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Question
1. examine the role and functions of IMF and ADB.



2.   Assume that your company plans to launch Herbal Medicine in European countries. Draft a research proposal to measure the export potential.

Answer
Question:   1.   examine the role and functions of IMF and ADB.
2.   
The IMF’s resources are provided by its member countries, primarily through payment of quotas, which broadly reflect each country’s economic size.
Historically, the annual expenses of running the Fund have been met mainly by interest receipts on outstanding loans, but the membership recently agreed to adopt a new income model based on a range of revenue sources better suited to the diverse activities of the Fund.
SDRs

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to around SDR 204 billion (equivalent to about $328.3 billion, converted using the rate of August 31, 2011).
The role of the SDR
The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets—gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.
However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.
The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR, serves as theunit of account of the IMF and some other international organizations.
Basket of currencies determines the value of the SDR
The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies,today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. The U.S. dollar-equivalent of the SDR is posted dailyon the IMF’s website. It is calculated as the sum of specific amounts of the four basket currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.
The basket composition is reviewed every five years by the Executive Board, or earlier if the Fund finds changed circumstances warrant an earlier review, to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems. In the most recent review (in November 2010), the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies that were held by other members of the IMF. These changes become effective on January 1, 2011. The next review will take place by 2015.
The SDR interest rate
The SDR interest rate provides the basis for calculating the interest charged to members on regular (non-concessional) IMF loans, the interest paid to members on their SDR holdings and charged on their SDR allocation, and the interest paid to members on a portion of their quota subscriptions. The SDR interest rate is determined weekly and is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies.
SDR allocations to IMF members
Under its Articles of Agreement (Article XV, Section 1, and Article XVIII), the IMF may allocate SDRs to member countries in proportion to their IMF quotas. Such an allocation provides each member with a costless, unconditional international reserve asset on which interest is neither earned nor paid. However, if a member's SDR holdings rise above its allocation, it earns interest on the excess. Conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall. The Articles of Agreement also allow for cancellations of SDRs, but this provision has never been used. The IMF cannot allocate SDRs to itself or to other prescribed holders.
General allocations of SDRs have to be based on a long-term global need to supplement existing reserve assets. Decisions on general allocations are made for successive basic periods of up to five years, although general SDR allocations have been made only three times. The first allocation was for a total amount of SDR 9.3 billion, distributed in 1970-72, and the second allocated SDR 12.1 billion, distributed in 1979-81. These two allocations resulted in cumulative SDR allocations of SDR 21.4 billion. To help mitigate the effects of the financial crisis, a third general SDR allocation of SDR 161.2 billion was made on August 28, 2009.
Separately, the Fourth Amendment to the Articles of Agreement became effective August 10, 2009 and provided for a special one-time allocation of SDR 21.5 billion. The purpose of the Fourth Amendment was to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the IMF after 1981—more than one fifth of the current IMF membership—never received an SDR allocation until 2009. The 2009 general and special SDR allocations together raised total cumulative SDR allocations to about SDR 204 billion.
Buying and selling SDRs
IMF members often need to buy SDRs to discharge obligations to the IMF, or they may wish to sell SDRs in order to adjust the composition of their reserves. The IMF may act as an intermediary between members and prescribed holders to ensure that SDRs can be exchanged for freely usable currencies. For more than two decades, the SDR market has functioned through voluntary trading arrangements. Under these arrangements a number of members and one prescribed holder have volunteered to buy or sell SDRs within limits defined by their respective arrangements. Following the 2009 SDR allocations, the number and size of the voluntary arrangements has been expanded to ensure continued liquidity of the voluntary SDR market. The number of voluntary SDR trading arrangements now stands at 32, including 19 new arrangements since the 2009 SDR allocations.
In the event that there is insufficient capacity under the voluntary trading arrangements, the Fund can activate the designation mechanism. Under this mechanism, members with sufficiently strong external positions are designated by the Fund to buy SDRs with freely usable currencies up to certain amounts from members with weak external positions. This arrangement serves as a backstop to guarantee the liquidity and the reserve asset character of the SDR.
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In order to ensure new world economic order and peace, it was necessary to restore stability in monetary system at international level and find effective means to reconstruct the war ravaged economies of the European countries. But stable peace could be achieved only by diverting a part of the world resources to the undeveloped and under-developed poor countries of Asia, Africa and Latin America. An effective solution to the problem of economic reconstruction and development was necessary for ensuring world economy and for dismantling the complex trade and exchange restrictions that had grown during the previous decade.

The main objective of IMF is to grant loans in foreign currencies to member countries to correct any disequilibrium in their balance of payments, when disequilibrium is of temporary nature and likely to be removed in the earliest possible period. According to the Article 1st of the agreement, the objectives of the IMP are-

(i) To promote international monetary cooperation through a permanent institution of the fund which provides the machinery for Consultation and Collaboration on international monetary problems?
(ii) To facilitate the expansion and balanced growth of international trade and to contribute thereby to the promotion and maintenance of high level of employment and real income;
(iii) To promote exchange stability and maintain orderly exchange arrangements among members by avoiding competitive exchange depreciation;
(iv) To assist in the establishment of a multi-lateral system of payments in respect of current transactions between members and elimination of foreign exchange restrictions which hamper the growth of world trade.
(v) To create confidence among members by making the general resources of the fund temporarily available to them and providing opportunity to correct mal-adjust¬ments in their balance of payments without resorting to the measures destructive of national or international prosperity.

