Since September 11, 2001, the U.S. government has significantly increased efforts to combat illegal financial operations and money laundering. With the passage of the U.S.A. Patriot Act and new legal requirements financial institutions must follow, money laundering is fiercely being fought. This effort is not only attempting to curtail criminal activity, but is working to disarm and deter terrorist organizations.

But what does this mean for businesses and the world economy? What kind of businesses are most at risk? And how can companies protect themselves against money laundering? To answer these questions it is first necessary to understand the size and scope of money laundering and how this illegal activity occurs.

Money Laundering Is Complex

In short, money laundering occurs when individuals or organizations seek to disguise or place illegally obtained funds in the stream of legitimate commerce and finance. Most commonly associated with illegal arms sales, smuggling, and the activities of organized crime, such as prostitution and drug trafficking, money laundering also often lies at the heart of embezzlement, computer fraud schemes and insider trading.

For example, when criminal activities produce large profits, those involved must look for ways to control the funds generated without drawing attention to themselves. This is usually achieved by disguising the sources, changing the form of the funds (i.e. from cash to money orders or traveler’s checks) or by moving the funds to a location where they will draw the least attention.

Traditionally, money launderers have targeted banks, since banks accept cash and facilitate domestic and international funds transfers. However, the U.S. securities market may be a growing target of criminals looking to hide and move illicit funds.

The Scope and Size

Anyway one looks at it, money laundering is a significant problem—in terms of size and scope. According to the Organisation for Economic Co-operation and Development (OECD), money laundering could equal two to five percent of the world’s gross domestic product, and based on 1996 statistics, money laundering ranges from $590 billion to $1.5 trillion. The smaller number is roughly equivalent to the value of the total output of an economy the size of Spain!

How Is Money Laundered?

After the funds are generated, the first stage of money laundering takes place when the launderer places his illegal proceeds into the financial system. This is usually accomplished by breaking up large amounts of cash into smaller sums and then depositing those less conspicuous amounts into bank accounts. Or, the cash is used to purchase a number of smaller monetary instruments that are then, in turn, deposited into bank accounts.

The second stage of money laundering is to convert or move the funds after they have been deposited into the financial system. For instance, the launderer may choose to convert the funds to investment instruments or wire them through a series of bank accounts across the globe. Another way to move the illegal funds is to disguise them as legitimate payments for goods or services.

After the second phase is complete, the final stage occurs. Referred to as integration, this involves re-entering the funds into the legitimate economy. At this point, many criminals choose to invest the funds into real estate or business ventures.

Effect of Money Laundering on Businesses and Society

Financial institutions are leading the way in the fight against money laundering. These institutions recognize the potential macroeconomic consequences and damage that could occur in their industry. They also understand the effect money laundering can have on publicly and privately held companies, regulatory authorities, capital flows, exchange rates, and international trade, as well as on national economies and workforces.

Money laundering also has steep social and political costs. If organized crime is allowed to infiltrate financial institutions, gain control of large sectors of the economy via investment, or even bribe public officials and governments, a country’s entire society, ethics and social framework could be at risk.

Protecting Your Business

A company’s first and most important step is to establish sound anti-money laundering policies and procedures across the board. For starters, this means placing an emphasis on “knowing your customer.”

Imperative to the success of an anti-money laundering effort is the full support of senior management and all employees. In fact, compliance to anti-money laundering policies and procedures should be part of a company’s code of ethics or basic employment standards/expectations. In addition, non-compliance with anti-money laundering strategies could be sufficient cause for employee dismissal.

A very clear anti-money laundering training program and a commitment to on-going training are two additional necessities. All employees who have customer contact (directly or indirectly) or who have occasion to see or handle customer transactions and activity, should be required to take the training, including all new hires. Furthermore, a policy should be in place that states what form of annual training will be given and who will take it.

Very importantly, the company needs to be concerned about protecting against fraud, money laundering and reputation risk, as well ensuring compliance with laws and regulations.

Ignorance Is No Excuse

Any company, knowingly or unknowingly, that facilitates the exchange of ill-gotten goods for legitimate assets may be vulnerable to money laundering charges. And, any company that provides a way to move dirty money from one source to another, or to many other end points is highly susceptible to money laundering charges. Consequently, almost any company, financial institution or organization can be a potential candidate for fraud.

Another concern is doing business with companies who either operate out of countries known for their high risk of money laundering or who are from countries known as “tax haven” countries.

Yet, not all companies operating in high risk lines of business or countries considered high risk need to be shunned. If they have the appropriate controls in place to ?“know their customers” and detect, deter and report unusual or suspicious transactions, they should be considered normal risk companies.

