2.1. Export Entry Modes - Direct Export Operations

International business

management

Theme 2.1. Export entry modes

Direct export

23.10.2014 Valeriu Potecea & Georgiana Surdu-Nițu

Organizing exporting operations


Direct export - import operations - is the act whereby a manufacturer fulfills its foreign sales/buying activities by its own export or import structures (or dependent organization)

Indirect export - import operations, assumes that between the producer and the final consumer there are a greater or lesser number of intermediates, which assume all or partially of the commercial risk and therefore have the right to charge commercial profit

The Internet and e-commerce

Outline of alternative basic marketing

channels


Reasons of direct export operations


A full return from export sales - the manufacturer has the opportunity to participate directly and therefore to obtain the entire profit margins

Thorough knowledge of foreign markets - the manufacturer has greater opportunities to maintain contact with foreign markets in order to determine readily what adaptations of the product are necessary to fit the needs and desires of foreign buyers

Protection from neglect in active performance of selling function – there is complete control of marketing methods and sales production; this method can promote the brand image of the company and strengthen its position in foreign markets

Export sales channels are permanent - the producer does not have to worry that a marketing organization will suddenly drop its line of preference for that of a competitor

Product goodwill accrues directly to the manufacturer rather than to a marketing organization

Per unit cost decreases as sales volume increases – fixed costs are spread over growing sales volume rather than remaining a constant proposition.

Advantages of direct export


Exp

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irect

exp

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Unified and high degree of exercised control

A ‘sales push’ approach can be implemented with relative ease

Greater customization of product solution is made possible by designing tailor-made

packages

Direct customer feedback improves firm responsiveness

Flexibility is possible across all marketing programs

Greater commitment of own sales staff encourages increased levels of sales turnover

Sales staff exhibit a high degree of product knowledge

Customer loyalty can be heightened for the exporter’s brands

The most persuasive forms of promotion in the overseas market

Role clarity is common among representatives

Limitations of direct export – import

operations


export marketing costs are usually large and are only justified to a certain turnover – the initial monetary outlay (provision for offices and equipment, salaries of personnel, costs of maintaining larger inventories necessary to fill foreign pipelines, the costs of sales effort) may be to large relative to sales volume

specific risks of the international market (in foreign trade activity) can affect the company's overall activities - there is always the chance that the product may not be acceptable in foreign markets or that foreign preferences may change suddenly

much time should be allocated by the company's management to international business activities at the expense of production and technological concerns – independent organizations have the contacts, knowledge, and experience necessary to develop export potential and to achieve satisfactory sales volumes in lesser time

requirements of specialized knowledge - that may not be available in the manufacturer’s organization or may require excessive expense to obtain

Organizational forms of direct export -import

operations


1. Home country based department or division

2. Overseas representative office

3. Overseas trade (sales) office

4. Foreign sales branch

5. Storage and warehouse facilities

6. Foreign sales subsidiary

7. Traveling salesperson

8. Foreign-based distributors and agents

1. Home-country based department


The manufacturer who wants to engage in direct export will most likely have to establish some type of export department or division in the home country.

This dependent organization may either be involved directly in making export sales or serve as the home-based export marketing department to coordinate and control the activities of other dependent organization located in foreign markets

Major types of activities carried out by the home-country based department :

promoting foreign economic affairs (prospecting, sales promotion, advertising, organizing and participating in trade fairs and exhibitions);

operative importing-exporting, focused on products, groups of products, markets, or foreign trade techniques;

Influencing production, focused on effective production and after-sales operations;

functional activities, focused on transport, insurance, finance and accounting, prices, economic analysis, etc.



There are basically three different types of home-country based export organizations:

1. Built-in export department

2. Separate or self-contained export department

3. Export sales subsidiary

The specific type that is appropriate for any manufacturer at a particular point in time depends upon such factors as:

the nature of the product

the size of the company

how long the company has been exporting

the expected potential volume of foreign sales

the underlying management philosophy towards doing business internationally

the corporate organizational structure

the extend to which either existing company resources can be allotted to export activities or additional needed resources can be acquired



1. Built-in export department

Is the simplest in structure, and, thus, the easiest to establish, being located at the

same place as the domestic departments with which it works.

This organization consists of an export sales manager with some clerical help.

The primary job of the sales manager is to do the actual selling or direct it.