IMF is governed by a board of governors, board of executive directors and a managing director. Board of governors is the highest authority. Every member country of IMF appoints one governor and an alternate governor for a period of 5 years. The board of governors has delegated many of its powers to the board of executive directors. Executive board deals regularly with a wide variety of administrative and polity matters. It is responsible for conducting the business of the fund. There are at present 21 executive directors. Managing director is appointed by the executive board. He conducts the ordinary business of the fund under the directions of the executive board. To improve the functioning of IMF and to advise it from time to time, an Interim Committee was appointed in 1974. It has 20 members. A Development Committee was also appointed in 1974 to solve the problems of developing countries and to give suggestions to the governors of IMF and the World Bank. The decisions of IMP are taken on the basis of majority. Every member country has 250 votes. Besides it, for a quota of everyone lakh dollar, there is one more vote. In this way a country having more quotas will have more votes.

International Liquidity
International liquidity is generally used as a synonym for international reserves. Such reserves include a country's official gold stock, holdings of its convertible foreign currencies, SDRs and its net position in the IMF. It is the aggregate stock of inter-nationally acceptable assets held by the central bank to settle a deficit in the balance of payments of a country. In other words international liquidity provides a measure of a country's ability to finance its deficit in the balance of payments without resorting to adjustment measures.

The sources of international liquidity include - owned reserves and borrowed reserves. Borrowed reserves were constituted by Capital imports in the form of borrowing from abroad and direct investments by foreign countries. The demand for international liquidity was increasing more than its supply due to which the problem of international liquidity arose. The shortage of international liquidity was due to the increasing deficits in the balance of payments of the majority of countries in the world. Too much dependence on exports exposed these economies to international fluctuations in the prices of their products. IMF in 1970 introduced a scheme for the creation and issue of Special Drawing Rights (SDRs) as unconditional reserve asset to remove all the related problems of international liquidity. Now SDR is the principal source of international liquidity to its members.


TO BE  more flexible and responsive to member countries’ needs. Borrowing limits were doubled with more funds available up front, and conditions were streamlined and simplified. The new framework also enables broader high-access borrowing on a precautionary basis.

Lending tailored to member countries’ needs
The SBA framework allows the Fund to respond quickly to countries’ external financing needs, and to support policies designed to help them emerge from crisis and restore sustainable growth.
Eligibility. All member countries facing external financing needs are eligible for SBAs subject to all relevant IMF policies. However, SBAs are generally used by middle income member (and, more recently, advanced) countries more often, since low-income countries have a range of concessional instruments tailored to their needs.
Duration. The length of a SBA is flexible, and typically covers a period of 12–24 months, but no more than 36 months, consistent with addressing short-term balance of payments problems.
Borrowing terms. Access to IMF financial resources under SBAs are guided by a member country’s need for financing, capacity to repay, and track record with use of IMF resources. Within these guidelines, the SBA provides flexibility in terms of amount and timing of the loan to help meet the needs of borrowing countries. These include:
• Normal access. Borrowing limits were recently doubled to give countries access of up to 200 percent of quota for any 12 month period, and 600 percent of total credit outstanding (net of scheduled repurchases).
• Exceptional access. The IMF can lend amounts above normal limits on a case-by-case basis under its Exceptional Access policy, which entails enhanced scrutiny by the Fund’s Executive Board. During the current global economic crisis, countries facing acute financing needs have been able to tap exceptional access SBAs.
• Front-loaded access. The new SBA framework provides increased flexibility to front load funds where warranted by the strength of the country’s policies and the nature of its financing needs.
• Rapid access. Fund support under the SBA can be accelerated under the Fund’s Emergency Financing Mechanism, which enables rapid approval of IMF lending. This mechanism was utilized in several instances during the recent crisis.
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The Asian Development Bank (ADB) is a multilateral development finance institution whose mission is to reduce poverty in the Asia Pacific region. Although the ADB claims to operate in the interest of Asia’s poorest citizens, civil society groups have long been concerned about the ADB’s role in promoting sustainable and equitable growth in the region.

