How to Expand Your Business Globally
Today's global market demands global action, yet, according to the U.S. Department of Commerce (DOC), fewer than 10 percent of American manufacturing and service companies are involved in international trade. However, like it or not, you're probably already competing globally foreign-owned companies are competing with you in your "domestic" markets. You can turn global competition to your advantage by tapping markets and labor supplies across international borders yourself a process that is simpler than you may believe. This Interactive Business Tool will help you understand how to stretch your company's global reach. In addition to this discussion, you will also find valuable information in a related module, How to Enter an Emerging Foreign Market.
- What You Should Know Before Getting Started
- Why Compete Globally?
- Watch Out For ...
- Methods of Doing Global Business
- Direct Exporting
- Indirect Exporting
- Your International Business Plan
- Getting Ready to Go Global
- Analyzing Your Industry
- Analyzing Your Business's Capabilities
- Selecting the Best Markets to Enter
- Market Factors to Assess
- Demographic and Geographic Factors
- Political Factors
- Economic Factors
- Social/Cultural Factors
- Market Access Factors
- Distribution and Production Factors
- Forming Connections in Your Market
- Pricing Your Product
- Quoting a Price
- Setting Terms of Sale
- Getting Paid
- Transporting Goods Internationally
A. Why Compete Globally?
Becoming involved in international trade can help your business:
- Enhance domestic competitiveness by finding less-expensive suppliers
- Increase sales and profits
- Gain global market share
- Reduce dependence on existing markets and suppliers
- Extend the sales potential of existing products with relatively low development costs
- Stabilize seasonal or cyclical market fluctuations
- Enhance potential for corporate expansion
B. Watch Out For ...
In order to participate in global trade, your business will need to incur additional costs, such as developing new promotional material, traveling to foreign locations, modifying your product to meet the needs of a new market, and shipping overseas. For these reasons, the decision to embark on international trade should be done with eyes open.
II. Methods of Doing Global Business
There are several methods you can use to enter a foreign market, including exporting, importing, licensing, joint ventures and off-shore production. If you have an existing business that creates a tangible product, exporting is the most common method. Start-up costs and risks are limited, and profits can be realized early on. If you are beginning a new venture, the other choices are options that may reduce some of the start-up risks.
There are two basic ways to export: directly or indirectly.
A. Direct Exporting
In direct exporting, your company finds a foreign buyer and then makes all arrangements for shipping your products overseas. This method requires a lot of footwork and infrastructure, and entails more risk, but the potential profit rewards are often higher. If you choose to export directly, you have several options:
Sales Representatives/Agents -- Essentially, you hire foreign-based representatives or "agents" who work on a commission basis to locate buyers for your product, just as you would domestically.
Distributors -- You strike a deal with a foreign distributor, who purchases merchandise from you and resells it with a markup. The distributor maintains inventory and provides after-sales service to the buyer.
B. Indirect Exporting
Your company uses an export intermediary to perform most of the details of the export arrangement. Many small businesses choose this option, at least at the outset. There are several types of export intermediaries:
Commissioned agents - These are brokers who link your product or service with specific foreign buyers, allowing the primary company to fulfill the order and handle packing, shipping and export documentation.
Export Management Companies (EMCs) and Export Trading Companies (ETCs) -- These companies operate in the country where the goods are to be exported. EMCs generally represent your product to promote it to other prospective overseas purchasers, while ETCs usually work according to demand, finding a need and sourcing your product for foreign buyers. Both types of companies usually take care of all aspects of the export transaction (including conducting market research, promoting your product overseas, accessing proper distribution channels, and locating foreign distributors), making them a viable option for smaller companies that lack the time and expertise to break into international markets on their own. EMCs and ETCs usually operate on a commission basis, although some work on a retainer basis and some take title to the goods they sell, making a profit on the markup. Importing and exporting can be done on any scale from a tiny home office or from the World Trade Center. You don't need a license from the United States government in order to do international trade, but the country with which you do business may require a license. What you do need is an international business plan.
