Evaluate the advantages and disadvantages of export as a mode of international operation.
INTRODUCTION
When applied to any business firm, internationalization can be defined as (a) the end result, (b) a process and /or (c) simply, a way of thinking (Albaum et al, 1998). The major theme underlying the process of internationalization is the increasing number of companies that are striving to serve the ‘global’ market.
Internationalization can hence be defined as
a step-by-step process of the development of international business wherein the company becomes extensively involved in pursuing international business operations and increasingly committed to these operations involving specific products in pre determined markets.
(Luostarinen, 1994, p.1)
This degree of internationalisation is largely determined by the extent of standardization or adaptation.
Albaum et al (1998) posit that the choices made by the global marketer with regards to the degree of standardization or adaptation lie on a continuum. At the one end of the continuum is the global corporation often defined as a company that operates with such severe consistency and at a comparatively lower cost that one could be lead to believe that the world were a single entity (Levitt, 1986). This implies that the company would have a standard offering (s) in all the markets that it operates within. The basic premise for this form of operation is that with passage of time nations, markets consumers -their needs, tastes and preferences have all grown to become increasingly homogeneous (Levitt, 1986).
At the other end of the continuum lie multinational corporations that operate in several countries and adapt the product/service (s) to local preferences and demands, albeit the higher costs involved.
Modes of Internationalisation
A company that choose to expand its operations and reach markets beyond its national boundaries can avail of distinct modes to facilitate entry into newer markets. These options range from exports, licensing, joint ventures to wholly owned subsidiaries. Each entry mode calls for a different level of commitment of resources (Vernon, 1983) and varying degree of control to the parties involved (Calvet, 1984; Root 1987)
Among these aforementioned modes of internationalisation, licensing, joint ventures and wholly owned subsidiaries are the different types of Strategic Alliances (SA). SA are primarily collaborations between two or more separate legal entities. These arrangements are formed with the objective of achieving a shared goal. SA, from a partner’s perspective is designed to enable its members to benefit from such arrangements. The potential benefits could comprise accessing new markets and at the same time reducing the inherent risk of operating in an unfamiliar terrain, shared risks in the process of developing new product or technology, sharing the required resource and capital investments or to exert control in the market that it is currently operating within (Lewis ,1990 ;Gates, 1993)
EXPORTS:
Generally, companies take the route of exports as the first step in internationalisation. This mode of internationalisation is a relatively simpler and easier means to expand operations overseas. Further, it is relatively less risky and has lesser potential to negatively impact the ordinary operations of the firm.
Exports exist at four basic levels (Albaum et al 1998) and include:
Level 1: Export of Surplus
At this level the firm is involved in obtaining overseas sales of its surplus products or possesses insufficient resources to sustain overseas requirements on an on-going basis.
Level 2: Export Marketing
At this level the firm actively seeks overseas sales of its products and also undertakes to make reasonable modifications to its offerings. The firm ensures that necessary arrangements to acknowledge the requirements and specifications of the overseas customers.
Level 3: Overseas Market Development
At this level the firm, in an effort to acquire and retain customers in the overseas market willingly undertakes major modifications to its products if required.
Level 4: Technological Developments
At this level the firm develops and manufactures new products that are specifically designed to suit the specific needs of the overseas market -both existing and potential.
Firms that to choose to export its products will then have to choose from two broad avenues of conducting their operations – direct or indirect exporting. The bases of differentiation in the two forms of exporting are in the manner in which transactions are carried out between the exporting firm and the foreign buyer. Direct exporting requires the producers to ensure that overseas sales are steady and all necessary sales activities are carried on properly. More often than not, these activities are undertaken by companies that administratively belong to the manufacturer’s company. On the other hand, indirect exports provide the manufacturer the opportunity to employ the services of various external parties. These third party entities are generally independent cooperative societies or marketing organisations. Hence, the real choice that exporting firm needs to make is whether the process of internationalisation should involve an integrated, company owned channel or if the channel should include intermediaries who are independent of the company. (Anderson & Coughlan, 1987)
ADVANTAGES:
Economies of scale & Economies of scope
A major advantage of exports is the potential economies of scale resulting from production volume. When there is an increased scale in production, distribution, advertising or other such areas there is a decrease in the cost per unit of the produce that the firm will require to incur. Further reduced costs have a direct impact on the potential profitability of the export venture.
Increases domestic competiveness
When a firm desires to successfully export its products to foreign countries, in all likelihood it will first ensure that it is competitive in the local market. From the firm’s perspective, local competiveness results from increasing productivity and efficiency.
