Lecture 1 : Introduction to Exporting

1.1 Introduction to Exporting

1.2 Orientation
1.3 Introduction

In this lecture, we will cover:

· Globalization and opportunities;
· What is exporting?;
· Exporting services;
· The benefits, risks and challenges of exporting; and
· Export rules and regulations.
1.4 Globalization

Globalization

What is globalization?
In today’s world, countries are becoming increasingly economically interdependent. This can be seen by the
increased movement of goods, services, labour and capital across international borders.
The term “globalization” is widely used to describe this emerging situation in which trade and entrepreneurial
activity are not only increasing, but are also becoming increasingly free of geographic boundaries.
Turning threats into opportunities
For an increasing number of companies, globalization is moving from a vague notion to an everyday reality.
This new reality, however, brings with it both threats and opportunities.
Today, even companies that are only active domestically feel the threat of globalization: with increased trade
between countries, local businesses often face competition from foreign companies in their domestic market.
However, many companies are also finding that globalization has brought them increased opportunities as
they expand their business beyond their domestic market, outsource some of their tasks to countries with
lower labour costs, or start partnerships and alliances with foreign companies.
Also of importance to note is the fact that the widespread use of the Internet and other information
technologies means that many small companies, particularly knowledge-based and technologically-driven
companies, are now “born global.” Size is beginning to matter less and less to a company’s ability to do
business internationally.
What is (Slide Layer)
1.5 Answer the question

Correct Choice

X When you send your goods to a customer located in another country and
receive payment from a source also located in another country.

X When you supply a trader in your own country with goods and are paid in
your own currency, while the trader then sells the goods to a customer in
another country.

Feedback:

Both answers are correct.

There are a number of different ways to define exporting and, depending on the definition used, both options
could describe an exporter. In this case, the first situation describes a direct exporter, while the second
situation describes an indirect exporter. The next slide will explain the difference between these in more detail.
1.6 What is exporting?

What is exporting?

Exporting is selling products or services across a country’s national borders and, in return, getting paid in
currency, goods, or services from parties who are also from outside these borders. There are many different
ways to export but as a general rule, they can be classified as either direct exporting or indirect exporting.
Direct exporting involves entering into direct relationships and negotiating contracts for the sale of goods
and/or services with buyers from another country.
Indirect exporting is arranged through local traders. These traders are responsible for negotiating
international sales, and while the traders get paid in international currency by their international customers,
the traders pay their domestic customers (indirect exporters) in local currency.
1.7 Indirect and direct exporting

Indirect and direct exporting

Indirect exporting

When businesses export indirectly, they rely on either an export trading company or an export management
company in order to find international customers and market their goods.

For smaller companies, the main advantage of indirect exporting is that it provides a way to enter foreign
markets without the potential complexities and risks of entering into direct relationships with international
buyers.

However, it may also mean losing part of their profit margin, as well as reducing their ability to eventually
develop direct relationships and grow their activities with international customers.

Another disadvantage of indirect exporting is that it is often the trading company that is recognized as the
exporter. Given this, it is the trading company, and not the indirect exporter itself, that is entitled to any
benefits or incentives offered to exporters by legislative bodies and other organizations.

Direct exporting

For businesses, the advantages of direct exporting include increased control over the export process,
potentially higher profits, closer relationships with international buyers and markets, as well as the
opportunity to learn what they can do to boost their overall competitiveness in these markets.

However, direct exporting requires an important investment of both time and resources for market research
and international brand development. In order to establish themselves as direct exporters, companies must
determine which countries they want to enter, assess whether or not their products will sell in those new
markets, and adapt their products to accommodate the needs of the local customers.
1.8 The Four Modes of Exporting

The Four Modes of Exporting

In addition to direct and indirect exporting, there are four basic methods (modes) by which products and
services are traded across international borders. These are:
Cross-border supply: Goods/services are shipped across international borders (e.g.: an Ethiopian coffee
exporter sells and ships coffee to Canada).

Consumption abroad: A consumer crosses international borders to purchase goods and/or receive services
(e.g.: a consumer travels to another country for tourism or in order to receive medical or educational services).

