EXPORTING, IMPORTING AND GLOBAL SOURCING

 Exporting and importing are the core components of international trade.

 Businesses engage in exporting when they sell goods or services to a foreign market, and in importing
when they purchase goods or services from foreign markets to sell domestically.
 Global Sourcing, on the other hand, involves purchasing goods or services from suppliers located
anywhere in the world to take advantage of cost efficiencies, superior quality, or other benefits.
Businesses often engage in global sourcing to reduce costs, improve quality, or access innovations from
foreign markets.
HOW A FOREIGN TARGET MARKET IS SELECTED

A. Market Demand The first consideration is whether there is a demand for the product in the foreign market.
- Businesses conduct market research to evaluate local consumer preferences, trends, and potential
demand for their offerings.

B. Economic Stability A country with a stable economy provides a safer environment for business operations.

INDICATORS OF STABLE ECONOMY

1. Consistent economic growth: A stable economy grows at a sustainable rate, avoiding booms and busts.
2. Low inflation: Prices remain relatively stable, preventing the devaluation of money and maintaining purchasing
power.
3. Low unemployment: A stable economy provides enough jobs for those seeking employment, contributing to
social well-being.
4. Balanced fiscal policies: Governments manage their budgets well, avoiding excessive debt or budget deficits.

C. Cultural Compatibility Understanding cultural differences is crucial in international business.

- Cultural factors, including language, consumer behavior, and religious or societal norms, can impact
product acceptance and marketing strategies.

KEY ASPECTS OF CULTURAL COMPATIBILITY:

1. Values Alignment: Compatibility in core values like honesty, respect, and work ethic.
2. Communication Styles: Similarities in verbal and non-verbal communication approaches.
3. Workplace Norms: Shared understanding of work expectations, leadership styles, and team dynamics.
4. Decision-Making Processes: Consistency in how decisions are made—whether hierarchical or collaborative.
5. Conflict Resolution: Similar approaches to resolving conflicts and handling differences.

D. Legal and Regulatory Environment Each country has its own set of trade regulations, including tariffs,
import/export restrictions, and product standards.
- Businesses must navigate these legal requirements to ensure compliance.

KEY COMPONENTS OF THE LEGAL AND REGULATORY ENVIRONMENT

1. Business Laws: These laws govern how companies are formed, operated, and dissolved. They include
corporate law, intellectual property law, contract law, and bankruptcy law.
Corporate Law: Defines the rights, duties, and powers of businesses.
Intellectual Property Law: Protects inventions, trademarks, and creative works.
Contract Law: Ensures that agreements between businesses and individuals are legally enforceable.

2. Employment and Labor Laws: These laws regulate the relationship between employers and employees,
including wages, working conditions, and workers' rights. Examples include minimum wage laws, anti-
discrimination laws, and workplace safety regulations.

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3. Taxation Policies: Regulations on corporate taxes, value-added taxes (VAT), and other business-related taxes
that companies must comply with.
Corporate Tax: Direct taxes on the income or profits of businesses.
Customs and Excise: Taxes on goods imported or exported

4. Environmental Regulations: Laws that businesses must follow to protect the environment. These include
pollution control laws, waste management regulations, and energy efficiency standards.

5. Consumer Protection Laws: These laws ensure the rights of consumers are protected, such as laws against false
advertising, product safety regulations, and warranties.

6. Trade Regulations: Rules that govern international trade, including tariffs, trade agreements, and restrictions
on imports and exports.
Tariffs: Taxes on imported goods.
Trade Agreements: Agreements between countries to facilitate or regulate trade.

7. Antitrust and Competition Laws: Laws that prevent monopolies and promote fair competition in the
marketplace. They aim to protect consumers by ensuring a competitive market.

8. Health and Safety Regulations: Laws and standards designed to ensure that products and services provided by
businesses are safe for consumers and employees.

D. Competition Firms also evaluate the level of competition in the target market.
- If the market is saturated with competitors, businesses may face challenges in gaining a position.
- However, if competition is low or if there is an unmet need, it may offer a significant opportunity.

PRICING STRATEGY FOR EXPORT ITEMS

 Cost-Plus Pricing This method involves calculating the total cost of production (including materials, labor,
and overheads) and adding a profit margin.
- While this approach ensures profitability, it may not always be competitive in foreign markets if local
alternatives are cheaper.
 Competitive Pricing Firms may price their products based on the competition in the target market.
- They assess the prices of local and international competitors and set their prices to remain competitive.
- In highly competitive markets, firms might adopt a lower price to capture market share.
 Market-Based Pricing In this approach, companies set prices according to what customers in the target
market are willing to pay.
- This strategy considers local purchasing power, consumer preferences, and perceived value.
- A high-quality product might justify a premium price, while a lower-income market may require budget
pricing.

Additional Considerations:
Export pricing also takes into account:
Tariffs: Taxes imposed on imports by the destination country.
Transportation Costs: Shipping, logistics, and insurance costs can significantly affect the final price.
Exchange Rates: Currency fluctuations between the exporter’s and importer’s countries can influence the final
price.