Most other export marketing activities – advertising, logistics, credit, etc. – are

performed by the regular domestic market-oriented departments of the

company.

Th

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uilt-

in f

orm

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Small in size

New or relatively new to export marketing

Expected foreign sales volume (turnover) is moderate to small

Management philosophy not oriented toward growth of foreign business

Existing marketing resources capacity not fully utilized in the domestic market

Either the company is unable to acquire additional resources or, if able to do so,

key resources are not available



2. Separate or self-contained export department

Is a self-contained and largely self-sufficient unit in which most of the

export activities are handled within department itself, making it a relatively

complete export marketing department.

It may be structured internally upon the basis of function, geographic region,

product, customer or some type of combination, depending largely upon how

export marketing task varies the most.

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There is no inherent possibility for clash between the international

and domestic sides of the firm regarding the time to be spent by

domestic marketing personnel on foreign business matters

Export operations can be conducted on a full-time basis by

personnel knowledgeable and specifically committed to exporting

Has a fairly high degree of flexibility in terms of where it is located

(not only at the headquarters of the company, but in one of the

major center of international business)

23.10.2014 Valeriu Potecea & Georgiana Surdu-Nițu 12

Organizing by function

Export Manager

Market

research/

sales

Production

Accounting

Marketing

Support

and

service

It is adopted by SMEs being suitable for companies that export less

diversified products, on a small number of markets and comparable in terms

of approach. This structure allows the delineation of tasks, skills and

responsibilities.


Organizing by geographic region

It is recommended when the export market requires a specific approach, each department is specialized. Provides a direct approach to the markets, a better understanding of their specific: competition, consumer demands, risks etc.

Export manager

Specialized

services

Europe

responsible

USA

responsible

Asia

responsible


Organizing by product

It is suitable for companies that have a wide range of products belonging

to different fields.

Export manager

Functional

services

Product 1 Product 2 Product 3




In attempting to separate completely export marketing activities from

domestic operation, some companies have established an export sales

subsidiary as a separate corporation. However, differs very little from the

separate export department.

It is wholly owned and controlled by the parent company, being essentially a

quasi-independent firm.

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With this unit, a manufacturer may be able to ascertain the profitability

of its foreign business

The chance of conflicting pressures arising from domestic departments is

minimized

It must purchase from the parent manufacturer the products that it sells

in overseas markets

The manufacturer must develop a system of internal transfer pricing




Although the export sales subsidiary is in many respects similar to an

export department, there are important reasons for its existence:

Unified control All authority relative to exporting is centered in one organization not

subject to conflict pressures from various domestic departments

Cost and profit control Since all revenues and expenses are separated from the domestic

organization, export costs and profits can be seen readily

Allocation of orders in

multiple plant enterprises

The subsidiary company can place an order with the most suitable plant

and can supervise traffic management responsibilities more effectively

Ease of financing Being a separate company, it is easier to ascertain its financial position.

Financial institutions may be more willing to advance funds for export

purposes

More complete line of

products

Being a separate company, it can purchase products from outside sources

to offer overseas buyers a more complete line

Tax advantages Corporate income tax laws in some countries may result in some savings

in total corporate taxes



A representative office or a liaison office is an office

established by a company to conduct marketing and other non-

transactional operations, generally in a foreign country where a

branch office or subsidiary is not warranted.

They have been used extensively by foreign investors in emerging

markets such as China, India, and Vietnam although they do have

restrictions through not being able to invoice locally for goods or

services. Consequently Representative Offices tend to be utilized by

foreign investors in fields such as quality control, and general liaison

activities between the Head Office and the Representative Offices

overseas.



Representative offices (RO) are generally easier to establish than a branch or subsidiary, as they are not used for actual "business" (e.g. sales) and therefore there is less incentive for them to be regulated.

They are acting according to the mandate of the company they represent, allows exporters to be in direct and constant contact with foreign market.

