Many small- and medium-sized companies will not have a substantial budget for conducting international trade research. These companies will often rely on secondary trade research as much as possible.

Most SMEs will perform the majority, if not all, of their research in house by using published sources and the Internet.

This type of research is called desk research and it involves obtaining secondary data (existing data that have already been collected for some purpose).

Whatever the size of the company, researchers should always start planning their research design by investigating whether any information can be sourced from within the company; for example, by finding information stored in company records, by talking to customers or distributors or by asking employees who have worked in a potential target market for information. However, most secondary data sources are external.

There’s a world of secondary data at your fingertips

Internal records and information from internal experts:

Sales and accounting records – can be used to determine baseline comparisons of trends, costs and target customers

Distributors and customers – can be used to determine buyer expectations and purchase patterns

Employees with experience in the target market – can be used to determine opinions about general conditions, cultural impact and business methods

External sources and experts:

Government departments and agencies – can be used to determine market assessment publications, trade statistics, trade regulations and export and import controls

Representatives of the target country – can be used to determine trade and market conditions specific to the country and cultural considerations

Trade or industry associations – can be used to determine practices, trends and conditions related to the organization’s expertise

Non-governmental associations (NGOs), universities and trade-related businesses – can be used to determine comparative market, population and demographic statistics, competitor information and credit information

Publications, directories and yearbooks – can be used to determine market statistics, general information about trends, interests, demands and regulations, sources of information and advice

Various websites and data tools – can be used to provide fast access to publications, directories, statistics and market research reports

When should you dive into secondary data?

Researchers should always check whether secondary research data are available internally before accessing external sources.

There are several reasons why a research project should always investigate secondary data sources first:

• It is cheaper to collect secondary data than it is to collect primary data.
• It is faster to collect secondary data than it is to collect primary data.
• Secondary data might be available that answer the market research objectives without the need for primary research.
• Secondary data collection can help improve a researcher’s understanding of a marketing problem and therefore lead to better design for the primary research.

Secondary data should also be used in the following circumstances:

• When companies are considering entering unfamiliar markets, secondary data enable companies to gain an appreciation of the nature of the market and the competitive business environment without spending too much money
• When researchers need facts that would be unrealistic or unnecessary to gather from a primary research source, such as the annual consumption of coffee in Poland or the population of Trinidad
• When researchers need to understand or monitor trends in financial issues, business conditions or demographic factors
• When primary research is too difficult or too expensive to access, secondary data might be all that is feasible

This article is adapted from content covered in the Feasibility of International Trade FITTskills course.

Learn everything you need to know about assessing your organization’s readiness to make the leap into new global markets including planning and executing effective market research.

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Visualize data in numerical format

Numerical data should be presented as charts, tables or graphs wherever possible. Researchers can use a wide range of tools to present material in an attractive and clear format. Spreadsheets can organize numerical information and generate graphs and charts. Graphics packages can also be used to portray both numerical and non-numerical information.

Tables are one of the easiest methods of presenting quantitative data, but they must be well organized. Tables must have clearly labelled rows and columns and be organized consistently.

Graphs and charts present numerical information in a visual form. Each part of the graph or chart should be labelled clearly. There are various styles of charts to choose from. For instance, pie charts are used when the components of the data being shown must add up to 100 percent. They are most often used to show market-size data, classification data or market shares.

1. Pie Charts

2. Spider charts

This type of visual representation is sometimes used to present comparative numerical information in a way that quickly and easily highlights differences among categories.

3. Bar charts

Bar charts or histograms are a common tool for illustrating data and are most commonly used with rated data. They can be used to show customer satisfaction levels, market size for different companies and trends within a group.

Present data in qualitative format

There are many effective ways to visualize data if it’s qualitative as well. Information can be presented in the form of a flow chart that communicates processes or decisions, or it can be explained in relation to marketing frameworks. Quotes can add emphasis to a point, because they indicate the thoughts of the consumer. However, quotes should never directly identify an individual.

Looking to determine if your new trade opportunities are viable? Check out the FITTskills Feasibility of International Trade online course!

4. Flow diagrams

This is a very simple and effective way of presenting organizational data. Flow charts should be labelled clearly, and the flow of a decision or process through the various stages should be clear and easy to understand. The reader should be able to start at one point and follow a path through to the conclusion.

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Making the leap from domestic sales to an operation that’s doing business internationally comes with a new range of considerations. Not least of these would be to calculate business costs in any new markets.

Any business exploring a new international market needs to taking into consideration new costs such as those associated with international shipping, currency exchange, and methods of payment, many of which are unique to international business and come with associated risks.

Organizations trading abroad must understand the different factors that can affect their business costs. These factors are shown in the following image and explained below.

1. Transmission delays

Transmission delays, an often-overlooked cost of doing business abroad, can affect cash flow significantly. International shipments and the resulting payments are complex enough—delays can slow the transmission of funds from the paying country to the receiving country by a few days to several weeks. The cash budget must consider the possibility of technical or bureaucratic delays along the payment chain.

The delays may be the result of improperly completed documentation or foreign administrative procedures. New exporters may be able to plan for the types of delays experienced in their domestic business, but they can be unpleasantly surprised when international business delays are far longer than they expect.

2. Exchange controls

Resulting from the host government’s attempt to conserve its hard currency reserves, exchange controls can prevent or restrict the payment of funds by the trading parties in a country. Often enforced by a cumbersome and lengthy system of foreign currency authorization, these regulations impose more problems for capital repatriation transactions than for payment of arm’s-length invoices.

