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
PS : If you have a suggestion or have noticed a mistake, please leave a comment.
