Foreign Direct Investment Flashcards
What are the benefits of an international strategy?
- New investment and trade broadens markets, thereby increasing economic stability & resiliency
- New investment brings innovation, which strengthens and grows existing industries.
- Increased competitiveness drives growth and eventually, employment.
What are the benefits of promoting FDI and Exporting?
They position a community for the long term by allowing capable firms to become more competitive, diversified and sustainable.
True or False
Most FDI occurs through mergers / acquisitions, but doesn’t always expand jobs.
True.
What is a primary difference b/w FDI and Exporting?
FDI focuses on attracting larger foreign firms.
Exporting focuses on knowledge of small to medium sized firms
True or False
Foreign owned firms tend to both import and export more than their domestic peers?
True.
What are some ways EDOs can promote exports in their communities?
- Convene - stakeholders identify SWOT
- Think Local - identify local assets and develop local brand to attract investments
- Collaboration - w/ other communities to create export plans and market globally
- Resources - utilize federal / state gov’t resources
- Plan - develop regional plan
- Educate - increase business’ understanding of exporting and gauge interest
- Improve Access - update website with current export resources available
- Support - identify export ready businesses & connect them with appropriate agencies / resources
- Leverage Global Connectivity - analyze existing business connections to foreign markets, immigrant communities
- Partner with Higher Education - to attract foreign students
- B-2-B Mentorship Program - share expertise to foster regional growth
- FTZ - designate foreign trade zone to reduce / delay duties on foreign inputs
- Organize - trade mission
- Broaden the Economic Strategy - align with exporting
Why are foreign firms more likely to locate in an industrial cluster of similar companies?
Gain access to:
- specialized knowledge
- skilled workers
- dense network of customers
- access to suppliers
What is portfolio foreign investments?
Where businesses purchase stocks or bonds of businesses in other countries.
What constitutes foreign direct investment?
When a foreign company owns a controlling stake in the firm (technically defined as owning more than 10% of a company)
Define FDI Stock
Total amount of foreign capital invested into a country at any given time.
Define FDI Flow
The change in total investment over a given unit of time (calculated by subtracting total divestment from total new investment).
What is the difference b/w vertical and horizontal investment?
Vertical - firm adds business functions on either side of its value chain outside of its home country (i.e. car manufacturer purchasing a dealer network abroad)
Horizontal - company expands its existing business operations into a new country
What 3 ways can FDI take occupancy?
- Greenfield - new construction projects by foreign companies (i.e. manufacturing sector)
- New - occupies vacant space already constructed (i.e. service and financial sectors)
- Mergers & Acquisitions - changes in a company’s ownership
Merger occurs when a domestic corp and foreign corp combine assets / liabilities into one entity
Acquisition occurs when a firm from one country is purchased by a firm from another country
The conventional benefits of FDI include:
Generate new construction projects (expenditures for equipment / materials, jobs, tax revenues)
Non-construction wages
Indirect and Induced job creation / tax revenues
New product availability in the marketplace
Increased clustering effects
More competition
What are the unique ‘spill-over’ benefits of FDI?
Exposure to innovative business practices
Technology transfer (physical and intangible) (vertical and horizontal)
Access to technology leads to more firms entering the market place
More competition can reduce the price and increase productivity
Enhanced technology sharing in clusters
Diversification through increased exposure and foreign ties
Positive marketing efforts through the presence of international firms
What is an industry cluster?
Regional groupings of related businesses that benefit from concentrations of research capacity, labor, logistics and capital.
What are some of the roles economic developer’s play with regards to FDI?
Marketer Ambassador Organizer Technical Assistance Reference Aftercare Service Provider
An FDI Marketing Plan identifies:
- Specific or regional target markets (countries/cities) and market intelligence
- Strategic connections to targets that can provide an advantage
- Budget for FDI
- Priority activities to be undertaken
- Additional marketing provided (social media)
- Timeline
2 of the least expensive yet most effective outreach methods in FDI are what?
1) word-of-mouth introductions
2) endorsements from foreign investors
What is meant by providing foreign investors with a ‘soft-landing’ in a community?
When economic developers make available assets, tools, resources to accommodate the needs of foreign investors so they can acclimate and succeed in an unfamiliar location / country.