At times, export controls can result in all payments being stopped. This can have a devastating effect on a company’s cash flow, and it should be insured against if the amounts involved are relatively large.

Want to learn more about all aspects of how to manage business costs and cash flows, ensure payment and stay profitable long-term? Get started with the FITTskills International Trade Finance online course!

3. Exchange rate fluctuations

Foreign exchange rate (FX) fluctuations can reduce the value of the proceeds from a sale or increase the value of the funds needed to pay for a transaction. Unless planned for and controlled through risk management techniques, such fluctuations can seriously undermine expected cash flows, or surprisingly increase profit, hence the need for the margin on the contract.

4. Political risks

Political risks can also severely affect a company’s cash flow. For instance, the revocation of an export or import permit frustrates performance under an international trade transaction. In the meantime, the exporter may have already covered the costs of arranging for the export sales, purchased supplies, fixed business costs, paid salaries or prepared the products for shipment. Such a situation will have an obvious negative impact on cash flow.

5. Delayed collection of receivables

The slower collection of international accounts receivable can strain a company’s cash position. To avoid this, care must be taken to select appropriate payment terms for each foreign buyer, and to factor likely delays into the cash budget. If the receivables involved are substantial, the exporter should use export credit insurance or export receivables discounting facilities to avoid excess risk.

6. Technology

Trade finance and logistics providers are investing significantly in the enhancement of technology and related reporting capabilities, working to turn the provision of timely information and high transactional visibility into a significant element of their value proposition to importers and exporters on a global basis. Technology—from processing systems to web-accessed software and sophisticated reporting systems—is enabling the delivery of trade finance solutions across the life of a transaction, and doing so at an ever-faster pace, to keep up with the evolving needs and increasing expectations of importers and exporters.

The latest developments in trade finance include significant forays by leading global banks into areas that traditionally have not been the purview of trade bankers but are increasingly so today. Logistics, customs brokerage, supply chain finance and management are all information areas that are of critical value to importers and exporters.

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While there are many risks inherent in international trade finance, there are also numerous methods of settlement in international trade available to exporters and importers to manage and mitigate risks.

In most developed countries, an organization can draw on a wealth of free or inexpensive expert opinions to assist with risk mitigation for financial transactions.

Major banks typically have large portfolios of international loan assets and maintain extensive international financial networks. To safeguard their interests and those of their customers, banks employ large staffs of political analysts and international economists, and are often willing to share their expert opinions and written reports.

Embassies and consulates abroad, as well as commercial officers, are valuable sources of political and economic risk information, and can refer their clients to local service providers abroad that can assist in obtaining more detailed information on commercial risks.

These resources can often provide information on a target country’s current business environment, as well as credit and business information about potential customers.

An organization should select the financial instruments that best address its needs and identified risks, as well as those that respond to the underlying dynamics of a commercial contract.

In general, importers and exporters must agree on terms and methods of payment based, in part, on the risks associated with planned transactions. Below you will find 4 methods of settlement in international trade you can use to reduce your risk.

Want to learn more about methods of settlement in international trade and other risk mitigation options? Check out the FITTskills International Trade Finance online course.

Risk Insurance

Businesses that engage in international trade can mitigate commercial risk and protect its interests through various forms of insurance, including:

• Political risk insurance
• Foreign accounts receivable insurance

Indeed, insurance options are available to address nearly every category of risk that suppliers and buyers could possibly encounter while conducting international commerce.

Political risk insurance (PRI) and accounts receivable insurance (ACI) are particularly common, and can be obtained from specialist private sector providers or, depending on the market, from public and private entities such as export credit agencies (ECAs).

Most ECAs were originally established as public sector entities that promoted exports by providing various financing and risk mitigation products and solutions.

In recent years, however, some of these organizations have been fully or partially privatized and have mandates that extend beyond their original public sector focus. In fact, just before the onset of the recent global financial crisis, many questioned the need for ECAs in international trade.

However, their critical value was demonstrated when the market collapsed and private sector providers retreated in panic. Variations on the ECA model continue to be numerous, with the approach and the scope of ECA-like organizations varying almost by country.

In any event, most ECAs continue to offer political risk insurance and foreign accounts receivable insurance, which are both important forms of coverage that can help exporters offset trade-related commercial risks. Some ECAs also offer medium-term buyer financing, which is another helpful tool for export promotion.

Risk Transfer

Many of the strategies mentioned in this section involve the transfer of risk from one party to another for a fee. Insurance, for example, transfers risk from an individual policyholder to a portfolio of clients managed by an insurer to disperse the risk among stakeholders whose premiums fund payouts against claims.

This usually occurs over time, as it is unlikely, under normal circumstances, that a material number of policyholders will present claims at the same time.

Another attribute of an organization that successfully mitigates and manages commercial risk includes the continual assessment of the relevant risks versus the associated costs of conducting global financial transactions.

For example, a very common loss suffered by exporters involves the commercial failure of the foreign importer, while, for importers, it is the failure or inability of the supplier to deliver the merchandise exactly as specified and when required. Sometimes, poor documentation will restrict or inhibit the export or import of merchandise.

Political and country risks account for a much smaller number of losses, but should also be considered when structuring a transaction.

The challenge for an organization trading internationally, whether importing or exporting, is to get to know and trust its foreign suppliers or importers and to balance this knowledge with the risk optimization tools available from a variety of sources.

