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 Importing, Exporting

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مُساهمةموضوع: Importing, Exporting   الإثنين مايو 04, 2015 2:13 pm

¬¬¬¬Export Selling and Export Marketing: A Comparison
To better understand importing and exporting, it is important to distinguish between export
selling and export marketing. Export selling does not involve tailoring the product, the price, or
the promotional material to suit the requirements of global markets. The only marketing mix
element that differs is the “place”; that is, the country where the product is sold. This selling
approach may work for some products or services; for unique products with little or no international
competition, such an approach is possible. Similarly, companies new to exporting may
initially experience success with selling. Even today, the managerial mind-set in many companies
still favors export selling. However, as companies mature in the global marketplace or as new
competitors enter the picture, export marketing becomes necessary.
Export marketing targets the customer in the context of the total market environment. The export
marketer does not simply take the domestic product “as is” and sell it to international customers.
To the export marketer, the product offered in the home market represents a starting point. It is
modified as needed to meet the preferences of international target markets; this is the approach the
Chinese have adopted in the U.S. furniture market. Similarly, the export marketer sets prices to
fit the marketing strategy and does not merely extend home-country pricing to the target market.

Charges incurred in export preparation, transportation, and financing must be taken into account in
determining prices. Finally, the export marketer also adjusts strategies and plans for communications
and distribution to fit the market. In other words, effective communication about product features
or uses to buyers in export markets may require creating brochures with different copy, photographs,
or artwork. As the vice president of sales and marketing of one manufacturer noted, “We have to
approach the international market with marketing literature as opposed to sales literature.”
Export marketing is the integrated marketing of goods and services that are destined for
customers in international markets. Export marketing requires:
1. An understanding of the target market environment
2. The use of marketing research and identification of market potential
3. Decisions concerning product design, pricing, distribution and channels, advertising, and
communications—the marketing mix
After the research effort has zeroed in on potential markets, there is no substitute for a personal
visit to size up the market firsthand and begin the development of an actual export-marketing
program. A market visit should do several things. First, it should confirm (or contradict) assumptions
regarding market potential. A second major purpose is to gather the additional data necessary
to reach the final go or no-go decision regarding an export-marketing program. Certain kinds of
information simply cannot be obtained from secondary sources. For example, an export manager or
international marketing manager may have a list of potential distributors provided by the U.S.
Department of Commerce. He or she may have corresponded with distributors on the list and
formed some tentative idea of whether they meet the company’s international criteria.
It is difficult, however, to negotiate a suitable arrangement with international distributors
without actually meeting face-to-face to allow each side to appraise the capabilities and character
of the other party. A third reason for a visit to the export market is to develop a marketing plan
in cooperation with the local agent or distributor. Agreement should be reached on necessary
product modifications, pricing, advertising and promotion expenditures, and a distribution plan.
If the plan calls for investment, agreement on the allocation of costs must also be reached.
As shown in Exhibit 8-2, one way to visit a potential market is through a trade show or a stateor
federally sponsored trade mission. Each year hundreds of trade fairs, usually organized around a
product category or industry, are held in major markets. By attending these events, company representatives
can conduct market assessment, develop or expand markets, find distributors or agents, or
locate potential end users. Perhaps most important, attending a trade show enables company representatives
to learn a great deal about competitors’ technology, pricing, and depth of market penetration.
For example, exhibits often offer product literature with strategically useful technological information.
Overall, company managers or sales personnel should be able to get a good general
impression of competitors in the marketplace as they try to sell their own company’s product.

Organizational Export Activities
Exporting is becoming increasingly important as companies in all parts of the world step up
their efforts to supply and service markets outside their national boundaries.1 Research has
shown that exporting is essentially a developmental process that can be divided into the following
distinct stages:
1. The firm is unwilling to export; it will not even fill an unsolicited export order. This may
be due to perceived lack of time (“too busy to fill the order”) or to apathy or ignorance.
2. The firm fills unsolicited export orders but does not pursue unsolicited orders. Such a firm
is an export seller.
3. The firm explores the feasibility of exporting (this stage may bypass stage 2).
4. The firm exports to one or more markets on a trial basis.
5. The firm is an experienced exporter to one or more markets.
6. After this success, the firm pursues country- or region-focused marketing based on certain
criteria (e.g., all countries where English is spoken or all countries where it is not necessary
to transport by water).
7. The firm evaluates global market potential before screening for the “best” target markets to
include in its marketing strategy and plan. All markets—domestic and international—are
regarded as equally worthy of consideration.
The probability that a firm will advance from one stage to the next depends on different
factors. Moving from stage 2 to stage 3 depends on management’s attitude toward the attractiveness
of exporting and their confidence in the firm’s ability to compete internationally. However,
commitment is the most important aspect of a company’s international orientation. Before a firm
can reach stage 4, it must receive and respond to unsolicited export orders. The quality and
dynamism of management are important factors that can lead to such orders. Success in stage 4
can lead a firm to stages 5 and 6. A company that reaches stage 7 is a mature, geocentric
enterprise that is relating global resources to global opportunity. To reach this stage requires
management with vision and commitment.
One study noted that export procedural expertise and sufficient corporate resources are required
for successful exporting. An interesting finding was that even the most experienced exporters
express lack of confidence in their knowledge about shipping arrangements, payment procedures,
and regulations. The study also showed that, although profitability is an important expected benefit
of exporting, other advantages include increased flexibility and resiliency and improved ability to
deal with sales fluctuations in the home market. Although research generally supports the proposition
that the probability of being an exporter increases with firm size, it is less clear that export
intensity—the ratio of export sales to total sales—is positively correlated with firm size. Table 8-1
lists some of the export-related problems that a company typically faces.2
National Policies Governing Exports and Imports
It is hard to overstate the impact of exporting and importing on the world’s national economies.
In 1997, for example, total imports of goods and services by the United States passed the $1 trillion
mark for the first time; in 2010, the combined total was $1.8 trillion. European Union imports, counting
both intra-EU trade and trade with non-EU partners, totaled more than $3 trillion. Trends in both
exports and imports reflect China’s pace-setting economic growth in the Asia-Pacific region. Exports
from China have grown significantly; they are growing even faster now that China has joined the
WTO. As shown in Table 8-2, Chinese apparel exports to the United States command more than
one-third of the overall apparel market. Historically, China protected its own producers by imposing
double-digit import tariffs. These are being reduced as China complies with WTO regulations.


Needless to say, representatives of the apparel, footwear, furniture, and textile industries in
many countries are deeply concerned about the impact increased trade with China will have on
these sectors. As this example suggests, one word can summarize national policies toward
exports and imports: contradictory. For centuries, nations have combined two opposing policy
attitudes toward the movement of goods across national boundaries. On the one hand, nations
directly encourage exports; the flow of imports, on the other hand, is generally restricted.


