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Managing Transnational Corpo Exporting, Importing, and Countertrade

Managing Transnational Corporations Exporting, Importing, and Countertrade

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Page 1: Managing Transnational Corporations Exporting, Importing, and Countertrade

Managing Transnational Corporations

Exporting, Importing, and Countertrade

Page 2: Managing Transnational Corporations Exporting, Importing, and Countertrade

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McGraw-Hill/IrwinInternational Business, 6/e

© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

Indian’s Mini Transnational Corporations

• Export Houses• Trading Houses• Star Trading Houses• Super Star Trading Houses• Manufacturing Sector• Services Sector

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Opening Case

• FCX initially got into exporting because it found that foreigners were often more receptive to the company’s products

• Reasons for its export success- FCX has received assistance from a number of federal

and state agencies- Persistence is also very important- They have made friends as well as gained customers

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The Problems and Pitfalls of Exporting

• Firms that do not export lose out on huge opportunities for growth and cost reduction

• Large firms pro-active in seeking foreign opportunities

• Medium and small-sized firms slow to respond- Too busy with local side of business- Ignorance of potential opportunities- Intimidated by mechanics of exporting to a foreign

country

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Information sources

• Department of Commerce- International Trade Administration- egTrade Promotion

Council of India- Foreign Commercial service agency in Embassies- Provide “best prospects” list, “comparison shopping

service,” and customized market research survey for a small fee

- Organizes exhibitions at international trade fairs to help potential exporters make foreign contacts and explore export opportunities

- Matchmaker program

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Information sources

• Trade Commissions- Maintained by many large cities- Provide business counseling, information

gathering, and financing

• Commercial banks and major accounting firms• Internet search

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Export Management Companies(EMC) Export Houses

• Act as the export marketing department for clients- Help identify opportunities and avoid common pitfalls

• Two types of assignments- Begin exporting operating operations for firm with the

understanding that the firm will take over operations once it is well established

- Provide start-up services and have continuing responsibility for selling the firms products

• Drawback: A firm can fail to develop its own exporting capabilities

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Export Strategy

• Risks can be decreased by taking few steps• Hire an experienced EMC or export consultant to

identify opportunities and deal with red tape• Focus on a few markets to learn what is needed to

succeed• Enter on a small scale to reduce costs of any failure• Invest time and managerial commitment in

building export sales

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Export Strategy

• Build strong and enduring relationships with local distributors and customers

• Hire local personnel • Keep option of local production open

- Cost-efficient economies of scale- Greater market acceptance

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Export and Import Financing

• Lack of trust between international trading partners due to several factors- Parties have never met- Language, cultural, and legal system differences- Difficulties in tracking down a party in case of default

• Problem solved by using a third party trusted by both as an intermediary – normally a reputable bank

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Tools Used to Aid Transactions

• Letters of Credit (LOC)- Bank guarantee on behalf of importer to exporter

assuring payment when exporter presents specified documents

• Drafts (Bill of Exchange)- Written order by exporter, telling an importer to pay a

specified amount of money at a specified time

• Bill of Lading- Issued to exporter, by carrier- Serves as receipt, contract, and document of title

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Letter of Credit

• Issued by a bank at the request of the importer• Bank pays a specified sum to a beneficiary,

normally the exporter, on presentation of particular, specified documents

• Fee paid by importer for letter of credit• May reduce borrowing ability of importer since

the letter is a financial liability

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Draft (Bill of Exchange)

• Written by an exporter instructing an importer to pay specified amount of money at specified time

• Required before the buyer can obtain the merchandise

• Two types- Sight drafts - payable on presentation to the drawee- Time draft - negotiable instrument allowing for

delay in payment

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Bill of Lading

• Issued to the exporter by the common carrier transporting the merchandise

• Serves three purposes:- Receipt - merchandise described on document has

been received by carrier- Contract - carrier is obligated to provide transportation

service in return for a certain charge- Document of title – can be used to obtain payment or a

written promise before the merchandise is released to the importer

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Export and Import Financing

Preference of a US exporting Firm

Preference of a French Importing Firm

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Using a Third Party

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Typical International Transaction