III. Your International Business Plan
If you're already in business, you probably already have a business plan. If so, you'll need to amend it to include the specifics of international business. If not, you'll need to begin from scratch in order to define your company's present status, internal goals and commitment, and to seek financial help if you expect to pursue a bank loan or other types of investment. An international business plan should define:
- Why you're interested in global trade
- What your import/export pricing strategy will be
- Who your potential export markets (or import sources) and customers are
- How you plan to enter the foreign market
- What additional costs (travel, shipping, marketing, sourcing) you expect to incur
- What revenues your venture is expected to bring in
- How you plan to finance your global expansion
- What the legal requirements are to enter the markets that interest you
- How you plan to transport the goods
- Whether you plan to pursue overseas partnership or investments
IV. Getting Ready to Go Global
For your business to succeed globally, the principles are the same as succeeding domestically: You need to find a product that will fill a targeted need for the purchaser in export markets according to price, value to customer/country and market demand. Do you have a product for which there is a market overseas? Is there a product manufactured overseas that has a market domestically? If so, you need to identify why your product will have a market overseas or why an imported product will sell domestically. What gives your product a competitive advantage for an overseas market? Who are the buyers for your product? Why would they buy from you? Take the following steps to determine the feasibility of your international business plan.
A. Analyzing Your Industry
You need to identify where your industry is today and predict the trends and directions that it will take over the next three years. How competitive is your industry in the global market? To find out, consult the following resources:
- Talk to people in the same business or industry, research industry-specific magazines, attend trade fairs and seminars.
- Consult the National Trade Data Bank (NTDB), obtain import/export statistics from the Bureau of the Census, and contact the U.S. Small Business Administration (SBA) or the U.S. Department of Commerce (DOC) district office in your area.
- Contact the SBA or the U.S.& Foreign Commercial Service (US & FCS) district office and contact a DOC country or industry desk in Washington, D.C.
- Contact SBA, your state international trade office, a DOC country or industry desk in Washington, D.C., for federal or state government market studies that have been conducted on your industry's potential international markets.
- Find export data on your industry through your SBA or DOC district office. Contact the SBA at (202) 205-6720 or DOC at (202) 482-2867 for a district office near you.
B. Analyzing Your Business's Capabilities
If you have an existing business that you are planning to expand globally, you probably are already doing a few things right to have reached this point in your business. However, you'll need to assess your business's strengths and weaknesses to determine what approach to take in the international market. Ask yourself the following questions:
- Why is your business successful in the domestic market? What's your growth rate? What are your strengths?
- What products do you feel have export potential?
- What are the competitive advantages of your products or business over other domestic and international businesses?
- What are the needs that will be filled by your product in a foreign market?
- What competitive products are sold abroad and to whom?
- Is there an after-market for your product? Who will provide it?
- What complementary goods and technologies does your product require?
If your product is an industrial good:
- What firms are likely to use it?
- What is the useful life of your product?
- Is use or life affected by climate?
- Will geography affect product purchase (e.g., transportation problems)?
- Will the product be restricted abroad (e.g., tariffs, quotas or non-tariff barriers)?
If the product is a consumer good:
- Who will consume it? How frequently will the product be bought?
- Is consumption affected by climate or geography?
- Will the product be restricted abroad (e.g., tariffs, quotas or non-tariff barriers)?
- Does your product conflict with traditions, habits or beliefs of customers abroad?
C. Selecting the Best Markets to Enter
Although the three largest markets for U.S. products are Canada, Japan and Mexico, these countries may not be the largest markets for your product. If you're not sure where to do business, one good indicator is to find out where your domestic competitors have expanded internationally. Another useful resource are three key United States government databases that can identify those countries that represent significant export potential for your product: The Small Business Administration's Automated Trade Locator Assistance System (SBAtlas), Foreign Trade Report FT925 and the U.S. Department of Commerce's National Trade Data Bank (NTDB).
Once you've identified several countries that you think have market potential for your product, you're ready to do serious market research. Research and review data and information for the following factors for each country.
D. Market Factors to Assess
Answer yes or no to the following questions to asses the potential of specific countries.
1. Demographic and Geographic Factors
___ Is there sufficient population size, growth and density in the correct demographic region? ___ Is the climate compatible with your product? ___ Is the shipping distance economically feasible? ___ Is there a sufficient physical distribution and communication network? ___ Are the natural resources you may need available?
2. Political Factors
___ Is the government amenable to trade with the United States? ___ Is the country politically stable? ___ Does the government have heavy involvement in business? ___ Are there existing trade restrictions, tariffs, non-tariff barriers or bilateral trade agreements?
3. Economic Factors
___ Is the economy sufficiently developed to support your product? ___ Is foreign trade a significant part of the economy? ___ Is the country's currency stable? What is the inflation rate, availability, controls and stability of exchange rate? ___ Is the per capita income and distribution of income sufficient to support your product?
