BUS 122 – Principles of Exporting and Importing
CHAPTER 2
EXPORTING: PRELIMINARY CONSIDERATIONS
These Lecture notes expand a little further on the issues discussed in Chapter 2, and add
some important “bits and pieces” to the subject of exporting that your textbook did not cover
in details. Please remember, this is a bonus material, which should be used in addition to –
not in lieu of, your textbook reading, Chapter 2.
Learning Objectives
1. Understand how the political, economic and legal systems of countries differ, and appreciate how
these differences influence the costs and risks associated with exporting to that country.
2. Become familiar with certain considerations relating to the product that companies plan to export,
including product modifications needed for various markets.
3. Become introduced to the subject of Export Controls, Licenses, Patents, Trademarks and Copyright
Registrations.
4. Be conversant with the Terms of Sale in export sales agreements and Incoterms.
5. Learn about certain transportation issues and how freight forwarders and foreign customs brokers
can be used to facilitate exporting.
6. Become aware of the various types of Export Financing and Payment Insurance.
7. Be acquainted with the role and functions of the Export Trading Companies in exporting.
SUMMARY
These Lecture Notes focus on the essential issues of exporting, such as Terms of Sale or Incoterms,
the use of Export Management Companies (EMC), Freight Forwarders and foreign customs brokers.
The role of governmental agencies in Export Financing and Export Controls and Licensing will be
introduced in this Chapter, and discussed in more details in later chapters. Please review the
Appendixes (PowerPoint slides) attached along with the Lecture Notes.
INTRODUCTION
Before you proceed to the exporting essentials, it is important that you clearly understand and feel
very comfortable answering the question: What is exporting? Many of you have already formulated
their opinion, answering an essay question in Test # 1 – very nice job!
The most important difference between export and domestic trade is that in export, sellers and buyers
are located in different countries. This is so obvious that it is often taken for granted and then,
incredibly, overlooked.
Because sellers and buyers are in different countries, they are subject to different regulations from
different authorities and have different procedures for settling disputes. Each country observes its
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BUS 122 – Principles of Exporting and Importing
own national holidays (something important to know, because that is when the Customs are usually
closed, and you do not want your shipment to get stuck there for a long time, such as a two-week
national holiday falling around the Chinese New Year’s celebrations in January – beginning
February).
To some extend, the commercial practices around the world differ, as will the countries’ product
standards. Each country of the world (for the exception of those belonging to the Euro-zone) has its
own currency; therefore, a risk of foreign exchange fluctuations is always present.
If this were not enough, the seller’s and buyer’s countries may belong to different common-market-
type regimes. This may result in conflicting multi-national regulations and discriminatory treatment
of products originating from non-member countries. Further, some countries, including the United
States, embargo other countries. (For more information on the subject, please review Appendix 1 –
Chapter 2 “International Economic Integration” PowerPoint Slides)
Given these obstacles, it’s amazing that foreign trade exists at all! It does for a multitude of reasons,
most of which will be addressed later in this course (and, also, should be reflected in your individual
Project Papers!). However, successful foreign trade requires care, particularly on the part of the
exporter.
WHO IS WHO IN EXPORTING
For simplicity, we will assume that the Seller is also the Exporter. This is normally the case, with
two exceptions:
1. Some Sellers engage specialized entities called export management companies (EMC) to handle
their exports. Because EMC(s) typically do not take title to the goods they handle, they are not
strictly speaking, sellers. However, their interests so closely match those of their seller-principals that
we may group them together.
2. Some buyers appoint purchasing agents to handle exports from their sellers’ countries. Because
these are exports of goods that have already been purchased for the account of their overseas
principal, the underlying sales transactions are really domestic business and are beyond the scope of
our course.
Having accounted for these two exceptional circumstances, we will consider the “Exporter” and the
“Seller” to be the same party for the purposes of this course unless otherwise indicated.
There are two basic approaches that a Manufacturer may use for exporting. It can handle its own
exports; this is called Direct Exporting. As we have seen, it can also engage an export intermediary,
such as an EMC, to handle its exports. This is called Indirect Exporting. Many manufacturers use
both approaches by directly exporting to established markets, and use export intermediaries for new
markets or for situations where the intermediary has particular qualifications. Once again, we will
make a generalization for the sake of simplicity. Throughout this course, the “Manufacturer” and the
“Exporter” will be considered to be the same party.
