Exporting is the practice of sending or carrying merchandise to a foreign country for trade or sale. International business is a potentially lucrative area for many businesses, but the small business owner should be aware that establishing oneself in a foreign market is a complex, time-consuming task. Many small businesses in the United States have dramatically improved their financial fortunes by pursuing exporting opportunities, but the vast majority of enterprises that have been successful in this regard did not enter the world of international trade until they had fully researched both their own exporting capabilities and various business conditions in the target market(s) abroad. Indeed, consultants point to a wide range of factors to consider when assessing your company's readiness to expand its business beyond America's borders. These include company export readiness, potential foreign markets, product distribution options, legal factors, operating costs and profit margin, financing resources, and exporting alternatives (such as joint ventures or off-shore manufacturing facilities).
Exporting is sometimes thought of as a practice that is largely the province of large businesses and international corporations, but exporting can also be helpful to a small business in a variety of ways. A small business that establishes its products in the international marketplace can increase sales and profitability, enhance its domestic reputation, reduce its dependence on domestic markets, reinvigorate the sales potential of existing products, stabilize seasonal market fluctuations, sell excess production capacity, and increase awareness of possible foreign competitors.
Of course, exporting is not a risk-free venture. Expanding a small business's operations into foreign markets may require the development of new promotional materials, assumption of increased short-term debt as a result of new operational and administrative costs, re-assignment of personnel, and adjustments in product functionality and appearance to meet the commercial and social standards of the environment in which the business hopes to establish itself. But many business analysts contend that, as the lines between domestic and international markets continue to blur, small businesses that remain ignorant of exporting do so at their peril.
Small business consultants counsel their clients to undertake a stringent regimen of research and self-analysis before committing time and resources to breaking into international markets. Indeed, consultants stress that a small business should be able to answer affirmatively to the following questions before considering expanding its business to include exporting:
In order to arrive at an informed answer to the above questions, consultants recommend that business owners with an eye to international markets take the time to complete an international business plan. This document can highlight potential trouble spots and business areas that need further research. Exporting factors that should be considered in any international business plan include:
A wide range of sources are available to help the small business owner research these issues. Trade associations, exporters' associations, state and federal government agencies, and foreign governments are all potential sources of valuable information.
Relevant trade associations include the Small Business Exporter's Association, the American Association of Exporters and Importers, the National Association of Export Companies (NEXCO), the National Federation of Export Associations (NFEA), and the National Federation of International Trade Associations (NFITA). In addition, the United States houses more than 5,000 trade and professional organizations with a wide range of industry specializations, many of which actively promote exporting among their members. The federal government, meanwhile, maintains a number of agencies that can be tremendously helpful to the small business owner who is pondering expansion into international markets. These include the United States and Foreign Commercial Service (US&FCS), the Small Business Administration (SBA) and its various programs (Service Corps of Retired Executives-SCORE, Small Business Development Centers-SBDCs, Small Business Institute-SBI), and the International Trade Administration (ITA), which is an arm of the U.S. Department of Commerce (DOC). Resources available through the ITA include international trade specialists and District Export Councils (DECs). The latter groups, which are scattered around the country, are comprised of thousands of executives with experience in international trade who have volunteered their time to help small businesses.
Finally, the U.S. government maintains several databases that can provide small business owners with important data on various exporting factors. These are the SBA's Automated Trade Locator Assistance System (SBAtlas), the National Trade Data Bank (NTDB), and Foreign Trade Report FT 925. SBAtlas provides current market information to SBA clients on world markets suitable for their products and services. Foreign Trade Report FT 925, meanwhile, provides users with a monthly breakdown of imports and exports by Standard Industrial Trade Classification (SITC) number for each country. The National Trade Data Bank, which is maintained by the Department of Commerce, includes thousands of government documents on various aspects of export promotion and international economics.