4. Social/Cultural Factors
___ What is the literacy rate and average educational level in the country? ___ Is there a middle class that would support your product? ___ Do the people have sufficient disposable income and a propensity to spend money on products similar to yours? ___ How is the market similar to and different from your domestic market? ___ Are there language and cultural barriers to doing business?
5. Market Access Factors
___ Are there limitations on trade, such as high tariff levels or quotas? ___ What documentation will you need? ___ Are there local standards, practices and other non-tariff barriers? ___ What is the country's policy on honoring patents and trademark protection?
6. Distribution and Production Factors ___ Are there intermediaries available if you need them? ___ Are there sufficient regional and local transportation and storage facilities? ___ Is there labor available with the skills you may need? ___ What are local manufacturing conditions? ___ What are local labor laws?
When you're determining which foreign market to enter, one of the key factors may be the existence or absence of tariffs and non-tariff trade barriers. Tariffs are taxes imposed on imported goods in order to raise the price of imported goods to the level of domestic goods. Often tariffs become barriers to imported products because the amount of tax imposed makes it impossible for exporters to profitably sell their products in foreign markets.
Non-tariff barriers are laws or regulations that a country enacts to protect domestic industries against foreign competition. Such non-tariff barriers may include subsidies for domestic goods, import quotas or regulations on import quality. Countries with low trade barriers in place are usually not good choices for global trade.
V. Forming Connections in Your Market
Once you've identified the product or service you want to import or export and the country that interests you, you need to make business connections in the chosen market. That is, you're looking for companies, agents or distributors who are looking for the products you will offer and that may be interested in doing business. You also need to determine whether you will handle your global business directly or choose an agent, distributor or intermediary to act on your behalf, and if so, you need to find someone qualified to do so.
The U.S. federal government, state governments, trade associations, exporters' associations and foreign governments offer low-cost and easily accessible resources to simplify and speed your entry into foreign markets. In addition, almost every industry and product has a corresponding organization and publication, even in developing countries. Consult these organizations and publications for ads, articles and listings for companies that manufacture, buy or sell the product for which you're looking. The Internet is a great boon for locating sources, since many companies that do international business will have English-language Web sites. Keep in mind, however, that Internet usage in most foreign countries lags behind United States usage, so if you limit your sourcing options to what is on the Web, you may not find the prices or selection you need.
The U.S. Department of Commerce (DOC) has a number of contact programs in place that can help you make the connections you need. Here's a run-down:
Export Mailing Lists - These are custom searches of the DOCs databases of prospective overseers customers. You select market criteria, then receive a list of relevant manufacturers, agents, retailers, service firms, government agencies with names, addresses, contacts, products and other information. Output is available as mailing labels or on disk.
Trade Lists - These are directories that the DOC publishes for each country based on the information above.
Trade Opportunities Programs - This service collects sales leads from overseas firms looking for U.S. products. Lead details include specifications, quantities, delivery dates and bid deadlines.
Agent/Distributor Service - This is a matching service that performs a custom search of foreign import agents and distributors, contacts them with your company's literature and products, then prepares a report identifying six prospects that are interested in doing business with you.
Here are a few other options for making contacts (more information about accessing these will follow in the "Resources" section):
Importing International chambers of commerce Consulates Embassies Foreign trade ministries World Trade Centers Association (WTCA) Foreign industry associations Foreign industry publications Trade associations
Exporting Thomas Register Dun & Bradstreet U.S. Department of Commerce WTCA Domestic industry associations Domestic industry publications National Association of Export Companies (NEXCO) National Federation of Export Associations (NFEA)
Once you've identified potential sources, contact them to seek specific product information, such as specifications, product samples and prices. Contact them by letter, fax, email, telex or cable. At this point, it's best to translate your business's own literature into the language of the country where you plan to do business. Although contacts at most foreign companies that do international business will speak English, it's best to communicate in your potential source's language.
VI. Pricing Your Product
Pricing a product is always one of the most important parts both of marketing a product and making a business profitable, and, unsurprisingly, pricing a product for the overseas market is one of the most critical factors for entering foreign markets. Prices must be high enough to generate a reasonable profit, yet low enough to be competitive in overseas markets. Naturally, your cost of goods sold must include all the expenses to move product to the port of destination, which hike up the bottom line considerably, but don't forget that doing business internationally affects your overhead as well.
