INTERNATIONAL ECONOMIC RELATIONS

Lecture 4:
Export and import strategies

Marc Arza Nolla

[email protected]
February 2024
Goals

The main purpose of this lecture is to tackle with two different questions: i)
why a firm may export; ii) types of export strategies; iii) limitations; iv) why to
import.

References

Daniel, J.D. and L.H. Radebaugh (1989): International Business, Chapter 14,
Global sourcing, production and export strategies. Ed. Addison-Wesley
Publishing Company, 5ᵗʰ edition.
1. Introduction

2. Why to export?
3. Export strategy
4. Why to import
1. Introduction

2. Why to export?
3. Export strategy
4. Why to import
 1. Introduction

The international market is larger than a firm's domestic market. Hence,

exporting is a way of increasing the revenue and profit of a company.

Many would-be exporters are often intimidated by the complexities and

mechanics of exporting to countries where business practices,
language, culture, legal systems, and currency are all very
different from the home market.

Common exporting pitfalls include

- poor market analysis
- a poor understanding of competitive conditions in the foreign market,
- a failure to customize the product offering to the needs of foreign customers
- lack of an effective distribution
- a poorly executed promotional campaign in the foreign market.
 1. Introduction

Some exporters tend to underestimate the time and expertise needed to

cultivate business in foreign countries.
1. Few realize the amount of management resources that have to
be dedicated to this activity.
2. Many foreign customers require face-to-face negotiations.
3. An exporter may have to spend months learning about a country's
trade regulations, business practices, and mores before a deal
can be closed.
4. Exporters often face voluminous paperwork, complex formalities,
and many potential delays and errors.
 1. Introduction

Where to export?
1. Companies usually select neighbouring markets to their initial
country of origin and markets in the same economic region.
2. Market research should start with a general approach to the
market potencial: GDP, GDP per capita, GDP growth,
infraestrucutres and overall stability.
3. The final step should be to develop a market research of the
specific industry of interest. (Example: for a company in the pet
industry the interesting would be the number of pets in the market
and the overall growth of spending in pet related products).
1. Introduction

2. Why to export?
3. Export strategy
4. Why to import
 2. Why to export?

Companies export in order to:

- increase sales,
- achieve economies of scale in production,
- diversify markets,
- and minimize risk.

All of these objectives are ultimately motivated by the potential for

greater profitability.

Companies can often sell their products at a greater profit abroad than
at home due to differences in the competitive environment or
differences in stages in the product life cycle in foreign markets.

Government actions at home and abroad in such areas as tax policy

can also affect profitability and stimulate exporting.
 2. Why to export?

Should we expand internationally?

What does the company want to gain from exporting?

- Sales volume, risk distribution, innovation, margin, ...
- Other reasons for expansion could be learning from international
markets or reacting to a competitor's move.

Too often companies focus on minimizing risk and investment, while

looking too much towards revenue and ignoring profitability.

International markets carry a higher degree of uncertainty and almost

always will be necessary for the company to change/adapt its
marketing strategy.
 2. Why to export?

Should we expand internationally?

- Is expanding internationally consistent with other company goals?

Financial situation, expansion drive, ...
- What will the expansion demand from the company's resources?
Investments, hhrr, share of mind, languages, ...
- What does expanding mean?
Exporting and beyond exporting.
- Are the expected benefits worth the costs?
Risk vs. Control, ...
1. Introduction

2. Why to export?
3. Export strategy
4. Why to import
 3. Export strategy

The probability of exporting successfully can be increased dramatically

by taking a handful of simple strategic steps.

a) It helps to hire an experienced export professional to help with

the identification of opportunities and navigate through the web of
paperwork and regulations.
b) It often makes sense to initially focus on one market, or a handful
of markets. The firm that enters many markets at once runs the risk of
spreading its limited resources.
c) It is recommended to enter a foreign market on a small scale to
reduce the costs of any subsequent failure. Entering on a small scale
provides the time and opportunity to learn about the foreign country
before making significant capital commitments.
d) The exporter needs to recognize the time and managerial
commitment involved in building export sales and should hire
additional personnel to oversee this activity.
 3. Export strategy

The probability of exporting successfully can be increased dramatically

by taking a handful of simple strategic steps.

e) In many countries, it is important to devote a lot of attention to

building strong and enduring relationships with local distributors
and/or customers.
f) It is important to hire local personnel to help establish the firm in a
foreign market. Local people have a greater knowledge of the market,
its tricks and culture.
g) It is important for the exporter to keep the option of local
production in mind. Once exports build up to a sufficient volume to
justify cost-efficient local production.
 3. Export strategy

STEP BY STEP MARKET RESEARCH

1. CAGE FRAMEWORK
2. GENERAL DEMOGRAPHIC AND SOCIAL INDICATORS
3. ECONOMIC INDICATORS
4. INDUSTRY & PRODUCT SPECIFIC INDICATORS
3. Export strategy
 3. Export strategy

Market research and selection:

When analysing possible markets as a possible objective for market

expansion through exports both a general approach (demography,
economy and social development) and a specific approach (industry
and product specfic information.