The ADB was founded in 1966 with the goal of eradicating poverty in the region. With over 1.9 billion people living on less than $2 a day in Asia, the institution has a formidable challenge. It plays the following functions for countries in the Asia Pacific region:
•   Provides loans and equity investments to its developing member countries (DMCs)
•   Provides technical assistance for the planning and execution of development projects and programs and for advisory services
•   Promotes and facilitates investment of public and private capital for development
•   Assists in coordinating development policies and plans of its DMCs
ADB performs the following functions:
(i) Promote investment in the region of public and private capital for development pur¬poses.
(ii) Provide loans for the economic and social development of the member countries of the region.
(iii) Help member countries in coordinating their development policies and plans.
(iv) Provide technical assistance for the preparation, financing and execution of develop¬ment projects and programmes.
(v) Undertake such other activities and provide such other services as may advance its objectives.
(vi) Provide financial and technical assistance to member countries for environmental protection.
(vii) Act as financial intermediary by transferring resources from global capital markets to developing countries.
(viii) Support public resource mobilisation and management to member countries.
Funds
ADB was set up with an authorised capital of US$ one billion which was later on raised to $21.6 billion. Japan, India, China, USA, Canada and Germany are the main subscribers. The Bank has 45 members out of which 15 are from outside the region.
Management
ADB is administered by a Board of Directors which is elected by the Board of Governors. The Board has 12 members of which 8 represent regional members and 4 represent non-regional members elected for two years' term.
The Board of Directors normally meets once in a week and exercises all the powers. The president is elected by the Board of Governors for a term of five years.
Progress
ADB has invested considerably in agriculture, agro industry, energy, transport, communication, social infrastructure, etc. It provides equity finance and underwriting facilities.
It has provided an assistance of more than 50 billion dollars since its beginning. The Bank has contributed significantly to economic development and living standards in Asia.
The ADB's operational strategy for India is to ensure higher sustainable economic growth so as to reduce poverty and promote employment. The bank encourages private sector investment in India through an improved incentive framework.
It seeks to improve policy, institutional and regulatory framework so as to improve the efficiency of public sector undertakings. It provides support for resource mobilisation and management at the state level. ADB has given much impor¬tance to rural development in India
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2. Assume that your company plans to launch Herbal Medicine in European countries. Draft a research proposal to measure the export potential.

Determining Your Products' Export Potential
There are several ways to evaluate the export potential of your products and services in overseas markets. The most common approach is to examine the success of your products domestically. If your company succeeds at selling in the U.S. market, there is a good chance that it will also be successful in markets abroad, at least those where similar needs and conditions exist.
Another means to assess your company's potential in exporting is by examining the unique or important features of your product. If those features are hard to duplicate abroad, then it is likely that you will be successful overseas. A unique product may have little competition and demand for it might be quite high.
Finally, your product may have export potential even if there are declining sales in the U.S. market. Sizeable export markets may still exist, especially if the product once did well in the United States but is now losing market share to more technically advanced products. Other countries may not need state-of-the-art technology and/or may be unable to afford the most sophisticated and expensive products. Such markets may have a surprisingly healthy demand for U.S. products that are older or considered obsolete by U.S. market standards.
 
Assessing Your Company's Export Readiness
Answering these general questions about how exporting will enhance into your company's short, medium and long-term goals will help determine your company's readiness to export:
•   What does the company want to gain from exporting?
•   Is exporting consistent with other company goals?
•   What demands will exporting place on the company's key resources, management and personnel, production capacity, and finance and how will these demands be met?
•   Are the expected benefits worth the costs, or would company resources be better used for developing new domestic business?
The next step is to more closely examine the impact of exporting on your company. The questions  will help you analyze the decision to export.
Table 1
________________________________________
Management Issues Involved in the Export Decision
________________________________________
Management Objectives
•   What are the company's reasons for pursuing export markets? Are they solid objectives (e.g., increasing sales volume or developing a broader, more stable customer base) or are they frivolous (e.g., the owner wants an excuse to travel)?
•   How committed is top management to an export effort? Is exporting viewed as a quick fix for a slump in domestic sales? Will the company neglect its export customers if domestic sales pick up?
•   What are management's expectations for the export effort? How quickly does management expect export operations to become self-sustaining? What level of return on investment is expected from the export program?
Experience
•   With what countries has business already been conducted, or from what countries have inquiries already been received?
•   Which product lines are mentioned most often?
•   Are any domestic customers buying the product for sale or shipment overseas? If so, to what countries?
•   Is the trend of sales and inquiries up or down?
•   Who are the main domestic and foreign competitors?
•   What general and specific lessons have been learned from past export attempts or experiences?
Management and Personnel
•   What in-house international expertise does the firm have (international sales experience, language capabilities, etc.)?
•   Who will be responsible for the export department's organization and staff?
•   How much senior management time (a) should be allocated and (b) could be allocated?
•   What organizational structure is required to ensure that export sales are adequately serviced?
•   Who will follow through after the planning is done?
Production Capacity
•   How is the present capacity being used?
•   Will filling export orders hurt domestic sales?
•   What will be the cost of additional production?
•   Are there fluctuations in the annual work load? When? Why?
•   What minimum order quantity is required?
•   What would be required to design and package products specifically for export?
Financial Capacity
•   What amount of capital can be committed to export production and marketing?
•   What level of export department operating costs can be supported?
•   How are the initial expenses of export efforts to be allocated?
•   What other new development plans are in the works that may compete with export plans?
•   By what date must an export effort pay for itself?