Government Programs That Support Exports
To see the economic boost that can come from a government-encouraged export strategy,
consider Japan; Singapore; South Korea; and the so-called greater-China or “China triangle”
market, which includes Taiwan, Hong Kong, and the People’s Republic of China. Japan totally
recovered from the destruction of World War II and became an economic superpower as a direct
result of export strategies devised by the Ministry for International Trade and Industry (MITI).
The four tigers—Singapore, South Korea, Taiwan, and Hong Kong—learned from the Japanese
experience and built strong export-based economies of their own. Although Asia’s “economic
bubble” burst in 1997 as a result of uncontrolled growth, Japan and the tigers are moving forward
in the twenty-first century at a more moderate rate. China, an economy unto itself, has attracted


increased foreign investment from Daimler AG, GM, Hewlett-Packard, and scores of other
companies that are setting up production facilities to support local sales, as well as exports to
world markets.
Any government concerned with trade deficits or economic development should focus on
educating firms about the potential gains from exporting. Policymakers should also remove
bureaucratic obstacles that hinder company exports. This is true at the national, regional, and
local government levels. In India, for example, leaders in the state of Tamil Nadu recently gave
Hyundai permission to operate its plant around the clock, making it the first Hyundai operation
anywhere in the world to operate on a 24-hour basis (see Exhibit 8-3).3 Governments commonly
use four activities to support and encourage firms that engage in exporting. These are tax incentives,
subsidies, export assistance, and free trade zones.
First, tax incentives treat earnings from export activities preferentially either by applying a
lower rate to earnings from these activities or by refunding taxes already paid on income associated
with exporting. The tax benefits offered by export-conscious governments include varying
degrees of tax exemption or tax deferral on export income, accelerated depreciation of exportrelated
assets, and generous tax treatment of overseas market development activities.
From 1985 until 2000, the major tax incentive under U.S. law was the foreign sales
corporation (FSC), through which American exporters could obtain a 15 percent exclusion on
earnings from international sales. Big exporters benefited the most from the arrangement;
Boeing, for example, saved about $100 million per year, and Eastman Kodak saved about
$40 million annually. However, in 2000 the WTO ruled that any tax break that was contingent on
exports amounted to an illegal subsidy. Accordingly, the U.S. Congress has set about the task of
overhauling the FSC system; failure to do so would entitle the EU to impose up to $4 billion in
retaliatory tariffs. Potential winners and losers from a change in the FSC law are lobbying
furiously. One proposed version of a new law would benefit GM, Procter & Gamble, Walmart,
and other U.S. companies with extensive manufacturing or retail operations overseas. By
contrast, Boeing would no longer benefit. As Rudy de Leon, a Boeing executive in charge of
government affairs, noted, “As we look at the bill, the export of U.S. commercial aircraft would
become considerably more expensive.”4
Governments also support export performance by providing outright subsidies, which are
direct or indirect financial contributions or incentives that benefit producers. Subsidies can
severely distort trade patterns when less competitive but subsidized producers displace
competitive producers in world markets (see the Marketing Metrics feature). OECD members

spend nearly $400 billion annually on farm subsidies; currently, total annual farm support in
the EU is estimated at $100 billion. With about $40 billion in annual support, the United States
has the highest subsidies of any single nation. Agricultural subsidies are particularly controversial
because, although they protect the interests of farmers in developed countries, they
work to the detriment of farmers in developing areas such as Africa and India. The EU has
undertaken an overhaul of its Common Agricultural Policy (CAP), which critics have called
“as egregious a system of protection as any” and “the single most harmful piece of protectionism
in the world.”5 In May 2002, much to Europe’s dismay, President George W. Bush signed
a $118 billion farm bill that actually increased subsidies to American farmers over a 6-year
period. The Bush administration took the position that, despite the increases, overall U.S.
subsidies were still lower than those in Europe and Japan, Congress voted to extend the farm
bill for another 5 years.
The third support area is governmental assistance to exporters. Companies can avail themselves
of a great deal of government information concerning the location of markets and credit
risks. Assistance may also be oriented toward export promotion. Government agencies at various
levels often take the lead in setting up trade fairs and trade missions designed to promote sales to
foreign customers.
The export–import process can entail red tape and bureaucratic delays. This is especially
true in emerging markets such as China and India. In an effort to facilitate exports, countries are
designating certain areas as free trade zones (FTZ) or special economic zones (SEZ). These
are geographic entities that offer manufacturers simplified customs procedures, operational
flexibility, and a general environment of relaxed regulations.
Governmental Actions to Discourage Imports and Block Market Access
Measures such as tariffs, import controls, and a host of nontariff barriers are designed to limit
the inward flow of goods. Tariffs can be thought of as the “three R’s” of global business: rules,
rate schedules (duties), and regulations of individual countries. Duties on individual products
or services are listed in the schedule of rates (see Table 8-3). One expert on global trade
defines duties as “taxes that punish individuals for making choices of which their governments
disapprove.”6
As noted in earlier chapters, a major U.S. objective in the Uruguay Round of GATT negotiations
was to improve market access for U.S. companies with major U.S. trading partners. When
the Uruguay Round ended in December 1993, the United States had secured reductions or total
elimination of tariffs on 11 categories of U.S. goods exported to the EU, Japan, five of the EFTA
nations (Austria, Switzerland, Sweden, Finland, and Norway), New Zealand, South Korea, Hong
Kong, and Singapore. The categories affected included equipment for the construction, agricultural,
medical, and scientific industry sectors, as well as steel, beer, brown distilled spirits,
pharmaceuticals, paper, pulp and printed matter, furniture, and toys. Most of the remaining tariffs
were phased out over a 5-year period. A key goal of the ongoing Doha Round of WTO trade talks
is the reduction in agricultural tariffs, which currently average 12 percent in the United States,
31 percent in the EU, and 51 percent in Japan.
Developed under the auspices of the Customs Cooperation Council (now the World
Customs Organization), the Harmonized Tariff System (HTS) went into effect in January
1989 and has since been adopted by the majority of trading nations. Under this system,
importers and exporters have to determine the correct classification number for a given
product or service that will cross borders. With the Harmonized Tariff Schedule B, the export
classification number for any exported item is the same as the import classification number.
Also, exporters must include the Harmonized Tariff Schedule B number on their export
documents to facilitate customs clearance. Accuracy, especially in the eyes of customs
officials, is essential. The U.S. Census Bureau compiles trade statistics from the HTS system.
Any HTS with a value of less than $2,500 is not counted as a U.S. export. However, all
imports, regardless of value, are counted.