The best case scenario is for an economic developer to provide a ___-____ _____ for foreign investors to assist in relocating & assimilating into a community.
One-stop shop
True or False
Welcoming foreign firms to your community is different from welcoming domestic firms to your community.
False.
They are both provided with current stats, info on trends, taxes, permitting or anything else they need to learn about their new environment.
Introductions should be made to service providers, chamber of commerce reps, industry associations, etc.
What is ‘aftercare’ and what is it’s purpose?
Aftercare describes a range of activities from providing post-establishment facilitation services to developmental support for new foreign investors.
Its purpose is to strengthen relationships with and support the success of foreign investors. The activities create a favorable business & operating environment for foreign firms, prevents their failure or relocation and facilitates their growth.
What is the rationale for providing ‘aftercare’?
Existing investors are more likely to invest further in a community than companies who have yet to invest.
It’s less expensive than attracting new investors.
What are some examples of ‘aftercare’?
Administrative services (building permits, work permits for spouses, finding homes, enrolling in schools, introductions to service providers - banks, legal, acctg)
Operational services (training support, real estate support for expansions, supplier contacts. business or financial planning, cluster support networks)
Strategic services (longer term expansion/growth, product line development, value added services, policy advocacy, helping local suppliers meet international standards, linking mgrs to networks)
What knowledge is needed before starting an aftercare program?
The needs of the investors and how the EDO can best serve them.
Resources available to meet needs.
Why are incubators attractive to foreign investors?
They provide smaller investors with the resources, support and opportunities that might be too cost prohibitive to develop on their own.
Why are regional partnerships and cooperation critical for FDI and Exporting initiatives?
Partnerships with the State EDOs ensure access to funding, expertise, leadership, commitment to local initiatives.
Regional partnerships promote resource sharing, cohesive branding, infrastructure access.
Partnerships with local companies leads to stronger cluster developments, developing local capacity & building multi-sector teams.
University agreements have wider research reach that’s critical in FDI attraction.
Name the primary services offered by SelectUSA.
- Promote FDI in US
- Coordinate with state/local officials to improve & implement FDI strategies
- One-stop shop for resources
- Provide searchable list of funding FDI projects
What are the 5 categories of strategic investment according to EDA?
- brainpower
- innovation & entrepreneurship networks
- quality, connected places
- branding experiences
- civic collaboration
True or False
Governor’s have found that strengthening their states’ connections to the international economy through trade and investment affects the state’s economic success.
True.
How can Governor’s best position their states as top FDI destinations?
Analyze and capitalize on their state assets (workforce, infrastructure, business climate, education, geography, etc.)
Offer sustained support to foreign firms interested in locating in their state
Prioritize FDI and adopt strategies that align with the state’s overall economic development plan
True or False
Ports are major logistics hubs and significant players for economic development and FDI.
True.
How do ports act as ‘funnels’ to economic development?
- Direct via ports and transportation services (revenues from port activities)
- Indirect via import/export activity and benefits (cost savings for services that would otherwise not be offered)
- Induced (economic multipliers and oppys around the port)
How do economic developers attract FDI to their local communities?
Through effective marketing, regional branding and targeting industry sectors that match local strengths and clusters.
What is the core skill of economic developers?
Relationship building
Before establishing a new eco-devo initiative, an economic developer must first…
- Study the history of growth/decay of the community
- Identify the SWOT
- Understand existing business assistance programs
- Determine if existing programs can be leveraged, expanded to meet needs
- Understand obstacles for private sector growth
- Develop relationships with key stakeholders to create vision for the community
What is a location consultant’s primary goal in assisting companies invest abroad?
To eliminate the communities with the most disadvantages for the client.
What is the location consultants role in assisting foreign investors?
Ensure company success in new location
Explain project so EDO’s understand needs
Gather data to allow effective evaluation
Eliminate communities with most disadvantages
When considering new investment endeavors, investors tend toward places that:
- They’ve invested in before
- Competitors have invested in
- Customers/Suppliers have a presence in
- Rank high in location attractiveness
- Positive reports in business press
- They’ve visited on business or vacas
- Have family roots in
List 4 reasons companies invest abroad.
