International Trade (Intl Trade) 101: Export Import Strategy - Market Entry Strategy, Export Licensing, Joint Venture, Wholly Owned Subsidiary, Pros and Cons

What This Is

Market Entry Strategy refers to the various methods companies use to enter a foreign market, including exporting, licensing, joint ventures, and wholly owned subsidiaries. A well-planned market entry strategy is crucial in international trade as it determines the level of control, risk, and potential returns for the company. For instance, a US company, "GreenTech," wants to enter the Chinese market with its eco-friendly cleaning products. It must decide whether to export directly, establish a joint venture with a local partner, or set up a wholly owned subsidiary in China.

Key Terms & Rules

• Incoterms 2020: A set of international trade terms that define the responsibilities of buyers and sellers in the delivery of goods. Understanding Incoterms is essential for accurate risk allocation and cost calculation.
• UCP 600 (Uniform Customs and Practice for Documentary Credits): A set of rules governing Letter of Credit (LC) transactions globally, ensuring secure and efficient payment for international trade.
• FOB (Free on Board): A trade term where the seller bears the cost and risk of delivering the goods to the buyer's vessel at the named port of shipment.
• DAP (Delivered at Place): A trade term where the seller bears the cost and risk of delivering the goods to the buyer's designated place of delivery.
• WOS (Wholly Owned Subsidiary): A business entity owned entirely by a parent company, providing full control over the subsidiary's operations and finances.
• JVA (Joint Venture Agreement): A contract between two or more parties to collaborate on a specific business project or venture, sharing risks and profits.
• HS Codes (Harmonized System Codes): A standardized system of codes used to classify goods for customs purposes, ensuring accurate duty calculation and compliance.
• Duty Calculation: The process of determining the amount of customs duty payable on imported goods, based on factors such as HS codes, country of origin, and value.
• Export Licensing: The process of obtaining permission from the government to export specific goods or services, ensuring compliance with regulations and restrictions.
• Risk Management: The process of identifying, assessing, and mitigating potential risks associated with international trade, such as currency fluctuations, political instability, and supply chain disruptions.

Step-by-Step Process

1. Conduct Market Research: Gather information about the target market, including consumer behavior, competition, and regulatory requirements.
2. Choose a Market Entry Strategy: Select the most suitable market entry strategy based on the company's goals, resources, and risk tolerance.
3. Develop a Business Plan: Create a comprehensive business plan outlining the company's objectives, strategies, and financial projections.
4. Establish a Local Presence: Set up a local office, subsidiary, or joint venture to facilitate communication, marketing, and distribution.
5. Comply with Regulations: Ensure compliance with local laws, regulations, and customs requirements, including obtaining necessary licenses and permits.
6. Monitor and Evaluate: Continuously monitor the market and evaluate the effectiveness of the market entry strategy, making adjustments as needed.

Common Mistakes

• Mistake: Confusing CIF (Cost, Insurance, and Freight) and CIP (Carriage and Insurance Paid To).
• Correction: CIF includes the cost of insurance, while CIP only includes the cost of carriage.
• Example: A US exporter sells goods to a Chinese buyer under CIF Shanghai, but the buyer assumes the insurance cost is included in the CIP term.
• Mistake: Assuming "open account" is risk-free.
• Correction: Open account transactions involve payment without a Letter of Credit or other security, increasing the risk of non-payment.
• Example: A US exporter sells goods to a Chinese buyer on open account, but the buyer fails to pay, leaving the exporter with a significant loss.
• Mistake: Misusing "free on board" with air freight.
• Correction: FOB is typically used for sea or inland waterway transport, while air freight requires a different set of terms, such as DAP or DDP.
• Example: A US exporter sells goods to a Chinese buyer under FOB Shanghai, but the buyer assumes the air freight cost is included in the FOB term.

Exam / Certification Tips

• Tricky Distinctions: Understand the differences between FOB and FCA (Free Carrier), as well as the implications for risk allocation and cost calculation.
• Confirmed vs Unconfirmed LC: Recognize the importance of confirmed LCs in ensuring secure payment, while unconfirmed LCs may not provide the same level of security.
• DPU (Destination Port Unloaded) vs DAT (Destination Port Available): Understand the differences between these two terms, which affect the responsibility for unloading and storage at the destination port.
• Memory Aid: Use the acronym "FOB" to remember that the seller bears the cost and risk of delivering the goods to the buyer's vessel at the named port of shipment.

Quick Practice Scenario

Scenario: A Chinese exporter sells goods to a US buyer under FOB Shanghai, but the buyer assumes the main carriage cost is included in the FOB term.

Question: Who bears the cost of main carriage?

Answer: The buyer bears the cost of main carriage.

Explanation: Under FOB, the seller only bears the cost and risk of delivering the goods to the buyer's vessel at the named port of shipment, not the main carriage cost.

Last-Minute Cram Sheet

• Under FOB, risk transfers when goods are on board the vessel – not at the port gate or on the dock.
• Incoterms 2020 includes 11 terms, each with specific responsibilities for buyers and sellers.
• UCP 600 governs LC transactions globally, ensuring secure and efficient payment.
• HS Codes are used to classify goods for customs purposes, ensuring accurate duty calculation and compliance.
• Export Licensing is required for certain goods or services, ensuring compliance with regulations and restrictions.
• Risk Management is essential in international trade, involving the identification, assessment, and mitigation of potential risks.
• A Wholly Owned Subsidiary provides full control over the subsidiary's operations and finances.
• A Joint Venture Agreement is a contract between two or more parties to collaborate on a specific business project or venture.
• DAP (Delivered at Place) is a trade term where the seller bears the cost and risk of delivering the goods to the buyer's designated place of delivery.
• DDP (Delivered Duty Paid) is a trade term where the seller bears the cost and risk of delivering the goods to the buyer's designated place of delivery, including duty and taxes.