Developing an Export Plan
Once you have decided to sell your products abroad, it is time to develop an export plan. A crucial first step in planning is to develop broad consensus among key management on the company's goals, objectives, capabilities, and constraints.   In addition, all aspects of an export plan should be agreed upon by the personnel involved in the exporting process, as they will ultimately execute the export plan.
The purposes of the export plan are (a) to assemble facts, constraints, and goals and (b) to create an action statement that takes all of these into account. The statement includes specific objectives, it sets forth time schedules for implementation, and it marks milestones so that the degree of success can be measured and help motivate personnel.
At least the following ten questions should ultimately be addressed:
1.   Which products are selected for export development? What modifications, if any, must be made to adapt them for overseas markets?
2.   Which countries are targeted for sales development?
3.   In each country, what is the basic customer profile? What marketing and distribution channels should be used to reach customers?
4.   What special challenges pertain to each market (competition, cultural differences, import controls, etc.), and what strategy will be used to address them?
5.   How will the product's export sale price be determined?
6.   What specific operational steps must be taken and when?
7.   What will be the time frame for implementing each element of the plan?
8.   What personnel and company resources will be dedicated to exporting?
9.   What will be the cost in time and money for each element?
10.   How will results be evaluated and used to modify the plan?
The first time an export plan is developed, it should be kept simple. It need be only a few pages long, since important market data and planning elements may not yet be available. The initial planning effort itself gradually generates more information and insight. As the planners learn more about exporting and your company's competitive position, the export plan will become more detailed and complete.
From the start, the plan should be viewed and written as a management tool, not as a static document. Objectives in the plan should be compared with actual results to measure the success of different strategies. The company should not hesitate to modify the plan and make it more specific as new information and experience are gained.
A detailed plan is recommended for companies that intend to export directly. Companies choosing indirect export methods may require much simpler plans.
NOTE: Many companies begin export activities hap-hazardly, without carefully screening markets or options for market entry. While these companies may or may not have a measure of success, they may overlook better export opportunities. If early export efforts are unsuccessful because of poor planning, your company may be misled into abandoning exporting altogether. Formulating an export strategy based on good information and proper assessment increases the chances that the best options will be chosen, that resources will be used effectively, and that efforts will consequently be carried through to success.



Management Issues Involved in the Export Decision
________________________________________
Management Objectives
•   What are the company's reasons for pursuing export markets? Are they solid objectives (e.g., increasing sales volume or developing a broader, more stable customer base) or are they frivolous (e.g., the owner wants an excuse to travel)?
•   How committed is top management to an export effort? Is exporting viewed as a quick fix for a slump in domestic sales? Will the company neglect its export customers if domestic sales pick up?
•   What are management's expectations for the export effort? How quickly does management expect export operations to become self-sustaining? What level of return on investment is expected from the export program?
Experience
•   With what countries has business already been conducted, or from what countries have inquiries already been received?
•   Which product lines are mentioned most often?
•   Are any domestic customers buying the product for sale or shipment overseas? If so, to what countries?
•   Is the trend of sales and inquiries up or down?
•   Who are the main domestic and foreign competitors?
•   What general and specific lessons have been learned from past export attempts or experiences?
Management and Personnel
•   What in-house international expertise does the firm have (international sales experience, language capabilities, etc.)?
•   Who will be responsible for the export department's organization and staff?
•   How much senior management time (a) should be allocated and (b) could be allocated?
•   What organizational structure is required to ensure that export sales are adequately serviced?
•   Who will follow through after the planning is done?
Production Capacity
•   How is the present capacity being used?
•   Will filling export orders hurt domestic sales?
•   What will be the cost of additional production?
•   Are there fluctuations in the annual work load? When? Why?
•   What minimum order quantity is required?
•   What would be required to design and package products specifically for export?
Financial Capacity
•   What amount of capital can be committed to export production and marketing?
•   What level of export department operating costs can be supported?
•   How are the initial expenses of export efforts to be allocated?
•   What other new development plans are in the works that may compete with export plans?
•   By what date must an export effort pay for itself?

Developing an Export Strategy
The most common methods of exporting are indirect selling and direct selling (). In indirect selling, an export intermediary such as an export management company (EMC) or an export trading company (ETC) normally assumes responsibility for finding overseas buyers, shipping products, and getting paid. In direct selling, the U.S. producer deals directly with a foreign buyer. The paramount consideration in determining whether to market indirectly or directly is the level of resources a company is willing to devote to its international marketing effort. Other factors to consider when deciding whether to market indirectly or directly include:
•   The size of your firm;
•   The nature of your products;
•   Previous export experience and expertise;
•   Business conditions in the selected overseas markets.
Approaches to Exporting
The way your company chooses to export its products can have a significant effect on its export plan and specific marketing strategies. The basic distinction among approaches to exporting relates to the company's level of involvement in the export process. There are at least four approaches, which may be used alone or in combination:
1.   Passively filling orders from domestic buyers who then export the product. These sales are indistinguishable from other domestic sales as far as the original seller is concerned. Someone else has decided that the product in question meets foreign demand. That party takes all the risk and handles all of the exporting details, in some cases without even the awareness of the original seller. (Many companies take a stronger interest in exporting when they discover that their product is already being sold over-seas.)
2.   Seeking out domestic buyers who repre-sent foreign end users or customers. Many U.S. and foreign corporations, general contractors, foreign trading companies, foreign government agencies, foreign distributors and retailers, and others in the United States purchase for export. These buyers are a large market for a wide variety of goods and services. In this case a company may know its product is being exported, but it is still the buyer who assumes the risk and handles the details of exporting.
3.   Exporting indirectly through intermediaries. With this approach, a company engages the services of an intermediary firm capable of finding foreign markets and buyers for its products. EMCs, ETCs, international trade consultants, and other intermediaries can give the exporter access to well-established expertise and trade contacts. Yet, the exporter can still retain considerable control over the process and can realize some of the other benefits of exporting, such as learning more about foreign competitors, new technologies, and other market opportunities.
4.   Exporting directly. This approach is the most ambitious and difficult, since the exporter personally handles every aspect of the exporting process from market research and planning to foreign distribution and collections. Consequently, a significant commitment of management time and attention is required to achieve good results. However, this approach may also be the best way to achieve maximum profits and long-term growth. With appropriate help and guidance from the Department of Commerce, state trade offices, freight forwarders, international banks, and other service groups, even small or medium-sized firms can export directly if they are able to commit enough staff time to the effort. For those who cannot make that commitment, the services of an EMC, ETC, trade consultant, or other qualified intermediary are indispensable.
Approaches 1 and 2 represent a substantial proportion of total U.S. sales, perhaps as much as 30 per-cent of U.S. exports. They do not, however, involve the firm in the export process. Consequently, this guide concentrates on approaches 3 and 4. (There is no single source or special channel for identifying domestic buyers for overseas markets. In general, they may be found through the same means that U.S. buyers are found, for example through trade shows, mailing lists, industry directories, and trade associations.)
If the nature of the company's goals and resources makes an indirect method of exporting the best choice, little further planning may be needed. In such a case, the main task is to find a suitable intermediary firm that can then handle most export details. Firms that are new to exporting or are unable to commit staff and funds to more complex export activities may find indirect methods of exporting more appropriate.
However, using an EMC or other intermediary does not exclude all possibility of direct exporting for your firm. For example, your company may try exporting directly to such "easy" nearby markets as Canada, Mexico, or the Bahamas while letting an EMC handle more ambitious sales to Egypt or Japan. You may also choose to gradually increase the level of direct exporting later, after experience has been gained and sales volume appears to justify added investment.
Consulting advisers before making these decisions can be helpful. The next chapter presents information on a variety of organizations that can provide this type of help - in many cases, at no cost.