Legitimate companies also must be aware that if they become investment recipients of laundered money, knowingly or unknowingly, their assets may be confiscated by the authorities. In addition, the public relations damage can be disastrous. And, since a corporation’s reputation and integrity can be among its strongest assets, protecting them is imperative.

Impact of the Internet

Over the years, sophisticated criminal organizations have leveraged the accessibility, speed and relative anonymity of the internet and web-based financial programs to better perform and hide their money laundering activities. In fact, instead of having to run the risk of physically transporting currency gained from illegal operations out of a country, criminals often now are concealing the currency by transforming it into a digital format. This way, dirty money is unable to be distinguished from legal currency.

On a positive note, the internet also is being used by banks, law enforcement and other interested parties as an investigative tool for research of people, companies, transactions and countries.

A Joint International Effort

Today’s global fight against money laundering includes a combined effort involving the U.S. government and several international institutions. Without a doubt, money laundering is an international problem that affects virtually every country. And to protect your company, you must be especially vigilant.

This article appeared in Impact Analysis, November-December 2004.
Topic: Strategies
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We’ve Merged. Are We Paying Attention to all the Right Components?

All merged and acquiring companies want the best outcome from the acquisition in order to deliver the expected return on investment. These companies focus on the most advantageous combination of systems, technologies, processes, financials and organizations. Is this enough?

No.

An area often overlooked is the new, combined culture. Who are we – now? How will we operate – now? What do we value – now? How will decisions be made – now?

A Common Example

Company A merges with Company B. Employees of A continue to operate as they always have: micro-managing, control-oriented and aggressively focused on achieving results. Moreover, A employees expect Company B employees to operate in the same way. Company B employees also continue to operate in the same was they always have: trusting each other in pursuit of goals with a high degree of autonomy and accountability, and with high level financial reporting only. They, too, expect A employees to do the same.

As a result of differing expectations, Company A employees look down on B employees as being out-of-touch, unprepared and not grounded in financial controls. Company B employees, for their part, feel overwhelmed by the requests for details they’ve never had to provide before, not appreciated and even trampled upon.

The business combination that looks good on paper has gotten off to a rough start. Both employee groups are moving down divergent paths, even while working on common goals. If this continues, business results will be impacted, and the forecasted financial benefits and expected outcomes may never materialize.

Generally, the acquirer, or the dominant or remaining entity, implicitly assumes that their current culture will continue, and that the other company’s employees will assimilate and accept the prevailing way of doing business. As an M&A executive in an acquiring company, I frequently witnessed lost opportunities to achieve the forecasted gains from the combination of companies. We often assume that the newly acquired company would take on our processes, systems, financial reporting and our expectations. When they did not, we felt they were wrong, naïve, and resistant to change. We began to “manage” them more tightly, and to give promotions and growth opportunities to “our own” people, who we trusted because they operated in the same way we did.

Now, as an executive coach, I assist companies to shape a new culture, one that all employees understand and can move toward. A shift is made from an assimilation model, of one organization fitting into another, to a model of all people, together, forming a new way of working, one that combines the best of both former companies.

They’re Experienced Business People. How Can this Happen?

Inattention to the cultural combination of companies, in my experience both inside acquiring companies and as a consultant to companies engaged in M&As, is the biggest obstacle to merger success. And this is topically measured in the return on investment—the ROI forecast that drove the business combination and that justified the price paid.

Cultures, generally assumed as “the way it is around here," tend to be transparent to many leaders, and therefore not unattended to. In the culture reside the relationships necessary to getting the work done (or not). The culture determines the amount of friction, or drag on results, that exists.

The Solution

To achieve a successful business combination, there are two strategies that must be in balance: the technical strategy and the cultural strategy. The technical strategy is the processes, systems, technologies, tasks, plans, deadlines necessary to accomplish the initiative. And the cultural strategy is the communication pathways, leadership, people, relationships, and environment necessary to achieve the initiative.

Leaders tend to spend more time on the technical strategies—estimates range from 80 to 99% of leaders’ time and attention is focused here. In fact, the cultural strategy can be transparent. In order to fully and powerfully achieve the goals of a business combination, both strategies must be in balance.

Some questions to ask yourself (and your leadership team) include the following:

 

  • Do we have a vision for how our people will all relate most effectively to one another?
  • Do we have a plan to address the differences in the way the two former organizations went about doing their work?
  • Do we understand the potential pitfalls and have possible solutions?
  • What has made each company successful?
  • How can we retain these characteristics in the new combined company?
  • Do we have clear expectations for how we will relate to each other, the business, and our clients, that are current with our new business situation?
  • Do we have a clear decision process that everyone understands and buys into?