Before entering a foreign market, a small business needs to make certain that the product that it is selling is suitable in its current form. As the Small Business Administration has cautioned, "when entering a foreign market, the manufacturer should consider the tastes and preferences in each market as part of marketing strategy. Frequently, only a small change may be required to successfully market the product. The color of the product, the design of the package, the size of the product all may need adjustment."
Sometimes the name of the product itself has to be changed. Horror stories abound of businesses that have launched products in foreign markets, only to belatedly discover that the product name has a negative connotation in the local language. More often, however, an exporter will find it necessary to make labeling changes (changing size measurements to the Metric system, for example, or providing instructions in three languages, as required when selling products within the European Community). Finally, the would-be exporter might have to make changes to the product itself in order to meet standards of the market in which he or she hopes to become established. Many nations, for example, have different electrical power systems; an American manufacturer that neglects to outfit its product with plugs that will fit into the target market's electrical outlets is doomed from the start.
In order to avert such disastrous scenarios, small business consultants recommend that exporters familiarize themselves with the guidelines of the International Organization of Standardization (ISO). This group issues documents that provide guidance on the selection and implementation of appropriate quality management programs for international operations. ISO standards are reviewed every five years to ensure that they are kept up-to-date with ever-changing international regulations and standards.
Many small business consultants also recommend that their clients not move too quickly in launching an exporting arm to their business. Instead, they suggest that entrepreneurs and small business owners take their product lines on "test drives" of one or two selected foreign markets. By conducting such testing, companies can uncover unanticipated factors that can hinder product acceptance in a given market. Indeed, test marketing allows manufacturers to check on the viability of much of their business forecasting and strategy.
Businesses have several options to choose from when entering foreign markets. One method commonly employed is to enter into a joint business venture with a company based in the targeted market. Such arrangements often take the form of licensing agreements—wherein the business assigns the rights to distribute or manufacture its product or service to the foreign company—or off-shore production—in which a business either establishes its own facility or contracts with an off-shore facility operator to manufacture the product. Most small businesses, however, choose to introduce their products or services to foreign markets via a variety of exporting arrangements. But while there are many nuances and options associated with exporting, these various practices are commonly divided into two areas: direct exporting and indirect exporting.
DIRECT EXPORTING Direct exporting practices generally require greater initial outlays of funds, personnel, and other resources, and they are generally regarded as riskier in nature than indirect exporting options. But direct exporting can also be a tremendously profitable practice. It basically requires businesses to find a foreign buyer for its products and make all arrangements to deliver those goods to the buyer.
There are four primary methods of direct exporting, each of which entails doing business with a different element of the international business world. The simplest option if you are a small business owner is simply to export your product line directly to the end-user. End-users that may make purchases in this manner range from foreign governments and major businesses to individual consumers.
Some businesses, though, choose to sell their goods directly to foreign retailers. Firms that employ this kind of direct exporting either hire sales representatives to work in the target market or introduce themselves and their products to retailers via direct mail campaigns or the Internet. The latter approach is less expensive, for it eliminates commission fees and travel expenses associated with maintaining a sales force, but it also curtails opportunities to engage in one-on-one communication with potentially valuable clients. Some business owners, of course, employ the Internet, direct mail, and sales representatives to establish themselves in new markets.
Another way of direct exporting is to secure the services of a sales representative or agent who conducts business in the target market. Representatives work on a commission basis to secure buyers for the exported product; they often handle other non-competing product lines as well. Agents, meanwhile, are often empowered to make legal commitments on behalf of client businesses, so small business owners should make certain that any agreement they sign with an agent specifies whether the agent will have legal authority to represent the company.
A commonly utilized method of direct exporting is to turn to distributors, who purchase goods from U.S. companies and re-sell them for profit in international markets. Listings of distributors can be found through the Department of Commerce's Agent/Distributor Service program, trade associations, and U.S. and foreign chambers of commerce located in targeted foreign markets. Again, the legal agreement between a company and a distributor is very important, so many business analysts recommend that small business owners consult with a legal and/or accounting professional when putting one together.