Rep

rese

nta

tive o

ffic

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wo

rks

for:

continuous prospecting the market

disseminate information on business activity and export offers and

providing marketing and sales assistance

informs the company about market segments, purchasing motives,

sectorial policies of the host country and local commercial customs

usage, competition, etc.

intermediation of business contacts



Functioning of the representative office in Romania:

Can’t be, in any case, an enterprise producing goods, rendering services or working for final clients;

Acts as an intermediary between the primary company which organized it and its contractual partners;

Therefore, acts as a mandatory (the parent firm acts as mandator), or as commission agent;

As mandatory, sign legal documents with third persons in the country of establishment in the name and on behalf of the Company who gave empowerment and; as commission agent acts to third parties in its own name, but on behalf of the Company's principal;

Doesn’t have legal personality, the RO being owned by mandator or principal;



In Romania, the stages of setting up representative offices are:

1. submission of the authorization request by foreign companies to the Ministry of Economy, Trade and Business Environment - General Trade Policy Directorate;

2. operating permit is registered at the Chamber of Commerce and Industry;

3. issuing registration code for VAT purposes.

In the application form for authorization to operate, a representative office will be mentioned:

registered office of the foreign company;

business objective of the representative office in accordance with the objectives of the applicant company;

the duration of the representative office;

number and positions of persons proposed to be employed at the representative office.



According to the Romanian Tax Code :

Representative offices shall conduct the accounting provided by Romanian law.

RO’ tax for a fiscal year is equal to the equivalent in RON of EUR 4,000, established for a fiscal year, according with the exchange currency rate, established by the NBR, the day before the actual payment of tax to the state budget.

If a foreign legal person who, during a fiscal year, abolishes or establishes a representative office in Romania, the tax payable for the year is calculated in proportion to the number of months the representative office is active.

Any foreign legal person that has a representative office in Romania is required to pay tax to the state budget in two equal installments by the dates of June 20 and December 20 .

Any foreign entity that owes tax on the representative office shall submit an annual statement to the competent tax authority, by 28 and 29 February of the year of assessment.



It is an operational department implanted abroad whenever foreign trade operations requires:

monitoring delivery of goods to end-users;

commissioning of equipment requiring technical assistance (service).

International sales office functions:

ensure a permanent contact with the local market in order to promote sales;

support the preparation and conduct of commercial negotiations;

follows on spot how to run contracts;

coordination of technical assistance;

providing a flow of valuable information on the conjectural situation



THE CHARACTERISTICS of overseas sales office:

manufacturer-owned office having no inventory, primarily intended to increase customer sales.

is organized and operates as an entity without legal personality;

has no capital and cannot be declared bankrupt;

relations with lenders and property issues are handled by the parent company;

parent company always retains the right to close overseas commercial office if its activity is unsatisfactory;

the practice of taxation of its activity represents sometimes an obstacle in avoiding this type of external network.



• Represents a service of a company established abroad.

• Is a way of extending the parent company, thereby helping to achieve its objective.

• Has no legal entity of its own, being part of the organic structure of parent company, which alone has the status of a subject of law.

• A branch office can engage in commercial activity in the foreign country and can earn profits. It is licensed for the purposes set out in its commercial license, but may only engage in activities similar to those carried on by the foreign company in its home jurisdiction.



Specifics of branch abroad:

financial and administrative dependent on parent company that created it;

the activity is usually identical to the parent company;

is incorporated, organized and operates according to local law;

necessary expenses of its activity are highlighted and supported in the income and expenditure statement of the parent company;

has no legal personality, having some initial funds on which can decide in part;

may have operational independence in their commercial and financial relations, borrow loans, in the limit of powers established by the act of creation ;

empowerment based on the representation given by the parent company, and in accordance with applicable law, may enter into commercial agreements with third parties;

branch activity takes place on a proper income and expenditure budget whose balance is reflected as a separate item in the income statement of the parent company .

5. Storage and warehouse facilities


widespread practice in international trade

is imposed by the need to ensure continuity of supply to consumers or users

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when it is necessary and profitable for manufacturer to maintain an inventory in foreign markets,

a storage and warehousing branch should be established

such facilities may be part of a sales branch; if so connected , the buyer is afforded greater

convenience and a potentially powerful marketing tool is created in that a greater volume of

business may be generated than would be the case if storage facilities were absent

The same situation occurs when warehousing branch is a separate entity, set up to fill orders

made by foreign distributors and agents

Many manufacturers are establishing such branches as central distribution points to serve a wide

area.

Where several market areas are to be served by a single storage or warehousing branch, it may

be best for these facilities to be located in a free port or trade zone such Hong Kong, New York,

Rotterdam or Colon, Panama, where the usual customs procedures and regulations of the

country where the free area is located do not apply – such warehouses are designated as customs

bonded warehouses during storage goods



It is an independent legal entity in financial terms, which takes into account in its operations the business strategies of the parent company.