- Gain direct access to foreign markets
- Improve access to export markets
- Acquire technology or learn business processes only available abroad
- Diversify
- Enter new lines of business
- Integrate foreign suppliers into the supply chain
- Acquire competitors
- Access financing only available abroad
- Avoid instability of home market
What are some factors in determining how much a firm will invest?
- Global economic conditions
- Growth oppys at home
- Economic conditions in target country
- State of competition w/in an industry
- Characteristics of the investing firm (size, access to capital, previous investing experience, corp. goals)
Most companies invest abroad with the goal of?
Controlling Assets.
There are numerous factors in deciding on an FDI location. Name 6
- Efficient regulatory environment
- Corporate tax rates
- Quality of education
- Workforce skills, wages, productivity
- Entrepreneurship support and risk-taking
- Quality of transportation, communications, infrastructure
- Availability / Cost of natural resources
- Size of consumer markets
- Access to export markets (transportation and trade agreements)
- Political stability
- Access to innovation & technology
- Energy costs
- Degree of industry clustering
- Commonalities b/w host & home country
- Economic growth rates
- Protectionist policies / restrictions on foreign equity
The growth of FDI since 1990 is attributable to what?
Deregulation Trade liberalization Technological advances in transport / communications Political changes Innovation as a source of growth
True or False
The primary goal of FDI is to increase technology transfer.
False.
The primary goal is to create new jobs.
True or False
Firms headquartered in emerging markets are responsible for a large share of mergers & acquisitions.
True.
These firms buy established firms in industrialized countries to acquire new technology and sell products in those markets.
How will ‘dry powder’ impact the future of FDI?
Dry Powder is the large amounts of cash that some large companies hold. It’s viewed as a major potential source of FDI in the future.
How are national competitiveness rankings used?
To compare countries on various metrics / factors against each other with regard to FDI, business climate, ease of doing business, economy, etc.
True or False
Today, most foreign capital is invested in the US through free-standing, foreign owned firms.
False.
Today, most foreign capital is invested in the US through domestic subsidiaries of multinational firms.
List the contributing factors to the strength of the US as a destination market for FDI.
World's largest consumer market Strong, consistent economic growth Established industry clusters Strong capital markets Quality, comprehensive infrastructure Culture of innovation & entrepreneurship Effective Institutions
True or False
The US workforce is 30% more productive than the German Workforce and twice as productive as the S. Korean workforce.
True.
What does the American Free Trade Agreement allow?
It offers barrier-free trade with other countries. Foreign foreign firms can build facilities in the US and export tariff-free to other countries.
Why is the US considered the most innovative country in the world?
When measured by the top universities, research and development spending, patents and availability of elete engineers and scientists, UP ranks 1st.
The US is home to 75% of the top 20 and 50% of the top 100 world universities.
These universities train elite engineers and scientists for the workforce, and produce academic research that can be commercialized.
What are the challenges to foreign investment in the US?
Corporate income tax rates are higher in the US
Balance of trade (UP imports more than exports)
National Security concerns
High business costs from crime / violence
Complex gov’t regulations
High federal debt
Underperforming primary education system
Strained relationships with several countries
Ineffective federal gov’t
Underfunded infrastructure
Inadequate financial sector regulation
Complex tax code
Stringent protections for workers
Rigorous environmental standards
True or False
The United Kingdom was the largest cumulative source of inward FDI to the US in 2013.
True
UK invested $519B in the US in 2013, ~1/5 of total US investment.
Which industries provide the majority of FDI in the US?
Manufacturing
Wholesale Trade
Finance / Insurance
Make up more than 50% of the foreign owned capital invested in the US
True or False
There has been a growing shift of FDI toward services.
True
Once a company decides to locate in the US, what are the determining factors in deciding on a location?
- Regulatory environment
- Workforce skills
- Suppliers / Competitors / Clustering
- Local / State taxes
- Infrastructure quality
- Local incentives
Although the US ranks high in international competitiveness rankings, US cities rarely place in the top 10. Why?
FDI in the US is diffused across many metro regions across the country
US cities rank low on quality of life factors compared to foreign cities
List the emerging trends economic developers should be prepared for?
