit opened in favor of the seller by the
buyer handle most countries’ exports.
Letters of credit shift the buyer’s credit risk to the bank
issuing the letter of credit.
When a letter of credit is employed, the seller ordinarily
can draw a draft against the bank issuing the credit and
receive money by presenting proper shipping documents.
The procedure for a letter of credit begins with
completion of the contract. Then the buyer goes to a local
bank and arranges for the issuance of a letter of credit; the
buyer’s bank then notifies its correspondent bank in the
seller’s country that the letter has been issued.
After meeting the requirements set forth in the letter of
credit, the seller can draw a draft against the credit ( in
effect, the bank issuing the letter) for payment for the
goods. 20
 3. Bills of Exchange
Bills of exchange is drawn by sellers on foreign
buyers.
In letters of credit, the credit of one or more
banks is involved, but in the use of bills of
exchange, the seller assumes all risk until the
actual money is received.
The typical procedure is for the seller to draw a
draft on the buyer and present it with the
necessary documents to the seller’s bank for
collection.
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 4. open accounts
In open accounts sales, terms are agreed to
between buyer and seller but without documents
specifying clearly the importer’s payment
obligations.
Open account terms involve less paperwork and
give more flexibility to both parties.
Open account sales are more attractive to
the importer, but because of the risks to the
exporter, they tend to be limited to foreign
subsidiaries, joint ventures or licensees, or
foreign customers with whom the exporter
has had a long and favorable experience.
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 5 .Consignment
The most favorable term to the importer is
consignment selling which allows the importer to
defer payment until the goods are actually sold.
This approach places all of the burden on the
exporter, and its use should be carefully weighed
against the objectives of the transaction.
If the exporter wants entry into a specific market
through specific intermediaries, consignment
selling may be the only method of gaining
acceptance by intermediaries.
Because exporters own the goods longer in this
method than in any other, their financial burdens
and risk are greatest.
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 Countertrade
Countertrade
 Structures an international sale when means of payment are
difficult, costly, or non-existent
No currency convertibility
different arrangements that parties use to trade products via
transactions that use limited or no currency or credit
Examples of countertrade transactions….
• barter [based on clearing arrangements used to avoid
money-based exchange]
• buybacks, offsets, and counter purchase [all of which are
used to impose reciprocal commitments]
Costs and Benefits of Countertrade
 Costs: inefficient, risky, cumbersome
 Benefits: build mutually beneficial relationships
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Types of Countertrade

Common Types of Countertrade

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