In spite of the progress made in simplifying tariff procedures, administering a tariff is an
enormous problem. People who work with imports and exports must familiarize themselves with
the different classifications and use them accurately. Even a tariff schedule of several thousand
items cannot clearly describe every product traded globally. The introduction of new products and
new materials used in manufacturing processes creates new problems. Often, determining the duty
rate on a particular article requires assessing how the item is used or determining its main component
material. Two or more alternative classifications may have to be considered. A product’s
classification can make a substantial difference in the duty applied. For example, is a Chinesemade
X-Men action figure a doll or a toy? For many years, dolls were subject to a 12 percent duty
when imported into the United States; the rate was 6.8 percent for toys. Moreover, action figures
that represent nonhuman creatures such as monsters or robots were categorized as toys and
thus qualified for lower duties than human figures that the Customs Service classifies as dolls.
Duties on both categories have been eliminated; however, the Toy Biz subsidiary of Marvel
Enterprises spent nearly 6 years on an action in the U.S. Court of International Trade to prove that
its X-Men action figures do not represent humans. Although the move appalled many fans of the
mutant superheroes, Toy Biz hoped to be reimbursed for overpayment of past duties made when
the U.S. Customs Service had classified imports of Wolverine and his fellow figures as dolls.7
A nontariff barrier (NTB) is any measure other than a tariff that is a deterrent or obstacle to
the sale of products in a foreign market. Also known as hidden trade barriers, NTBs include
quotas, discriminatory procurement policies, restrictive customs procedures, arbitrary monetary
policies, and restrictive regulations.
A quota is a government-imposed limit or restriction on the number of units or the total
value of a particular product or product category that can be imported. Generally, the quotas are
designed to protect domestic producers. In 2005, for example, textile producers in Italy and other
European countries were granted quotas on 10 categories of textile imports from China.
The quotas, which were scheduled to run through the end of 2007, were designed to give
European producers an opportunity to prepare for increased competition.8
Discriminatory procurement policies can take the form of government rules, laws, or
administrative regulations requiring that goods or services must be purchased from domestic
companies. For example, the Buy American Act of 1933 stipulates that U.S. federal agencies and
government programs must buy goods produced in the United States. The act does not apply if
domestically produced goods are not available, if the cost is unreasonable, or if “buying local”
would be inconsistent with the public interest. Similarly, the Fly American Act states that U.S.
government employees must fly on domestic carriers whenever possible. One of the most controversial
aspects of U.S. President Barack Obama’s $885 billion economic stimulus bill was a
proposed provision requiring that all manufactured goods purchased with stimulus money be
“Made in the USA” (see Exhibit 8-4). Opponents alleged that the proposal’s language violated
U.S. trade agreements; the clause elicited strong protests from key trading partners, some of
which announced that they would retaliate with protectionist measures of their own. Congress
ultimately toned down the protectionist rhetoric, thus averting a possible trade war.9

Customs procedures are considered restrictive if they are administered in a way that makes
compliance difficult and expensive. For example, the U.S. Department of Commerce might
classify a product under a certain harmonized number; Canadian customs may disagree.
The U.S. exporter may have to attend a hearing with Canadian customs officials to reach an
agreement. Such delays cost time and money for both the importer and exporter.
Discriminatory exchange rate policies distort trade in much the same way as selective
import duties and export subsidies. As noted earlier, some Western policymakers have argued
that China is pursuing policies that ensure an artificially weak currency. Such a policy has the
effect of giving Chinese goods a competitive price edge in world markets.
Finally, restrictive administrative and technical regulations also can create barriers to trade.
These may take the form of antidumping regulations, product size regulations, and safety and
health regulations. Some of these regulations are intended to keep out foreign goods; others are
directed toward legitimate domestic objectives. For example, the safety and pollution regulations
being developed in the United States for automobiles are motivated almost entirely by legitimate
concerns about highway safety and pollution. However, an effect of these regulations has been to
make it so expensive to comply with U.S. safety requirements that some automakers have
withdrawn certain models from the market. Volkswagen, for example, was forced to stop selling
diesel automobiles in the United States for several years.
As discussed in earlier chapters, there is a growing trend to remove all such restrictive trade
barriers on a regional basis. The largest single effort was undertaken by the EU and resulted in the
creation of a single market starting January 1, 1993. The intent was to have one standard for all of
Europe’s industry sectors, including automobile safety, drug testing and certification, and food and
product quality controls. The introduction of the euro has also facilitated trade and commerce.

