Literature review - Assignment Example

A payment contract is a structured negotiation between a supplier and a company. In this case, the company can pay the supplier a penalty or take the products from a supplier. The company and supplier agree on a payment method for all products. Additionally, the company must pay the supplier for products not taken. This is based on an agreed ceiling. Organizational managers need to recognize the methods they can use to finance international trade in order to conduct importing and exporting with an aim of maximizing the value of their organization.

Pol Antras and Fritz Foley (2011) wrote an article in which they explored international trade finance practices. Their study analyzed some of the most important financial terms that support international trade (Antras & Foley, 2011, p. 7). The study provided opportunities for understanding how the financial terms affect trade. Antras and Foley (2011) used detailed transaction level information and data from a U.S based firm that exported refrigerated and frozen food products. The researchers began by outlining broad patterns on the use of different financing terms.

The patterns helped in identifying a model for a trade finance mode, which is shaped by the risk that importers may default on exporters. Additionally, the model is based on the probability that exporters may fail to deliver goods according to the contract. According to the researchers, the empirical results of the study show that transactions may occur on letter of credit terms, and cash in advance in case the importer operates in a country that has weak contractual enforcement. Exporters rarely use letters of credit.

The need for prepayment diminishes as importers and exporters establish a relationship. Managers of multinational corporations need to decide the best financing terms for their transactions. Exporters may need importers to pay for ordered goods before the goods are loaded for shipment, or they may allow