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Lesson#25
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Countertrade Specialized Modes and Direct
Investment
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MODES OF ENTRY INTO INTERNATIONAL MARKETS
Countertrade, Specialized Modes and Direct Investment
Countertrade:
• 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
– bilateralism
– entry into new
markets
– major growth
opportunities in emerging markets lacking hard currency and cash-strapped
countries
Forms of countertrade:
•
Barter
– 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
country
• 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
transfer.
– 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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