Additive Manufacturing (3-D Printing) Big Data Digitization Energy Dynamics E-Commerce
How could emerging trends impact economic development?
Technology improvements could decentralize manufacturing and impact where industries locate
Big data allows companies to better understand customer needs and alter processes to accommodate them
Robotics and digitization will result in more efficient production processes and could impact manufacturers to locate closer to customer base
Price, availability, sources and uses of energy will impact FDI
Online sales will impact supply chains, infrastructure and location of retail and supply firms
To best position a community for FDI, what 3 key items should economic developers stay apprised of?
- Changing patterns of foreign investment
- Competitive position of US
- Characteristics of top-performing US cities
What are the 4 general initiatives that will continue to be winning strategies for attracting FDI?
- Human capital development
- Strategic cluster development
- Innovative capacity development
- Entrepreneurship promotion
What are the 3 main factors determining America’s competitiveness in the global economy?
- Skilled workforce
- Research & Development (R&D)
- Infrastructure
What is the ‘middle skills gap’?
Middle Skills are needed for jobs that require more education than a high-school degree but less than a 4-yr college degree. Vacancies are found in fields such as computer technology, nursing, high-skill mfg, etc.
True or False
The US educational system has been able to keep up in teaching the skills necessary for today’s technology companies.
False
The skills that companies desire from employees have changed so significantly and rapidly, the education system has not been able to keep pace.
True or False
The majority of R&D is undertaken overseas.
True
R&D within the US is largely funded by private organizations due to the growing federal debt and pressure on research budgets
The first step in attracting foreign investment is to ensure a community has the ___________ to make it happen,
Capacity
What can an economic developer do to determine their target market in pursuit of FDI?
- Understand local community and ability to provide resources for specific industries
- Conduct industry analysis (what industries best fit community based on existing businesses, gaps, suppliers and customers)
- Know factors involved in location decision making process
- Know needs / preferences of industries that are compatible with local economy
- Know your competition for these same industries and your competitive advantages
With regard to marketing why is it important to identify a target market?
Targeted marketing efforts are more effective when focused on a market that is more likely to respond.
What can local gov’t improve to create an investment-friendly environment for foreign investment?
- Improve effective use of buildings / space
- improve productivity of workforce
- improve efficient use of financial resources
What factors affect a community’s business climate?
Attitudes towards economic growth Public-private cooperations Gov't responsiveness Gov't efficiency Gov't regulations Labor relations Eco-Devo resources and experience
Access to _______________ determines the capacity to move goods / people efficiently.
Transportation
Why is it important to understand your community’s access to the global economy through transportation?
Transportation is how a company accesses their suppliers, vendors, customers, market, technology
Transportation capacity will identify ability to handle increases in demand, size of customer market, speed to market
What are some of the criteria an economic developer should include in their community inventory?
Federal Gov't Data Business Climate Economic Structure Labor Market / Workforce Transportation Infrastructure Taxes R&D access Education / Training Financial Capital availability Qualify of Life Sites / Facilities
In a SWOT analysis, what are the internal factors?
Strengths - are assets or factors that give a community its competitive advantage and make the area an attractive place to be.
Weaknesses - are factors or trends that are obstacles or constraints that make it difficult for businesses to develop, operate profitably or grow.
In a SWOT analysis, what are the external factors?
Opportunities - conditions external to the community that make it easier or possible to develop competitive advantage.
Threats - unfavorable trends or developments external to the economy that lead to loss or decline in a community’s competitive advantage.
Regarding FDI, what will a SWOT analysis tell an economic developer?
Which industry sectors are most primed for foreign investment.
Those sectors will have the largest # of employees, have attracted the largest amount of investment or growing the fastest.
Additional factors include:
if the sector aligns with the strength of the location;
has potential for foreign investment;
can make the largest impact on the economy
What is a trade mission?
Overseas trips of public / private delegates to seek opportunities to develop personal relationships with foreign investors looking to expand in the US
What determines if a trade mission is productive?
If it generates leads for FDI in the delegation’s home jurisdiction.
What are the typical considerations involved in planning pre- and post- trade missions?