Combining the ideas of the two preceding paragraphs, we get a Seller who is also both Exporter and
Manufacturer.
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BUS 122 – Principles of Exporting and Importing
For your convenience, the following bonus material of Lecture Notes will follow the same
alphabetic references and sub-chapter headings, as in the textbook.
A. PRODUCTS
There are several issues for exporters to consider with regard to the product they plan to sell abroad:
- Product nature and attributes
- Export limitations and special procedures required by the appropriate governmental
agencies that control export of those products
- Country-specific requirements, technical and configuration standards, pricing,
communication and marketing strategy; compliance with foreign laws; choosing an
appropriate distribution system.
The four elements constitute a firm's marketing mix: product attributes, distribution strategy,
communication strategy, and pricing strategy. A firm's marketing mix is the set of choice that if
offers its customers. (For more information on the subject, you may want to review Appendix 2 –
Chapter 2 “Export Marketing, Product and Pricing” PowerPoint Slides)
Many firms vary their marketing mix from country to country depending on differences cultures,
levels of economic development, product and technical standards, the availability of distribution
channels, and so forth. It is important to stress the point that selling a product on a global scale may
require that a firm vary its products from country to country to satisfy local preferences. This may,
also, require a firm to establish R&D (research and development) centers in different parts of the
world, and closely link R&D and marketing in each region to ensure that the company is producing
products that its overseas customers will buy.
From various news coverage and business articles, you must have learned about the tension that exists
in most international businesses. This is the tension between, on the one hand, the need to reduce
costs, and on the other hand, the need to be responsive to local conditions.
Learning Tip # 1: A broad array of international marketing resources is available on the Internet. A
very comprehensive menu of these resources, courtesy of Cal State Hayward, is available at:
[Link]
The current consensus among academics is that although the world is moving towards global markets,
the continuing persistence of cultural and economic differences among nations acts as a major brake
on any trend toward global consumer tastes and preferences. In addition, trade barriers (such as
tariffs, quotas, Voluntary Export Restrains, embargo, “red tapes, etc) and differences in product and
technical standards also constrain a firm's ability to sell a standardized product to a global market.
Learning Tip #2: There is a number of consulting companies that help firms "go global." Students
might be interested in knowing a little bit about these companies. One company is the Chicago based
Quadral Group. The Quadral Group's web site can be accessed at: [Link]
MARKET SEGMENTATION
Market segmentation refers to identifying distinct groups of consumers whose purchasing behavior
differs from others in important ways. Firms must adjust their marketing mix from segment to
segment.
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BUS 122 – Principles of Exporting and Importing
In international business, segmentation needs to consider the existence of segments that transcend
national borders and understand differences across countries in the structure of segments. For a
segment to transcend national borders, consumers in that segment must have some compelling
similarities that lead to similarities in purchasing behavior. Where such similarities do not exist, there
must be some customization if the firm is to maximize performance in the market. This
customization may be in the product, the packaging, or simply the way in which the product is
marketed.
Global market segments are much likely to exist in industrial products (e.g., memory chips, chemical
products, and corporate bonds) than in consumer products.
PRODUCT ATTRIBUTES
Products sell well when their attributes match consumer needs. If consumer needs were the same the
world over, a firm could simply sell the same product worldwide. But consumer needs vary from
country to country depending on culture and the level of economic development.
Cultural Differences
Countries differ along a whole range of (cultural) dimensions, including tradition, social structure,
language, religion, and education. At the same time, there is some evidence that tastes and
preferences are becoming more cosmopolitan.
Economic Differences
Just as important as differences in culture are differences in the level of economic development.
Firms based in highly developed countries tend to build a lot of extra performance attributes into their
products. Consumers in less developed nations do not usually demand these extra attributes, where
the preference is for more basic products.
Product and Technical Standards
Notwithstanding the forces that are creating some convergence of consumer tastes and preferences.
The vision of global markets may still be a long way off due to national differences in product and
technological standards.
DISTRIBUTION STRATEGY
A critical element of a firm's marketing mix is its distribution strategy, the means it chooses for
delivering the product to the consumer.
A Typical Distribution System
A typical distribution system consists of a channel that includes a wholesale distributor and a retailer.
If the firm manufacturers it product in the particular country, it can sell directly to the consumer, to
the retailer, or to the wholesaler. The same options are available to a firm that manufacturers outside
the country.
