2.1. Export Entry Modes - Direct Export Operations

International business
management
Theme 2.1. Export entry modes
Direct export
Valeriu Potecea & Georgiana Surdu-Niu
23.10.2014
Organizing exporting operations
Direct export - import operations - is the act whereby a

manufacturer fulfills its foreign sales/buying activities by its own
export or import structures (or dependent organization)
Indirect export - import operations, assumes that between

the producer and the final consumer there are a greater or
lesser number of intermediates, which assume all or partially
of the commercial risk and therefore have the right to charge
commercial profit
The Internet and e-commerce
23.10.2014
Outline of alternative basic marketing

channels
23.10.2014
Reasons of direct export operations

A full return from export sales -
the manufacturer has the opportunity to

participate directly and therefore to obtain the entire profit margins
Thorough knowledge of foreign markets -
Protection from neglect in active performance of selling function

there is complete control of marketing methods and sales production; this method can
the manufacturer has greater

opportunities to maintain contact with foreign markets in order to determine readily what
adaptations of the product are necessary to fit the needs and desires of foreign buyers
promote the brand image of the company and strengthen its position in foreign markets
Export sales channels are permanent -
Product goodwill accrues directly to the manufacturer rather

than to a marketing organization
Per unit cost decreases as sales volume increases
the producer does not have to

worry that a marketing organization will suddenly drop its line of preference for that of a
competitor
fixed costs are

spread over growing sales volume rather than remaining a constant proposition.
23.10.2014
Advantages of direct export

Export sales characteristics
associated with direct export
Unified and high degree of exercised control

A sales push approach can be implemented with relative ease
Greater customization of product solution is made possible by designing tailor-made
packages
Direct customer feedback improves firm responsiveness
Flexibility is possible across all marketing programs
Greater commitment of own sales staff encourages increased levels of sales turnover
Sales staff exhibit a high degree of product knowledge
Customer loyalty can be heightened for the exporters brands
The most persuasive forms of promotion in the overseas market
Role clarity is common among representatives
23.10.2014
Limitations of direct export import

operations
export marketing costs are usually large and are only

justified to a certain turnover the initial monetary outlay (provision
for offices and equipment, salaries of personnel, costs of maintaining larger inventories
necessary to fill foreign pipelines, the costs of sales effort) may be to large relative to
sales volume
specific risks of the international market (in foreign trade

activity) can affect the company's overall activities - there is
always the chance that the product may not be acceptable in foreign markets or
that foreign preferences may change suddenly
much time should be allocated by the company's

management to international business activities at the
expense of production and technological concerns
independent organizations have the contacts, knowledge, and experience
necessary to develop export potential and to achieve satisfactory sales
volumes in lesser time
requirements of specialized knowledge
- that may not be available

in the manufacturers organization or may require excessive expense to obtain
23.10.2014
Organizational forms of direct export -import

operations
1.
2.
3.
4.
5.
6.
7.
8.
Home country based department or division

Overseas representative office
Overseas trade (sales) office
Foreign sales branch
Storage and warehouse facilities
Foreign sales subsidiary
Traveling salesperson
Foreign-based distributors and agents
23.10.2014
1. Home-country based department
The manufacturer who wants to engage in direct export will most likely have to
establish some type of export department or division in the home country.
This dependent organization may either be involved directly in making export sales
or serve as the home-based export marketing department to coordinate and
control the activities of other dependent organization located in foreign markets
Major types of activities carried out by the home-country based department :
promoting foreign economic affairs (prospecting, sales promotion, advertising, organizing

and participating in trade fairs and exhibitions);
operative importing-exporting, focused on products, groups of products, markets, or

foreign trade techniques;
Influencing production, focused on effective production and after-sales operations;
functional activities, focused on transport, insurance, finance and accounting, prices,

economic analysis, etc.
23.10.2014
There are basically three different types of home-country based export

organizations:
1. Built-in export department
2. Separate or self-contained export department
3. Export sales subsidiary
The specific type that is appropriate for any manufacturer at a particular

point in time depends upon such factors as:
the nature of the product

the size of the company
how long the company has been exporting
the expected potential volume of foreign sales
the underlying management philosophy towards doing business internationally
the corporate organizational structure
the extend to which either existing company resources can be allotted to
export activities or additional needed resources can be acquired
23.10.2014