An organization must then choose a form of settlement consistent with the assessed risk and its level of tolerance for that risk. The ongoing test will be to remain competitive—and commercially viable—while incorporating the risk of loss and the price of protection against such a loss, into the final price of the finished product.

Risk can also arise from factors beyond the good faith or control of the trading partners. If exchange controls are imposed by a government, the ability and willingness to pay is not sufficient to assure a successful conclusion to the transaction. The next section emphasizes the trade finance instruments which can be used to secure payment.

Learn about what impacts your cash flow and how to maximize it with this free FITTskills Lite resource. 

Open Account

Open account payments are essentially transfers of funds to the account of the exporter. Historically, open account payments have been used in trade between very stable and secure markets, such as the United States and Canada, or in intra-EU trade, and in cases where the trading relationship is established and trusted.

Open account payment terms are those under which the seller extends credit to the buyer, finances the whole sale and sends a standard invoice demanding payment within thirty to sixty days of receiving the goods.

In addition, terms are suitable for a very strong buyer-seller relationship with a creditworthy client. Much of the trade between Canada and the United States is done on an open account basis.

Trade on open account is also increasingly the preferred mode of payment across much of the globe.

This shift, driven by large global importers, introduces additional risk for exporters in that payment is affected after the delivery of goods and/or services, sometimes for as long as 90-120 days after delivery.

This method has some potential risks as the importer could, for example, become insolvent, or the country of import could experience political turmoil, preventing payment. In such cases, the exporter loses control, and usually title, to the goods and/or services and has limited recourse to recover payment.

From a documentation standpoint, aside from the commercial invoice that will be issued by the exporter in an open account transaction, this transaction normally also involves an ocean bill of lading (i.e. if ocean shipping was part of the agreed-upon terms and a shipping container of goods has been sent).

In these instances, the exporter will usually send all original copies of the ocean bill of lading (i.e. those issued by the shipper as receipt for the goods) to the buyer. The ocean bill of lading serves as the title to the goods so, upon receipt, the buyer (or the buyer’s designate) can present an original copy of the ocean bill of lading at the receiving port to get the shipment released.

Note that, in certain circumstances, it is possible for the exporter to authorize a release of the goods without an original copy of the ocean bill of lading. However, many exporters still rely on the courier to deliver original copies of the ocean bill of lading to the importer to prevent an unintended and unsecure release of the goods.

Payment in Advance

One of the methods of settlement in international trade not yet mentioned is payment in advance. In contrast, payment in advance (advance payment) is a payment that is made before receiving the good or service, so it presents the highest risk to the importer (i.e. given that the exporter could easily receive the funds and not carry through with the promised shipment).

Exporters sometimes require advance payments by importers as protection against non-payment or to purchase supplies to fulfill the order. Higher advance payments may be required for specialized products as a hedge against buyer default when it may be more difficult or impossible to sell the products to a another buyer.

If an importer wanted to have a pre-shipment inspection when paying cash in advance, he/she could hire a 3rd-Party Inspection service to visit the manufacturer and file an inspection report.

However, the cost of such an inspection would also add to the investment being made by the importer. So the credibility of the exporter in this sort of a scenario would typically have to be very high.

Even with the best intentions and good faith, factors such as political turmoil and other unforeseen events could prevent a willing and well-intentioned exporter from completing a shipment as promised.

As a result, payment in advance is rarely used for transactions that are structured on a recurring basis. However, advance payment is frequently used when the reputation of the exporter is well-established and the importer sees little risk in an advance payment.

Advance payment establishes the importer’s credibility when the exporter does not have sufficient confidence in the importer. In these situations, the initial payment in advance transaction is used to gain the confidence of the exporter, and it is often accompanied by negotiations that are intended to lead to better payment terms on subsequent transactions, such as open account, as described above, or documentary collections.

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Product compliance is a constantly evolving process. Because laws, standards and regulation continuously change, manufacturers, retailers and suppliers are pressed to innovate quickly in order to create compliant products and substances. Whether an organization manufactures the product or resells it, the responsibility to comply makes the manufacturer, suppliers and the reseller legally accountable.

The role of product compliance increases in scenarios of product proliferation, complex supply chains and multiple markets. With a recent increase in compliance-related penalties, fines and recalls, there is no room for non-compliance. The challenge for your company lies not only in producing a compliant product, but also in declaring it as compliant by placing it on store shelves.

Legal issues and risks—particularly product liability—are increased by production activities in multiple foreign markets, off-shore manufacturing and off-shore contracts. Some of these legal risks can be mitigated through regulatory compliance and meeting product standards.

What is Product Compliance?

In the simplest terms, product compliance means adhering to all the regulatory requirements and standards that products and services need to meet to be lawfully marketed in a given jurisdiction. These requirements vary depending on the product and the market, covering areas such as electrical safety, chemical composition, and children’s safety, to name a few. Compliance can be a complex area with multiple laws and regulations for suppliers and buyers to consider. Regulatory authorities ensure that products and substances are in compliance and can authorize regulatory approval.

It’s important as a manufacturer or distributor to have a comprehensive understanding of the different aspects of product compliance to avoid costly mistakes. Since different laws regulate various aspects of products, manufacturers need to understand not just one regulation, but possibly multiple regulations to bring their products to market in a compliant way.

Want to learn more about regulatory compliance and getting your products ready for global markets? Check out the FITTskills Products & Services for a Global Market online course.

Regulatory Compliance

Manufacturing compliance is comprised of technical, legal and corporate requirements, as well as regulations and practices manufacturers must comply with in order to produce and market products.