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ANALYSIS FOR ESTIMATING MARKET POTENTIAL

Demand Forecasting Companies use past sales data, industry trends, and economic indicators to predict future
demand for their product. This process helps in estimating potential sales volumes.

Market Size and Growth Rates Market potential is also assessed by analyzing the size of the target market (i.e.,
the number of potential customers) and the expected growth rate of the market. A large and fast-growing market
typically offers more opportunities than a small, stagnant one.

Competitor Analysis Understanding the current competitive landscape helps firms assess whether they can
compete effectively.
- If dominant players already control the market, it may be difficult to gain a foothold. On the other hand,
markets with limited competition might offer more potential.

Purchasing Power and Affordability the income levels and purchasing power of consumers in the target market
are crucial factors.
- A product that is affordable in one country might be considered a luxury in another, limiting its market
potential.

STRATEGIES USED BY FIRMS TO INITIATE INTERNATIONAL BUSINESS ACTIVITY

Direct Exporting
The simplest method of entering a foreign market, where the company sells its products directly to customers or
distributors in the target country. While direct exporting allows for more control over sales, it can involve higher
shipping and logistics costs.

Licensing
A company allows a foreign firm to produce and sell its product in exchange for a licensing fee or royalty.
This strategy requires lower investment and risk, as the local partner handles production and distribution, but it
also offers less control over the brand and product quality.

Advantages of Licensing
1. Low Investment and Risk:
The licensor does not need to invest in production facilities, distribution networks, or extensive marketing efforts
in the foreign market.
Since the local partner (licensee) assumes these responsibilities, the financial risk for the licensor is relatively low.

2. Access to Foreign Markets:

Licensing provides a quick and cost-effective way for companies to enter international markets, especially those
with restrictive trade barriers or complex regulatory environments.
Local partners often have better knowledge of the market, enabling faster market penetration.

3. Revenue Generation:
Licensing agreements provide the licensor with a steady stream of income through royalty payments or licensing
fees, without the need for direct operations in the foreign market.

4. Leverages Local Expertise:

The licensee brings in local expertise, including knowledge of cultural preferences, market trends, and regulatory
requirements.
This can increase the success of the product in the foreign market.

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5. Reduced Management Burden:
The licensor doesn’t need to manage foreign production, marketing, or distribution, allowing it to focus on its core
business activities in its home market or other areas of interest.

6. Builds Brand Presence:

Licensing helps establish the licensor’s brand in international markets, leading to greater global recognition and
brand equity without the complexities of direct international operations.

Disadvantages of Licensing
1. Limited Control:
Once a licensing agreement is in place, the licensor has limited control over how the product is produced,
marketed, and sold in the foreign market.
This can lead to inconsistent product quality or brand representation.
If the licensee underperforms, it can damage the brand’s reputation.

2. Lower Profit Potential:

Licensing typically generates lower profits compared to direct exports, franchising, or wholly owned subsidiaries,
as the licensor only earns royalties or fees rather than a share of total sales or profits.
The bulk of the profits stay with the licensee, who controls operations in the foreign market.

3. Risk of Intellectual Property Theft:

Licensing involves sharing proprietary knowledge, such as product designs, manufacturing techniques, or
technology, with the licensee.
This can lead to intellectual property (IP) theft or unauthorized use beyond the terms of the agreement.
Once the agreement expires, the licensee may become a direct competitor using the licensor’s IP.

4. Dependence on the Licensee:

The success of the licensing agreement depends heavily on the competence and reliability of the licensee.
Poor management, lack of marketing efforts, or insufficient quality control by the licensee can negatively impact
the licensor's brand and revenues.

5. Limited Long-Term Presence:

Since licensing is a temporary arrangement, the licensor may struggle to maintain a long-term presence in the
market after the agreement ends, especially if the licensee decides not to renew or starts competing with its own
version of the product.

6. Potential for Conflict:

Disagreements can arise over the interpretation of the licensing agreement, especially concerning product quality,
marketing strategies, and royalty payments.
These conflicts can damage the partnership or lead to legal disputes.

Franchising
Similar to licensing, franchising involves granting foreign partners the right to operate under the company’s brand
name and business model.
Franchising is commonly used by fast-food chains and service providers looking to expand internationally.

Joint Ventures
A joint venture involves partnering with a local firm in the target market to share resources, risks, and profits.
This strategy allows the firm to benefit from the local partner’s market knowledge, but it may involve challenges
related to control and decision-making.

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Wholly Owned Subsidiaries
The company establishes its own operations in the foreign market, either by building new facilities or acquiring
an existing business.
This strategy offers the highest level of control but requires significant investment and carries higher risks.

"Optimism is a happiness magnet. If you stay positive, good things and good people will be drawn to you."
— Mary Lou Retton

Prepared by:

PROF. RENJIE M. PEREZ, LPT, MPA, MAB

School of Accountancy, Business and Management
Department of Business Administration
National University Philippines – Clark

WARNING: This material is protected by Copyright Laws. Unauthorized use shall be prosecuted in the full extent of
the Philippine Laws. DO NOT REPRODUCE.