1. Built-in export department
Is the simplest in structure, and, thus, the easiest to establish, being located at the
same place as the domestic departments with which it works.
This organization consists of an export sales manager with some clerical help.
The primary job of the sales manager is to do the actual selling or direct it.
Most other export marketing activities advertising, logistics, credit, etc. are
performed by the regular domestic market-oriented departments of the
company.
The built-in form is

best suited under the
following conditions:
Small in size
New or relatively new to export marketing
Expected foreign sales volume (turnover) is moderate to small
Management philosophy not oriented toward growth of foreign business

Existing marketing resources capacity not fully utilized in the domestic market
Either the company is unable to acquire additional resources or, if able to do so,
key resources are not
available
Valeriu
Potecea & Georgiana Surdu-Niu 23.10.2014

2. Separate or self-contained export department
Is a self-contained and largely self-sufficient unit in which most of the

export activities are handled within department itself, making it a relatively
complete export marketing department.
It may be structured internally upon the basis of function, geographic region,
product, customer or some type of combination, depending largely upon how
export marketing task varies the most.
Characteristics of
separate export
department
There is no inherent possibility for clash between the international

and domestic sides of the firm regarding the time to be spent by
domestic marketing personnel on foreign business matters
Export operations can be conducted on a full-time basis by
personnel knowledgeable and specifically committed to exporting
Has a fairly high degree of flexibility in terms of where it is located
(not only at the headquarters of the company, but in one of the
major center of international business)
23.10.2014
Organizing by function
It is adopted by SMEs being suitable for companies that export less
diversified products, on a small number of markets and comparable in terms
of approach. This structure allows the delineation of tasks, skills and
responsibilities.
Export Manager
Market
research/
sales
12
Production
Accounting
Marketing
Support
and
service
23.10.2014
Organizing by geographic region
It is recommended when the export market requires a specific approach, each

department is specialized. Provides a direct approach to the markets, a better
understanding of their specific: competition, consumer demands, risks etc.
Export manager
Specialized
services
Europe
responsible
13
USA
responsible
Asia
responsible
23.10.2014
Organizing by product
It is suitable for companies that have a wide range of products belonging

to different fields.
Export manager
Functional
services
Product 1
14
Product 2
Product 3
23.10.2014
In attempting to separate completely export marketing activities from

domestic operation, some companies have established an export sales
subsidiary as a separate corporation. However, differs very little from the
separate export department.
It is wholly owned and controlled by the parent company, being essentially a
quasi-independent firm.
Characteristics of
export sales
subsidiary
With this unit, a manufacturer may be able to ascertain the profitability

of its foreign business
The chance of conflicting pressures arising from domestic departments is
minimized
It must purchase from the parent manufacturer the products that it sells
in overseas markets
The manufacturer must develop a system of internal transfer pricing
23.10.2014
Although the export sales subsidiary is in many respects similar to an

export department, there are important reasons for its existence:
Unified control All authority relative to exporting is centered in one organization not
subject to conflict pressures from various domestic departments
Cost and profit control Since all revenues and expenses are separated from the domestic
organization, export costs and profits can be seen readily
Allocation of orders in The subsidiary company can place an order with the most suitable plant
multiple plant enterprises and can supervise traffic management responsibilities more effectively
Ease of financing Being a separate company, it is easier to ascertain its financial position.
Financial institutions may be more willing to advance funds for export
purposes
More complete line of Being a separate company, it can purchase products from outside sources
products to offer overseas buyers a more complete line
Tax advantages Corporate income tax laws in some countries may result in some savings
in total corporate taxes
23.10.2014
2. Overseas representative office
A representative office or a liaison office is an office

established by a company to conduct marketing and other nontransactional operations, generally in a foreign country where a
branch office or subsidiary is not warranted.
They have been used extensively by foreign investors in emerging

markets such as China, India, and Vietnam although they do have
restrictions through not being able to invoice locally for goods or
services. Consequently Representative Offices tend to be utilized by
foreign investors in fields such as quality control, and general liaison
activities between the Head Office and the Representative Offices
overseas.
23.10.2014