The risk of non-compliance has become an increasingly major concern in recent years, particularly for manufacturers with operations in multiple countries and jurisdictions that have their own compliance requirements.

This development has been further heightened by the increasing role of governmental regulatory bodies in certain industry sectors, along with the emergence of global standards to address the increasingly global nature of manufacturing. Regulatory compliance can impact every stage of the manufacturing process from product design to the end product.

Product Safety Compliance

Product safety compliance requires products to conform to regulations that ensure the product does not harm consumers, property or the environment throughout the product life cycle from inception to disposal. Regulations govern product concept/design, manufacturing, labelling, packaging, use and disposal (see Figure 2 1)

Safety regulations can cover the characteristics of a product, as well as its technical specifications, safety features, functionality, quality and durability. Product safety regulations may also apply to production processes, such as the way in which a product is manufactured. These regulations can also apply to the product life cycle, including how returns and disposals are managed, illustrated below.

Each company must research the regulations that apply to its products within its target markets, and ensure that its products, production processes and packaging comply with those requirements.

Many industries also have voluntary industry standards and best practices for packaging that often exceed regulatory expectations to reassure consumers and the general public with respect to the safety and integrity of that industry.

The post Product compliance: What you need to know about product regulatory compliance appeared first on Trade Ready.

An international business plan acts as a framework that identifies goals and objectives, specific target markets and clients, resources required and strategies to be developed in pursuit of international business opportunities. The plan allows for the monitoring of progress via metrics against which success and failure can be measured. A comprehensive international business plan will be comprised of a number of integrated strategies related to business functions, including communications, sales and marketing, finance and production.

What Is an International Business Plan?

An international business plan is a valuable management tool that describes who a business is, what it plans to achieve and how it plans to overcome risks and provide anticipated returns. It can be used for a wide variety of purposes, such as to:

• Set goals and objectives for the organization’s performance.
• Provide a basis for evaluating and controlling the organization’s performance.
• Communicate an organization’s message to managers and staff, outside directors, suppliers, lenders and potential investors.
• Help the planner identify the cash needs of the business.
• Provide benchmarks against which to compare the progress and performance of the business over time.

A comprehensive and detailed plan forces the planner to look at an organization’s operations and re-evaluate the assumptions on which the business was founded. In doing so, strengths and weaknesses can be identified.

Although highly dependent on the individual business case, on average it takes a three-year commitment to establish a successful presence in a foreign market. This process may require tremendous human, technical and financial resources during the developmental period.

Want to learn more about conducting proper research, selecting the most effective entry strategy and implementing it efficiently? Check out the FITTskills International Market Entries Strategy online course!

The Planning Process

An international business plan is subject to repeated adjustment and revision to keep it current with the changing circumstances of the organization. The plan is a feedback mechanism through which new information is continually incorporated into the organization’s operations. Planning always precedes action. Therefore, planning must be thought of as a continuous cycle. The analytical tools presented here are not intended to be used just once. If they are to be useful, they should be used repeatedly as part of a process of improvement and incremental adjustment.

Plan Preparation Guidelines

These 7 guidelines will help in preparing a comprehensive international business plan:

1. Clearly define the objectives for producing the plan: Who is going to read the plan, and what will they need to do? These objectives can help you decide how much emphasis to put on various sections.
2. Allocate sufficient time and resources to thoroughly research the plan: A plan is only as good as the research that went into producing it.
3. Show drafts of the plan to others: It can be very useful to obtain feedback from others, both inside and outside the business.
4. Create an original plan that is done specifically for each business case: A common mistake entrepreneurs make is to borrow heavily from a sample plan and simply change the names and some of the numbers. There are two big problems with this approach. First, the emphasis placed on various sections of the plan must reflect what is important to the particular business in question. Second, a good plan should flow like a story, with the sections working together to demonstrate why the business will succeed. Plans that borrow too heavily from other plans tend to be disjointed, with some sections contradicting others and various key issues left unaddressed.
5. Outline the key points in each section before the writing starts: These points must then be reviewed to ensure the sections are consistent with each other, there is little duplication and all key issues have been addressed.
6. Ensure financial projections are believable: For many readers, the financial section is the most important part of the plan because it identifies the financing needs and shows the profit potential of the business. In addition, a good financial plan will give the reader confidence that the author really understands the business.
7. Consider writing the executive summary as the last step in the process: It is usually easier to provide a concise overview after the detailed content has been created.

If you’re having trouble getting started with your business plan, try writing like it’s a series of tweets—one for every section of your business plan. To get your point across, 140 characters is all you need.

Forcing yourself to boil each section of your business plan down to one main point is an exercise in decision making and strategy all in itself. When you’re done, you’ll have everything you need to take your next step, whether that’s practicing your pitch to potential investors or a business partner, or sitting down to expand each tweet into a full section of a more traditional business plan.

Core Content

The international business plan is the culmination of all of the work done to determine the appropriate venture for the organization’s growth. As part of the feasibility process, the organization will have determined its own internal readiness, conducted comprehensive target market research and carefully analyzed any relevant risks.

For more information on this topic, see the FITTskills Feasibility of International Trade online course.

At this point, the organization can take all of this information and analysis and formally document the plan for moving forward. There are many different models and examples of how to put together a formal business plan, rather than one correct way.

The right format will depend on the organization, the venture being pursued and who will be accessing the business plan and for what purpose. However, there are some basic guidelines to follow.