 
Distribution Considerations
•   Which channels of distribution should the firm use to market its products abroad?
•   Where should the firm produce its products and how should it distribute them in the foreign market?
•   What types of representatives, brokers, wholesalers, dealers, distributors, or end-use customers, and so forth should the firm use?
•   What are the characteristics and capabilities of the available intermediaries?
•   Should the assistance of an EMC or ETC be obtained?
Your answers from Table 1 in Chapter 1 can help you determine if indirect or direct exporting methods are best for your company.
 
Indirect Exporting
The principal advantage of indirect marketing for a smaller U.S. company is that it provides a way to penetrate foreign markets without the complexities and risks of direct exporting. Several kinds of intermediary firms provide a range of export services. Each type of firm offers distinct advantages for your company.
Confirming Houses
Confirming houses or buying agents are finders for foreign firms that want to purchase U.S. products. They seek to obtain the desired items at the lowest possible price and are paid a commission by their foreign clients. In some cases, they may be foreign government agencies or quasi-governmental firms empowered to locate and purchase desired goods. An example is foreign government purchasing missions.
Export Management Companies
An EMC acts as the export department for one or several producers of goods or services. It solicits and transacts business in the names of the producers it represents or in its own name for a commission, salary, or retainer plus commission. Some EMCs provide immediate payment for the producer's products by either arranging financing or directly purchasing products for resale. Typically, only larger EMCs can afford to purchase or finance exports.
EMCs usually specialize either by product or by foreign market, or sometimes even both. Because of their specialization, the best EMCs know their prod-ucts and the markets they serve very well and usually have well-established networks of foreign distributors already in place. This immediate access to foreign markets is one of the principal reasons for using an EMC, since establishing a productive relationship with a foreign representative may be a costly and lengthy process.
One disadvantage of using an EMC is that a manufacturer may lose control over foreign sales. Most manufacturers are properly concerned that their product and company image be well maintained in foreign markets. An important way for a company to retain sufficient control in such an arrangement is to carefully select an EMC that can meet the company's needs and maintain close communication with it. For example, a company may ask for regular reports on efforts to market its products and may require approval of certain types of efforts, such as advertising programs or service arrangements. If a company wants to maintain this type of relationship with an EMC, it should negotiate points of concern before entering an agreement, since not all EMCs are willing to comply with the company's concerns.
Export Trading Companies
An ETC facilitates the export of U.S. goods and services. Like an EMC, an ETC can either act as the export department for producers or take title to the product and export for its own account. Therefore, the terms ETC and EMC are often used interchangeably. A special kind of ETC is a group organized and operated by producers. These ETCs can be organized along multiple or single-industry lines and can also represent producers of competing products.
Export Trading Company Act of 1982
and The Office of Export Trading Company Affairs
The Export Trading Company Act of 1982 allows banks to make equity investments in commercial ventures that qualify as ETCs. In addition, the Export- Import Bank (Ex-Im Bank) of the United States is allowed to make working capital guarantees to U.S. exporters. Through the Office of Export Trading Company Affairs (OETCA) within the International Trade Administration, the U.S. Department of Commerce promotes the formation and use of U.S. export intermediaries and issues export trade certificates of review providing limited immunity from U.S. antitrust laws.
OETCA informs the business community of the benefits of export intermediaries through conferences, presentations before trade associations and civic organizations, and publications. The major pub-lication on this subject is the Export Trading Company Guidebook, available for purchase through the U.S. Government Printing Office. OETCA provides counseling to businesses seeking to take advantage of the act.
OETCA also maintains the Contact Facilitation Service (CFS) database, a listing of U.S. producers of goods and services and of organizations that provide trade facilitation services. Under a public-private sector arrangement, the CFS database is published annually in a directory entitled The Export Yellow Pages. The directory provides users with the names and addresses of banks, EMCs, ETCs, freight forwarders, manufacturers, and service organizations and names the export products or export-related services that these firms supply. By obtaining CFS registration forms from Commerce EACs, firms can register in the database free of charge and be listed in subsequent editions of The Export Yellow Pages.
The certificate of review program provides ex-porters with an antitrust "insurance policy" intended to foster joint activities where economies of scale and risk diversification can be achieved. The act also amends the Sherman Antitrust Act and the Federal Trade Commission Act to clarify the jurisdictional reach of these statutes to export trade. Both acts now apply to export trade only if there is a "direct substantial and reasonably foreseeable" effect on domestic or import commerce of the United States or the export commerce of a U.S. competitor.
Certificates of review are issued by the Secretary of Commerce with the concurrence of the U.S. Department of Justice. Any U.S. corporation or partnership, any resident individual, or any state or local en-tity may apply for a certificate of review. A certificate can be issued to an applicant if it is determined that the proposed "export trade activities and methods of operation" will not result in a substantial lessening of domestic competition or restraint of trade within the United States. For the conduct covered by the certificate, its holder and any other individuals or firms named as members are given immunity from government suits under U.S. federal and state antitrust laws. In private party actions, liability is reduced from treble to single damages, greatly reducing the probability of nuisance suits. Moreover, in the event of private litigation involving conduct covered by the certificate of review, a prevailing certificate holder re-covers the costs of defending the suit, including rea-sonable attorney's fees.
Export Agents, Merchants, or Remarketers
Export agents, merchants, or remarketers purchase products directly from the manufacturer, packing and marking the products according to their own specifications. They then sell these products overseas through their contacts in their own names and assume all risks for accounts.
In transactions with export agents, merchants, or remarketers, a U.S. firm relinquishes control over the marketing and promotion of its product. This situation could have an adverse effect on future sales efforts abroad if the product is underpriced or incorrectly positioned in the market, or if after-sales services are neglected. On the other hand, the effort required by the manufacturer to market the product overseas is very small and may lead to sales that otherwise would take a great deal of effort to obtain.