 

When barriers arise, they generally exist in the cultural realm. Communication has become blocked (resulting in misunderstandings and frustration), trust is reduced or differing expectations have become apparent. These barriers, if unaddressed, lead to increased friction and reduced performance, resulting in missed goals. Having a process to anticipate and deal with these situations is critical to the success of the combination.

Barbara Osterman, founder and owner of Human Solutions LLC, is a business leadership consultant and cultural catalyst. She can be reached at 585-586-1717 and This email address is being protected from spambots. You need JavaScript enabled to view it. . This article appeared in Business Strategies Magazine, April 2004.
Topic: Strategies
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As stated in Chapter One, to succeed in exporting, you must first identify the most profitable international markets for your products or services. Without proper guidance and assistance, however, this process can be time consuming and costly — particularly for a small business.

The U.S. federal government, state governments, trade associations, exporters’ associations and foreign governments offer low-cost and easily accessible resources to simplify and speed your foreign market research. This chapter describes those resources and how to use them.

Federal Government Resources

Many government programs and staff are dedicated to helping you, the small business owner, assess whether your product or service is ready to compete in a foreign market. The U.S. government created the Trade Promotion Coordinating Committee (TPCC) in 1990. It is the federal government’s export team. The TPCC, an interagency task force chaired by the Secretary of Commerce, is dedicated to thinking strategically about our global competitive position and has been charged with leveraging and streamlining our export promotion and trade finance services.

U.S. Export Assistance Centers (EACs)

EACs were authorized by Sec. 202 of the Export Enhancement Act of 1992 and implemented by recommendation of the TPCC’s report, Toward a National Export Strategy. They are designed to provide the U.S. exporting community a single point of contact for all federal export promotion and finance programs. EACs can deliver services directly or refer clients to appropriate public and private sector partners. The Centers integrate representatives of the Small Business Administration (SBA), the Department of Commerce (DOC) and the Export-Import Bank of the United States (Ex-Im Bank), and additional federal agencies at certain sites. Depending upon site-specific needs and feasibility, the centers are co-located conveniently in facilities with private and other public sector partners already servicing the exporting community.

Co-located federal agencies concentrate on assisting export-ready firms in all areas of export promotion and trade finance. EAC staff assess and service a company in accordance with standard criteria to determine its stage of export readiness. Companies considered to be in the start-up stage are referred by the center counselor to a local resource partner for business start-up assistance and basic “How-to-Export” classes. Resources appropriate for this type of counseling are the SBA’s Service Corps of Retired Executives (SCORE) and the Small Business Development Centers (SBDCs).

The U.S. Small Business Administration

Many new-to-export small firms have found the counseling services provided by the SBA’s SCORE volunteers particularly helpful. Through your local SBA District office (389 chapters nationwide), you can gain access to more than 10,500 SCORE volunteers with experience in international trade.

Two other SBA-sponsored programs are available to small businesses needing management and export advice: Small Business Development Centers (SBDCs) and Small Business Institutes (SBIs) affiliated with colleges and universities throughout the United States. SBDCs offer counseling, training and research assistance on all aspects of small business management.

The SBI program provides small business owners with intensive management counseling, including qualified business students who are supervised by faculty. SBIs provide advice on a wide range of management challenges facing small businesses, including finding the best foreign markets for particular products or services.

The U.S. Department of Commerce

The U.S. Department of Commerce’s (DOC) International Trade Administration (ITA) is a valuable source of advice and information. International trade specialists can help you locate the best foreign markets for your products.

The United States and Foreign Commercial Service (US&FCS) helps U.S. firms compete more effectively in the global marketplace with trade specialists in 69 U.S. cities, including Export Assistance Centers, and in 70 countries worldwide. US&FCS specialists provide information on foreign markets, agent/distributor location services, trade leads and counseling on business opportunities, and trade barriers and prospects abroad.

Check the DOC’s National Trade Data Bank (NTDB) for the US&FCS Country Commercial Guides for each country in which there is a Foreign Commercial Service presence. In addition, the NTDB offers Department of State country reports and the Central Intelligence Agency’s World Factbook (www.cia.gov/cia/publications/factbook/). These are valuable sources for identifying international markets for your exportable products or services.

District Export Councils (DECs) are another useful ITA-sponsored resource. The 51 District Export Councils located around the United States are composed of 1,800 executives with experience in international trade who volunteer to help small businesses export. Council members come from banks, manufacturing companies, law offices, trade associations, state and local agencies, consulting companies and educational institutions. They draw upon their experience to encourage, educate, counsel and guide potential, new and seasoned exporters in their individual marketing needs.