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Export Assistance

• Two forms of government-backed assistance prospective exporters can draw on for financing- Export-Import Bank- Export Credit Insurance (ECGC)

www. Exim.gov

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Export-Import Bank

• Referred to as Eximbank• Provides loans and loan-guarantee programs• Makes commercial banks more willing to lend cash

to foreign enterprises• US EXIM Bank Lends money to foreign borrowers

to purchase U.S. exports

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Export Credit Insurance

• Provided by Foreign Credit Insurance Association (FCIA)

• Consists of private commercial institutions operating under the guidance of Export-Import Bank

• Provides credit insurance in case importer defaults in payment

• Commercial and political risks taken into account

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The Role of Government in the Export/Import Environment

• Political- Protecting jobs and industries- National security- Retaliation

• Economic- Develop/protect infant industry- Strategic trade policy

• First mover advantage• The ‘catch-up’ argument

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Countertrade

• Countertrade is an alternative means of structuring an international sale when conventional means of payment are difficult, costly, or nonexistent- Governments may restrict the convertibility of

their currency

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Countertrade

• Denotes a whole range of barter-like agreements• Primarily used when a firm exports to a country

whose currency is not freely convertible- Developing countries e.g. former USSR

• Importing country may lack the foreign exchange reserves required

• 8 to 10% of world trade in form of countertrade- Example: Venezuelan government’s contract with

Caterpillar

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Counter Trade Examples

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Types of Countertrade

• Barter- Direct exchange of goods and services between

two parties without a cash transaction- Two-fold problems

• If goods are not exchanged simultaneously, one party ends up financing the other for a period

• Goods may be unwanted, unusable, or have a low re-sale value

• Counter purchase- Reciprocal buying agreement- Rolls –Royce Finland deal;

buy and sell TV in Britain

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Types of Countertrade

• Offset- One party agrees to purchase goods and services with a

specified percentage of the proceeds from the original sale

- Party can fulfill the obligation with any firm in the country to which the sale is being made

- Gives exporter greater flexibility to choose goods to be purchased

• Switch trading- Occurs when a third-party trading house buys the firm’s

counter purchase credits and sells them to another firm that can better use them

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Types of Countertrade

• Compensation or buybacks- Occurs when a firm builds a plant in a country or

supplies technology, equipment, training, or other services- Agrees to take certain percentage of plant’s

output as partial payment for the contract- Example: Occidental petroleum- Russia deal; Ammonia

plant; get Ammonia over 20 years

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Advantages of Countertrade

• Means to finance an export deal when other means are not available

• Unwilling firms may lose an export opportunity and be at a competitive disadvantage

• Countertrade can become a strategic marketing weapon

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Disadvantages of Countertrade

• Accept alternative means of payment instead of hard currency

• Exchange of unusable or poor-quality goods that cannot be disposed profitably

• Expenses relating to maintaining an in-house trading department to arrange and manage countertrade deals

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ASCRO ACCOUNTS

• What are these?• How does it work?• Advantages• Disadvantages

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What is an ESCROW ACCOUNT?

• Escrow a/c refers to an arrangement where assets or revenue streams are held in the safe custody of a Bank as safety against a situation when a contract isn’t fulfilled. The escrow arrangement ensures that obligations between parties are met with and transactions are operated in terms of the underlying agreement

• An Escrow account is typically used for lending arrangements, project financing, securitisations, M&A's, buy-back of shares, take-overs, custody, litigations, purchase & sale of land, custody of software source code, etc.

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Benefits of an ASCROW Account

• Greater security and comfort. • Trapping of identified cash flows. • Compliance with regulatory requirements. • Safe custody of cash / documents. • Easy monitoring.

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Firm Suitability to Countertrade

• Countertrade most attractive to huge multinationals that can use their worldwide network of contacts to most profitably dispose goods

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Looking Ahead to Next session

• Global production, Outsourcing, and Logistics- Strategy, Production, and Logistics- Where to Produce- The Strategic Role of Foreign Factories- Outsourcing Production: Make-or-Buy Decisions- Managing a Global Supply Chain

- Please read Case:- MICROSOFT-OUTSOURCING XBOX PRODUCION