Risks Facing Companies When Exporting - Coursework Example

Introduction Organizations are increasingly becoming complex and more and more firms are finding it easier to expand at the international level. Low demand at domestic level as well as opening up of international markets therefore has allowed international firms to look for opportunities to do business at international level. Tapping the potential available in the international markets therefore is one of the key strategic requirements of international firms in order to continue to grow and expand. (Osland, Taylor ,and Zou, 2001) There are different ways through which a firm can actually expand or grow at the international level. Exporting is one such method which can allow the international firms to actually trade at international level. Through exporting, a firm basically does not enter the international market itself but rather sells its goods and services in the international markets through importers located in the host countries. It is also however, important to note that exporting is not without risks and international firms have to manage different risks related with the exporting. Risks such as managing foreign exchange risk, political risk, etc. are some of the risks which can endanger the firm’s ability to receive back payments against such exports. Intermediaries therefore can play an important role in minimizing such risks and allowing international firms to actually transact at international level without running significant risk. This paper will therefore discuss some of the risks faced by the international firms while exporting and the role of intermediaries in the overall process of export. Exporting As discussed in the introductory part, organizations are increasingly becoming complex and in order to remain competitive, they require innovative ideas to expand. The urge to expand and tap into new markets therefore forces firms to look for new ways of entering into new markets. In order to expand at the international level, a firm normally has different options to exercise in order to successfully enter into any market. The choice of making an entry into any given market however, largely depends upon the factors critical to each organization. ( Bade and Johnson,2010) Exporting is one of the oldest methods adapted by firms to enter into new markets because of the relatively risk averse nature of the trade. In typical sense, exporting can be considered as the process of selling goods as well as services produced in one country to be sold in another country. Exporting therefore is important in the sense that it requires the sale of goods or service from one country to another and therefore the involvement of the exporter as well as the importer is one of the key requirements for exporting. Both the parties to the transaction therefore need to be located in two different countries. (Czinkota, and Johnston, 1983) Exporting is also considered as one of the easiest methods to enter into a foreign market because it does not require much effort on the part of the exporting company. Establishing a joint venture or starting up a Greenfield project may require the international firms to commit relatively higher costs and time however; through exporting an international firm can gain access to the foreign market without committing much of its resources. Exporting therefore is often one of the preferable methods for small international firms to expand their base into foreign markets. There are essential two ways or types through which export takes place i.e. direct and indirect. Direct export is considered as one of the basic modes of exporting and is effective when the overall volume for export purposes is relatively small. Direct exporting often therefore takes place through either the direct representatives or importing distributors. Sales representatives are used for generating sales on commission bases whereas importing distributors purchase the products on their own and sell the same in the open local market. One of the key advantages of the selling through the direct sales representatives is the choice over the type of market to enter as well as better protection of the trademarks as well as other patented property. (Crick and Chaudhry, 1997) Indirect exports however, take place through the intermediaries where the local importers actually purchase the goods and services from the exporters and sell them on their own in the local market. There are different intermediaries through which indirect exporting may takes places including the export trading companies, export management companies, export merchants as well as confirming houses. Indirect exports may be one of the preferred methods of exporting for the small firms because due to lack of resources they may involve other players who can help them to generate leads to sell in international market. It is however, important to note that involving more players in the process may also reduce the overall profitability of the exporter. (Clarke, and Brennan, 1993) One of the key advantages of the indirect exporting is the fast access to the market as the exporter will not have to find sales representatives selling the goods exclusively in the local market. Further, exporter often has very little financial commitments which can actually free up many resources for the export firm to focus on building the relationships to expand the market for his goods and services. The different modes of entry therefore differ in the overall risk they carry and the willingness of the international firm to assume such risks. It is therefore critical to understand that whether the firm is relying on entering a foreign market through exporting or setting up a greenfield project, the overall decision is always based upon critically evaluating the different risks involved in the process. Risks in Exporting Exporting therefore is also one of the risky ventures as the international firms have to manage the risks particular to a market which is relatively not known to them. Some of the risks which firms can face while exporting are: Political Risk Political risk is one of the major causes of the exporters not exporting to other countries because of the impact of the decisions taken politically. Political risk can therefore arise when the decisions taken by the governments at the local as well as international level may not result in the outcome as expected by the exporter. The impact of the political decisions therefore can