The United States Department of Agriculture

If you have an agricultural product, you may want to investigate the U.S. Department of Agriculture’s (USDA) Foreign Agricultural Service (FAS). With posts in 80 embassies and consulates worldwide, the FAS can obtain specific overseas market information for your product. The FAS also maintains sector specialists in the United States to monitor foreign markets for specific U.S. agricultural products. The FAS Trade Assistance and Planning Office (TAPO) can assist you in finding out more about the export programs of the USDA, or go to the FAS website: www.fas.usda.gov.

The United States Export-Import Bank

Country desk officers at The United States Export-Import Bank (Ex-Im Bank) will provide you with information about a country’s political and economic risk.

Non-Federal Resources

State Economic Development Offices

Most state commerce and economic development offices have international trade specialists to assist you. Many states have trade offices in overseas markets. Port authorities are a wealth of export information. Although traditionally associated with transportation services, many port authorities around the country have expanded their services to provide export training programs and foreign-marketing research assistance. For example, the New York-New Jersey Port Authority provides extensive services to exporters including XPORT, a full-service export trading company. XPORT, created in 1982, is the first publicly sponsored U.S. trading company. XPORT specializes in helping small- to medium-size businesses in New York and New Jersey introduce their products in world markets. Among the services XPORT can offer are market research, transportation of products, contact with local distributors and market entry strategies.

Foreign Embassy Commercial Sections

Talk to the Commercial Attaché assigned to the embassy of the country to which you wish to export. For a web listing of embassies, visit www.embassy.org/embassies/.

Exporters’ Associations

World Trade Centers, import-export clubs and organizations such as the American Association of Exporters and Importers and the Small Business Exporter’s Association can aid in your foreign market research.

Trade Associations

The Federation of International Trade Associations (www.fita.org), founded in 1984, fosters international trade by strengthening the role of local, regional and national associations throughout the United States, Mexico and Canada that have an international mission. FITA affiliates are 450+ independent international associations which fall into six categories: world trade clubs, associations/chambers of commerce with regional/bilateral interests, associations focused on international logistics, associations supporting international trade, associations supporting exporters and professional associations. More than 5,000 trade and professional associations currently operate in the United States; many actively promote international trade activities for their members. Chambers of Commerce, particularly state chambers, or chambers located in major industrial areas, often employ international trade specialists who gather information on markets abroad.

How to Gather Foreign Market Research

Now that you know where to begin your research, you should next identify the most profitable foreign markets for your products or services. You will need to:

  1. Classify your product
  2. Find countries with the largest and fastest growing markets for your product
  3. Determine which foreign markets will be the most penetrable
  4. Define and narrow down those export markets you intend to pursue
  5. Talk to your U.S. customers or other companies doing business internationally
  6. Research export efforts of U.S. competitors
  7. Classifying your product

The Standard Industrial Classification (SIC) code is the system by which the U.S. government formerly classified its goods and services. Today, the government has begun using the North American Industry Classification System (NAICS) (www.census.gov/epcd/www/naics.html). Knowing the proper code for your product or service can be useful in collecting and analyzing data available in the United States.

Data originating outside the United States or information available from international organizations usually are organized under the Standard International Trade Classification (SITC) system, which may assign a different code to your product or service. Another method of classifying products for export is the Harmonized System (HS). Knowing the HS classification number and the SIC and the SITC codes for your product is essential to obtaining domestic and international trade and tariff information. DOC and USDA trade specialists can assist in identifying the codes for your products. The codes are available on the National Trade Data Bank (NTDB). The U.S. Bureau of the Census (USBC) can help identify the HS number for your product.

Finding Countries With the Largest and Fastest Growing Markets for Your Product

At this stage of your research, learn where your domestic competitors are exporting. Trade associations can often provide data on where companies in a particular industry sector are exporting their products. In 2002, the three largest markets for U.S. products were Canada, Mexico and Japan. Yet these countries may not be the largest markets for your product.

Three key U.S. government databases can identify those countries which represent significant export potential for your product: SBA’s Automated Trade Locator Assistance System (SBAtlas), Foreign Trade Report FT925 and the U.S. DOC’s National Trade Data Bank (NTDB).