Representative offices (RO) are generally easier to establish than a branch
or subsidiary, as they are not used for actual "business" (e.g. sales) and
therefore there is less incentive for them to be regulated.
They are acting according to the mandate of the company they represent,
allows exporters to be in direct and constant contact with foreign market.
Representative office
works for:
continuous prospecting the market

disseminate information on business activity and export offers and
providing marketing and sales assistance
informs the company about market segments, purchasing motives,
sectorial policies of the host country and local commercial customs
usage, competition, etc.
intermediation of business contacts
23.10.2014

Functioning of the representative office in Romania:
Cant be, in any case, an enterprise producing goods, rendering services or

working for final clients;
Acts as an intermediary between the primary company which organized it

and its contractual partners;
Therefore, acts as a mandatory (the parent firm acts as mandator), or as

commission agent;
As mandatory, sign legal documents with third persons in the country of

establishment in the name and on behalf of the Company who gave
empowerment and; as commission agent acts to third parties in its own
name, but on behalf of the Company's principal;
Doesnt have legal personality, the RO being owned by mandator or principal;
23.10.2014

In Romania, the stages of setting up representative offices are:
1.
2.
3.
submission of the authorization request by foreign companies to the Ministry

of Economy,Trade and Business Environment - General Trade Policy Directorate;
operating permit is registered at the Chamber of Commerce and Industry;
issuing registration code for VAT purposes.
In the application form for authorization to operate, a representative office
will be mentioned:
registered office of the foreign company;

business objective of the representative office in accordance with the
objectives of the applicant company;
the duration of the representative office;
number and positions of persons proposed to be employed at the
representative office.
23.10.2014

According to the Romanian Tax Code :
Representative offices shall conduct the accounting provided by Romanian law.
RO tax for a fiscal year is equal to the equivalent in RON of EUR 4,000,
established for a fiscal year, according with the exchange currency rate,
established by the NBR, the day before the actual payment of tax to the state
budget.
If a foreign legal person who, during a fiscal year, abolishes or establishes a

representative office in Romania, the tax payable for the year is calculated in
proportion to the number of months the representative office is active.
Any foreign legal person that has a representative office in Romania is

required to pay tax to the state budget in two equal installments by the dates
of June 20 and December 20 .
Any foreign entity that owes tax on the representative office shall submit an
annual statement to the competent tax authority, by 28 and 29 February of
the year of assessment.
23.10.2014
3. Overseas trade (sales) office

It is an operational department implanted abroad whenever foreign trade
operations requires:
monitoring delivery of goods to end-users;

commissioning of equipment requiring technical assistance (service).
International sales office functions:
ensure a permanent contact with the local market in order to promote sales;
support the preparation and conduct of commercial negotiations;
follows on spot how to run contracts;
coordination of technical assistance;
providing a flow of valuable information on the conjectural situation

23.10.2014
3. Overseas trade (sales) office
THE CHARACTERISTICS of overseas sales office:
manufacturer-owned office having no inventory, primarily intended to increase

customer sales.
is organized and operates as an entity without legal personality;
has no capital and cannot be declared bankrupt;
relations with lenders and property issues are handled by the parent company;
parent company always retains the right to close overseas commercial office if its
activity is unsatisfactory;
the practice of taxation of its activity represents sometimes an obstacle in avoiding

this type of external network.
23.10.2014
4. Foreign sales branch
Represents a service of a company established abroad.
Is a way of extending the parent company, thereby helping to achieve

its objective.
Has no legal entity of its own, being part of the organic structure of
parent company, which alone has the status of a subject of law.
A branch office can engage in commercial activity in the foreign

country and can earn profits. It is licensed for the purposes set out in
its commercial license, but may only engage in activities similar to
those carried on by the foreign company in its home jurisdiction.
23.10.2014
4. Foreign sales branch