Tariff Systems
Tariff systems provide either a single rate of duty for each item, applicable to all countries, or
two or more rates, applicable to different countries or groups of countries. Tariffs are usually
grouped into two classifications.
The single-column tariff is the simplest type of tariff; a schedule of duties in which the rate
applies to imports from all countries on the same basis. Under the two-column tariff (Table 8-4),
column 1 includes “general” duties plus “special” duties indicating reduced rates determined by
tariff negotiations with other countries. Rates agreed upon by “convention” are extended to all
countries that qualify for normal trade relations (NTR) (formerly most-favored nation, or
MFN) status within the framework of the WTO. Under the WTO, nations agree to apply their
most favorable tariff or lowest tariff rate to all nations—subject to some exceptions—that are
signatories to the WTO. Column 2 shows rates for countries that do not enjoy NTR status.
Table 8-5 shows a detailed entry from chapter 89 of the harmonized system pertaining to
“Ships, Boats, and Floating Structures” (for explanatory purposes, each column has been identified
with an alphabet letter). Column A contains the heading-level numbers that uniquely
identify each product. For example, the product entry for heading level 8903 is “yachts and other
vessels for pleasure or sports; rowboats and canoes.” Subheading level 8903.10 identifies
“inflatable”; 8903.91 designates “sailboats with or without auxiliary motor.” These six-digit
numbers are used by more than 100 countries that have signed on to the HTS. Entries can extend
to as many as 10 digits, with the last 4 used on a country-specific basis for each nation’s individual
tariff and data collection purposes. Taken together, E and F correspond to column 1 as shown in
Table 8-4, and G corresponds to column 2.
The United States has given NTR status to some 180 countries around the world, so the
name is really a misnomer. Only North Korea, Iran, Cuba, and Libya are excluded, showing that
NTR is really a political tool more than an economic one. In the past, China had been threatened
with the loss of NTR status because of alleged human rights violations. The landed prices
of its exports—the cost after the goods have been delivered to a port, unloaded, and passed
through customs—would have risen significantly. Thus, many Chinese products would have
been priced out of the U.S. market. The U.S. Congress granted China permanent NTR as a
precursor to its joining the WTO in 2001. Table 8-6 illustrates what a loss of NTR status would
have meant to China.
A preferential tariff is a reduced tariff rate applied to imports from certain countries. GATT
prohibits the use of preferential tariffs, with three major exceptions. First are historical preference
arrangements such as the British Commonwealth preferences and similar arrangements that
existed before GATT. Second, preference schemes that are part of a formal economic integration
treaty, such as free trade areas or common markets, are excluded. Third, industrial countries are
permitted to grant preferential market access to companies based in less-developed countries.
The United States is now a signatory to the GATT customs valuation code. U.S. customs value
law was amended in 1980 to conform to the GATT valuation standards. Under the code, the primary
basis of customs valuation is “transaction value.” As the name implies, transaction value is defined
as the actual individual transaction price paid by the buyer to the seller of the goods being valued.
In instances where the buyer and seller are related parties (e.g., when Honda’s U.S. manufacturing
subsidiaries purchase parts from Japan), customs authorities have the right to scrutinize the transfer
price to make sure it is a fair reflection of market value. If there is no established transaction value for
the good, alternative methods that are used to compute the customs value sometimes result in
increased values and, consequently, increased duties. In the late 1980s, the U.S. Treasury
Department began a major investigation into the transfer prices charged by the Japanese automakers
to their U.S. subsidiaries. It charged that the Japanese paid virtually no U.S. income taxes because of
their “losses” on the millions of cars they import into the United States each year.
During the Uruguay Round of GATT negotiations, the United States successfully sought a
number of amendments to the Agreement on Customs Valuations. Most important, the United
States wanted clarification of the rights and obligations of importing and exporting countries in
cases where fraud was suspected. Two overall categories of products were frequently targeted for
investigation. The first included exports of textiles, cosmetics, and consumer durables; the
second included entertainment software such as videotapes, audiotapes, and compact discs.
Such amendments improve the ability of U.S. exporters to defend their interests if charged
with fraudulent practices. The amendments were also designed to encourage nonsignatories,
especially developing countries, to become parties to the agreement.
Customs Duties
Customs duties are divided into two categories. They may be calculated either as a percentage of
the value of the goods (ad valorem duty), as a specific amount per unit (specific duty), or as a
combination of both of these methods. Before World War II, specific duties were widely used
and the tariffs of many countries, particularly those in Europe and Latin America, were
extremely complex. During the past half-century, the trend has been toward the conversion to ad
valorem duties.
As noted, an ad valorem duty is expressed as a percentage of the value of goods. The definition
of customs value varies from country to country. An exporter is well advised to secure information
about the valuation practices applied to his or her product in the country of destination. The reason
is simple: to be price competitive with local producers. In countries adhering to GATT conventions
on customs valuation, the customs value is the value of cost, insurance, and freight (CIF) at the port
of importation. This figure should reflect the arm’s-length price of the goods at the time the duty
becomes payable.
A specific duty is expressed as a specific amount of currency per unit of weight, volume, length,
or other units of measurement; for example, “50 cents U.S. per pound,” “$1.00 U.S. per pair,” or
“25 cents U.S. per square yard.” Specific duties are usually expressed in the currency of the importing
country, but there are exceptions, particularly in countries that have experienced sustained inflation.
Both ad valorem and specific duties are occasionally set out in the custom tariff for a given
product. Normally, the applicable rate is the one that yields the higher amount of duty, although
there are cases where the lower is specified. Compound or mixed duties provide for specific, plus
ad valorem, rates to be levied on the same articles.
Other Duties and Import Charges
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تاريخ التسجيل : 14/01/2015
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مُساهمةموضوع: رد: Importing, Exporting   الإثنين مايو 04, 2015 2:13 pm


Dumping, which is the sale of merchandise in export markets at unfair prices, is discussed in detail
in Chapter 11. To offset the impact of dumping and to penalize guilty companies, most countries
have introduced legislation providing for the imposition of antidumping duties if injury is caused to
domestic producers. Such duties take the form of special additional import charges equal to the
dumping margin. Antidumping duties are almost invariably applied to products that are also manufactured
or grown in the importing country. In the United States, antidumping duties are assessed
after the U.S. Commerce Department finds a foreign company guilty of dumping and the
International Trade Commission (ITC) rules that the dumped products injured American companies.
Countervailing duties (CVDs) are additional duties levied to offset subsidies granted in the
exporting country. In the United States, countervailing duty legislation and procedures are very
similar to those pertaining to dumping. The U.S. Commerce Department and the ITC jointly
administer both the countervailing duty and antidumping laws under provisions of the Trade and
Tariff Act of 1984. Subsidies and countervailing measures received a great deal of attention
during the Uruguay Round GATT negotiations. In 2001, the ITC and U.S. Commerce
Department imposed both countervailing and antidumping duties on Canadian lumber producers.
The CVDs were intended to offset subsidies to Canadian sawmills in the form of low fees for
cutting trees in forests owned by the Canadian government. The antidumping duties on imports
of softwood lumber, flooring, and siding were in response to complaints by American producers
that the Canadians were exporting lumber at prices below their production cost.
Several countries, including Sweden and some other members of the EU, apply a system
of variable import levies to certain categories of imported agricultural products. If prices of imported
products would undercut those of domestic products, these levies raise the price of imported products
to the domestic price level. Temporary surcharges have been introduced from time to time by certain
countries, such as the United Kingdom and the United States, to provide additional protection for
local industry and, in particular, in response to balance-of-payments deficits.

Key Export Participants
Anyone with responsibilities for exporting should be familiar with some of the entities that can
assist with various export-related tasks. Some of these entities, including foreign purchasing
agents, export brokers, and export merchants, have no assignment of responsibility from the
client. Others, including export management companies, manufacturers’ export representatives,
export distributors, and freight forwarders, are assigned responsibilities by the exporter.
Foreign purchasing agents are variously referred to as buyer for export, export commission
house, or export confirming house. They operate on behalf of, and are compensated by, an overseas
customer known as a principal. They generally seek out the manufacturer whose price and
quality match the specifications of their principal. Foreign purchasing agents often represent
governments, utilities, railroads, and other large users of materials. Foreign purchasing agents do
not offer the manufacturer or exporter stable volume except when long-term supply contracts are
agreed upon. Purchases may be completed as domestic transactions with the purchasing agent
handling all export packing and shipping details, or the agent may rely on the manufacturer to
handle the shipping arrangements.
The export broker receives a fee for bringing together the seller and the overseas buyer. The fee
is usually paid by the seller, but sometimes the buyer pays it. The broker takes no title to the goods
and assumes no financial responsibility. A broker usually specializes in a specific commodity, such
as grain or cotton, and is less frequently involved in the export of manufactured goods.