SBA’s Automated Trade Locator Assistance System (SBAtlas) is offered only by the U.S. Small Business Administration and provides current market information to SBA clients on world markets suitable for their products and services. This valuable research tool supplies small business exporters with information about where their products are being bought and sold and which countries offer the largest markets. The country reports detail products imported and exported by various foreign nations. Data are supplied by the DOC’s USBC and member nations of the United Nations, and are presented in an easy-to-read report format. This information can be obtained through a SCORE counselor at SBA District Offices, at EACs, SBDCs and SBIs. This service is free to requesting small businesses.

Foreign Trade Report FT925 gives a monthly, country-specific breakdown of imports and exports by SITC number. Available by subscription from the Government Printing Office, the FT925 can also be obtained through EACs, DOC ITA offices, or downloaded from the National Trade Data Bank.

The National Trade Data Bank (NTDB), a web-based subscription service of the DOC’s STAT-USA, is a trade library of more than 190,000 documents on export promotion and international economic information from more than 20 Federal sources. With the NTDB, you can conduct databank searches on markets, tariffs and non-tariff barriers, importers, logistics and product information. NTDB can be purchased by subscription or accessed at Export Assistance Centers, many DOC ITA offices, and at nearly 1,000 Federal depository libraries throughout the United States. Once you learn the largest markets for your products, determine which are the fastest growing. Find out what demographic patterns and cultural considerations will affect market penetration.

Several publications, most available on the NTDB, provide geographic and demographic statistical information pertinent to your product: The World Factbook, produced by the Central Intelligence Agency; World Population, published by DOC’s USBC; The World Bank Atlas, available from the World Bank (www.worldbank.org); and the United Nations International Trade Statistics Yearbook.

Determining the Most Penetrable Markets

Once you have defined and narrowed a few prospective foreign markets for your product, you will need to examine them in detail. At this stage you should ask the following questions: How does the quality of your product or service compare with that of goods already available in your target foreign markets? Is your price competitive in the markets you are considering? Who are your major customers?

Answering these questions may seem overwhelming at first, but many resources are available to help you select which foreign markets are most conducive to selling your product. Use the workbook in the first part of this guide to assist you.

The DOC’s ITA can link you with specific foreign markets. ITA offices are part of the US&FCS and communicate directly with FCS officers working in U.S. embassies worldwide. FCS staff and in-country market research firms produce in-depth reports on selected products and industries that can answer many of your questions regarding foreign market penetration. You can also order a Comparison Shopping Service (CSS) report through ITA district offices. The report is a low-cost way to conduct research without having to leave the United States.

SBA’s and DOC’s Export Legal Assistance Network (ELAN) provides new exporters with answers to their initial legal questions. Local attorneys counsel small businesses on a one-time basis to address their export-related legal questions. These volunteer attorneys can address questions pertaining to contract negotiations, licensing, credit collections procedures and documentation. There is no charge for this one-time service, available through SBA or DOC district offices.

The Trade Opportunities Program (TOP) of the DOC can furnish U.S. small businesses with trade leads from foreign companies that want to buy or represent their products or services. These trade leads are available at www.commmerce.gov/trade_opportunities.html. Other important issues about the target foreign markets you should explore include political risk considerations, the cultural environment and any product modifications, such as packaging or labeling, will make the product more “exportable.”

Identifying market-specific issues is easily accomplished by contacting foreign government representatives in the United States. Commercial posts of foreign governments located within embassies and consulates can assist you in obtaining specific market and product information.

American Chambers of Commerce (AmChams) abroad also can be an invaluable resource. As affiliates of the U.S. Chamber of Commerce, 84 AmChams, located in 59 countries, collect and disseminate extensive information on foreign markets. While membership fees are usually required, the small investment can be worth the information received.

Another fundamental question to ask country-specific experts is what market barriers, such as tariffs or import restrictions, exist for your product. You should consult specialists at the U.S. Trade Representative (USTR) office on trade barriers. Trade barriers can include non-tariff barriers, as well.

Tariffs are taxes imposed on imported goods. In many cases, tariffs raise the price of imported goods beyond the level of domestic goods. As a result, tariffs can become real barriers to imported products. Non-tariff barriers are laws or regulations that a country enacts to protect domestic industries against foreign competition. Such non-tariff barriers may include subsidies for domestic goods, import quotas or regulations on import quality.

To determine the rate of duty, you will need to identify the Harmonized Tariff number, which corresponds to the product you wish to export. Each country has its own schedule of duty rates corresponding to the section of the Harmonized System of Tariff Nomenclature (HS).

Defining Which Markets to Pursue

Once you know the largest, fastest growing and most penetrable markets for your product or service, you must then define your export strategy.