Commercial presence: A company registered in one country establishes a branch in another country (e.g.: an
Egyptian textile SME establishes a branch office in Morocco).

Temporary movement of natural persons: An exporter crosses international borders to deliver services (e.g.: a
doctor from Japan supplies services in Liberia by his/her physical presence in the country).
1.9 Exporting services

Exporting services

The output of services has grown from roughly 55% of global GDP in the mid-1970s to some 70% today. While
the service sector accounts for a large share of most economies, some services are not easily exported. While
exporting personal services such as haircuts or massages is somewhat difficult, business services are easier to
export - especially if they are highly innovative, specialized, or technologically advanced.

The following service sectors have particularly high export potential:

· Travel and tourism: This sector encompasses all travel and tourism-related businesses, including
recreational and cultural services.

· Transportation services: This sector encompasses aviation, shipping, railroads, freight, and pipelines.

· Construction, design, and engineering: This sector encompasses professional services in the areas of
design and planning, urban development, construction, and civil engineering.

· Banking, financial and insurance services: This sector encompasses services which range from account
management and credit card operations to risk evaluation.

· Professional business services: This sector includes services such as accounting, advertising, legal, and
management consulting.

· Telecommunication and information: This sector includes services such as data processing, network
services, and professional computer services.

· Entertainment: The sector includes the distribution of recorded music, film and television shows.

· Education and training: This sector includes the provision of management, technical and language
training, as well as university education.
1.10 Answer the question

Feedback:

Correct answer: true.

Exports are products or services that are sold to customers who live in a different country than the one in
which they are produced. They can be sold either directly to customers or indirectly to local buyers who then
export the products.
1.11 Answer the question

Correct Choice

A management firm providing advice to a foreign client.

An investment bank arranging financing for a foreign firm.

X A beverage company selling products to a local export management

company.

An engineering firm building roads in a foreign country.

Feedback when correct:

The correct answer is: A beverage company selling its products to a local export management company.

This is a form of indirect export of goods.

1.12 The Benefits and Risks of Exporting

The Benefits and Risks of Exporting

1.13 Answer the question

Correct Choice

X It is an opportunity to expand markets and increase turnover.

X It gives the enterprise a competitive edge.

X It helps the enterprise gain access to diversified markets in order to hedge

against downturns in its domestic market.

X It allows the enterprise to use its idle capacity.

Feedback when correct:

All answers are correct.

Although individual reasons to export may vary between enterprises, these are all possible reasons to consider
exporting. The next slide will explore the benefits of exporting in more detail.

.
1.14 The Benefits of exporting

The Benefits of exporting

Benefits for enterprises

As an entrepreneur, you have many reasons to carefully consider exporting. Some of these include:
· Expanding your business activities: As an enterprise’s domestic market is often limited, targeting global
markets is a good way to diversify your client base. Successful international engagement would increase
your enterprise’s sales.

· Reducing dependence: Diversifying your clients to include foreign markets may help protect you from
fluctuations in the economy of your home country, as well as extend the life cycle of your products. It may
also decrease the effect of seasonality in your business.

· Improving performance, productivity and competitiveness: The demands of exporting may require
your firm to refine its products, production processes, and the skills of its workers. Much of this upgrading
may be achieved through partnerships with buyers in your export market, who may be willing to transfer
technology and skills and/or provide capital investment.

· Achieving economies of scale: Exporting can bring economies of scale to your business when there is
little or no modification necessary to introduce your products into your target export market.

· Using idle capacity: When exports increase, equipment, staff and capital that may be idle can be put to
work.

· Gaining exposure to new ideas, marketing and management skills: Exporting can give your company
exposure to worldwide “best practices,” in your business area, helping you gain new ideas to improve your
operations.

· Making more profit: Often, the profit margins in international markets are higher than in domestic
markets due to high price sensitivity when selling domestically.
Benefits for a country’s economy
Engaging in export activities can bring many benefits to your country and local community. Some of these
include:

· Attracting investment: Exporting can benefit communities by attracting foreign direct investment into
the local area.

· Empowering individual entrepreneurs and groups of producers: The export of goods and services can
give increased income opportunities for a variety of small-scale entrepreneurs and groups of producers
directly or indirectly involved with export activities in the local area.