One of the reasons business plans are developed is to convince investors and/or bankers to invest in the venture.

Increasingly, they are looking for a business plan to include two sections: one relating to online strategy (in terms of e-marketing, social media and ROI) and the second relating to corporate social responsibility (including quality, health, safety and environment policies).

The inclusion of these topics gives more credibility to the company by demonstrating its commitment to the community and to employees’ well-being.

Telling a Story 

One trend in business planning is to use a narrative structure in the document, rather than traditional technical writing techniques. Storytelling techniques are increasingly being used throughout the business world to create personal and organizational brands, deliver marketing messages and develop persuasive plans.

Stories make presentations better. Stories make ideas stick. Stories help us persuade. Savvy leaders tell stories to inspire us, motivate us. That’s why so many politicians tell stories in their speeches. They realize that “what you say” is often moot compared to “how you say it.

Instead of using bulleted points and cold, technical language, organizations employ a “beginning, middle and end” narrative style. This engages the audience by establishing the context, describing the conflict or obstacles and arriving at a successful resolution.

The Executive Summary

Usually the last step of preparing the international business plan is to develop the executive summary, a short overview of what the plan proposes to accomplish. For some purposes, a one-page business plan can also be useful.

There is not a great deal of difference between an executive summary and a one-page business plan. The most significant distinction is the one-page plan must completely fit on one page in a readable font, while an executive summary may spread over two or three pages.

One-Page Business Plan

There is a trend towards the one-page business plan, especially if the plan is to be presented to potential partners for their consideration. Audiences for the one-page plan will be looking for a “quick hit”: a clear and concise description of what the opportunity is and how it is being pursued.

For example, a one-page business plan might include the following topics, as described in Noah Parson’s article “How to Write a One-Page Business Plan” on the website Bplans:

• Customer problem/opportunity
• Your solution/approach
• Business model (how you make money)
• Target market (who is the customer and how many are there)
• Competitive advantage
• Management team
• Financial summary
• Funding required

The one-page plan (or the executive summary, if used in place of the one-page plan) may provide the first impression the audience has of the business. This is the most important document generated out of the business planning process, and significant effort and care should be taken in its creation.

There are many websites the provide blank samples of one-page business plans, including Bplans, the GoForth Institute and Startup.com.

A Note on Strategic Plans

A strategic plan covers many of the same points as a business plan. However, a strategic plan sets out the detailed action plan to be followed to achieve the objectives of the international business plan.

It must outline specific activities, their due dates and who is responsible for each activity. It is a project plan with a critical path. A strategic plan ensures any venture is carried out in a coordinated, informed and systematic way.

A key consideration in action planning is how quickly to enter the market, which is driven by the chosen market entry strategy. If market entry is done too quickly, the potential for costly mistakes increases. However, if it is completed too slowly, opportunities may be missed and competitors will have more time to react.

The Planning Cycle

Attaching the word “cycle” to planning implies that it happens more than once. International business plans need to be reviewed periodically because new information that has an impact on both planning and operations is continually coming in.

All plans, including international business plans and strategic plans, need to be reviewed every time there is a major event impacting the business, such as civil unrest, a currency fluctuation or the presence of a new competitor.

The post A Guide to Preparing an International Business Plan appeared first on Trade Ready.

Major banks, such as Royal Bank of Canada, Industrial and Commercial Bank of China, BNP Paribas and HSBC, have large portfolios of international loan assets and maintain extensive international financial networks. To safeguard their interests and those of their customers, banks employ large staff of political analysts and international economists, and are often willing to share their expert opinions and written reports.

Embassies and consulates abroad, as well as commercial officers, are valuable sources of political, economic and commercial risk information. These resources can often provide information on a target country’s current business environment, as well as credit and business information about potential customers.

Solutions available to mitigate some of the most common commercial risks to ensure successful international transactions include those represented in the figure below.

These options are explored in the following sections with guidelines for both the importer and exporter.

Want to learn more about payment, risk mitigation, financing, and the flow of goods and services. Check out the International Trade Finance FITTskills online course.

1. International Trade Finance Instruments

Trade finance instruments have evolved slowly since their introduction to the market, some as early as several hundred years ago. They have been gradually  adapted to the changing needs of organizations trading internationally. In more recent years, several factors have contributed to a heightened need for traditional banking instruments to adapt while still providing commercial parties with protection, security and risk mitigation. These factors include:

• Rapidly changing role of technology
• Electronic transmission of shipping and title documents
• Acceptance of electronic transfer of title
• Large-scale movement toward trade on open account.

An organization should select the financial instruments that best address its needs and identified risks, as well as those that respond to the underlying dynamics of a commercial contract. In general, importers and exporters must agree on terms and methods of payment based, in part, on the risks associated with planned transactions.

In low-risk transactions, such as those between parties with established and trusted commercial relationships, organizations often use documentary collections. Open account terms are similarly well suited for established relationships, although companies that use these instruments must pay more attention to risk mitigation now than in the past. Documentary letters of credit offer protection to both importers and exporters. Confirmed letters of credit give exporters even more protection and, as such, are used effectively in the most high-risk markets in the world.

2. Risk Insurance

Businesses that engage in international trade can mitigate commercial risk and protect its interests through various forms of insurance, including:

• Cargo insurance
• Political risk insurance
• Foreign accounts receivable insurance

Indeed, insurance options are available to address nearly every category of risk that suppliers and buyers could possibly encounter while conducting international commerce.