Piggyback Marketing
Piggyback marketing is an arrangement in which one manufacturer or service firm distributes a second firm's product or service. The most common piggy-backing situation is when a U.S. company has a contract with an overseas buyer to provide a wide range of products or services.
Often, this first company does not produce all of the products it is under contract to provide, and it turns to other U.S. companies to provide the remaining products. The second U.S. company thus piggybacks its products to the international market, generally without incurring the marketing and distribution costs associated with exporting. Successful arrangements usually require that the product lines be complementary and appeal to the same customers.  
Direct Exporting
The advantages of direct exporting for a U.S. company include more control over the export process, potentially higher profits, and a closer relationship to the overseas buyer and marketplace. However, these advantages do not come easily since the U.S. company needs to devote more time, personnel, and corporate resources than indirect exporting requires.
When a company chooses to export directly to foreign markets, it usually makes internal organizational changes to support more complex functions. A direct exporter normally selects the markets it wishes to penetrate, chooses the best channels of distribution for each market, and then makes specific foreign business connections in order to sell its product.
Organizing for Exporting
A company new to exporting generally treats its export sales no differently than its domestic sales, using existing personnel and organizational structures. As international sales and inquiries increase, the company may separate the management of its exports from that of its domestic sales.
The advantages of separating international from domestic business include the centralization of specialized skills needed to deal with international markets and the benefits of a focused marketing effort that is more likely to increase export sales. A possible disadvantage is that segmentation might be a less efficient use of corporate resources.
When a company separates international from domestic business, it may do so at different levels in the organization. For example, when a company first begins to export, it may create an export department with a full or part-time manager who reports to the head of domestic sales and marketing. At later stages, a company may choose to increase the au tonomy of the export department to the point of creating an international division that reports directly to the president.
Larger companies at advanced stages of exporting may choose to retain the international division or to organize along product or geographic lines. A company with distinct product lines may create an inter-national department in each product division. A company with products that have common end users may organize geographically. For example, it may form a division for Europe and another for the Pacific Rim. A small company's initial needs may be satisfied by a single export manager who has responsibility for the full range of international activities. Regardless of how a company organizes its exporting efforts, the key is to facilitate the marketer's job. Good marketing skills can help the firm operate in an unfamiliar market. Experience has shown that a company's success in foreign markets depends less on the unique attributes of its products than on its marketing methods.
Once your company is organized to handle exporting, a proper channel of distribution needs to be carefully chosen for each market. These channels include sales representatives, agents, distributors, retailers, and end users.
Sales Representatives
Overseas, a sales representative is the equivalent of a manufacturer's representative in the United States. The representative uses the company's product literature and samples to present the product to potential buyers. A representative usually handles many complementary lines that do not conflict. The sales representative usually works on a commission basis, assumes no risk or responsibility, and is under contract for a definite period of time (renewable by mutual agreement). The contract defines territory, terms of sale, method of compensation, reasons and procedures for terminating the agreement, and other details. The sales representative may operate on either an exclusive or a nonexclusive basis.
Agents
The widely misunderstood term "agent" means a representative who normally has authority, perhaps even a power of attorney, to make commitments on behalf of the firm he or she represents. Firms in the United States and other developed countries have stopped using the term and instead rely on the term "representative," since agent can imply more than intended. It is important that any contract state whether the representative or agent does or does not have legal authority to obligate the firm.
Distributors
The foreign distributor is a merchant who purchases goods from a U.S. exporter (often at a substantial discount) and resells it for a profit. The foreign distributor generally provides support and service for the product, thus relieving the U.S. company of these responsibilities. The distributor usually carries an inventory of products and a sufficient supply of spare parts and also maintains adequate facilities and personnel for normal servicing operations. Distributors typically handle a range of non-conflicting but complementary products. End users do not usually buy from a distributor; they buy from retailers or dealers.
The terms and length of association between the U.S. company and the foreign distributor are established by contract. Some U.S. companies prefer to begin with a relatively short trial period and then extend the contract if the relationship proves satisfactory to both parties.
Foreign Retailers
A company may also sell directly to foreign retailers, although in such transactions, products are generally limited to consumer lines. The growth of major retail chains in markets such as Canada and Japan has created new opportunities for this type of direct sale. This method relies mainly on traveling sales representatives who directly contact foreign retailers, although results might also be achieved by mailing catalogs, brochures, or other literature. The direct mail approach has the benefits of eliminating commissions, reducing traveling expenses, and reaching a broader audience. For optimal results, a firm that uses direct mail to reach foreign retailers should support it with other marketing activities.
American manufacturers with ties to major domestic retailers may also be able to use them to sell abroad. Many large American retailers maintain overseas buying offices and use these offices to sell abroad when practical.
Direct Sales to End Users
A U.S. business may sell its products or services directly to end users in foreign countries. These buyers can be foreign governments; institutions such as hospitals, banks, and schools; or businesses. Buyers can be identified at trade shows, through international publications, or through Commerce's Export Contact List Service. (Contact your local EAC for more details).
The U.S. company should be aware that if a product is sold in such a direct fashion, the company is responsible for shipping, payment collection, and product servicing unless other arrangements are made. Unless the cost of providing these services is built into the export price, a company could have a narrower profit than originally intended.