· Taking advantage of growth opportunities: Rising exports contribute to GDP growth, and can also have
a “knock-on effect” on related industries.

· Fostering cooperation: Countries often build strong mutual economic and social ties as a result of the
relations which they build through exports, and can often engage in many other areas of cooperation, such
as technology transfer.

· Creating jobs: Growth in exports can help a country generate more employment opportunities for its
inhabitants.

· Earning foreign currency: Through exports, countries can earn foreign currency, which can also
contribute to financing imports.
1.15 How is exporting different?

How is exporting different?

Doing business internationally is not the same as doing business in the domestic market. Below are several
factors that affect the exporting efforts of companies.
1.16 Exporting risks

Exporting risks
Although exporting can open a wealth of opportunities for your enterprise, it also entails risks. In fact, doing
business internationally often involve risks that are both different and greater than those encountered
domestically, and which can change depending on the country to which you intend to export. Some typical
areas of risk in exporting include:

· Political risks: Instabilities in the political situation of the export country can disrupt or, in some cases,
prevent the completion of export contracts.

· Legal risks: There may be differences between the law of your country and that of the country to which
you intend to export. Potential differences in legal processes are important to keep in mind when entering
into international contractual agreements.

· Currency risks: Fluctuations in the value of currencies, whether in your home country or in your export
market, can seriously harm profit margins in international transactions.

· Payment risks: International transactions often involve the risk of payment delays, or of not receiving
payment at all.
1.17 Answer the question

Correct Choice

A new competitor entering the market

Operational risks, such as equipment breakdown

X Political instability in the importing country, leading to contract disruption

X Changes in laws dealing with international business activities

Environmental risks, including natural disasters

X Currency fluctuations

High staff turnover

Feedback:

The correct answers are:

Political instability in the importing country, leading to contract disruption;

Changes in laws dealing with international business activities; and

Currency fluctuations
All businesses entail risks. However, doing business internationally can involve different risks from those
encountered domestically and will be influenced by the country you intend to export to.

1.18 Challenges to Exporting

Challenges to Exporting
1.19 Answer the question

Correct Choice

X To ensure standards in terms of quality, health and environmental

protection.

X To manage the flow of goods, services, people and currencies.

X To protect cultural artefacts

X For national security reasons

Feedback:

Nations create export and import rules and regulations in order to manage the flow of goods, currency, people
and services across their borders. Governments want to protect their citizens, resources and national integrity,
and different governments impose different sets of regulations on exports and imports. In other words,
exporters face regulations when their products exit their home country’s borders, as well as when they enter
the borders of the country to which they are exporting.

Rules and regulations for exports have a variety of different purposes. For example, some governments do not
want certain goods to cross their national borders: the goal may be to control the export of rare cultural
artefacts, or to prohibit the importation of certain goods, such as narcotics or firearms. There are many
different reasons for which a country may want to impose controls on imports and exports. The next slide
explains the various types and categories of rules and regulations.

1.20 Export rules and regulations

Export rules and regulations

Anyone intending to do business internationally must allocate resources to ensuring knowledge of, and
compliance with, national and international rules of trade.
1.21 International Rules and Regulations

Export rules and regulations

Anyone intending to do business internationally must allocate resources to ensuring knowledge of, and
compliance with, national and international rules of trade.

International rules and regulations

As an entrepreneur, you have many reasons to carefully consider exporting. Some of these include:
International Standards: Countries require that imported goods conform to mandatory standards in terms
of quality, health and safety. Standards are an important tool in the international marketing of products
and services because they convey information that helps buyers understand and trust their quality and
specifications. Buyers will be extremely reluctant to purchase products from sellers that do not meet the
required mandatory standards of their home countries.

Rules of Origin: Today’s supply chains are global. This means that the activities required to get a product
from conception to design, production, and distribution are often undertaken by various companies
spread across different countries or geographic regions.

· Because regional trade agreements give preference or apply tariffs according to agreements between
countries, governments need to know the country of origin of products. As such, if the production process
of a product takes place in several different countries, customs authorities must use rules of origin to see
which agreement applies.