Differences Between Countries
Retail Concentration - In some countries the retail system is very concentrated, whereas in other
countries it is fragmented. In a concentrated system, a few retailers supply most of the market. A
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BUS 122 – Principles of Exporting and Importing
fragmented retail system is one in which there are many retailers, no one of which has a major share
of the market.
Channel Length - Refers to the number of intermediaries between the producer and the consumer. If
the producer sells directly to the consumer, the channel is very short. If the producer sells through an
import agent, a wholesaler, and a retailer, a long channel exists.
Channel Exclusivity - An exclusive distribution channel is one that is difficult for outsiders to
access. Japan's system is often help up as an example of a very exclusive system.
Choosing a Distribution Strategy
A choice of distribution strategy determines which channel the firm will use to reach potential
consumers. Since each intermediary in a channel adds its own markup to the products, there is
generally a critical link between channel length and the firm's profit margin. However, a long channel
also has benefits. One benefit of using a longer channel is that it economizes on selling costs when
the retail sector is very fragmented.
COMMUNICATION STRATEGY
Another critical element in the marketing mix is communicating the attributes of the product to
prospective customers. A number of communication channels are available to a firm; they include
direct selling, sales promotion, direct marketing, and advertising. A firm's communications strategy
is partly defined by its choice of channel.
Barriers to International Communication
International communication occurs whenever a firm uses a marketing message to sell its products in
another country. The effectiveness of a firm's international communication can be jeopardized by
certain potentially critical variables, such as:
Cultural Barriers
Cultural barriers can make it difficult to communicate messages across cultures. The best way for a
firm to overcome cultural barriers is to develop cross-cultural literacy.
Source and Country of Origin Effects
Source effects occur when the receiver of the message (the potential consumer) evaluates the
message based upon the status or image of the sender. Source effects can be either positive or
negative. The class can be stimulated to think of some positive and negative source effects (German
autos vs. German wine, Italian cuisine vs. British cuisine). A subset of source effects is referred to as
country of origin effects (the extent to which the place of manufacturing influences product
evaluations).
PRICING STRATEGY
International pricing strategy is an important component of the international marketing mix.
Strategic Pricing
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BUS 122 – Principles of Exporting and Importing
The concept of strategic pricing has three aspects, which we will refer to as predatory pricing, multi-
point pricing, and experience curve pricing.
Predatory Pricing
Predatory pricing involves using the profit gained in one market to support aggressive pricing in
another market. The objective is to drive competitors out of the market.
Multi-point Pricing Strategy
Multi-point pricing strategy becomes an issue in those situations where two or more international
businesses compete against each in two or more distinct (national) markets.
The concept of multi-point pricing refers to the fact a firm’s pricing strategy in one market may have
an impact on their rival’s pricing strategy in another market. In particular aggressive pricing in one
market may elicit a competitive response form a rival in another market that is important to the firm.
The managerial message in all of this is that pricing decisions around the world need to be centrally
monitored.
Experience Curve Pricing
Many firms pursuing an experience curve pricing strategy on an international scale price low
worldwide in attempting to build global sales volume as rapidly as possible, even if this means taking
large losses initially. A firm using experience curve pricing believes that several years in the future,
when it has moved down the experience curve, it will be making substantial profits and, moreover,
has a cost advantage over its less aggressive competitors.
Regulatory Influences on Prices
Firms' abilities to engage in either price discrimination or strategic pricing may be limited by national
or international regulations.
Antidumping Regulations
Dumping occurs whenever a firm sells a product for a price that is less than the cost of producing it.
From the perspective of an international business, the important point is that antidumping rules set a
floor under export prices and limit firms’ ability to pursue strategic pricing.
Competition Policy
Most industrialized nations have regulations designed to promote competition and to restrict
monopoly practices. These regulations can be used to limit the prices that a firm can charge in a given
country.
CONFIGURING THE MARKETING MIX
Standardization versus customization is not an all or nothing concept. In reality most firms
standardize some things and customize others. When looking at the overall marketing mix and
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BUS 122 – Principles of Exporting and Importing
message, one often finds some aspects of standardization and some aspects of customization in all
products depending on local requirements and overall cost structures.
Learning Tip #3: In the coming years, the Internet will become an increasingly important part of
international marketing mix and export sales. Two sites that contain information and links to other
sites on international marketing on the Internet are: [Link]
and [Link]
You may find the above links useful when working on your Project paper for this class.