Export merchants are sometimes referred to as jobbers. These are marketing intermediaries
that identify market opportunities in one country or region and make purchases in other
countries to fill these needs. An export merchant typically buys unbranded products directly
from the producer or manufacturer. The export merchant then brands the goods and performs all
other marketing activities, including distribution. For example, an export merchant might identify
a good source of women’s boots in a factory in China. The merchant then purchases a large
quantity of the boots and markets them in, for example, the EU or the United States.
An export management company (EMC) is an independent marketing intermediary that acts
as the export department for two or more manufacturers (principals) whose product lines do not
compete with each other. The EMC usually operates in the name of its principals for export markets,
but it may operate in its own name. It may act as an independent distributor, purchasing and reselling
goods at an established price or profit margin. Alternatively, it may act as a commission representative,
taking no title and bearing no financial risks in the sale. According to one recent survey of
U.S.-based EMCs, the most important activities for export success are gathering marketing information,
communicating with markets, setting prices, and ensuring parts availability. The same survey
ranked export activities in terms of degree of difficulty; analyzing political risk, sales force management,
setting pricing, and obtaining financial information were found to be the most difficult to
accomplish. One of the study’s conclusions was that the U.S. government should do a better job of
helping EMCs and their clients analyze the political risk associated with foreign markets.10
Another type of intermediary is the manufacturer’s export agent (MEA). Much like an
EMC, the MEA can act as an export distributor or as an export commission representative.
However, the MEA does not perform the functions of an export department and the scope of
market activities is usually limited to a few countries. An export distributor assumes financial
risk. The export distributor usually represents several manufacturers and is therefore sometimes
known as a combination export manager. The firm usually has the exclusive right to sell a
manufacturer’s products in all or some markets outside the country of origin. The distributor
pays for the goods and assumes all financial risks associated with the foreign sale; it handles all
shipping details. The agent ordinarily sells at the manufacturer’s list price abroad; compensation
comes in the form of an agreed percentage of list price. The distributor may operate in its own
name or in the manufacturer’s name.
The export commission representative assumes no financial risk. The manufacturer
assigns some or all foreign markets to the commission representative. The manufacturer carries
all accounts, although the representative often provides credit checks and arranges financing.
Like the export distributor, the export commission representative handles several accounts and
hence is also known as a combination export management company.
The cooperative exporter, sometimes called a mother hen, a piggyback exporter, or an export
vendor, is an export organization of a manufacturing company retained by other independent
manufacturers to sell their products in foreign markets. Cooperative exporters usually operate as
export distributors for other manufacturers, but in special cases they operate as export commission
representatives. They are regarded as a form of export management company.
Freight forwarders are licensed specialists in traffic operations, customs clearance, and
shipping tariffs and schedules; simply put, they can be thought of as travel agents for freight.
Minnesota-based C.H. Robinson Worldwide is one such company. Freight forwarders seek out
the best routing and the best prices for transporting freight and assist exporters in determining
and paying fees and insurance charges. Forwarders may also do export packing, when necessary.
They usually handle freight from the port of export to the overseas port of import. They may also
move inland freight from the factory to the port of export and, through affiliates abroad, handle
freight from the port of import to the customer. Freight forwarders also perform consolidation
services for land, air, and ocean freight. Because they contract for large blocks of space on a ship
or airplane, they can resell that space to various shippers at a rate lower than is generally
available to individual shippers dealing directly with the export carrier.
A licensed forwarder receives brokerage fees or rebates from shipping companies for
booked space. Some companies and manufacturers engage in freight forwarding or some portion
of it on their own, but they may not, under law, receive brokerage from shipping lines.