Cost of Goods Sold
In addition to the material and labor used in the manufacture of your product, you must consider:
Export packing Forwarding Container loading Documentation Inland freight Consular legalization Truck/rail unloading Bank documentation Wharfage Dispatch Handling Bank collection fees Terminal charges Cargo insurance Ocean freight Other misc. Bunker surcharge Telex Courier mail
International Overhead Costs
Changes in product packaging Promotional literature Marketing and advertising Sales salaries, bonuses and commissions Foreign market research Translation, consulting and legal fees Foreign agent/distributor product information and training
Once you've determined your break-even price based on the additional costs above, you're ready to set your prices. The selected pricing structure should be part of your market penetration objectives. Your goals will vary depending on the target overseas market. Ask yourself the following questions regarding pricing:
Are you entering the market with a new or unique product? Are you selling excess or obsolete products? Can your product demand a higher price because of brand recognition or superior quality? Are you willing to reduce profits to gain market share for long-term growth?
Obtain as much information as possible on local market prices as part of your market research. Overseas distributors and agents of similar products of equivalent quality can give you some insight.
A. Quoting a Price
The pro-forma (projected) invoice is the most commonly used document to give price quotations to potential customers. The quotation in a pro-forma invoice is usually considered binding, although prices may change prior to final sale. To prepare the invoice, you should give a detailed description of the product, an itemized list of charges and sale terms. Prices should be quoted in United States dollars to reduce foreign exchange fluctuation risks. The invoice should also indicate the period during which the price quotation is valid.
B. Setting Terms of Sale
You should be familiar with the common terms of sale used in international trade before preparing your pro-forma invoice. Terms of the sale that you should spell out include:
Risk of Loss - This clause excuses the exporter from responsibility where a default in performance is caused by events beyond the exporter's control, such as war, acts of God or labor problems.
Payment and Finance Terms - This describes when payment will be made, in addition to providing provisions for late payments, partial payments and remedies for nonpayment.
Warranties - In some cases, the importer will require the exporter to warrant that the goods meet certain standards of construction and performance.
Acceptance of Goods - Frequently, the importer will insist upon the right to inspect the goods upon delivery. If the goods do not meet the standards set in the invoice, the importer can reject them.
Intellectual Property Rights - Protection of the exporter's patents, trademarks or copyrights should be assured in the agreement, in particular since these protections are frequently eroded when goods cross international lines. Get this in writing.
Dispute Settlement - This is always a good clause in any agreement of sale, but in an international agreement, it's especially useful. Spell out how and where any disputes will be resolved and which nation's law should be applied.
VII. Getting Paid
One of your primary concerns in entering the overseas market is to be paid in full and on time. While the credit of a buyer is always a concern, you may have less recourse when it comes to collecting unpaid international debts, so you should exercise extra caution. Be sure that you and your buyer agree upon the terms of the sale in advance.
The primary methods of payment for international transactions, ranked in order of most secure to the exporter to least secure, include:
Payment in advance - This is the most desirable, but it's usually just an option when the manufacturing process is specialized, lengthy or capital intensive and requires partial or progress payments.
Letters of Credit (LC) - A letter of credit is an internationally recognized instrument issued by a bank on behalf of its client, the purchaser. The LC actually represents the bank's guarantee to pay the seller, provided the conditions specified on it are fulfilled.
Documentary Collection (Drafts) - Documentary collections involve the use of a draft, drawn by the seller on the buyer, requiring the buyer to pay the face amount either on sight (sight draft) or on a specified date in the future (time draft). The draft is an unconditional order to make such payment in accordance with its terms, which specify the documents needed before title to the goods will be passed.
Consignment - In this arrangement, the importer only pays the exporter after the goods have been resold to another purchaser. Title to the goods remains with the exporter until the purchase conditions are satisfied. Consignment is very risky for the seller since there are no guarantees when or if the goods will be sold, and in the meantime, the exporter's capital remains tied up in inventory over which he or she has no control.
Open account - This means that payment is due after the goods are manufactured and delivered (usually within 15, 30 or 60 days). In other words, this is the typical way that business is conducted in the United States. However, this method is considered risky internationally because your recourse to collect unpaid debts is limited.
VIII. Transporting Goods Internationally
Once you've set terms of sale, the next variation between selling a product domestically and internationally occurs: how to transport the goods. One of the main differences between selling domestically and exporting is the documentation required. Providing proper documentation with your shipments is essential, if the goods are to arrive safely and on time.
Luckily, the role of the international freight forwarder (your shipper) is to act as an agent for the exporter in moving cargo to the overseas destination. These agents are familiar with the import/export rules and regulations of foreign countries, methods of shipping, United States government regulations and the documents connected with foreign trade.
