Advantage and disadvantage of Exports

Any commercial activities that take place across borders comprise International Business. Nature of such business may involve movement of goods, providing services, expansion of franchise, outsourcing or off-sourcing production or research and development.

As a domestic firm, it may be an intended strategy to export products and services. However, before venturing into the export business the firm must assess both advantages and disadvantages. Such firms will have its fair share of opportunities and face various deterrents.

Why a firm would be inclined to export? What incentive does exporting provide?

There may be various reasons, prominent among them are:

1.Using excess capacity

A firm may look to exploit surplus production capacity which it may have. It can extend its manufacturing facility to a party from outside the country or export its products directly.

Certain industries are seasonal in nature. By also focusing on export market, they can ensure manufacturing throughout the year.

2.Lack of domestic market

A firm may not have a market of its product in its own country.

A mining company with natural resources but with no processing capability of its own or producer in its own country may be forced to export raw materials.

3.Stagnation in domestic market

A producer in domestic arena finds down the line a decline in sales and lack of interest from consumers, perhaps because of changed technology or availability of substitute in its own country. Exports can open up new opportunities in markets where its products can still do well.

An electronic manufacturer would prefer to export to under-developed countries in its declining phase instead of incurring losses by sticking to domestic market only.

4.Targeted market is not present in its own country

A firm may not be able to sell its products, designed for a targeted segment which does not exists in its own country and hence would need to export to other countries.

An order supplier for niche leather goods brands would need to export rather than try to sell in domestic market where buyers are non-existent.

5.Over-competition in own country

Domestic market in its own country may have become price sensitive and with no cost advantage it needs to look for fresher grounds.

6.Brand name

A firm with domestically established brand name may want to capitalize on it.

Mahindra and Mahindra, going global with its brand of SUVs is an example of such expansion.

7.Spreading of risk

Firms spread their risk by diversifying into international market and by not tying themselves to business cycles in their own country. Firm’s own country could face recession and during such period revenues from overseas business play an important role in survival.

8.Economics of scale and higher profit margin

With expansion into international market a firm increases its scale of operation, consequently higher utilization of production facility and acquiring cost advantage and hence increased profitability.

9.Identification of demand

A firm may identify a demand that exists in another country and hence choose to produce and export to the country.

10.Foreign exchange

A firm may be inclined to export and earn foreign exchange to negate its own requirement for imports.

11.Export Incentives

Many governments hand out incentives in form of Duty Draw back, Duty free import licences, tax holidays etc. Exporters can be major beneficiary of such schemes, contributing to their income and presenting them with competitive advantage.

Disadvantages of Exports

1.Fluctuation in foreign exchange rate

Fluctuation in foreign exchange rate can adversely affect profit margins in local currency terms. A stronger local currency would imply lower revenue. Over a long run, it can be genesis for loss of competitive advantage in international market.

2.Economic conditions in importing country

An economic slowdown in importing country can cause reduced export orders.

3.Political conditions in importing country

De-growth in economic could be consequence of an adverse change in political environment.

An importing nation going to war with its neighbor or deterioration in political stability could result in diminishing imports.

4.Change in regulation in importing country

Governments in importing country could bring out a change in laws, regulations or policy, adversely affecting export potentials.

Higher import duty or regulations to deter dumping changes business scenario.

5.Rivalry between nations

A competing nation’s government sometime provide higher export incentives or could even extend sovereign assistance in dumping into an importing nation; meaning significant lower business for the firm.

6.Socio barriers

Difference in language and culture creates socio barriers for exporting firms.

7.Higher  working capital requirement

Export could require higher inventory days and abound logistic challenges while shipping to certain destinations.

8.Credit risk

One of the major risks which an exporter faces is payment risk. Unrealized proceeds mean financial loss to exporters.

Even though international financial transactions have undergone standardization and is regulated, possibility of non-liquidation of export receivables exists.

Conclusion 

While exports present more advantages than disadvantages, it is important for firms to review periodically to assess benefits and draw their strategy accordingly.

Vinay Pandey, 27/11/2017

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