- What is the purpose
- Reasonable costs / budget
- Where will the mission go (identify markets)
- Who will go (local delegates)
- Pre-planning (marketing / recruitment / orientation)
- What activities to attend
- Follow-up (debrief delegates / maintain relationships with foreign contacts)
What are the legal entities for foreign firms to consider when entering into the US market?
- Branch (extension of foreign firm)
- Subsidiary (separate legal entity w/ 80% control)
- International Joint Venture
- Mergers / Acquisitions
Why do experts discourage foreign firms establishing a branch operation when entering the US market?
Foreign companies are exposed to high legal liabilities, intellectual property risks and greater taxation.
What are the options for a foreign firm in establishing a subsidiary in the US and which is the preferred method by experts?
- Corporation
- General or Limited Liability Partnership (GP or LLP)
- Limited Liability Company (LLC)
Corporation is preferred for liability and tax reasons.
How can an economic developer assist a foreign firm in establishing a subsidiary?
Assist in incorporation process / procedures;
Assist with trademark protection for name, brands and logo;
Build local supply chain & get involved in innovation ecosystem;
Build relationships with R&D institutions, cluster associations and networking
What is an International Joint Venture (IJV)?
Strategic alliance of 2+ partner companies where one of the partners is a foreign company
The purpose is to share resources, risks, rewards and management
Temporary partnerships for a specific purpose (usually 5 years)
Partners decide how partnership will be organized
What are the 3 principal functions for an International Joint Venture (IJV)?
- Distribution of a foreign company’s products in US
- Joint production in US
- Research & Development to develop new products
The advantages of an International Joint Venture (IJV) include:
- Synergy, collaboration & economies of scale (sharing facilities / resources, pooling risk and capital)
- Market access for the foreign partner (existing customer base & distribution channels, experience with gov’t rules / regs)
- Benefits to US firm (access to technology, exporting platform)
The disadvantages of an International Joint Venture (IJV) include:
- Differences in business culture, mgmt, leadership
- Disputes over control, sales, intellectual property
- Challenges in capitalizing the venture due to temporary nature of IJV
True or False
In a Limited Liability Partnership, the partners pay taxes on the partnership’s disbursements.
True
LLP’s are tax pass-throughs where the company does not pay any taxes, but the partners do.
How can an economic developer assist a foreign firm in establishing an International Joint Venter (IJV)?
- Matchmaking b/w local & international partners
- Assist with due diligence
- Provide info on potential partner countries legal / tax systems
- Provide financing for IJVs
- Connect IJVs with professional services
- Assist dispute resolutions
Once a foreign firm is established in a community, how can economic developers assist in their success?
- Provide access to professional services
- Connect them to professional service providers
- Connect them to R&D institutions
- Assist with workforce development needs (assist in hiring locally)
- Offer data on local economy
- Assist with personal needs (schools, housing, banking, language learning, etc.)
- Connect them to local suppliers
- Encourage involvement in local philanthropy
True or False
Failure to obtain a visa is the most common factor preventing entrepreneurs who want to come to the US
True
What are the 2 visa classes especially for foreign investors?
Treaty Investor E-2 Visa
Immigrant Investor EB-5 Visa
What is the difference b/w the E-2 and EB-5 Visas?
E-2 - Treaty Investor is a non-immigrant visa for those who plan to invest in a commercial enterprise in the US; used for the purpose of developing & directing an investment; valid for 2 years; does NOT provide a way to permanent residency; unlimited extensions.
EB-5 - Immigrant Investor is an immigrant visa for those seeking permanent resident status and who have invested or committed to invest in a commercial enterprise; includes a job creation component; includes a minimum investment requirement; 10,000 allocated per year
What challenges do immigrant entrepreneurs often face in starting & operating businesses in the US?
Unfamiliar with American institutions
Difficulty in accessing credit
Lack of financial literacy or mgmt skills
Language barriers
Access to business support services
Lack of awareness on benefits of workforce training
Poor business networks
How does ‘protectionism’ challenge FDI in the US?
It protects inbound flows of foreign investment or restricts conditions on outbound investment.
Inward protectionism include measures to prevent or discourage foreign investors from coming to, or staying in a host country.
In screening a potential FDI prospect, what information should an economic developer review?
History of investing abroad Prior merger / acquisitions Employment trend (increasing?) Financial resources to invest Current export activity
Compare industries to their own sector and not to the overall market
Name 4 of the value dimensions and how they shape the international business environment?