Locating Foreign Representatives and Buyers
A company that chooses to use foreign representatives may meet them during overseas business trips or at domestic or international trade shows. There are other effective methods that can be employed without leaving the United States. Ultimately, the exporter may need to travel abroad to identify, evaluate, and sign overseas representatives; how-ever, a company can save time by first conducting background research in the United States. The Commercial Service contact programs, banks and service organizations, and publications are available to help in this manner.
Contacting and Evaluating Foreign Representatives
Once your company has identified a number of potential representatives or distributors in the selected market, it should write and/or fax directly to each. Just as the U.S. firm is seeking information on the foreign representative, the representative is interested in corporate and product information on the U.S. firm. The prospective representative may want more information than the company normally provides to a casual buyer. Therefore, the firm should provide full information on its history, resources, personnel, product line, previous export activity, and all other pertinent matters. The firm may wish to include a photograph or two of plant facilities and products, and even product samples when practical. You may also want to consider inviting the foreign representative to visit its operations. Whenever the danger of piracy is significant, the exporter should guard against sending product samples that could be easily copied. A U.S. firm should investigate potential representatives or distributors carefully before entering into an agreement. The U.S. firm also needs to know the following points about the representative or distributor's firm:
•   Current status and history, including background on principal officers;
•   Methods of introducing new products into the sales territory;
•   Trade and bank references;
•   Data on whether the U.S. firm's special requirements can be met; and
•   A view of the in-country market potential for the U.S. firm's products. This information is not only useful in gauging how much the representative knows about the exporter's industry, it is valuable market research in its own right.
A U.S. company may obtain much of this information from business associates who currently work with foreign representatives. However, U.S. exporters should not hesitate to ask potential representatives or distributors detailed and specific questions. Suppliers have the right to explore the qualifications of those who propose to represent them overseas. Well-qualified representatives will gladly answer questions that help distinguish them from less-qualified competitors. Your company should also consider other private-sector sources for credit checks of potential business partners.
In addition, the U.S. company may wish to obtain at least two supporting business and credit reports to ensure that the distributor or representative is reputable. By using a second credit report from a different source, the U.S. firm may gain new or more complete information. Reports from a number of companies are available from commercial firms and from the Department of Commerce's International Company Profiles. Commercial firms and banks are also sources of credit information on overseas representatives. They can provide information directly or from their correspondent banks or branches overseas. Directories of international companies may also provide credit information on foreign firms.
If the U.S. company has the necessary information, it may wish to contact a few of the foreign firm's existing U.S. clients to obtain an evaluation of the representative's character, reliability, efficiency, and past performance. To protect itself against possible conflicts of interest, it is also important for the U.S. firm to learn about other product lines that the foreign firm represents.
Once the company has prequalified some foreign representatives, it may wish to travel to the foreign country to observe the size, condition, and location of offices and warehouses. In addition, the U.S. company should meet the sales force and try to assess its strength in the marketplace. If traveling to each distributor or representative is difficult, the company may decide to each of them at U.S. or at worldwide trade shows.