Specifics of branch abroad:
financial and administrative dependent on parent company that created it;

the activity is usually identical to the parent company;
is incorporated, organized and operates according to local law;
necessary expenses of its activity are highlighted and supported in the income
and expenditure statement of the parent company;
has no legal personality, having some initial funds on which can decide in part;
may have operational independence in their commercial and financial relations,
borrow loans, in the limit of powers established by the act of creation ;
empowerment based on the representation given by the parent company, and
in accordance with applicable law, may enter into commercial agreements with
third parties;
branch activity takes place on a proper income and expenditure budget whose
balance is reflected as a separate item in the income statement of the parent
company .
23.10.2014
5. Storage and warehouse facilities
widespread practice in international trade

is imposed by the need to ensure continuity of supply to
consumers or users
Characteristics:
when it is necessary and profitable for manufacturer to maintain an inventory in foreign markets,
a storage and warehousing branch should be established
such facilities may be part of a sales branch; if so connected , the buyer is afforded greater
convenience and a potentially powerful marketing tool is created in that a greater volume of
business may be generated than would be the case if storage facilities were absent
The same situation occurs when warehousing branch is a separate entity, set up to fill orders
made by foreign distributors and agents
Many manufacturers are establishing such branches as central distribution points to serve a wide
area.
Where several market areas are to be served by a single storage or warehousing branch, it may
be best for these facilities to be located in a free port or trade zone such Hong Kong, New York,
Rotterdam or Colon, Panama, where the usual customs procedures and regulations of the
country where the free area is located do not apply such warehouses are designated as customs
bonded warehouses during storage goods
23.10.2014
6. Foreign sales subsidiary
It is an independent legal entity in financial terms, which

takes into account in its operations the business strategies of the
parent company.
It is an independent company that works independently and

indefinitely autonomous in its own headquarters, having a separate
legal entity and established by the parent company, which owns
the majority of capital (www.rubinian.com).
There are several ways to create a subsidiary abroad:
taking an existing structure,

creating a new structure (ex nihilo) and
joint venture
23.10.2014
6. Foreign sales subsidiary

Specifics of subsidiary abroad:
organizational structure, size and management strategies are

determined by the conditions of the legal and economic
environment of the country in which it operates;
procedures, the fees and taxes, and legislation concerning social
insurance mechanisms are those in the operating area;
affiliates must take account the economic mechanism and the host
country government strategies;
commercial reputation is decisive for the subsidiary in establishing
sustainable relations with very important partners;
establishment of foreign subsidiaries is justified to the extent that
exports will have a progressive evolution, if business with third-origin
goods can be conducted, the legal and institutional bilateral framework
is favorable and when legislation is permissive in the host country.
23.10.2014
Branch vs. Subsidiary
Branch:
Subsidiary:
It is not a legal entity, it can not

perform legal acts in its own name;
is an independent company which has

legal personality, legal acts being signed
in its own name;
legal documents are signed by their

managers indicated by the parent
company;
acquires legal rights and assume

obligations on its own, having its own
legal liability;
the obligations of branch liability is

incurred by the parent company in
the
event
of
non-compliance
obligations;
as a separate legal entity is responsible

according to the legal regime under
which it was established.
is financed with funds from the

parent company to conduct an
economic
activity
under
the
objectives of the society.
23.10.2014
7. Traveling salesperson
A traveling export salesperson is one who resides in one

country, often the home country of the employer, and travels
abroad to perform the sales duties
In contrast, a resident salesperson is sent out of the home

country to live and work in a foreign market
In essence, the resident salesperson is a foreign sales branch of the

company
Of course, the company may establish a formal branch office, to

which a resident salesperson is assigned
However, a branch office often also employs as sales people

nationals of the country in which it is located
23.10.2014
Traveling salesperson
Functions:
The communication of product information to customers, and obtaining orders

A sales person is always deeply involved in customer relations:
- maintaining and improving the companys position with customers and general
public
- demonstrator or tutor is the type of traveling salesperson whose main job is to work
closely with foreign-based agents or distributors already representing the company
- since the sales task primarily is to help agents and distributors do a better job, the
tutor operates more or less as a troubleshooter
Information gatherer and communicator
The salesperson is managements front-line intelligence agent, and, as such, is in a position to
provide information on such things as:
- what competitors are doing
- what customers are thinking
- how products are performing and
- what the future is of any given market
23.10.2014
8. Foreign-based distributors and agents
Form of direct export involving independent marketing

organization foreign based distributors and agents
Distributor
Agent
is a merchant and such is a customer of