result into either complete ban on the exports from a particular country or extra restrictions which can make it relatively costlier for the exporters to export to such countries. (Wood and Robertson, 2000) For example, in May 1998, Pakistan conducted its nuclear tests and in order to avoid the capital flight from the country imposed restrictions on the outflow of foreign currency from the country. As a result of this, many exporters were not able to realize their proceeds from the sales made in Pakistan because buyers in Pakistan were simply not able to pay them in US dollars due to political decision taken by then government of the country. The above situation clearly identifies as to how political risk can actually hamper the smooth operations of an exporter and cause serious risks in terms of realizing the export proceeds. Political risk can also manifest itself in terms of the security within the country as highly insecure countries may not be preferred by the exporters to export. Border close due to wars as well as economic embargo on any given country can further complicate the issues for the exporters and resultantly discourage them from exporting. (Richards, 2003) Legal Risks One of the key risks to be managed is the legal risk and requires exporters to better understand as to how the overall regulatory environment within the country will have an impact on the exporter. Exporter therefore always runs the risk of not properly understanding the general as well as specific legal framework applicable for the exporters. Understanding of the tax rules, import procedures, property rights as well as the currency dealings are some of the risks which might emerge under the banner of legal risk. International firms therefore will have to ensure that they better understand these risks before they decide to export. Consulting with the local legal experts can provide an opportunity to the exporting firms to get a general awareness about the legal requirements and what needs to be done in order to successful export to the target market. For example, it is not legally allowed to export wine to many Islamic countries therefore if an exporter is planning to export the wine, the exporting firm need to understand as to under what conditions and to whom it can export wine. Such understanding therefore is of critical importance to manage the legal risks. Another important area where legal risk can be relatively higher and more intense is the settlement of legal disputes arising between importer and exporter. Due to differences in the domestic legal framework of exporter and importer, the overall legal complications in exports are settled through the rules on exports as set by different international bodies such as International Chamber of Commerce. However, despite this, the disputes between both the parties can create significant legal risk for the exporters. Foreign Exchange Risk Foreign exchange risk is also one of the key risks faced by the exporters however it may be properly managed by the firm. Foreign exchange risk arises when the value of the exporter’s local currency changes adversely against the currency in which the transaction has been carried out. The adverse movements in the currency values therefore may reduce the overall profitability of the exporter and sustained adverse movements may force the exporter to stop exporting to that country. (Mathur, 1985) Foreign exchange risk is often the result of the weak economic conditions of any given economy. The widespread changes or movements in the foreign currency values therefore may be due to poor economic management of a particular country. Exporters however, can manage this risk through entering into financial derivative transactions on the foreign currency. Through forward or future booking of the currency, an exporter can effectively ensure that the losses to be incurred just because of the currency movement may be minimized through effective hedging techniques. Cultural and Language Differences This risk may not be apparent in the first instance but the cultural differences play an important role in determining the overall success or failure of an exporting company in a foreign market. Working in a different market necessitates understanding of the tastes and preferences of the consumers and what impact the overall buying choices of the consumers. If an exporter failed to properly understand the cultural and language differences, the rate of failure may become high. For example, Indian consumers do not eat meat therefore if an exporter is willing to export meat to India may not find it a lucrative market. Without understanding and knowing the cultural and religious outlook of the consumers, exporters may not be able to export correct product for the correct market. Without assessing these variables, the overall probability of failure may be high. Intellectual Property Protection Over the period of time, a trend has emerged in international market where the products produced and patented by the international firms are easily copied and reproduced within the local market at much cheaper rates. The violation of the intellectual property rights of the international firms therefore has become one of the key concerns for the international firms. Protecting the intellectual property rights is therefore one of the key risks which exporters have to manage by engaging only with those importers or agents who can be trusted. Countries like China has been famous for violating the intellectual property rights of the international firms as local firms by copying the technology used in producing particular goods and services often produce me too type of products. Such products are therefore sold locally at much cheaper prices thus effectively restricting the ability of exporters to grow or expand in a given market. Some reports suggest that the intellectual property rights violations are expanding globally and increasingly firms are finding it difficult to maintain their intellectual property. Though in the past Russia and China were the leading countries involved in the violations of copyrights and patents however, other countries are now being involved too thus increasing the overall risks for the exporters to protect their intellectual property. Though different legislative measures have been taken by the countries to curb this and encourage exporters however, there is still a lot need to be done in order to provide exporters a complete security from this risk. Role of