The Small Business Administration recommends several different approaches for the small business entrepreneur who wants to find foreign buyers for his or her product line. Advertising in trade journals—especially the DOC's widely read Commercial News USA —is commonly cited as an effective way of publicizing a small business product line to overseas markets, as are catalog and video/catalog exhibitions. Trade shows and trade missions are other potentially valuable avenues to explore, but the SBA also encourages small business owners to be proactive in their approach to finding buyers for their products. "Rather than wait for potential foreign customers to contact you," suggests the SBA, "another option is to search out foreign companies looking for the particular product you produce" by investigating information held on the DOC's Economic Bulletin Board, the World Trade Centers Network, and other government and business sources.
INDIRECT EXPORTING Small businesses that wish to enter international markets also have the option of pursuing a variety of indirect exporting options. Many of these options involve the use of intermediaries. Export intermediaries include commissioned agents, export management companies (EMCs), export trading companies (ETCs), ETC cooperatives, and foreign trading companies.
The SBA characterizes commissioned agents as brokers who serve businesses by linking their product or service with foreign purchasers. Export management companies, meanwhile, are firms that represent the interests of a range of companies; acting as representatives for their client companies, EMCs solicit and transact business with prospective foreign buyers. They are not, however, responsible for ensuring that foreign buyers meet their payment obligations once a transaction has been made. Specific services offered by EMC generally include: undertaking market research, assessing viability of various distribution channels, arranging financing, handling export logistics (preparing invoices, arranging insurance, etc.), and providing legal advice on trade matters. Some EMCs also provide help in negotiating export contracts and after-sales support.
Export trading companies are similar to EMCs in many functional respects, but their standing is more neutral. ETCs act as agents between buyers and sellers, directly paying manufacturers for goods that they subsequently sell to purchasers. Since a small business does not have to rely on the end purchaser to receive compensation under this arrangement, an ETC is seen as a fairly risk-free indirect exporting option. ETC cooperatives, meanwhile, are described by the SBA as U.S. government-sanctioned cooperatives of companies with similar product lines who are interested in securing increased foreign market share. Agricultural interests and trade associations have enjoyed notable success with such cooperatives over the years.
Finally, small companies that choose not to enter into any of the above agreements may still explore foreign markets through agreements with export merchants or via a practice commonly known as "piggy-back exporting." Export merchants or agents are businessmen who will purchase and repackage products for export. They assume all risks associated with selling the goods, but analysts caution that such arrangements can also compromise a business's control over the pricing and marketing of its product in key markets. Piggyback exporting, meanwhile, is a practice wherein another company armed with an already-established export distribution system sells both its own products and those of other, often smaller enterprises who are not similarly equipped.
Business consultants view indirect exporting options such as EMCs and ETCs as sensible alternatives for small companies because they provide greater financial protection to businesses than do direct exporting avenues. Moreover, these indirect exporting options still allow an entrepreneur to publicize his or her product in international markets in relatively inexpensive fashion. Finally, they give small businesses an opportunity to gain knowledge from outfits that are both well-connected and experienced in various nuances of international trade. Analysts caution, however, that there are also possible drawbacks to casting one's lot with such organizations. Use of an intermediary in reaching and dealing with customers inevitably means that a business loses some control over the manner in which it and its products are presented. As the Small Business Administration noted in The Trade Game: A Small Business Guide to Exporting, this is no small matter: "Your company's image and name are at stake. You will want to incorporate any concerns you may have into your contract, and you will want to monitor closely the activities and progress of your intermediary." The small business owner also needs to gauge whether the increased sales realized through use of an intermediary compensate for the discounts that he or she has to offer to secure that intermediary's services.
Small businesses interested in securing these indirect exporting options can find further information through a number of sources, ranging from trade fairs and trade journals to organizations such as NEXCO and NFEA and government agencies such as the DOC's Office of Export Trading Company Affairs (OETCA).
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Sletten, Eric. How to Succeed in Exporting and Doing Business Internationally. Wiley, 1994.
SEE ALSO: Tariffs