Organizing for Exporting in the Manufacturer’s
Country
Home-country issues involve deciding whether to assign export responsibility inside the
company or to work with an external organization specializing in a product or geographic area.
Most companies handle export operations within their own in-house export organization.
Depending on the company’s size, responsibilities may be incorporated into an employee’s
domestic job description. Alternatively, these responsibilities may be handled as part of a
separate division or organizational structure.
The possible arrangements for handling exports include the following:
1. As a part-time activity performed by domestic employees.
2. Through an export partner affiliated with the domestic marketing structure that takes
possession of the goods before they leave the country.
3. Through an export department that is independent of the domestic marketing structure.
4. Through an export department within an international division.
5. For multidivisional companies, each of the preceding options is available.
A company that assigns a sufficiently high priority to its export business will establish an
in-house organization. It then faces the question of how to organize effectively. This depends on
two things: the company’s appraisal of the opportunities in export marketing and its strategy for
allocating resources to markets on a global basis. It may be possible for a company to make
export responsibility part of a domestic employee’s job description. The advantage of this
arrangement is obvious: It is a low-cost arrangement requiring no additional personnel. However,
this approach can work under only two conditions: First, the domestic employee assigned to the
task must be thoroughly competent in terms of product and customer knowledge; second, that
competence must be applicable to the target international market(s). The key issue underlying
the second condition is the extent to which the target export market is different from the domestic
market. If customer circumstances and characteristics are similar, the requirements for specialized
regional knowledge are reduced.
The company that chooses not to perform its own marketing and promotion in-house has
numerous external export service providers from which to choose. As described previously, these
include EMCs, export merchants, export brokers, combination export managers, manufacturers’
export representatives or commission agents, and export distributors. However, because these
terms and labels may be used inconsistently, we urge the reader to check and confirm the
services performed by a particular independent export organization.
Organizing for Exporting in the Market Country
In addition to deciding whether to rely on in-house or external export specialists in the home
country, a company must also make arrangements to distribute the product in the target market
country. Every exporting organization faces one basic decision: To what extent do we rely on
direct market representation as opposed to representation by independent intermediaries?
The two major advantages to direct representation in a market are control and communications.
Direct market representation enables decisions concerning program development, resource
allocation, or price changes to be implemented unilaterally. Moreover, when a product is not yet
established in a market, special efforts are necessary to achieve sales. The advantage of direct
representation is that the marketer’s investment ensures these special efforts. With indirect or
independent representation, such efforts and investment are often not forthcoming; in many cases,
there is simply not enough incentive for independents to invest significant time and money in
representing a product. The other great advantage to direct representation is that the possibilities
for feedback and information from the market are much greater. This information can vastly
improve export marketing decisions concerning product, price, communications, and distribution.
Direct representation does not mean that the exporter is selling directly to the consumer or
customer. In most cases, direct representation involves selling to wholesalers or retailers. For
example, the major automobile exporters in Germany and Japan rely upon direct representation
in the U.S. market in the form of their distributing agencies, which are owned and controlled by
the manufacturing organization. The distributing agencies sell products to franchised dealers.
In smaller markets, it is usually not feasible to establish direct representation because the
low sales volume does not justify the cost. Even in larger markets, a small manufacturer usually
lacks adequate sales volume to justify the cost of direct representation. Whenever sales volume
is small, use of an independent distributor is an effective method of sales distribution. Finding
“good” distributors can be the key to export success.
Trade Financing and Methods of Payment
The appropriate method of payment for a given international sale is a basic credit decision.
A number of factors must be considered, including currency availability in the buyer’s country,
creditworthiness of the buyer, and the seller’s relationship to the buyer. Finance managers at
companies that have never exported often express concern regarding payment. Many CFOs with
international experience know that in a normal business environment there are generally fewer
collections problems on international sales than on domestic sales, provided the proper financial
instruments are used. The reason is simple: A letter of credit can be used to guarantee payment
for a product.
Unfortunately, the global financial crisis is undermining the ability of firms of all sizes to get
the financing they depend on for trade. Until recently, big lenders such as Citigroup and HSBC
had a thriving business setting up lines of credit and then assigning them to smaller banks.
However, these smaller banks have become more risk averse and are cutting their exposure to
trade financing. Compounding the problem is the fact that trade finance is drying up in key
emerging markets—the very markets that have the potential to boost the volume of global trade.
In Brazil, for example, even large companies such as Embraer are finding that the cost of dollardenominated
financing has increased dramatically. To remedy the situation, Brazil’s development
bank and central bank are both making funds available for trade financing.11
With the constraints of the current economic environment in mind, we will review the basics
of trade financing. The export sale begins when the exporter-seller and the importer-buyer agree
to do business. The agreement is formalized when the terms of the deal are set down in a pro
forma invoice, contract, fax, or some other document. Among other things, the pro forma
invoice spells out how much, and by what means, the exporter-seller wants to be paid.
Documentary Credit
Documentary credits (also known as letters of credit) are widely used as a payment method in
international trade. A letter of credit (L/C) is essentially a document stating that a bank has
substituted its creditworthiness for that of the importer/buyer. Next to cash in advance, an L/C
offers the exporter the best assurance of being paid. That assurance arises from the fact that the
payment obligation under an L/C lies with the buyer’s bank and not with the buyer. The international
standard by which L/Cs are interpreted is ICC Publication No. 500 of the Uniform
Customs and Practice for Documentary Credits, also known as UCP 500.
The importer-buyer’s bank is the “issuing” bank; the importer-buyer is, in essence, asking
the issuing bank to extend credit. The importer-buyer is considered the applicant. The issuing
bank may require that the importer-buyer deposit funds in the bank or use some other method to
secure a line of credit. After agreeing to extend the credit, the issuing bank requests that the
exporter-seller’s bank advise and/or confirm the L/C. (A bank “confirms” an L/C by adding its
name to the document.) The seller’s bank becomes the “advising” and/or “confirming” bank.
Whether it is advised or confirmed, the L/C represents a guarantee that assures payment
contingent on the exporter-seller (the beneficiary in the transaction) complying with the terms set
forth in the L/C.
The actual payment process is set in motion when the exporter-seller physically ships the
goods and submits the necessary documents as requested in the L/C. These could include a
transportation bill of lading (which may represent title to the product), a commercial invoice,
a packing list, a certificate of origin, or insurance certificates. For most of the world, a commercial
invoice and bill of lading represent the minimum documentation required for customs
clearance. If the pro forma invoice specifies a confirmed L/C as the method of payment, the
exporter-seller receives payment at the time the correct shipping documents are presented to
the confirming bank.
The confirming bank, in turn, requests payment from the issuing bank. In the case of an
irrevocable L/C, the exporter-seller receives payment only after the advising bank negotiates the
documents and requests payment from the issuing bank in accordance with terms set forth in the
L/C. Once the shipper sends the documents to the advising bank, the advising bank negotiates
those documents and is referred to as the negotiating bank. Specifically, it takes each shipping
document and closely compares it to the L/C. If there are no discrepancies, the negotiating or
confirming bank transfers the money to the exporter-seller’s account.
The fee for an irrevocable L/C—for example, “1/8 of 1 percent of the value of the credit,
with an $80 minimum”—is lower than that for a confirmed L/C. The higher bank fees associated
with confirmation can drive up the final cost of the sale; fees are also higher when the transaction
involves a country with a high level of risk. Good communication between the exporter-seller
and the advising or confirming bank regarding fees is important; the selling price indicated on
the pro forma invoice should reflect these and other costs associated with exporting. The process
described here is illustrated in Figures 8-1 and 8-2.
Documentary Collections (Sight or Time Drafts)
After an exporter and an importer have established a good working relationship and the finance
manager’s level of confidence increases, it may be possible to move to a documentary collection
or open-account method of payment. A documentary collection is a method of payment that uses
a bill of exchange, also known as a draft. A bill of exchange is a negotiable instrument that is
easily transferable from one party to another. In its simplest form, it is a written order from one
party (the drawer) directing a second party (the drawee) to pay to the order of a third party (the
payee). Drafts are distinctly different from L/Cs; a draft is a payment instrument that transfers
all the risk of nonpayment onto the exporter-seller. Banks are involved as intermediaries but they
do not bear financial risk. Because a draft is negotiable, however, a bank may be willing to buy
the draft from the seller at a discount and thus assume the risk. Also, because bank fees for drafts
are lower than those for L/Cs, drafts are frequently used when the monetary value of an export
transaction is relatively low.
With a documentary draft, the exporter delivers documents such as the bill of lading, the
commercial invoice, a certificate of origin, and an insurance certificate to a bank in the exporter’s
country. The shipper or bank prepares a collection letter (draft) and sends it via courier to a
correspondent bank in the importer-buyer’s country. The draft is presented to the importer;
payment takes place in accordance with the terms specified in the draft. In the case of a sight draft
(also known as documents against payment or D/P), the importer-buyer is required in principle to
make payment when presented with both the draft and the shipping documents, even though the
buyer may not have taken possession of the goods yet. Time drafts can take two forms. As the
name implies, an arrival draft specifies that payment is due when the importer-buyer receives
the goods; a date draft requires payment on a particular date, irrespective of whether the importer
has the goods in hand.
Cash in Advance
A number of conditions may prompt the exporter to request cash payment—in whole or in
part—in advance of shipment. Examples include times when credit risks abroad are high;
when exchange restrictions within the country of destination may delay return of funds for an
unreasonable period; or when, for any other reason, the exporter may be unwilling to sell
on credit terms. Because of competition and restrictions against cash payment in many
countries, the volume of business handled on a cash-in-advance basis is small. A company that
manufactures a unique product for which there are no substitutes available can use cash in
advance. For example, Compressor Control Corporation is a Midwestern firm that manufactures
special equipment for the oil industry. It can stipulate cash in advance because no other
company offers a competing product.
Sales on Open Account
Goods that are sold on open account are paid for after delivery. Intracorporate sales to branches or
subsidiaries of an exporter are frequently on open-account terms. Open-account terms also generally
prevail in areas where exchange controls are minimal and exporters have had long-standing
relations with good buyers in nearby or long-established markets. For example, Jimmy Fand is the
owner of the Tile Connection in Tampa, Florida. He imports high-quality ceramic tile from Italy,

