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Countertrade Specialized Modes and Direct Investment


Countertrade, Specialized Modes and Direct Investment


• The sale of a good, service, know-how or system in one direction is conditional upon the sale of a
good or service as part or full payment in the reverse direction.
• More than 20% of world trade is financed through countertrade transactions.
world debt crisis
circumvention of exchange controls
entry into new markets
major growth opportunities in emerging markets lacking hard currency and cash-strapped

Forms of countertrade:


simplest form of countertrade, in which each party simultaneously swaps its products or services
for the products or services of other party
Compensation Deal

semi-barter or simple compensation - importer makes part payment in cash and balance in goods
or services
Counterpurchase (Parallel Barter)

two separate contracts specifying products to be exchanged
one contract for payment of exported goods
second for exporter’s counter-purchase obligation with penalty for non-fulfillment
Advance Purchase

– exporter buys goods in advance from countertrading country before making exports to that
Buy-Back Agreement

– also called compensation agreement
– one party exports production equipment, machinery, technology, or turnkey plant to another party
- the exporter buys-back part of the output as compensation
Offset Agreement

– used often in military-related or technology purchases (air crafts)
– exporting firm permits certain portion of purchase to be produced or assembled in the importing
country - called Direct Offset.
– may take the form of co-production, licensing, subcontracting, or joint venture
– Indirect Offsets do not relate to the purchase equipment - that is some other equipment is
produced or assembled in the importing country
Clearing Accounts

a refined form of barter done at government level on log-term basis covering broad range of products
clearing accounts established to track credits and debits of trades
balance in accounts over the long run
Switch Trading

three or more parties required to complete countertrade transactions
one party not willing to accept all the goods or clearing credits received in the transaction
professional switch trader or a bank steps in and provides a secondary market for the goods or
credits using own network of firms and personal contacts

Specialized entry modes:
Management Contracts

– is an agreement where one firm provides managerial assistance, technical expertise or specialized
services to a second firm for some agreed period in return for a flat fee or a percentage of sales.
(such as hotels)

Turnkey Projects

– is a contract under which a firm agrees to fully design, construct and equip a facility and then turn
the project over to the purchaser when it is ready for operation. (such as the motorway)

Turnkey projects:

Turnkey Plus projects

may include feasibility study or management of the completed facility in the operational phase -
project operators may also be required to assist the client organization in securing sources of
finance or to be involved in equity participation in the completed facility.
Turnkey failures

minimum investment required in the project by the turnkey supplies
commission gap due to contractor’s emphasis on hardware and equipment rather than skills
indigenization of operation of the facility done too soon.

Types of foreign direct investment:

An investment in foreign country that also brings at least 10% ownership rights (voting control) is
termed as a direct investment. Direct investment not only brings in capital, it also brings into a country
latest technologies and management expertise. Forms of direct investments are in the following;

Subsidiary establishment

– the greenfield strategy
starting a new operations from scratch
– acquisition strategy
buy an existing firm conducting business in the host country

Joint venture

when two or more firms agree to work together and create a jointly owned but separate firm to
promote their mutual interests

Managing a joint venture:
A joint venture is usually managed in one of the three ways:

The parent firms may jointly share management with each firm appointing key personnel who
report back to the executives of the parent.
One parent may assume primary responsibility.
An independent team of managers may be hired to run the joint venture.
A non-joint venture strategic alliance may be formed merely to allow the partners to overcome a
particular hurdle that each faces in the short run.

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