Political risk insurance (PRI) and accounts receivable insurance (ACI) are particularly common, and can be obtained from specialist private sector providers or, depending on the market, from public and private entities such as export credit agencies (ECAs).

Established in post-war Europe as part of a broad reconstruction strategy, ECAs were originally public sector entities that promoted exports by providing various financing and risk mitigation products and solutions.

In recent years, however, many of these organizations have been fully or partially privatized and now have mandates that extend beyond their original public sector focus. In fact, just before the onset of the recent global financial crisis, many questioned the need for ECAs in international trade.

However, their critical value was demonstrated when the market collapsed and private sector providers retreated in panic. Variations on the ECA model continue to be numerous, with the approach and the scope of ECA-like organizations varying almost by country. Many ECAs now offer political risk insurance and foreign accounts receivable insurance, which are both important forms of coverage that can help exporters offset trade-related commercial risks. Unit 3 provides further details on how organizations can use ECAs to mitigate commercial risk.

3. International Financial Institutions and Aid Agencies

International financial institutions (IFIs), such as the World Bank’s International Finance Corporation, and regional development banks offer financing and risk mitigation programs that facilitate the conduct of international trade by engaging local banks in international trade finance and enhancing trade flows.

Some examples of such regional development banks include:

• Asian Development Bank
• European Bank for Reconstruction and Development
• Inter-American Development Bank
• International Islamic Trade Finance Corporation

Several IFIs have developed programs specifically to address the risk profile of their local banks, providing guarantees so international banks are more likely to extend confirmations to the documentary letters of credit issued by local banks. Without these guarantees, the risk profile of IFI-affiliated local banks would be such that international banks would either refuse requested confirmations outright, or charge high fees for them.

Many international aid agencies and development finance institutions also provide financing or risk mitigation solutions. These solutions foster increased trade flows with higher-risk developing and emerging markets, which helps encourage development and reduce poverty in these markets.

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Technology, especially the Internet, has transformed how business is conducted in both domestic and international markets. In 2011, the number of digital buyers worldwide reached 792.6 million. A year later, the number had risen to 903.6 million—a 14% increase. As of 2015, online purchases accounted for about 8% of total retail sales around the world and that amount increases every year.

Global business to business (B2B) e-commerce sales are forecasted to reach USD 6.7 trillion by 2020, more than twice the value of business to consumer (B2C) e-commerce (USD 3.2 trillion).

While online growth is to be expected, it is projected that 27% of all global B2B sales will have an online component within the next five years.

China is expected to lead the growth with the largest online market in the world and generate approximately USD 2.1 trillion in online sales.

Statistics from 2016 indicate that 40% of worldwide Internet users have purchased products online via desktop, mobile, tablet or other online devices, which amounts to more than 1 billion online buyers. With the projected digital buyer penetration expected to reach close to 50% of Internet users worldwide in 2018, the e-commerce industry will continue to evolve and expand.

What Is E-Commerce?

Electronic commerce or e-commerce is the buying and selling of goods or services on the Internet or through other electronic means. The goods and services can be physical or intangible, the latter permitting digital delivery as well as sales.

E-commerce is a type of market entry strategy and can be completed directly by selling through an organization’s own website or indirectly by listing products or services on another organization’s website. E-commerce may be the sole mode of market entry, but most often it is used in combination with other market entry strategies.

E-commerce encompasses all elements of commerce including providing
product and service information, processing orders, accepting payment, fulfilling orders, providing storage and delivery, and customer support. An e-commerce transaction can be business to consumer (B2C), business to business (B2B),business to government, and consumer to consumer. This module focuses on B2C and B2B e-commerce. E-commerce includes purchases and sales conducted over computer networks using multiple formats including the web and electronic data interchange, and multiple devices such as personal computers, laptops, tablets and smartphones.
It draws on other technologies such as digital marketing, email, electronic funds transfer, supply chain management, online transaction processing, inventory management systems and automated data collection systems.

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When first learning about e-commerce, people may be confused by the
plethora of unfamiliar terms and phrases such as “e-commerce platform”,
“convergent commerce”, “e-commerce control panel”, “full service shopping cart”, “e-tailing”, “m-commerce” and “creative digital strategy enthusiast”.

The language is a reflection of the ever evolving state of e-commerce technology and applications. New terms used in this module are defined in the glossary.

The benefits of E-Commerce for your business

E-Commerce has provided new opportunities to organizations around the
world. These opportunities take the form of global market access to customers, business partners and suppliers. Additional benefits associated with e-commerce include:

• Low risk, low cost market testing
• Ability to track customer preferences and purchasing actions
• Targeted online advertising and other marketing
• Reduced communication and transaction costs
• Increased productivity and efficiency
• Lower cost exit strategy, especially in e-commerce only scenarios
• Decreased costs associated with establishing international trading relationships
• More efficient information sharing and transactions with business partners
• Enhanced participation in international value chains

The E-Commerce Environment

E-commerce occurs in a complex environment of human and machine abilities and interactions. The nature of the environment is constantly evolving as demonstrated in this section.

B2B and Global E-Commerce Sales Global B2B e-commerce sales are forecasted to reach USD 6.7 trillion by 2020, more than twice the value of B2C e-commerce (USD 3.2 trillion).6 Organizations are wise to consider migrating to online platforms for these reasons:

• The expectation among a growing number of companies to conduct
buying and selling online
• A shift from some companies to conduct procurement transactions
through the Internet instead of through Electronic Data Interchange (EDI)
• Growing interest of companies in placing orders through mobile
commerce devices
• The increasing popularity of e-market places such as Alibaba.com and
AmazonSupply.com

A B2B e-commerce implementation is more complex than B2C. In a B2B setting, prices are typically highly variable. Volumes are much higher than B2C and consist of a wider range of products that require flexible shipping and logistics solutions.