 
Negotiating an Agreement with a Foreign Representative
When the U.S. company has found a prospective representative that meets its requirements, the next step is to negotiate a foreign sales agreement. EACs can provide counseling to firms planning to negotiate foreign sales agreements with representatives and distributors. The International Chamber of Commerce also provides useful guidelines and can be reached at 212-206-1150.
Most representatives are interested in the company's pricing structure and profit potential. Representatives are also concerned with the terms of payment, product regulation, competitors and their market shares, the amount of support provided by the U.S. firm (sales aids, promotional material, advertising, etc.), training for sales and service staff, and the company's ability to deliver on schedule.
The agreement may contain provisions that the foreign representative:
•   Not have business dealings with competing firms (because of anti-trust laws, this provision may cause problems in some European countries);
•   Not reveal any confidential information in a way that would prove injurious, detrimental, or competitive to the U.S. firm;
•   Not enter into agreements binding to the U.S. firm; and,
•   Refer all inquiries received from outside the designated sales territory to the U.S. firm for ac-tion.
To ensure a conscientious sales effort from the foreign representative, the agreement should include a requirement that it apply the utmost skill and ability to the sale of the product for the compensation named in the contract. It may be appropriate to include performance requirements such as a minimum sales volume and an expected rate of increase.
In the drafting of the agreement, special attention must be paid to safeguarding the supplier's interests in cases where the representative proves less than satisfactory. It is vital to include an escape clause in the agreement, allowing the supplier to end the relationship safely and cleanly if the representative does not fulfill the firm's expectations. Some contracts specify that either party may terminate the agreement with written notice 30, 60, or 90 days in advance. The contract may also spell out exactly what constitutes just cause for ending the agreement (i.e., failure to meet specified performance levels). Other contracts specify a certain term for the agreement (usually one year), but arrange for automatic annual renewal unless either party gives written notice of its intention not to renew.
In all cases, escape clauses and other provisions to safeguard the supplier may be limited by the laws of the country in which the representative is located. For this reason, the supplier should learn as much as it can about the legal requirements of the representative's country and obtain qualified legal counsel in preparing the contract. These are some of the legal questions to consider:
•   How far in advance must the representative be notified of the supplier's intention to terminate the agreement? Three months satisfy the requirements of many countries, but a verifiable means of conveyance (i.e., registered mail) may be needed to establish when the notice was served.
•   What is just cause for terminating a representative? Specifying causes for termination in the written contract usually strengthens the supplier's position.
•   Which country's laws (or which international conventions) govern a contract dispute? Laws in the representative's country may forbid the representative from waiving its nation's legal jurisdiction.
•   What compensation is due to the representative on dismissal? Depending on the length of the relationship, the added value of the market the representative created for the supplier, and whether termination is for just cause as defined by the foreign country, the supplier may be required to compensate the representative for losses.
•   What must the representative give up if dismissed? The contract should specify the return of property such as: patents, trademarks, name registrations, and customer records.
•   Should the representative be referred to as an agent? In some countries, the word agent implies power of attorney. The contract needs to specify if the representative is or is not a legal agent with power of attorney.
•   In what language should the contract be drafted? In most cases, the contract should be in both English and the official language(s) of the foreign country.
The supplier should also be aware of U.S. laws that govern such contracts. For instance, the supplier should seek to avoid provisions that could be contrary to U.S. anti-trust laws. The Export Trading Company Act of 1982 provides a means to obtain anti-trust protection when two or more companies combine for exporting (see the section of OETCA, earlier in this chapter). In any case, the supplier should obtain legal advice when preparing and entering into any foreign agreement.
Foreign representatives often request exclusivity for marketing in a country or region. It is recommended that suppliers not grant exclusivity until the foreign representative has proven his or her capabilities or that it be granted for a limited, defined period of time, such as one year, with renewal possible. The territory covered by exclusivity may also need to be defined, though some countries' laws may prohibit that type of limitation.
The agreement with the foreign representative should define what laws apply to the agreement. Even if a supplier chooses a U.S. law or that of a third country, the laws of the representative's country may define which law applies. Many suppliers define the U.N. Convention on Contracts for International Sale of Goods (CISG) as the source of resolution to contract disputes or defer to a ruling by the International Court of Arbitration of the International Chamber of Commerce.
Sample Outline for an Export Plan
________________________________________
Table of Contents
•   Executive Summary (one or two pages maximum)
Introduction: Why This Company Should Export
Part I - Export Policy Commitment Statement
Part II - Situation/Background Analysis
•   Product or Service
•   Operations
•   Personnel and Export Organization
•   Resources of the Firm
•   Industry Structure, Competition, and Demand
Part III - Marketing Component
•   Identifying, Evaluating, and Selecting Target Markets
•   Product Selection and Pricing
•   Distribution Methods
•   Terms and Conditions
•   Internal Organization and Procedures
•   Sales Goals: Profit and Loss Forecasts
Part IV - Tactics: Action Steps
•   Primary Target Countries
•   Secondary Target Countries
•   Indirect Marketing Efforts
Part V - Export Budget
•   Pro Forma Financial Statements
Part VI - Implementation Schedule
•   Follow-up
•   Periodic Operational and Management Review (Measuring Results Against Plan)
Addenda: Background Data on Target Countries and Market
•   Basic Market Statistics: Historical and Projected
•   Background Facts
•   Competitive Environment
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