Intermediaries The overall nature of the exporting necessitates the involvement of different intermediaries during the various stages of the transaction which ensure that the overall process completes without any hassle and with minimum risk. (Balabanis, 2005) The roles played by different intermediaries therefore are discussed here: Export Promotion Boards In almost every country, there are certain institutions which shape the overall export policy of the country. Along with ministry of commerce, such institutions therefore promote exports and provide information and resources to the local manufacturers and service providers about the different export opportunities existing in other countries. The role played by such institutions therefore is limited to providing information, training as well as business leads through exhibitions. Exporters therefore need to work closely with such agency to continuously look for new opportunities to expand into new markets while at the same time understand as to how they can get the support of such institutes to reduce political risk. (Sibanda, Erwee, and Ng, 2011), International Chamber of Commerce Though International Chamber of Commerce may not be directly involved in any kind of export transaction on individual basis but its sets the broader rules and regulations which regulate the exports. All transactions of exports therefore are based upon the rule set by ICC and each party has to comply with these regulations in order to claim any legal course of action. The rules defined by ICC outline as to how the export transactions take place and under what conditions. Based on these rules therefore the liability of each party to the transaction is identified. ICC and its role therefore is of critical importance and it directly have an impact on almost all exporting firms. Financial Institutions One of the key roles is played by the financial institutions which are aimed at reducing almost any type of risk associated with exporting. The involvement of financial institutions therefore guarantees that any risks associated with the exports are minimized. (Baker, 2003) When importer and exporter agree to purchase any sell any good or service, the transaction always requires opening up of a letter of credit in favor of exporter. The opening up of a letter of credit however, can only takes place through a financial institution and as such bank completely take over the responsibility to pay to the exporter in case importer fail to pay. The establishment of a letter of credit as well as letter of guarantee by a financial institution therefore shifts the risk from exporter towards the bank and as such exporter gets the guaranteed payments. As such a financial institution therefore assumes the responsibility to pay to the exporter. The role played by the financial institutions therefore is that of transferring of risk from one party to another. By assuming the risks associated with the importer, financial institutions act as intermediaries to facilitate exporter to reduce the risk. Financial institutions however, cannot completely reduce all the risks and exporters have to therefore ensure that they develop mechanism which can effectively allow them to minimize other risks also. (Westhead, 2008) Export Agents Export agents, in their typical sense, operate as the agents of the exporters and therefore become facilitator between importers and exporter. The role played by the export agents is that of critical importance because an export agent actually markets the products and services of the exporter in local market however, he does not assume any risk on the part of the manufacturer. The export agents therefore operate as one of the most important links in the whole process of exporting because it is through them that the exporter is able to generate sales and therefore become able to penetrate into any new market. The role played by the export agents therefore is that of serving as a link between the buyer and seller and thus ensuring that sellers get the buyers and vice versa. (Rialp, Axinn, and Thach, 2002) Shipping Agents One of the key roles played by the shipping agents is to ensure that the goods shipped by the exporters are delivered to their destinations. The shipping companies therefore form the part of the overall supply chain link necessary for ensuring the movement of goods from one country to another country. Shipping agents therefore offer the mode of transport which is not only cheaper but is also reliable and secure. By issuing a bill of lading, a shipper assumes the risks that the goods have been delivered to him and it’s now his responsibility to deliver the goods to the buyers. The bill of lading issued by a shipping agent provides legal recourse to each party. Conclusion Exporting is one of the easiest and oldest methods of entering into any new foreign market. International firms looking to expand themselves into international markets therefore may consider exporting as one of the preferred methods because exporting does not require any larger commitment of resources as well as time to be spent on developing the market. However, exporting is also risky and exporters have to manage different risks in order to become successful. Some of the risks which need to be managed include political risks, legal risks, foreign exchange risk, intellectual property protection as well as managing the cultural and language differences. Exporting as a process also requires the involvement of different intermediaries during whole process. These intermediaries play important roles in ensuring that the transactions between the importer and exporter are smoothly carried out. Financial institutions play the role of diversifying the risk whereas export agents offer an opportunity to exporters to gain access to the large base of local buyers. Similarly, export promotion boards can also play important role in assisting the exporters to tap into new markets by providing them information and support to export without any significant Hassel. Exporting however, is still risky and require prudent management. References 1. Bade , D. and Johnson, T. (2010) Export/Import Procedures and Documentation, New York: AMACOM. 2. Baker, J. 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Wood, V , and Robertson, K (2000) "Evaluating international markets: The importance of information by industry, by country of destination, and by type of export transaction", International Marketing Review, 17 (1), p.34 – 55 Read More