Product Safety and Product Liability
Different countries have different product safety and liability laws (safety standards to which a
product must adhere). In some cases US businesses must customize products to adhere to local
standards if they are to do business in a country, whether these standards are higher or just different.
When product standards are lower in other countries, firms face an important ethical dilemma.
Should they produce products only of the highest standards even if this puts them at a competitive
disadvantage relative other producers and results in not maximizing value to shareholders? Or should
they produce products that respond to local differences, even if that means that consumers may not be
assured of the same levels of safety in different countries?
E. COMPLIANCE WITH FOREIGN LAW
In this section, I would like to make the point that a country’s political, economic, and legal systems
have a direct impact on its economic potential, therefore – the exporters’ ability to sell their products
successfully into foreign markets.
As you know, different countries have different political systems, economic systems, and legal
systems. Cultural practices can vary dramatically from country to country, as can the education and
skill level of the population. All of these differences have major implications for exporting.
Political Systems
A) By political system we mean the system of government in a nation. Political systems can be
assessed according to two related dimensions. The first is the degree to which they emphasize
collectivism as opposed to individualism. The second dimension is the degree to which they are
democratic or totalitarian.
The political environment of a country matters because:
1) when economic freedoms are restricted, so may be the ability of international traders (exporters) to
operate in the most efficient manner, and
2) when political freedoms are restricted there are both ethical and risks concerns that have to be
considered.
Economic Systems
There are three broad types of economic systems: market, command, and mixed. In reality almost all
are mixed to some extent, for even the most market oriented have some governmental controls on
business and even the most command based either explicitly allow some free markets to exist or have
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BUS 122 – Principles of Exporting and Importing
black markets for some goods and services. Yet all countries can be considered to be at some point
on a continuum between pure market and pure command.
Market Economy
In a pure market economy the goods and services that a country produces, and the quantity in which
they are produced, is not planned by anyone. Rather price and quantity are determined by supply and
demand. For a market economy to work, there must be no restrictions on either supply or demand -
no monopolistic sellers or buyers.
Command Economy
In a pure command economy the goods and services that a country produces, the quantity in which
they are produced, and the price at which they are sold are all planned by the government. Resources
are allocated "for the good of society". The government owns most, if not all, businesses.
Mixed Economy
A mixed economy includes some elements of each. In Canada, for example, while most business is
privately owned and operated under market principles, health care, electrical power, and liquor
distribution are run by state owned enterprises in most provinces. Over the past few decades France
has chosen to inefficiently operate many business enterprises “for the good of workers and the
country,” and complains vigorously to the EU when more efficient private firms from other EU
countries seek to encroach on the markets these enterprises poorly serve.
Legal Systems
The legal system of a country refers to the rules, or laws, that regulate behavior, along with the
processes by which the laws of a country are enforced and through which redress for grievances is
obtained.
The legal environment of a country is of immense importance to international business because a
country's laws regulate business practice, define the manner in which business transactions are to be
executed, and set down the rights and obligations of those involved in business transactions.
Differences in the structure of law can have an important impact upon the attractiveness of a country
as an investment site and/or market.
Different Legal Systems
The common law system (based on tradition, precedent, and custom) evolved in England over
hundreds of years. It is now found in most of Great Britain’s former colonies, including the United
States.
A civil law system is based on a very detailed set of laws organized into codes. Over 80 countries,
including Germany, France, Japan, and Russia, operate with a civil law system.
Islamic law is the most widely practiced theocratic law system (based on religious teachings) in the
modern world.
Differences in Contract Law
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BUS 122 – Principles of Exporting and Importing
Contract law is the body of law that governs contract enforcement. A contract is a document that
specifies the conditions under which an exchange is to occur and details the rights and obligations of
the parties involved. The United Nations Convention in Contracts for the International Sales of
Goods (CIGS) establishes a uniform set of rules governing certain aspects of the making and
performance of everyday commercial contracts between sellers and buyers who have their places of
business in different nations. By adopting CIGS, a nation signals to other nations that it will treat the
Convention’s rules as part of its law.
Property Rights
Control over property rights (the bundle of legal rights over the use to which a resource is put and
over the use made of any income that may be derived from that source) are very important for the
functioning of business. Property rights can be violated by either private action (theft, piracy,
blackmail, Mafia) or public action (governmental bribery and corruption, nationalization).