Spain, Portugal, Colombia, Brazil, and other countries. Fand takes pride in the excellent credit
rating that he has built up with his vendors. The manufacturers from whom he buys no longer
require an L/C; Fand’s philosophy is “pay in time,” and he makes sure that his payables are sent
electronically on the day they are due.
The main objection to open-account sales is the absence of a tangible obligation. Normally,
if a time draft is drawn and then dishonored after acceptance, it can be used as a basis of legal
action. By contrast, if an open-account transaction is dishonored, the legal procedure may be
more complicated. Starting in 1995, the Export-Import Bank expanded insurance coverage on
open-account transactions to limit the risk for exporters.
Additional Export and Import Issues
In the post–September 11 business environment in the United States, national security concerns
have resulted in increased scrutiny for imports. A number of initiatives have been launched to
ensure that international cargo cannot be used for terrorism. One such initiative is the Customs
Trade Partnership Against Terrorism (C-TPAT). As noted on the U.S. Customs and Border
Protection Web site:
C-TPAT recognizes that U.S. Customs and Border Protection (CBP) can provide the highest
level of cargo security only through close cooperation with the ultimate owners of the
international supply chain such as importers, carriers, consolidators, licensed customs
brokers, and manufacturers. Through this initiative, CBP is asking businesses to ensure the
integrity of their security practices and communicate and verify the security guidelines of
their business partners within the supply chain.
CBP is responsible for screening import cargo transactions; the goal of C-TPAT is to secure
voluntary cooperation from supply chain participants in an effort to reduce inspection delays.
Organizations that are C-TPAT certified are entitled to priority status for CBP inspections.
Another issue is duty drawback. This refers to refunds of duties paid on imports that are
processed or incorporated into other goods and then re-exported. Drawbacks have long been
used in the United States to encourage exports. However, when NAFTA was negotiated the U.S.
trade representative agreed to restrict drawbacks on exports to Canada and Mexico. As the
United States negotiates new trade agreements, some industry groups are lobbying in favor of
keeping drawbacks.12 Duty drawbacks are also common in protected economies and represent a
policy instrument that aids exporters by reducing the price of imported production inputs. China
was required to remove duty drawbacks as a condition for joining the WTO. As duty rates around
the world fall, the drawback issue will become less important.
Sourcing
In global marketing, the issue of customer value is inextricably tied to the sourcing decision:
whether a company makes or buys its products as well as where it makes or buys its products.
Outsourcing means shifting production jobs or work assignments to another company to cut
costs. When the outsourced work moves to another country, the terms global outsourcing or
offshoring are sometimes used. In today’s competitive marketplace, companies are under intense
pressure to lower costs; one way to do this is to locate manufacturing and other activities in
China, India, and other low-wage countries. And why not? Many consumers do not know where
the products they buy—sneakers, for example—are manufactured (see Exhibit 8-6). It is also
true that, as Case 1-1 in Chapter 1 indicated, people often can’t match corporate and brand names
with particular countries.\

In theory, this situation bestows great flexibility on companies. However, in the United
States the sourcing issue has became highly politicized. At election time, candidates tap into
Americans’ fears and concerns over a “jobless” economic recovery. The first wave of nonmanufacturing
outsourcing primarily affected call centers. These are sophisticated telephone operations
that provide customer support and other services to in-bound callers from around the world.
Call centers also perform outbound services such as telemarketing (see Exhibit 8-7). Now,
however, outsourcing is expanding and includes white-collar, high-tech service sector jobs.
Workers in low-wage countries are performing a variety of tasks, including completing tax
returns, performing research for financial services companies, reading medical CAT scans and
X-rays, and drawing up architectural blueprints. American companies that transfer work abroad
are finding themselves in the spotlight.

As this discussion suggests, the decision of where to locate key business activities depends on
other factors besides cost. There are no simple rules to guide sourcing decisions. The sourcing
decision is one of the most complex and important decisions faced by a global company. Several
factors may figure into the sourcing decision: management vision, factor costs and conditions,
customer needs, public opinion, logistics, country infrastructure, the political environment, and
exchange rates.
Management Vision
Some chief executives are determined to retain some or all manufacturing in their home country.
The late Nicolas Hayek was one such executive. When he was head of the Swatch Group, Hayek
presided over the spectacular revitalization of the Swiss watch industry. The Swatch Group’s
portfolio of brands includes Blancpain, Omega, Breguet, Rado, and, of course, the inexpensive
Swatch brand itself. Hayek demonstrated that the fantasy and imagination of childhood and
youth could be translated into breakthroughs that allow mass-market products to be manufactured
in high-wage countries side-by-side with handcrafted luxury products. The Swatch story is
a triumph of engineering, as well as a triumph of the imagination.
Similarly, top management at Canon has chosen to maintain a strategic focus on high-valueadded
products rather than manufacturing location. The company aims to keep 60 percent of its
manufacturing at home in Japan. The company offers a full line of office equipment, including
popular products such as printers and copiers; it is also one of the top producers of digital
cameras. Instead of increasing the level of automation in its Japanese factories, it has transitioned
from assembly lines to so-called cell production.15
Factor Costs and Conditions
Factor costs are land, labor, and capital costs (remember Economics 101!). Labor includes the
cost of workers at every level: manufacturing and production, professional and technical, and
management. Direct labor costs in basic manufacturing today range from less than $1 per hour in
the typical emerging country to $6 to $12 per hour in the typical developed country. In certain
industries in the United States, direct labor costs in manufacturing exceed $20 per hour without
benefits. German hourly compensation costs for production workers in manufacturing are
160 percent those in the United States, whereas those in Mexico are only 15 percent of those in
the United States.
Volkswagen’s business environment includes a significant wage differential between
Mexico and Germany, the strength of the euro, and growing worldwide demand for compact
and subcompact vehicles. Taken together, these factors dictate a Mexican manufacturing
facility that builds models destined for the United States and other markets. Volkswagen has
invested $1 billion to design and produce the next-generation Jetta at a sprawling plant in
Mexico City. Volkswagen and other global automakers also benefit from the fact that Mexico
has some 40 free-trade agreements that cut the costs of importing components as well as
exporting finished vehicles. In addition, Mexico’s car industry is now well developed and the
labor pool is highly skilled.16
Do lower wage rates demand that a company relocate 100 percent of its manufacturing to
low-wage countries? Not necessarily. During his tenure as chairman at VW, Ferdinand Piech
improved his company’s competitiveness by convincing unions to accept flexible work schedules.
For example, during peak demand, employees work 6-day weeks; when demand slows, factories
produce cars only 3 days per week.

