Quiz 14: Exporting, Importing, and Countertrade
V# exports pet shampoos. These the firm prefers to export though local distributors in each country because: 1) The market for pet shampoos is a niche market and requires a lot of local knowledge. 2) This enables the firm to enter many markets almost simultaneously without using much of its own resources. The product although a specialized product does not involve any high technology. 3) Also by registering the trademark in all the countries where it operates it is protecting its brand value. 4) It has gained a first-mover advantage in all these markets. 5) The degree of customization required in the markets is very small so the firm can standardize its products and benefit from the economies of scale. The danger in this approach lies in the fact that the distributor that has been chosen may not be as familiar with the pet market as is required for this product. His lack of knowledge and general incompetence could sales in this market for the product. However these problems could be avoided by: 1) Proper vetting of the distributor before appointment. Conduct complete background checks. 2) Learn the nuances of the local market. 3) Learn the local culture. 4) Adapt the firm's products to the market and the particular methods employed in the usage of the products. With these simple steps, costly mistakes that could cost the firm lost time and money could be avoided.
The Philippine Firm (PF) is unable to get a local loan to pay for the lumber upfront from the Washington Firm (WF). Assume there is a trustworthy bank in the Philippines named BP (Bank of the Philippines) and a trustworthy bank in Washington named WB (Washington Bank). PF orders lumber from WF under a letter of credit (a promise by a Bank to pay WF on PF's behalf). PF asks BP to send a letter of credit to WB on behalf of WF, as WB is WF's bank. WB tells WF when the letter arrives. WF ships the lumber to PF in exchange for a time draft or bill of exchange (an order instructing PF's agent, BP, to pay a certain amount of money at a certain time to the holder of the draft). WF gives the draft to the firm's bank, WB. WB gives the draft to BP, who returns it after accepting the conditions of the draft. WF formally sells the draft to WB in exchange for money, and BP tells PF of the draft and gives a deadline to pay. The draft or bill of exchange is a time draft of maybe 30 days in order to give PF the time to sell the imported lumber and to pay the BP. Once the draft contract reaches maturity, BP pays WB and the process is complete.
The benefits of exporting are: 1) The export market is much larger than the domestic market. 2) With the right strategy there are great profits to be made in the export market. 3) This can expand the revenue and profit base of a firm. 4) This is true for most firms in most industries. 5) The larger market gives a firm the opportunity to get the benefit of the economies of scale. 6) There is always more competition in the export market than in the domestic market. This serves to hone the competitive edge of a firm that participates in the export market, also in the domestic market. 7) A firm with a global strategy is protected against the ups and downs of the economic cycles. When one market is down some other market will be up.