- Time orientation - how a culture values past, present and future when it comes to punctuality and project deadlines
- Space orientation - how a culture views personal space and comfort levels in personal space, touching and seating arrangements
- Activity orientation - how accomplishments are valued (doing - tangible accomplishments and measurable achievements are valued; being - relationships and social structures are valued)
- Relationship orientation - how a culture relates to others, make decisions and work w/in a group. Cultures that value relationships will seek consensus and try to arrive at win-win solutions
What are some of the challenges in negotiating through FDI projects?
- Attitudes / Styles - (win-win solutions, exchanging info, cooperation VS. aggressive debates, persuasive arguments, based on contingencies)
- Gathering / Sharing Information - (time spent gathering and amount of info shared differs; info sharing viewed as creating bargaining advantages or building trust)
- Pace of Negotiations - (depends on a country’s view of time; work style impacts pace also; monochronic styles address actions / goals methodically and sequentially; polychronic styles pursue multiple actions and goals at the same time)
- Bargaining - (attitudes toward bargaining and haggling vary)
- Decision Making - (influenced by hierarchy and authority dependent on value of consensus; foreign firms typically work within clearly established lines of authority; they rarely delegate authority so important to establish relationships with top execs)
- Agreements / Contracts - (keep written correspondence of meetings and key negotiation stages; contracts may not be seen as binding; don’t bring an attorney to the negotiation table)
What factors have lead to the surge in cross-border trade over the past 20 years?
- Trade Agreements
- Trade promotion by international agencies w/ clearer goals, rules and penalties
- Convergence in incomes b/w developed and developing countries
- Decreasing costs of transportation & communication
- Innovation & deregulation in financial products & markets
- Opening of trade in previously isolated markets
True or False
Services now account for 1/5 of global exports.
True
True or False
Multinational mfg companies are the largest exporters due to cross-border movements of intermediate goods in the course of their manufacturing and production processes.
True
True or False
In 2015, merchandise trade was growing about 50% faster than income.
True
Why are long-term prospects for commodities trading difficult to predict?
Probable changes and volatility in technology, policy and population dynamics make it difficult to predict.
______________ presents a major opportunity to export critical infrastructure techology, (i.e. equipment for power generation, telecommunication, oil/gas, in addition to the services to install and maintain them).
Urbanization
How can services be exported?
- Service producer travels to the consumer (consulting)
- Producer delivers the service remotely (call centers)
- Consumer travels to the producer (tourism)
Why is the current pattern of global trade changing?
- Demand from industrialized countries is slowing
- Demand from emerging countries is increasing
- Challenges in national economies and politics
- Population, Labor force and demographic changes
- Income and wage growth in developing countries
- Natural resources availability and price
- Volatility in financial markets
- National security issues
What is the importance of understanding countries’ trade balances?
Trade surpluses (exports exceed imports) and trade deficits (imports exceed exports) have a corresponding effect on capital flows. Exports bring in $$; Imports send out $$
What are trade barriers?
Policies that intentionally or inadvertently restrict trade.
How can international trade be restricted?
- Import Tariffs
- Quotas (value, volume or number of units)
- Subsidies (i.e. agricultural products)
- Technical Barriers (regulations such as size, shape, design, function to protect consumers and environment)
Define a Trade Agreement.
A treaty b/w sovereign countries that establishes the terms of trade.
What is the difference b/w Preferential Trade Agreements (PTAs) and Free Trade Agreements (FTAs)?
PTAs - give preferential treatment through reduced barriers / tariffs
FTAs - parties agree to eliminate tariffs and quotas
Since the Recession of 2008/09, the pace of trade growth has ___________.
Slowed
True or False.
According to estimates, the majority of global economic growth will occur outside of US borders.
True.
Only 4% of US firms export, of which 98% are __________.
SMEs (small / medium-sized enterprises)
SMEs account for 35% of total export revenue
Which industrial sector is driving export growth in the US?
Manufacturing (transportation equipment, computers, electronics, chemicals, machinery, petroleum, coal)
Growth spurred by emerging markets characterized by high urbanization and infrastructure development
What criteria must be met for a product to be marketed as “Made in America”?