Do not choose too many markets. For most small businesses, three foreign markets will be more than enough, initially. You may want to test one market and then move on to secondary markets as your “expertise” develops. Focusing on regional, geographic clusters of countries can also be more cost effective than choosing markets scattered around the globe.

After you have identified the best export markets, your next step will be to determine the best way to distribute your product abroad. Chapter Four, “Foreign Market Entry,” discusses distribution methods.

This chapter appeared in the book Breaking Into the Trade Game, 2004.
Topic: Strategies
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Exporting is crucial to America’s economic health. Increased exports mean business growth, and business growth means bigger profits for U.S. companies — all of which ultimately results in more jobs for American workers. Yet only a small percentage of potential exporters take advantage of these opportunities. It is critical for more U.S. businesses to think globally.

Your decision to read this publication shows you are interested in exporting. You may have already discovered that your company is competing internationally because foreign-owned companies are competing with you in your “domestic” markets. The division between domestic and international markets is becoming increasingly blurred. In a world of 6.1 billion people, global communication networks, next-day airfreight deliveries worldwide and CNN, it no longer makes sense to limit your company’s sales to the local or even the national market. Your business cannot ignore these international realities if you intend to maintain your market share and keep pace with your competitors.

Making the decision to export requires careful assessment of the advantages and disadvantages of expanding into new markets. Once the decision is made to export, an international marketing plan is essential. This chapter presents the advantages and disadvantages of exporting, and offers a method to evaluate your company’s readiness to export. The remaining chapters in this publication guide you through the steps necessary to master the “trade game.”

Advantages and Disadvantages of Exporting

Consider some of the specific advantages of exporting. Exporting can help your business:

  1. Enhance domestic competitiveness
  2. Increase sales and profits
  3. Gain global market share
  4. Reduce dependence on existing markets
  5. Exploit corporate technology and know-how
  6. Extend the sales potential of existing products
  7. Stabilize seasonal market fluctuations
  8. Enhance potential for corporate expansion
  9. Sell excess production capacity
  10. Gain information about foreign competition

In comparison, there are certain disadvantages to exporting. Your business may be required to:

  1. Develop new promotional material
  2. Subordinate short-term profits to long-term gains
  3. Incur added administrative costs
  4. Allocate personnel for travel
  5. Wait longer for payments
  6. Modify your product or packaging
  7. Apply for additional financing
  8. Obtain special export licenses

These disadvantages may justify a decision to forego direct exporting at the present time, although your company may be able to pursue exporting through an intermediary. If your company’s financial situation is weak, attempting to sell into foreign markets may be ill-timed. The decision to export needs to be based on careful analysis and sound planning.

The Need for an International Marketing Plan

Behind most export success stories is a plan. Whether formally written or sketched out informally at a meeting with your management team, an international marketing plan is an essential tool to properly evaluate all the factors that would affect your company’s ability to go international.

An international marketing plan should define your company’s:

  1. Readiness to export
  2. Export pricing strategy
  3. Reason for exporting
  4. Potential export markets and customers
  5. Methods of foreign market entry
  6. Exporting costs and projected revenues
  7. Export financing alternatives
  8. Legal requirements
  9. Transportation method
  10. Overseas partnership and foreign investment capabilities
  11. Corporate commitment to the exporting process

Creating an international marketing plan helps to define your company’s present status, internal goals and commitment, and it is also required if you plan to seek export financing assistance. Preparing the plan in advance of making export loan requests from your bank will save time and money. Completing and analyzing an international marketing plan helps you anticipate future goals, assemble facts, identify constraints and create an action statement. The plan also should set forth specific objectives, an implementation timetable and milestones to gauge your success.

The International Marketing Plan Workbook

The purpose of the International Marketing Plan Workbook is to prepare your business to enter the international marketplace. Ask yourself: Should I expand my company through exporting? Do I have any products or services I can export? This workbook will lead you step by step through the process of exporting your product to an international market.

The workbook is divided into sections. Each section should be completed before you start the next. After you have completed the entire workbook, you will be ready to develop an international marketing plan to export your product. The remaining chapters of this Guide will assist you in determining where and how to find the resources to begin exporting successfully.

Planning

Why complete this workbook and write a plan? Six reasons it will be worth your time and effort are:

  1. Careful completion of this workbook will help evaluate your level of commitment to exporting.
  2. The completed workbook can help you assess your products’ potential for the global market.
  3. The workbook gives you a tool to help you better manage your international business operations successfully.
  4. The completed workbook will help you communicate your business ideas to people outside your company. It is an excellent starting point for developing an international financing proposal.
  5. Businesses are managed more successfully when operating from a business plan.
  6. A plan forces the business to stay focused on primary objectives and provides a measuring tool of results as each step is achieved.