General indicators:

Population size and growth

Age distribution % of english speakers
Political stability/instability
Educational level
Human Development Index (UN)
Urbanization rate Global Competitivenes Inex (WEF)
% of mobile/internet use
 3. Export strategy

Market research and selection:

Economic indicators are a key factor in the general research of an

exporting strategy.

Economic indicators:

GDP growth
GDP per capita
GINI index
Unemployment rate
Inflation
Public debt (% of GDP)
Public deficit
Balance of payments
 3. Export strategy

Industry & product specific indicators:

Competitors
Industry volume (turnover)
Public statistical information
Market reports (free or $)
Trade show & events
Related proxy indicators
...
 3. Export strategy

Choosing an expansion strategy?

External

Internal
 3. Export strategy

Direct Agent Distributor Licensing JV Subsidiary

sales

Advantages:
- Total control by the exporter
- No intermediary costs
- Higher transport costs?
- Light commercial/sales approach
- Lower potential sales
- Higher payment risk

The exporter works directly with each costumer and so there is no

intermediary and total control.
It is only recommendable for contexts involving a small number of
costumer not needing a very close costumer service.
Transport costs may be higher as shipments to different costumers will
not be grouped.
Sales pressure will not be easy from abroad and so the sales potential is
lower than in other strategies.
The level of payment risk is also higher due to lack of market information.
 3. Export strategy

Direct Agent Distributor Licensing JV Subsidiary

sales

Advantages
- A cost/effective presence
- Commission costs (5-15%)
- The exclusivity issue
- Managing control & compromise
- Managing transport costs

As most agents are only paid on a commission basis this is an

extremely cost effective strategy. Exclusivity should only be granted
covering particular territories or distribution channels (groups of
costumers) and always conditioned to compliance of sales
objectives. Controlling the agent's performance and gathering
market information is key when using this strategy. As with direct
sales transport costs may be high.
 3. Export strategy

Direct Agent Distributor Licensing JV Subsidiary

sales

Advantages:
- A (few) costumer (s) per market
- The exclusivity issue (again)
- Loosing control of market information
- Loosing control of prices
- Transport efficiency
Distributors facilitate the expansion of a company as they directly take
care of the sales and logistics efforts inside each market. The main
drawbacks of this strategy is that the expanding company looses control
of both prices and market information and unless it follows both issues
gathering information if the relation with the distributor terminates the
company will loose all the information acquired by the distributing
company.
It is an efficient strategy in terms of transport as the distributor receives
goods in one single shipment and will later organize its own logistics.
 3. Export strategy

Direct Agent Distributor Licensing JV Subsidiary

sales

Control
National subsidiary

Cooperation
Licensing
Joint Ventures

Direct exporting
Distributor
Franchising

Exporting
Trading companies
Risk
 3. Export strategy

Direct Agent Distributor Licensing JV Subsidiary

sales

Licensing agreement:

- Minimum involvement and financial risk

- Intellectual property risk
- Limited profit (% royalties)
- Fit for offshoring manufacturing
 3. Export strategy

Direct Agent Distributor Licensing JV Subsidiary

sales

Subsidiary/Joint venture:

- Greatest involvement, greatest potential

- Human resources are everything
- Highest cost/investment
- Highest control & market information
1. Introduction

2. Why to export?
3. Export strategy
4. Why to import
 4. Why to import?

Introduction

Before components can be manufactured, raw materials must be procured.

For countries with few natural resources (such as Japan and many European
markets), this can be critical, since nearly all of the uranium, crude oil, and a
significant percentage of its agricultural products are purchased from abroad.

Imports involves risks that are very similar to those faced by exporters:

Culture and language

Tranport and logistics
Quality and delivery (mirroring payment risk)
Currecny exchange risk
Political risc
...
 4. Why to import?

Import strategy

Importation requires a certain degree of expertise in dealing with institutions

as well as documentation that a firm may prefer to avoid. As a result, the
importer may wish to work through an import broker.

The strategic considerations are more critical in the long run. In the case that
the US dollar is strong a US company may consider sourcing more of their
purchases abroad.
For instance, in early 1980s the US dollar was strong. GM felt that they
needed to be competitive with foreign manufacturers. Hence, they consider to
sourcing more of their purchases abroad.

Basic reasons to import:

Price
Quality
Unavailability of items domestically
Faster delivery and continuity of supply
Better technical service
More advanced technology, etc.
EXPORTING BUSINESS CASE