Intellectual Property Regulations: Intellectual property (IP) refers to inventions, designs, text, films and
images, as well as certain plants and seeds. These are governed by international rules that individuals,
companies and institutions use to “protect” themselves from intellectual property theft through:

· Copyrights and trademarks

· Patents

· Industrial designs

· Geographical indications
1.22 Country-level rules and regulations
1.23 Challenges to exporting goods

Challenges to exporting goods

The United Nations Conference on Trade and Development (UNCTAD) estimates that the average trade
transaction involves 20-30 different parties, 40 documents, 200 data elements (30 of which are repeated at
least 30 times) and the re-keying of 60-70 per cent of all data at least once.

Market

· Intense global competition.

· So called “invisible barriers” to entering the global value chain, which is in some cases dominated by
leading firms or multinationals.

· Adapting existing products or developing new ones to suit market needs.

· Differences in business culture.

Company

· Lack of commitment to exporting by top management.

· Lack of capabilities to deliver after-sales services.

· Lack of market information and incapability of building an export strategy.

 · Lack of awareness of available distribution channels (part of the export strategy) and/or inability to
select the optimum form of distribution.

· Upgrading technology and the skills of the staff to meet the needs of new clients.

· Accessing capital to finance business expansion.

· Lack of information regarding financial institutions in international trade.

· Being prepared to commit time and resources for a longer period before seeing a return on investment.

· Inability to successfully implement a high-volume strategy due to insufficient production capacity.

· Inability to negotiate a realistic price and inexperienced intermediaries.

Policy

· Vast number of international rules and regulations.

· Constant changes in international markets.

1.24 Challenges to exporting services

Challenges to exporting services

The most obvious way in which exporting services differs from exporting goods is that service exports are
invisible and/or intangible. The specific challenges of exporting services include:

· Communication: As services are intangible, communicating a service offer is more difficult than
communicating a product offer.

· Adaptation to needs: Services must frequently be tailored to the specific needs of the client. Such
adaptation often requires the direct participation and cooperation of the client.

· Finance: The intangibility of services often results in a lack of collateral on the part of service exporters.
As a result, financial institutions may be less willing to provide financial support.

· Labour market and regulations: Exporting services may require company staff or management to travel
to the export market for an extended period of time, or may require the hiring of local workers. This can
result in legal obligations such as the securing of work permits and compliance with local labour practices.
Hiring local employees can be difficult if there are skill shortages in the export market.
1.25 Answer the question

Correct Choice

Selling fresh fruits to European Sanitary and phytosanitary regulations

supermarkets

International production and distribution Intellectual property regulations

of music

Textile and apparel processing and Rules of Origin

production

Manufacturing of household electrical Technical regulations

appliances

Feedback:

The correct answers are:

Selling fresh fruits to European supermarkets - Sanitary and phytosanitary regulations

International production and distribution of music - Intellectual property regulations

Textile and apparel processing and production - Rules of Origin

Manufacturing of household electrical appliances - Technical regulations

1.26 Key points

Key points

· Globalization can bring opportunities to businesses by allowing them to diversify outside of their
national markets, outsource a part of their tasks, as well as form partnerships and alliances with foreign
companies.
· Exporting is the selling of products or services across a country’s national borders. Direct exports
involve entering into direct relationships with overseas importers, while indirect exports are transactions
arranged through local traders.
· The benefits of exporting include increased sales, risk diversification, the extension of product life
cycles, improved competitiveness, economies of scale, earning foreign currency and potentially increased
profits.
· Exporting involves risks such as political instability, differences in legal processes, currency fluctuations
and delays in payment, or even non-payment.
· Some of the challenges to exporting goods include the vast number of rules and regulations that must
be observed, intense global competition, the difficulties of adapting products to suit different market
needs, lack of commitment by the management to exporting, lack of awareness of the situations in
different markets, lack of export capabilities, large requirements in terms of time and financial resources,
and difficulties in meeting high volume demands.
· Specific challenges to exporting services include the difficulty of communicating an intangible service
offering, compliance with different labour regulations and work permits, lack of collateral leading to
difficulties in obtaining for financial support, and the need to tailor most services to the specific needs of
the client.
1.27 Thank you for completing the lecture