Foreign Trade Dr I. Chaneta Faculty of Commerce University of Zimbabwe

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1 Dr I. Chaneta Faculty of Commerce University of Zimbabwe ABSTRACT The importance of foreign trade in general and exporting in particular to a country s economy cannot be over emphasised. It is through exporting that a country earns foreign exchange to buy essential products it does not produce. Developing countries, Zimbabwe included, have in the past relied heavily on the export of primary products from the agricultural and mining sectors. However, falling prices and depletion of natural resources has seen many developing countries turning to the manufacturing sector for export earnings. Zimbabwe is no exception. Today, our manufacturers, small and large, are being called upon to look beyond our borders and play a key role in the development of the country by engaging in sustainable export market activities. Key words: foreign trade, export of primary products, direct and indirect export, licensing, diversification. INTRODUCTION Once a company decides that a particular foreign market represents an attractive opportunity, its task is to determine the best mode of entering that market (Kottler, 1984). Here, it has three major entry strategies namely: export (have production and selling abroad); joint venturing (joining with foreign companies in some way); and direct investment abroad. Each succeeding strategy tends to involve more commitment, risk; and possible profits. The three types of market entry strategies are diagrammatically exhibited in Table 1: Alternative Market Entry Strategies. EXPORT The simplest way for a company to get involved in a foreign market is through export. Anderson (1985) says that a company can get involved in export on two levels: Occasional exporting. It is a passive level of involvement where the company may export surpluses from time-to-time and sell goods to resident buyers representing foreign companies. Active exporting This takes place when the company continues to produce all of its goods in the home country. It may or may not modify them for the export market. Exporting

2 involves the least change in the company s product lines, organisation, investments or company mission. Kotler (1984) says that a company can decide to export its product in two broad ways: a) It can hire independent international marketing middlemen (indirect export); or b) It can assume direct responsibility for selling to the foreign buyers or importers (direct export). INDIRECT EXPORT It is the more popular of the two for the firm that is just beginning its exporting activity. First, it involves less investment. The firm does not have to develop an overseas sales force or a set of contacts. Second, it involves less risk. International marketing middlemen presumably bring know-how and services to the relationship and the seller will normally make fewer mistakes. Three types of domestic middlemen arrangements available to exporting company a) Domestic-based export merchant This middleman buyers the manufacturer s product and sells it abroad on its own account. The exporting company simply makes its sales to the export merchant. b) Domestic-based export agent In this case the company retains some of the chores and all of the risk, because the agent simply agrees to seek foreign buyers for a commission. Within the agent class, there are several variants: export buying agents reside in the manufacturer s country, represent foreign buyers, place orders with the manufacturer, take care of shipments, and make payment; brokers exist to find buyers, are paid commission and do not handle the products and; manufacturer s export agents represent several exporters whose interests ate non-competing and carry out selling and other services. c) Cooperative organisation Here, the organisation carries on exporting activities on behalf of several producers and is partly under the administrative control of the producers. This form is often used by producers of primary products fruits, nuts etc for foreign sales.

3 i) DIRECT EXPORT Sellers who are approached by foreign buyers will most likely undertake direct export instead of paying service charges to middlemen. So will larger sellers or those whose market has grown to sufficient size to justify undertaking their own export activity. The investment and risk are somewhat greater, but so is the potential return. WAYS THE COMPANY CARRIES ON DIRECT EXPORT ACTIVITY Here too, are several ways in which the company carries on direct exporting activity: a) Domestic-based export department This consists of an export sales manager with some clerical assistants. They carry on the actual selling and draw on regular company departments for marketing assistance in such areas as advertising, credit and logistics. It might evolve into a self-contained export department or sales subsidiary carrying out all the activities involved in export, and possibly be operated as a profit centre. b) Overseas branch or subsidiary This may be established in addition to, or instead of a domestic export department. An overseas sales branch allows the manufacturer to achieve greater presence and programme control in the foreign market. The sales branch handles sales distribution and may handle warehousing and promotion as well. It often serves as a display centre and customer service centre. c) Travelling export sales representative The company can decide to have one or more home-based sales representatives travel abroad at certain times to take orders or find business. d) Foreign-based distributors or agents foreign-based distributors buy and own the goods; foreign-based agents sell the goods on behalf of the company. They may be given exclusive rights to represent the manufacturer in that country or only general rights. JOINT VENTURING Fletcher and Brown (2002) say that a second broad method of entering a foreign market is to join with nationals in the foreign country to set up production and marketing facilities. Joint venturing differs from supporting in that a partnership is formed that leads to some production facilities abroad, and it differs from direct investment in that an association is formed with some one in that country. Four types of joint venture can be distinguished:

4 a) Licensing It represents a comparatively simple way for a manufacturer to become involved in international marketing. The licensor enters an agreement with a licensee in the foreign market offering the right to use a manufacturing process, trademark, patent, trade secret or other item of value for a fee or royalty. The licensor gains entry into the market at little risk. The licensee gains production expertise or a well-known product or name without having to start from scratch. Gerber introduced its baby foods in the Japanese market through a licensing arrangement. It did not have the staff to develop and operate its own production facility, nor did it want to risk the capital loss if the Japanese were not receptive to its products. Licensing has potential disadvantages in that the firm has less control over the licensee than if it had set up its own production facilities. Furthermore, if the licensee is very unsuccessful, the firm has forgone these profits, and if and when the contract ends, it may find it has set up a competitor. To avoid these dangers, the licensor must establish a mutual advantage in working together, and a key to doing this is to remain innovative so that the licensee continues to depend on the licensor. b) Contract Manufacturing Instead of licensing a foreign company to manufacture and market its products, the firm may wish to retain the marketing responsibility. But it may not be ready to invest in its own foreign production facilities. Under these conditions an excellent option is to contract with local manufacturers to produce the product. A company called Sears has used this method in opening up departmental stores in other countries such as Mexico and Spain. Sears enters into contracts with qualified local manufacturers to produce many of the products it sells. Contract manufacturing has the drawback of less control over the manufacturing process and the loss of potential profits on manufacturing. On the other hand, it offers the company a chance to get started faster, with less risk and with the opportunity to possibly form a partnership or buy out the local manufacturer later. c) Management Contracting Here, the domestic firm agrees to supply the management know-how to a foreign company that is willing to supply the capital. Thus the domestic firm is really exporting management services rather than its own products. This arrangement is being used by a hotel called Hilton in its system of managing hotels throughout the world. This system is a low-risk method of getting into a foreign market and start yielding income right from the beginning. d) Joint-ownership This is an increasingly popular arrangement. It consists of foreign investors joining with local investors to create a local business in which they share jointownership and control. The foreign investor may buy an interest in a local company or the two parties may form a new business venture. From the point of view of the foreign investor a joint may be necessary or desirable for economic or political reasons. Economically, the firm may find it lacks the financial, physical or managerial resources to undertake the ventures alone.

5 Or the foreign government may require joint ownership with local companies as a condition for entry. DIRECT INVESTMENT The ultimate form of involvement in a foreign market is investment in foreignbased assembly or manufacturing facilities. Companies just starting out in the market would be well advised to avoid this scale of participation at the outset. However, as experienced is gained through export channels, and if the foreign market appears large enough, foreign product facilities offer distinct advantages. The company may secure these advantages partially through licensing or joint-ownership ventures, but if it wants full control (and profits), it may give serious consideration to direct investment. The advantages of direct investment are several. First, the firm may secure real cost economies in the form of cheaper labour or raw materials, foreign government investment incentives, freight savings etc. Second, the firm will gain a better image in the host country because it demonstrates its concern with that country s future. Third, the firm develops a deeper relationship with government, customers and local suppliers, enabling it to make a better adaptation of its products to the local marketing environment. WHY COMPANIES GET INVOLVED IN FOREIGN TRADE Exporting offers numerous advantages which, unfortunately, many firms have not seized. The opening of new consumer markets through historic trade agreements, the restructuring of political boundaries and the new world trade order, has ushered in countless opportunities for businesses to export. Zimbabwe is a small economy, with an expanding manufacturing base, and this calls for the need to enter export markets if it is to realise its full potential. Advances in E-commerce have more opportune time for Zimbabwean companies to capitalise on these market shifts and enter the export market. Below are some of the reasons for companies to export: The need for foreign currency. Many companies operating in Zimbabwe import some form of machinery or equipment, and other inputs for the operation of their business. The depreciation of the local currency has made if difficult for companies to finance imports if they do not earn any foreign currency. Exporting would, therefore enable companies to overcome such a problem. Increase sales and profits. If the company is performing well domestically, expansion into foreign markets is likely to improve its profitability in the long term. Lessen the effect of market fluctuations. By tapping global markets, companies are no longer held captive to economic changes, varying consumer demand and seasonal fluctuations in the domestic economy. Make use of excess production capacity. Exporting could increase the utilisation of production capacity and length of production runs, thereby reducing average unit costs and raising economies of scale. Enhance competitiveness. Exporting helps improve a company s and thus a country s competitive advantage through exposure to new technologies, methods and processes. Gain global market share. By exporting, the company will learn from its competitors, their strategies and what they have done to gain a share in foreign markets.

6 Reduce dependence on existing domestic markets. Diversification into exports expands the company s market base and reduces its dependence on the local market. CONCLUSION Export can provide opportunities to: develop and improve on product quality; adopt a marketing oriented approach when selling products; and develop more efficient production methods.

7 REFERENCES Anderson E. and Gatignon H. (1986) Modes of Foreign Entry, Journal International Business Studies, 17 (3) p1-26. The Banker (1996) Aussies Find Asian Partners 146 (845): 77, July. Barrett N.J A Study of the Internationalisation of Austrian Manufacturing Firm, University of New South Wales. Bilkey W.J. and Tesar G The Export Behaviour of Small-sized Manufacturing firms, Journal Business Studies, Spring/Summer, pp Calof J.C. and Beamish P.W Adapting to International Markets, International Business Review 4 (2) p Fletcher R and Brown L International Marketing, Parson Education Australia. Fletcher R A Holistic View of Internationalisation, Business Review, Vol. 10 pp Hollensen S Global Marketing A Marketing Response Approach, Prentice Hall, Harlow U.K. Johanson J. and Wieldersheim P.F The Internationalisation of the firm, Journal of Management Studies, Vol. 12 No. 3 pp Kotler P Principles of Marketing, Prentice Hall International. Reid S.D The Decision Maker and Export Entry and Expansion, Journal of Business Studies, Vol. 12 No2. pp Toyne B. and Walters G.P Global Marketing Management 2 nd Edition Ch 9 Allyn and Bacon, Boston. Tuckey B Orbital Cranks up for Indonesian Project, Business Review Weekly July p35. Welch L.S Internationalisation: Evolution of a Concept, Journal of General Management, Vol 14 No2 pp Young S. and Davies J.R International Market Entry and Development, Hemel Hempstead, UK. Zim Trade, International Trade Centre, UNCTAD/WTO 1999.

8 Table 1:Alternative Market Entry Strategies Export Joint Venturing Direct Investment Indirect Export Domestic based export merchant Domestic based export agent Cooperative organisation Licensing Assembly facilities Direct export Domestic based export department. Overseas sales branch. Travelling export sales representative. Foreign based agents By R. Fletcher and L. Brown (2006). Contracting manufacturing; Joint ownership ventures Manufacturing facilities