Public Action and Corruption
Public action to violate property rights occurs when public officials extort income or resources from
property holders using various legal mechanisms including excessive taxation, requiring expensive
licenses or permits from property holders, or taking assets into state ownership without compensating
the owners.
In some countries, corruption is kept to a minimum while in other corruption is rampant.
Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act makes it a violation of the United States law to bribe a foreign
government official in order to obtain or maintain business over which the foreign official has
authority, and requires all publicly traded countries to keep detailed records so that it is clear whether
a violation of the act has occurred or not.
G. PATENT, TRADEMARK, AND COYRIGHT REGISTRATIONS AND INFRINGEMENTS.
The Protection of Intellectual Property
Intellectual property refers to property, such as computer software, a screenplay, or the chemical
formula for a new drug that is the product of intellectual activity. Intellectual Property rights include
patents (documents giving the inventor of a new product or process exclusive rights to the
manufacture, use, or sale of that invention); copyrights (exclusive legal rights of authors, composers,
playwrights, artists, and publishers to publish and dispose of their work as they see fit); and
trademarks (designs and names, often officially registered, by which merchants or manufacturers
designate and differentiate their products).
The protection of intellectual property rights differs greatly from country to country. While many
countries have stringent intellectual property regulations on their books, the enforcement of these
regulations has often been lax. In addition to lobbying their governments, firms may want to stay out
of countries where intellectual property laws are lax rather than risk having their ideas stolen by local
entrepreneurs (such reasons partly underlay decisions by Coca-Cola and IBM to pull out of India in
the early 1970s).
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BUS 122 – Principles of Exporting and Importing
Note: In 1947, Intellectual Property comprised just fewer than 10% of all U.S. exports. In 1986, the
last year the government compiled statistics in this area, the figure had grown to more than 37% (U.S.
Dept. of Commerce). Today, some estimates place the figure at over 50% of all exports.
Learning Tip #4: A summary of U.S. Trademark law, which may be interesting to you, can be found
at: [Link]
An International agreement signed by 96 countries to protect intellectual property rights is known as
the Paris Convention for the Protection of Industrial Property. In addition, a new agreement
known as the Trade Related Aspects of Intellectual Property Rights (TRIPS) requires WTO
members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years.
Learning Tip # 5: The World Intellectual Property Organization’s web site contains extensive
information on various treaties and agreements between countries regarding the protection of
intellectual property. The site is: [Link]
Learning Tip # 6: A number of countries and regions maintain an international “Chamber of
Commerce” to disseminate current information about their respective country or regional of the
world. These Chambers of Commerce are an excellent “first stop” when conducting research on the
market potential of a particular country or area. An index of the Chambers of Commerce available on
the Internet can be accessed at: [Link]
Learning Tip # 7: The U.S. State Department produces a series of annual "Country Reports" to
acquaint American businesses with other countries. Each report contains nine sections: (1) Key
Economic Indicators; (2) General Policy Framework; (3) Exchange Rate Policies; (4) Structural
Policies; (5) Debt Management Practices; (6) Significant Barriers to US Exports and Investments; (7)
Export Subsidies Policies; (8) Protection of US Intellectual Property; and (9) Worker Rights.
Information about obtaining these reports is available through the United States Stated Dept. at
[Link]
M. TERMS OF SALE
Terms of sale identify and assign costs, risks, and responsibilities between sellers and buyers in
Contracts of Sale. Although sellers and buyers may be free to agree to any conditions they wish, both
parties are usually better off using well-established sales terms (or, commercial terms) rather than
inventing their own. The advantages are obvious, especially in foreign trade where, by definition,
seller and buyer are located in different countries. This implies different trade practices and legal
systems, Customs, and often languages. Clearly, anything that can provide consistency makes life
easier for all concerned.
Fortunately, the International Chamber of Commerce (ICC) provides Terms of Sale called Incoterms
that are widely used in international trade throughout the world. Incoterms have been around since
1936, and periodic revisions ensure that they reflect current trade practice, and the latest version,
Incoterms 2000, has been translated into more than 30 languages.
WHAT INCOTERMS ARE?
Incoterms are scenarios of seller-buyer responsibilities, costs, and risks used in international sale of
goods. (For more information on the subject, please review Appendix 3 – Chapter 2 “Incoterms
2000” PowerPoint Slides).
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