Taxes and regulatory matters are also more complex, as is marketing because clients have a greater need for information about how products and services work and they will interact with systems clients already have in place.

In addition, a B2B e-commerce platform is more difficult and costly to design, implement and maintain.

Your current and potential customers are online

According to the International Telecommunication Union (ITU), the United
Nations agency for information and communications technology, there were 3.5 billion Internet users in the world in 2016. That number reflects a seven fold increase that brought Internet penetration up to 47% of the global population. The fact that only one percent of the population was connected to the Internet in 1995 highlights the rapid changes in information and communication technology (ICT) in the last 20 years.10 Figure 1.1 shows the percentage of individuals using the Internet by region and development status.

Note that Europe is the most connected region in the world, followed by the Americas. Of course, these are generalizations and within the Americas and other regions there is great diversity in connectivity. It is important to consider the actual number of users as well. Even though the percentage of people who are Internet users in developing countries is only 40 percent, this translates into 2.5 billion users compared to a total of 1 billion Internet users in developed countries.

Figure 1.1 – Percentage of Individuals Using the Internet

The value of digital commerce

The total value of global digital commerce in 2016 was estimated at approximately USD 2.1 trillion. As illustrated in Figure 1.2, the United States forecasted total transaction value for 2016 was just over USD 605.3 billion, the highest amount among all countries. China followed with the second highest forecasted value of digital transactions, before the United Kingdom, Japan and Germany.

5G Networks

The demand for more stable and faster wireless Internet access continues with increased use of bandwidth for personal computers, smartphones, watches, home appliances, security cameras, wearable technology and the many other devices that connect to the Internet. Gartner, Inc. forecasted 6.4 billion connected devices in the world in 2016, reaching 20 million by 2020. To meet this ever-growing demand, a new form of wireless signal is needed. 5G is being developed to replace 4G technology and is targeted for unveiling at the 2020 Olympics in Tokyo. Test locations are currently operating in the United States.

Wireless telephone technology started with first generation (or 1G). When it
expanded to 2G in the early 1990s, people could send text messages between
two mobile devices for the first time. With 3G came the ability to make telephone calls, send text messages and browse the Internet. These capabilities were enhanced with 4G, especially when companies added Long-Term Evolution (LTE), a standard for high speed wireless communication, to 4G connectivity. The 5G technology builds upon the  foundation created by 4G LTE. The difference between 4G and 5G has been compared to going from a garden hose to a fire hose. 5G will allow easier downloads and uploads of Ultra HD and 3D video and thousands more Internet-connected devices.

Online shoppers are on mobile

The use of mobile devices for e-commerce is growing rapidly. Since 2014, the number of global mobile users has been greater than the number of desktop users (see Figure 1.2). It is no longer a question of whether the mobile market is important to e-commerce but rather a question of how consumers behave when using different types of mobile devices and what their preferences are.

Figure 1.2 – Global Mobile Users Surpass Desktop Users

For B2B transactions, research shows that 43% of small business owners primarily use mobile devices to run their operations.16 Mobile, or m-commerce, is increasingly important to developing economies where cellular networks have enabled access to services not previously available. For example, the estimated number of Internet users in Kenya is 26.1 million, making it the 21st most connected population in the world. Of those, 99.9% access Internet through mobile telephones. While feature telephones still dominate, smartphones are catching up fast.

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Subcontracting is a transfer-related market entry strategy. It can involve an organization providing a foreign manufacturer with raw materials, semi-finished products, components, a design or the technology to produce goods, or it could involve an organization simply contracting with a foreign manufacturer to independently produce goods. Either way, the subcontracting organization then purchases these goods from the manufacturer.

In many subcontracting arrangements, the foreign manufacturer is used as a processor or assembly agent only and is paid by the organization for the goods it produces. However, there are different levels of subcontracting. One form is known as original equipment manufacturing (OEM). In OEM, a manufacturer in a foreign market produces goods to a required design and specification provided by the subcontracting party. The subcontracting party then distributes, markets and sells these goods in the local market or elsewhere.

Another form of subcontracting is original design manufacturing (ODM). In ODM, an organization in a foreign market designs and manufactures a product for a subcontracting organization, which then arranges for distribution, marketing and sales in the foreign market.

One major international organization that uses subcontracting is Nike. The sports equipment manufacturer provides equipment, training and raw materials to manufacturers in China, Vietnam, Indonesia and Thailand, which are contracted to produce finished goods.

In 2020, NIKE was the largest seller of athletic footwear and apparel in the world, employing approximately 75,400 employees worldwide. The company had global sales in excess of USD 37 billion and USD 2.5 billion in profit, however it subcontracts the production of all of its manufacturing to suppliers in low-cost countries. For example, in 2021 the company reported that it was purchasing finished products from 486 factories in 39 countries and that those factories were employing more than 1 million workers.

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Pros and Cons of Subcontracting

Subcontracting can enable organizations to produce goods without the investment in capacity, and potentially at a lower cost than would be possible using domestic production (i.e. if they choose a subcontractor in a market with lower labour and production costs).