The inherent advantage of being competitive in the local market is twofold – one, it places the firm in a more dominant position compared to its local competitors and two, when the firm’s products are considered more superior than those of its counterparts there is automatically an increased demand in the for its products in the market-local and foreign.
Economical implications
No nation can satisfy efficiently and economically the constantly changing needs of its population, hence making imports imperative in the long run. Exporting then in turn becomes a means of financing the country’s own imports. Further, exports offset the potential adverse effect that imports can have on the country’s balance of payments.
Exports also have a direct impact on the country’s general economic conditions. In the event of a business downturn in the exporter’s country, export volumes tend to remain steady and in some cases even increase. This in-turn could help restore and revive the domestic economic conditions.
Access to new markets
Exports are a comparatively a low cost and a low risk means of gaining entry and conducting operations in new markets. Exports are a cost effective way of gaining access to lucrative foreign market opportunities. Further, when compared to more cumbersome modes of entry like joint ventures and other forms of strategic alliances, exports enable an accelerated pace of entering a new market.
Diversification
Companies that operate in diversified geographical markets face a lesser risk than non-exporting companies (Albaum et al, 1998). This can be largely attributed to the fact that countries are not subject to similar timing, type and position in the business cycle. Hence, the possibility that an economic downturn manifests at the same time across these countries are minuscule. Further, market spreading reduces the risk of declining demand, sales and profits from a single market. In essence exports NOT PLACING EGGS IN ONE BASKET.
Seasonal products.
In the case of products that witness seasonal demand like sports equipments and clothes, exports often provides a means of offsetting the fluctuation in demand patterns. By exporting seasonal products to countries where the seasons are opposite and hence more favourable for sales as compared to the home market, the firm can ensure that its business does not suffer. Further, this also enables the firm to ensure that there is a balanced production spread out through the year.
DISADVANTAGES
Cultural distance
When a firm operates in an overseas market there is often lack of cultural compatibility between the firm and the foreign market, owing to cultural distances. The perceived cultural difference between the foreign country and the home country of the exporter is called psychic or cultural distances (Holzmuller and Kasper, 1990; Klein and Roth, 1990)
Cultural compatibility therefore, implies that similar belief systems, values and practices exist. Cultural compatibility is of paramount importance for the stability and success of any form of cooperation (Holtbrugge, 1995; Vaara, 2000). Further, lack of cultural compatibly could lead to difficulties in communicating with and understanding the local needs and demands of the foreign market, which in-turn could hinder the ability of the exporter to anticipate changes in the customer’s changing tastes and preferences.
Uncertainty in decision making
Under the circumstance of inadequate and limited information from partners (intermediaries/agents) in the foreign markets, exporters often face the risk f uncertainty in their decision making (Achrol & Stern; 1988). Further, the exporting firm may need to depend heavily on the foreign intermediary/agent as a result of the local political rules and regulations.
Economic Ethnocentrism
Exports provide the exporter an opportunity to conduct operations that are guided by economic ethnocentrism. The term economic ethnocentrism refers to the exporters self centred bias towards the well being and prosperity of their own nation at the cost of the foreign countries (Han, 1998). When an exporter is driven by economic ethnocentrism, it could have a negative impact on the nations and consumers involved. The sense of obligation to the exporter’s domestic market could lead exporting firms to disregard the well being and interest of the foreign market.
Grey Market Exporting
Grey markets refer to the legal importing of genuine products by unauthorised agents and intermediaries. These intermediaries obtain the goods from respective business entities located in other countries (Albaum et al, 1998). Although it is a form of parallel importation, gray market channels can cause several disadvantages to the primary exporting firm.
Cavusgil & Sikora (1987) posit that the grey market goods adversely affect the manufacturer in four distinct ways.
- The global strategy of the exporter could be disturbed.
- In the event that the product fails to meet health and safety requirements, the manufacturer may have to incur unforeseen legal liabilities.
- It can have a devastating impact on the image of the brand and its goodwill and equity.
- Relationships between legal distributors and the exporting firm can be tarnished.
Operational difficulties
The nature of the arrangement in the case of exports could cause operational problems to the exporter. Since the exporter is considerably dependent on the local intermediaries to ensure availability and distribution of its products in the foreign market, it implies that the exporters themselves have a relatively lower degree on control in the foreign market operations. Further, although it is vital that the activities of the exporter and its intermediaries are coordinated and directed towards the same strategic goal, it often is a challenging issue to address.
EXPORTING : ETHICAL AND MORAL ISSUES
DISADVANATAGES
- Opportunism
- Dependence on local players
- Dependence on transportation
- Country specific rules, regulations and licenses
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