Can I hire someone to do this for me?

No! Nobody will do your thinking or make decisions for you. This is your business. If the marketing plan is to be useful, it must reflect your ideas and efforts.

Why is planning so important?

The planning process forces you to look at your future business operations and anticipate what will happen. This process better prepares you for the future and makes you more knowledgeable about your business. Planning is vital for marketing your product in an international marketplace and at home.

Any firm considering entering into international business transactions must understand that doing business internationally is not a simple task. It is stimulating and potentially profitable in the long-term but requires much preparation and research prior to the first transaction.

Entry into the international market may take as long as two years of cash outflow to generate profit. In considering products or services for the international market, a business needs to be:

  1. Successful in its present domestic operation
  2. Willing to commit resources of time, people and capital to the export program
  3. Aware of and sensitive to the cultural differences in doing business in other countries

Approach your export operations in the same way you would your domestic operations — using sound business fundamentals. Developing an international marketing plan helps you assess your present market situation, business goals and commitment, which will increase your opportunities for success.

A marketing plan is a process, not a product. Planning is a continuous process. Your marketing plan must be revised on a continual basis as your knowledge increases about international markets. You will be surprised how much easier it is to update a marketing plan after the first one is written. Plus, after a revision or two, you will know more about your international business market opportunities.

Goal Setting

Identifying business goals can be an exciting and often challenging process. It is, however, an important step in planning your entry into the international marketplace. The following exercise is an additional step to help clarify your short- and long-term business goals.

Step 1: Define long-term goals.

  1. What are your long-term goals for this business in the next 5 years? Examples: increase export sales by ___% annually or ___% market share or ___% profitability or return on assets.
  2. How will the international market help you reach your long-term goals?

Step 2: Define short-term goals.

  1. For your international business, what are your first year goals? Examples: select a sales/distribution outlet in the export markets chosen; develop relationships with agents/distributors; participate in trade shows or trade missions in chosen market(s).
  2. What are your two-year goals for your international business products/services? Example: modify product for metric definition; expand international opportunities from initial penetration of a market to other similar markets.

Step 3: Develop an action plan with a timeline to reach your short-term goals.

Identifying Products with Export Potential

List the products or services your company sells. Then, write the reason you believe it has export potential and why it will be successful in the international marketplace. The reasons should be based on your current knowledge rather than research. Based on reasons for export success, select one or more products you believe might have the best prospects for exporting.

Step 1: Select the most exportable products to be offered internationally.

To identify products with export potential, you need to consider products that are successfully sold in the domestic market. The product should fill a targeted need for the purchaser in export markets according to price, value to customer/country and market demand. What are the major products your business sells? What product(s) do you feel have the best potential for international trade?

Step 2: Evaluate the product(s) to be offered internationally.

What makes your product(s) attractive for an overseas market? Why do you believe international buyers will purchase your company’s products?

Determining Your Company’s Export Readiness

Brainstorm a list of pros and cons for expanding your market internationally. Based on your current assumptions about your company and products, and any market knowledge, determine your probability of success in the international market.

Step 1: Why is your business successful in the domestic market?

Give specific reasons. What is your company’s annual growth rate?

Step 2: What are the competitive advantages of your products or business over other domestic and international businesses?

Step 3: What is your level of commitment and that of your company’s top management to expanding into international markets?

How much preparation time, planning and resources are you willing to commit to implementing an export program?

Industry Analysis

Step 1: Determine your industry’s growth for the next three years.

Talk to people in the same business or industry, research industry-specific magazines, attend trade fairs and seminars; use the National Trade Data Bank (NTDB) (www.stat-usa.gov).

Step 2: Research how competitive your industry is in global markets.

Utilize the NTDB; obtain import/export statistics from the Bureau of the Census, contact the U.S. Small Business Administration (SBA), the U.S. Export Assistance Center (EAC) (www.sba.gov/oit/export/useac.html) or the U.S. Department of Commerce (DOC) district office in your area.

Step 3: Determine your industry’s future growth rate in the international market.

Contact a U.S. EAC, Small Business Development Center (SBDC) or DOC country or industry desk in Washington, D.C.

Step 4: Research federal or state government market studies that have been conducted on your industry’s potential international markets.

Use the resources identified above.

Step 5: Find export data available on your industry.

Contact your SBA district office, the SBDC or Service Core of Retired Executives (SCORE) representative (www.score.org), or a U.S. Export Assistance Center.

Developing Your Export Marketing Plan

(Read chapters 2 and 3 of this guide before completing this section).