the exporter
is a representative who acts on behalf of

the exporter and is not a customer
takes title to the exporters goods;

imports the products involved
does not take the title of goods; leaves the

importation to the buyers whose orders
have been passed on to the principal
its income comes from the margin taken

as determined by the trade discount
granted by the exporter
usually paid on the basis of a commission
Normally carries an inventory
does not carry an inventory (except for

showroom purposes)
23.10.2014
In most cases, the agent or distributor is a manufacturers

exclusive representative in a given foreign market area
and is the sole importer.
There are instances where exclusive are not granted:
sales to foreign government agencies are often reserved for

the manufacturer itself
when an agent is appointed as a general agent (in this case the
manufacturer can appoint other agents in the general agents market area)
The functions performed by distributors and agents are

basically the same as those carried out by the domesticbased marketing agency of the same type or the
manufacturers own foreign-based organizations.
23.10.2014
Characteristics:
Since these foreign-based outlets are granted exclusive rights, there is every
reason to expect that they will put extra effort into promoting the sale of the
manufacturers products
If a product is of a type that may require service , the distributor stands ready to
provide such service by having the proper facilities , well-trained personnel, and
a complete stock of the necessary parts and materials
If a manufacturer is committed to direct export, then using exclusive agents or

distributors is the easiest and least costly way of doing it.
Manufacturers new to direct export often choose this way, particularly where
only a moderate sales volume is expected in a market area.
Even if a large sales volume is generated (and a sales branch or subsidiary is
established), often there are good reasons why the agent and distributor should
not be eased out of the manufacturers channel
23.10.2014

2.1. Export Entry Modes - Direct Export Operations

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2.1. Export Entry Modes - Direct Export Operations

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International business

Theme 2.1. Export entry modes

Valeriu Potecea & Georgiana Surdu-Niu

Organizing exporting operations

Direct export - import operations - is the act whereby a

Indirect export - import operations, assumes that between

The Internet and e-commerce

Valeriu Potecea & Georgiana Surdu-Niu

Outline of alternative basic marketing

Valeriu Potecea & Georgiana Surdu-Niu

Reasons of direct export operations

the manufacturer has the opportunity to

Thorough knowledge of foreign markets -

Protection from neglect in active performance of selling function

the manufacturer has greater

Export sales channels are permanent -

Product goodwill accrues directly to the manufacturer rather

Per unit cost decreases as sales volume increases

the producer does not have to

fixed costs are

Valeriu Potecea & Georgiana Surdu-Niu

Advantages of direct export

Unified and high degree of exercised control

Valeriu Potecea & Georgiana Surdu-Niu

Limitations of direct export import

export marketing costs are usually large and are only

specific risks of the international market (in foreign trade

much time should be allocated by the company's

requirements of specialized knowledge

- that may not be available

Organizational forms of direct export -import

Home country based department or division

Valeriu Potecea & Georgiana Surdu-Niu

1. Home-country based department

Major types of activities carried out by the home-country based department :

promoting foreign economic affairs (prospecting, sales promotion, advertising, organizing

operative importing-exporting, focused on products, groups of products, markets, or

Influencing production, focused on effective production and after-sales operations;

functional activities, focused on transport, insurance, finance and accounting, prices,

1. Home-country based department

There are basically three different types of home-country based export

The specific type that is appropriate for any manufacturer at a particular

the nature of the product

1. Home-country based department

The built-in form is

Management philosophy not oriented toward growth of foreign business

1. Home-country based department

Is a self-contained and largely self-sufficient unit in which most of the

There is no inherent possibility for clash between the international

Valeriu Potecea & Georgiana Surdu-Niu

Organizing by geographic region

It is recommended when the export market requires a specific approach, each

Valeriu Potecea & Georgiana Surdu-Niu

It is suitable for companies that have a wide range of products belonging

Valeriu Potecea & Georgiana Surdu-Niu

1. Home-country based department

3. Export sales subsidiary

In attempting to separate completely export marketing activities from

With this unit, a manufacturer may be able to ascertain the profitability

1. Home-country based department

3. Export sales subsidiary

Although the export sales subsidiary is in many respects similar to an

Valeriu Potecea & Georgiana Surdu-Niu

2. Overseas representative office