- Final assembly / processing done in the US
- Negligible foreign mfg costs (materials / labor)
- Negligible foreign content
- Negligible % of final product made overseas
Where are the top 10 export markets for the US?
- Canada
- Mexico
- China
- Japan
- United Kingdom
- Germany
- Brazil
- South Korea
- Netherlands
- Hong Kong
Which of the top 10 US export markets export more services than goods?
United Kingdom
Export growth is driven primarily by what?
The increasing economic growth of the trading country.
True or False
The US exports the same % of goods and services.
False.
US exports are 30% services and 70% goods
What is driving the increase in service exports from the US?
Tourism, Travel, Education
Why are more companies exporting?
- Improvements in trade
- Reductions in shipping costs
- Innovations in e-commerce
- Elimination of trade barriers
List a few of the benefits of exporting.
- Access to new customers (95% of world’s population)
- Entry to promising markets (less competition; reputation of UP products)
- Mitigate risks (diversification reduces susceptibility to downturns in market)
- Moderate seasonal fluctuations in sales (different cultural or climate patterns will smooth seasonal variability)
- Keep up with competition (gain insight into competition)
- Encourage innovation (access to new technology and overcome challenges leading to new innovation & business)
What are the 3 key attributes a company needs in order to export?
- Demand for their product abroad
- Have organizational readiness for export
- Have ability to compete in the foreign market
What does a company need to be “export ready”?
- financial security
- market ready products/services and be prepared to modify if necessary
- resources available for exporting
- commitment from mgmt
- ability to fill orders quickly
- awareness of cultural pitfalls
- experience in marketing (market analysis, distribution and customer service)
- have realistic expectations of ROI
True or False
An international / export business plan is the same as a domestic business plan.
False
Export plans are similar to domestic business plans but also include info specific to exporting:
- how international trade fits into long-term goals
- best foreign markets to pursue
- entry strategy for each market
- steps to carry out the strategy
- action plan to implement the strategy
What are some considerations in selecting a target export market?
- Economic factors (political, financial, environmental, business climate)
- Competitive environment (price, origin, competitors)
- Regulatory obstacles (duties, quotas, tariffs)
- Product modifications (language, cultural variations & differences, technical regulations)
- Demand factors (age, income, volume, cultural factors, projected demand growth)
- Distribution (promotional media, prevailing distribution methods)
What are the 4 primary means for goods in entering the export market?
- Licensing design or technology
- Indirect Exporting (selling through agents or distributors)
- Direct Exporting (selling B2B, e-commerce, etc.)
- Establishing overseas joint venture
What are the advantages / disadvantages of Indirect and Direct Exporting?
Indirect Exporting:
- Adv - leverages experience of intermediary; customers prefer to buy through intermediaries; admin tasks are taken care of; commissioned based; cost effective, low-risk
- DisAdv - little control over products; lower profits, less intel gained on consumers / competitors
Direct Exporting:
- Adv - more control over product and pricing; less intermediary costs; greater profit potential
- DisAdv - greater risk in service & profit potential; more time & expense in preparation, selling
What are the 3 modes for service entry into the export market?
- Consumer travels to the exporter (tourism)
- Exporter travels to the consumer (consulting)
- Services delivered online / phone (call centers)
What are “Incoterms” and what are the 2 most common forms?
Incoterms (International Commercial Terms) define shipping terms in international trade.
Ex-Works (EXW) specifies a buyer is responsible for the goods once they leave the warehouse.
Free-On-Board (FOB) specifies the exporter is responsible for getting the goods onto a vessel at the port.
Why do many companies contract with freight forwarders for their shipping responsibilities?
Complex documentation is required for shipping and the requirements change based on product and destination country.
Why is Credit Insurance purchased?
To decrease the risk of payment method such as Letters of Credit; to protect the investments of US exporters when foreign buyers default.
What risks do exporters face that those selling in the domestic market do not?
- Payment (not prompt or paid at all)
- Political instability (impose new tariffs; sanctions imposed)
- Economic fluctuations (downturns impact energy prices, inflation, product demand)
- Currency variations (req’t payment in US dollars)
- Intellectual property (not protected in many countries)