It is an independent company that works independently and indefinitely autonomous in its own headquarters, having a separate legal entity and established by the parent company, which owns the majority of capital (www.rubinian.com).

There are several ways to create a subsidiary abroad:

taking an existing structure,

creating a new structure (ex nihilo) and

joint venture

http://www.rubinian.com/







Specifics of subsidiary abroad:

organizational structure, size and management strategies are

determined by the conditions of the legal and economic environment of the country in which it operates;

procedures, the fees and taxes, and legislation concerning social insurance mechanisms are those in the operating area;

affiliates must take account the economic mechanism and the host country government strategies;

commercial reputation is decisive for the subsidiary in establishing sustainable relations with very important partners;

establishment of foreign subsidiaries is justified to the extent that exports will have a progressive evolution, if business with third-origin goods can be conducted, the legal and institutional bilateral framework is favorable and when legislation is permissive in the host country.

Branch vs. Subsidiary


Branch:

It is not a legal entity, it can not perform legal acts in its own name;

legal documents are signed by their managers indicated by the parent company;

the obligations of branch liability is incurred by the parent company in the event of non-compliance obligations;

is financed with funds from the parent company to conduct an economic activity under the objectives of the society.

Subsidiary:

is an independent company which has legal personality, legal acts being signed in its own name;

acquires legal rights and assume obligations on its own, having its own legal liability;

as a separate legal entity is responsible according to the legal regime under which it was established.

7. Traveling salesperson


A traveling export salesperson is one who resides in one country, often the home country of the employer, and travels abroad to perform the sales duties

In contrast, a resident salesperson is sent out of the home country to live and work in a foreign market

In essence, the resident salesperson is a foreign sales branch of the company

Of course, the company may establish a formal branch office, to which a resident salesperson is assigned

However, a branch office often also employs as sales people nationals of the country in which it is located

Traveling salesperson


Fu

ncti

on

s:

The communication of product information to customers, and obtaining orders

A sales person is always deeply involved in customer relations:

- maintaining and improving the company’s position with customers and general

public

- demonstrator or tutor is the type of traveling salesperson whose main job is to work

closely with foreign-based agents or distributors already representing the company

- since the sales task primarily is to help agents and distributors do a better job, the

tutor operates more or less as a troubleshooter

Information gatherer and communicator The salesperson is management’s front-line intelligence agent, and, as such, is in a position to

provide information on such things as:

- what competitors are doing

- what customers are thinking

- how products are performing and

- what the future is of any given market

8. Foreign-based distributors and agents


Form of direct export involving independent marketing

organization – foreign based distributors and agents

Distributor Agent

is a merchant and such is a customer of

the exporter

is a representative who acts on behalf of

the exporter and is not a customer

takes title to the exporter’s goods;

imports the products involved

does not take the title of goods; leaves the

importation to the buyers whose orders

have been passed on to the principal

its’ income comes from the margin taken

as determined by the trade discount

granted by the exporter

usually paid on the basis of a commission

Normally carries an inventory does not carry an inventory (except for

showroom purposes)

Foreign-based distributors and agents


In most cases, the agent or distributor is a manufacturer’s

exclusive representative in a given foreign market area

and is the sole importer.

There are instances where exclusive are not granted:

sales to foreign government agencies are often reserved for

the manufacturer itself

when an agent is appointed as a general agent (in this case the

manufacturer can appoint other agents in the general agent’s market area)

The functions performed by distributors and agents are

basically the same as those carried out by the domestic-

based marketing agency of the same type or the

manufacturer’s own foreign-based organizations.

Foreign-based distributors and agents


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Since these foreign-based outlets are granted exclusive rights, there is every

reason to expect that they will put extra effort into promoting the sale of the

manufacturer’s products

If a product is of a type that may require service , the distributor stands ready to

provide such service by having the proper facilities , well-trained personnel, and

a complete stock of the necessary parts and materials

If a manufacturer is committed to direct export, then using exclusive agents or

distributors is the easiest and least costly way of doing it.

Manufacturers new to direct export often choose this way, particularly where

only a moderate sales volume is expected in a market area.

Even if a large sales volume is generated (and a sales branch or subsidiary is

established), often there are good reasons why the agent and distributor should

not be eased out of the manufacturer’s channel

2.1. Export Entry Modes - Direct Export Operations

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