Pros

It also has the following advantages:

• There is no real cost to establish the manufacturing process in the target market.
• The relationship with the target market is relatively easy to terminate.
• The organization does not have to obtain a business licence to conduct operations.
• The organization is free to focus on other core competencies.
• The products can be produced in the target market, removing the need for transportation over long distances and payment of import duties and taxes.
• Products produced by subcontractors are sold under the subcontracting organization’s brand name.
• Many governments welcome subcontracting arrangements.
• The organization can benefit from the local knowledge and experience of the subcontractor.

Cons

The disadvantages of subcontracting include:

• Distribution, marketing and sales must be organized.
• Suitable subcontractors can be difficult and time consuming to find.
• Subcontractors must be vetted carefully and monitored continuously.
• There is the potential for damage to an organization’s reputation if a subcontractor is found to be operating in an unethical manner.
• Possible misappropriation of intellectual property by subcontractor. Subcontracting can be considered a form of business partnership, with different levels of cooperation between the organizations.

Obviously, an ODM arrangement involves the closest level of cooperation.

When Is Subcontracting a Suitable Strategy?

Organizations with a strategic goal of reducing costs should consider subcontracting if they have a product that can be easily manufactured at a foreign location. Subcontracting can also enable organizations to gain access to complementary resources and diversify. It is also beneficial when organizations do not have substantial funds to invest in overseas expansion. However, it involves a great degree of management time to locate and monitor the subcontractor, and the organization must arrange for payment to the subcontractor.

In addition to the possibility of lowering costs, subcontracting can be a means to avoid paying tariffs or being restricted by import quotas in markets that are not easily accessed.

By subcontracting production to a domestic firm or event to a nearby country that has better trade terms, an exporter that is facing considerable barriers that make direct exports difficult can still access the market.

This approach also gives the organization a degree of flexibility because overseas production can cease at the end of a subcontracted project. However, it is essential to provide schedules, standards and regulations.

Subcontracting might not be a suitable strategy for organizations that cannot cope with the risk that their intellectual property will be lost or that they might be increasing levels of competition in the future.

Due Diligence for Market Entry

Irrespective of the market entry method that is chosen, service providers should make sure they undertake a high degree of due diligence to assess the legal and regulatory issues related to the provision of services for the target customers.

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It is important to understand the relationship between services and products when developing products. Many services are related to products because they:

• Are part of the product, such as a warranty

• Affect products, such as transportation

• Are part of the reverse supply chain, such as free delivery of product

Provided on a global scale, these product-related services generate billions in international trade revenue.

Consider the American coffee company Starbucks. The service provided by baristas making Starbucks beverages is an integral part of customers purchasing the company’s products. In 2015, service generated USD 19.2 billion in revenue for Starbucks.

Starbucks entered the market offering a coffee shop experience. The company sells its signature fair trade coffee perfectly ground, brewed and served in their coffee shops all over the world. In 2016, Starbucks had baristas serving coffee in fifty countries. In terms of continued growth, it expects to have more than 37,000 stores by 2021. Starbucks continues to innovate both in terms of its products and its brand experience.

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Starbucks offers coffee-based drinks, such as lattes, as well as teas and smoothies. It also sells coffee paraphernalia, such as mugs, coffee beans and coffee makers. Customers can also buy food products. Starbucks uses these associated products to enhance its coffee service and offer more to customers with a “one-stop-shopping” strategy.

Customers can go in for coffee and also have a snack or lunch. Starbucks has also expanded its home brewing by selling beverage pods for consumers using single cup brewing systems.

Understanding how organizations can employ services to enhance their products is directly related to increasing a product’s competitive advantage through a “service-added competitive strategy”.

Many manufacturers are exploring the “servitization” of their products by reviewing production, operations and ownership aspects of their products to move towards a service model. For example, in the United Kingdom, Finning Equipment has moved towards a service model where its equipment is tracked to monitor, maintain and, if necessary, replace equipment based on use and physical condition data.

How servitization improves customer satisfaction and increases profits in manufacturing

Servitization refers to the process manufacturing companies and other organizations undergo to develop the capabilities they need to provide services that complement their traditional products. As equipment becomes increasingly complex, customers need more service expertise than ever before.

Manufacturers around the world are redeveloping their approach to meet the needs of customers. Servitization has grown to become a popular strategy for boosting both customer satisfaction and profits in the manufacturing industry.

Through the design process, the addition of services is a part of product development and adaptation.

The servitization strategy is driving manufacturers to review their business models and consider service and leasing models instead of ownership models. This is very much in line with models supported by the circular economy movement.

3 key benefits of servitization for manufacturers

Manufacturers benefit from integrating servitization into their business model through:

More effective solutions: Before servitization took hold, manufacturers simply sold products and service as an afterthought. Today, customers want a strong service program to complement the equipment they purchase. By offering service programs, manufacturers can play an active role in solving their customers’ problems, rather than just selling a product.

Greater financial stability: The long-term service contracts that go along with servitization guarantee more secure revenue streams. Service contracts lay the foundation for customer loyalty and provide upselling and cross-selling opportunities.

Increased customer retention: Some manufacturers report that servitization increases customer retention because it allows them to become familiar with their customers, their equipment and their needs. The close relationship gives manufacturers the information they need to make their customers’ businesses more efficient.

With increasing demand for additional benefits—including mobile management systems and responsive customer service—more manufacturing companies will start offering service contracts.

By integrating service into their business models, manufacturers benefit from increased financial stability and opportunities to develop better relationships with their customers.

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