Freight forwarders can help you with your order from the start by advising you on freight costs, port charges, consular fees, costs of special documentation and insurance costs as well as handling fees. Freight forwarders may also recommend the best type of packing for protecting the merchandise in transit and arrange to have the merchandise packed at the port or sealed in shipping containers. If you plan to take advantage of these services, be sure you figure these additional export costs into the price you charge your customer.
When the order is ready to ship, freight forwarders should be able to review the letter of credit, commercial invoices, packing list and other documentation to ensure that everything is in order. Following are the paperwork documents that you may need to fill out to ship an order internationally.
International Shipping Documentation
Commercial Invoice - This proves the exporter's ownership of the goods and promises payment. The description of the goods on the commercial invoice must correspond exactly to the description in the letter of credit or other method of payment. It's usually best to prepare a commercial invoice in English and in the language of the destination country.
Export License - You don't need a license to export goods, unless it's possible that export could threaten United States national security, affect certain foreign policies of the United States, or create short supply in domestic markets. To determine whether you need a license, check with the U.S. Department of Commerce's Bureau of Export Administration (BEA).
Shipper's Export Declaration (SED) - This is used for mail shipments valued at more than $500 and required for other shipments valued at more than $2,500 so that the Bureau of the Census can monitor exports. The SED must be presented to the carrier before the shipment departs.
Certificate of Origin - Although the commercial invoice may contain a statement of origin, some countries require Certificates of Origin. Certificates of Origin allow for preferential duty rates if the exporter's country has an agreement with the importer's country to allow entry of certain products at lower tariffs.
Export Packing List - This itemizes the material in each individual package and indicates the type of package and individual net, legal, tare and gross weights and measurements for each package (in both U.S. and metric systems). A copy of the packing list should be attached to the outside of a package in a waterproof envelope marked "packing list enclosed." The list is used by the shipper or forwarding agent to determine the total shipment weight and volume and whether the correct cargo is being shipped. In addition, customs officials may use the list to check the cargo. The original packing list should be forwarded along with your other original documents in line with the conditions of sale.
Insurance Certificate - Most exporters insure goods for 110 percent of their value.
Inspection Certificate - Many foreign purchasers request that the seller certify that the goods being shipped meet certain specifications. This certification is usually performed by an independent inspection firm.
Dock Receipts - This document transfers shipping obligations from the domestic to the international carrier as the shipment reaches the terminal.
Bill of Lading/Air Waybill - Bills of lading and air waybills provide evidence to title of the goods and set forth the international carrier's responsibility to transport the goods to their named destination.
Training Module Checklist
___ Have you identified the product you wish to export? ___ Have you decided whether to try direct exporting or indirect exporting? ___ Have you articulated why you're interested in global trade? ___ Have you identified the best market to enter? ___ Have you identified who your potential export markets (or import sources) and customers are? ___ Have you determined how you plan to enter the foreign market ___ Have you calculated additional costs (travel, shipping, marketing, sourcing) you will need to incur to enter the global market? ___ Do you understand the legal requirements to enter the markets that interest you? ___ Have you determined how you plan to transport the goods?
Terri Morrison et al., Dun & Bradstreet's Guide to Doing Business Around the World (Prentice Hall, 1997)
Carl A. Nelson, "Import/Export: How to Get Started in International Trade" (McGraw-Hill, 1995)
Jeswald W. Salacuse, "Making Global Deals" (Houghton Mifflin, 1991)
U.S. Department of Commerce, "A Basic Guide to Exporting," (NTC Business Books, U.S. Small Business Administration)
Charles Valentine, "The Ernst & Young Guide to Expanding in the Global Market" (John Wiley, 1991)
Office of International Trade U.S. Small Business Administration 409 Third Street, S.W. Washington, D.C. 20416 Phone: (202) 205-6720 FAX: (202) 205-7272
U.S. Department of Commerce 14th & Constitution Avenue, N.W. Room 3850 Washington, D.C. 20230 Phone: (202) 482-2867 FAX: (202) 482-5933
International Trade Administration U.S. Department of Commerce 14th & Constitution Avenue, N.W. Room 3850 Washington, D.C. 20230 Phone: (202) 482-2867 FAX: (202) 482-5933
of Trade and Economic Analysis
Department of Commerce
14th & Constitution Avenue, N.W.
Washington, D.C. 20230
Phone: (202) 482-5145
FAX: (202) 482-5697
of Export Administration
U.S. Department of Commerce
Office of Export Licensing
Room 1099, HCH Building
14th & Constitution Avenue, N.W.
Washington, D.C. 20230
Phone: (202) 482-8536
FAX: (202) 482-3322
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