Labor costs in nonmanufacturing jobs are also dramatically lower in some parts of the
world. For example, a software engineer in India may receive an annual salary of $12,000; by
contrast, an American with the same education and experience might earn $80,000.
The other factors of production are land, materials, and capital. The cost of these factors
depends on their availability and relative abundance. Often, the differences in factor costs will
offset each other so that, on balance, companies have a level field in the competitive arena. For
example, some countries have abundant land, and Japan has abundant capital. These advantages
partially offset each other. When this is the case, the critical factor is management, professional,
and worker team effectiveness.
The application of advanced computer controls and other new manufacturing technologies
has reduced the proportion of labor relative to capital for many businesses. In formulating a
sourcing strategy, company managers and executives should also recognize the declining importance
of direct manufacturing labor as a percentage of total product cost. It is certainly true that,
for many companies in high-wage countries, the availability of cheap labor is a prime consideration
when choosing manufacturing locations; this is why China has become “the world’s
workplace.” However, it is also true that direct labor cost may be a relatively small percentage of
the total production cost. As a result, it may not be worthwhile to incur the costs and risks of
establishing a manufacturing activity in a distant location.
Customer Needs
Although outsourcing can help reduce costs, sometimes customers are seeking something
besides the lowest possible price. Dell recently rerouted some of its call center jobs back to
the United States after complaints from key business customers that Indian tech support
workers were offering scripted responses and having difficulty answering complex problems.
In such instances, the need to keep customers satisfied justifies the higher cost of home-country
support operations.
Logistics
In general, the greater the distance between the product source and the target market, the
greater the time delay for delivery and the higher the transportation cost. However, innovation
and new transportation technologies are cutting both time and dollar costs. To facilitate
global delivery, transportation companies such as CSX Corporation are forming alliances
and becoming an important part of industry value systems. Manufacturers can take advantage
of intermodal services that allow containers to be transferred among rail, boat, air,
and truck carriers. In Europe, Latin America, and elsewhere, the trend toward regional
economic integration means fewer border controls, which greatly speeds up delivery times
and lowers costs.
Despite these overall trends, a number of specific issues pertaining to logistics can affect
the sourcing decision. For example, in the wake of the 2001 terror attacks, importers are
required to send electronic lists to the U.S. government prior to shipping. The goal is to help
the U.S. Customs Service identify high-risk cargo that could be linked to the global terror
network. In the fall of 2002, a 10-day strike on the West Coast shut down 29 docks and cost
the U.S. economy an estimated $20 billion. Such incidents can delay shipments by weeks or
even months.
Country Infrastructure
In order to present an attractive setting for a manufacturing operation, it is important that a
country’s infrastructure be sufficiently developed to support manufacturing and distribution.
Infrastructure requirements will vary by company and by industry, but minimally, they will
include power, transportation and roads, communications, service and component suppliers, a
labor pool, civil order, and effective governance. In addition, companies must have reliable
access to foreign exchange for the purchase of necessary material and components from

abroad. Additional requirements include a physically secure setting where work can be done
and from which product can be shipped.
A country may have cheap labor, but does it have the necessary supporting services or infrastructure
to support a high volume of business activities? Many countries offer these conditions,
including Hong Kong, Taiwan, and Singapore. In scores of other low-wage countries, however,
the infrastructure is woefully underdeveloped. In China, a key infrastructure weakness is the
“cold chain,” a food industry term for temperature-controlled trucks and warehouses. According
to one estimate, an investment of $100 billion will be required to modernize China’s cold
chain.18 Meanwhile, the Chinese government is spending hundreds of millions of dollars on a
superhighway system that will eventually connect all 31 of China’s provinces. When the project
is completed in 2020, China will have about 53,000 miles of paved expressway—more than
the United States.
Infrastructure improvement is a key issue in other emerging markets as well. In India, for
example, it takes 8 days for cargo travelling by truck between Kolkata and Mumbai to make the
trip of 1,340 miles!19 One of the challenges of doing business in the new Russian market is an
infrastructure that is woefully inadequate to handle the increased volume of shipments.
The Mexican government, anticipating much heavier trade volume because of NAFTA, has
committed billions of dollars for infrastructure improvements.
Political Factors
As discussed in Chapter 5, political risk is a deterrent to investment in local sourcing.
Conversely, the lower the level of political risk, the less likely it is that an investor will avoid a
country or market. The difficulty of assessing political risk is inversely proportional to a
country’s stage of economic development: All other things being equal, the less developed
a country, the more difficult it is to predict political risk. The political risk of the Triad
countries, for example, is quite limited as compared to that of a less-developed country in
Africa, Latin America, or Asia. The recent rapid changes in Central and Eastern Europe and
the dissolution of the Soviet Union have clearly demonstrated the risks and opportunities
resulting from political upheavals.
Other political factors may weigh on the sourcing decision. For example, with protectionist
sentiment on the rise, the U.S. Senate passed an amendment that would prohibit the U.S.
Treasury and Department of Transportation from accepting bids from private companies that use
offshore workers. In a highly publicized move, the state of New Jersey changed a call center
contract that had shifted jobs offshore. About one dozen jobs were brought back to the state—at
a cost of about $900,000.
Market access is another type of political factor. If a country or a region limits market access
because of local content laws, balance-of-payments problems, or any other reason, it may be
necessary to establish a production facility within the country itself. The Japanese automobile
companies invested in U.S. plant capacity because of concerns about market access. By producing
cars in the United States, they have a source of supply that is not exposed to the threat of tariff or
import quotas. Market access figured heavily in Boeing’s decision to produce airplane components
in China. China ordered 100 airplanes valued at $4.5 billion; in return, Boeing is making
investments and transferring engineering and manufacturing expertise.20
Foreign Exchange Rates
In deciding where to source a product or locate a manufacturing activity, managers must take into
account foreign exchange rate trends in various parts of the world. Exchange rates are so volatile
today that many companies pursue global sourcing strategies as a way of limiting exchange-related
risk. At any point in time, what has been an attractive location for production may become much
less attractive due to exchange rate fluctuation. For example, endaka is the Japanese term for a
strong yen. In 2010, the yen strengthened to a 15-year high, trading at ¥85/$1. For every 1 yen
increase relative to the American dollar, Canon’s operating income declines by 6 billion yen!
As noted earlier, Canon’s management is counting on R&D investment to ensure that its products
deliver superior margins that offset the strong yen. Also, Canon and other Japanese companies have
become less reliant on the U.S. market as demand in emerging markets has increased.
The dramatic shifts in price levels of commodities and currencies are a major characteristic
of the world economy today. Such volatility argues for a sourcing strategy that provides alternative
country options for supplying markets. Thus, if the dollar, the yen, or the mark becomes
seriously overvalued, a company with production capacity in other locations can achieve
competitive advantage by shifting production among different sites
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