Step 1: Select the best countries to market your product.

Since the number of country markets to be considered by a company is very large, it is neither possible nor advisable to research them all. Your firm’s time and money are spent most efficiently by using a sequential screening process.

Your first step in this process is to select the most commercially attractive countries for your product. Preliminary screening involves defining the physical, political, economic and cultural environment. Research the NTDB for DOC Country Commercial Guides for each country in which there is a Foreign Commercial Service presence. In addition, the NTDB has Department of State country reports and the Central Intelligence Agency world report.

Using the categories below, select 3 countries you think have the best market potential for your product.

  1. Review the market factors below for each country.
  2. Research data/information for each country.
  3. Rate each factor on a scale of 1-5 with 5 being the best.
  4. Select a target market country based on your ratings.

Demographic/Physical Environment (Country/Rating)

  • Population size, growth, density
  • Urban and rural distribution
  • Climate and weather variations
  • Shipping distance
  • Product-significant demographics
  • Physical distribution and communication network
  • Natural resources

Political Environment (Country/Rating)

  • System of government
  • Political stability and continuity
  • Ideological orientation
  • Government involvement in business
  • Attitudes toward foreign business

Competitive Environment (Country/Rating)

  • Other competitive offerings
  • Uniqueness of your product/service
  • Pricing of competitive products
  • National economic and developmental priorities

Economic Environment (Country/Rating)

  • Overall level of development
  • Economic growth: GNP, industrial sector
  • Role of foreign trade in the economy
  • Currency: inflation rate, availability, controls,
  • stability of exchange rate
  • Balance of payments
  • Per capita income and distribution
  • Disposable income and expenditure patterns

Social/Cultural Environment (Country/Rating)

  • Literacy rate, educational level
  • Existence of middle class
  • Similarities/differences in relation to home market
  • Language and other cultural considerations

Market Access (Country/Rating)

  • Limitations on trade: high tariff levels, quotas
  • Documentation and import regulations
  • Local standards and practices
  • Patents and trademark protection
  • Preferential treaties
  • Legal considerations for investment, taxation, repatriation, employment, code of laws

Product Potential (Country/Rating)

  • Customer needs and desires
  • Local production, imports, consumption
  • Exposure to and acceptance of product
  • Availability of linking products
  • Industry-specific key indicators of demand
  • Attitudes toward products of foreign origin
  • Competitive offerings

Local Distribution and Production (Country/Rating)

  • Availability of intermediaries
  • Regional and local transportation facilities
  • Availability of manpower
  • Conditions for local manufacture

Indicators of population, income levels and consumption patterns should be considered. In addition, statistics on local production trends, along with imports and exports of the product category, are helpful for assessing industry market potential. Often, an industry will have a few key indicators or measures that will help determine the industry strength and demand within an international market. A manufacturer of medical equipment, for example, may use the number of hospital beds, the number of surgeries and public expenditures for health care as indicators to assess the potential for its products. At this point, ask yourself what the projected growth rates for the three countries selected over the next 3-5 years will be.

Step 2: Determine projected sales levels.

Much of this information can be obtained from a trade association for your particular industry. What is your present U.S. market percentage? What are the projected sales for similar products in your chosen international markets for the coming year? What sales volume will you project for your products in these international markets for the coming year? What is the projected growth in these international markets over the next five years?

Step 3: Identify customers within your chosen markets.

What companies, agents or distributors have purchased similar products? What companies, agents or distributors have made recent requests for information on similar products? What companies, agents or distributors would most likely be prospective customers for your export products?

Step 4: Determine method of exporting.

How do other U.S. firms sell in the markets you have chosen? Will you sell direct to the customer? Who will represent your firm? Who will service the customers’ needs?

Step 5: Building a distributor or agent relationship.

Plan to travel to the country in question as many times as is necessary to build a successful relationship. Will you appoint an agent or distributor to handle your export market? Consider legal advice from the Export Legal Assistance Network (ELAN) (www.fita.org/elan). A free initial consultation is available by request through an SBA District Office, SBDC, SCORE or U.S. Export Assistance Center. At this point, there are a number of questions that must be answered. For example:

  1. What facilities does the agent or distributor need to service the market?
  2. What type of client should your agent or distributor be familiar with in order to sell your product?
  3. What territory should the agent or distributor cover?
  4. What financial strength should the agent or distributor have?
  5. What other competitive or non-competitive lines are acceptable or not acceptable for the agent or distributor to carry?
  6. How many sales representatives does the agent or distributor need and how often will they cover the territory?
  7. Will you use an export management company to do your marketing and distribution for you? If yes, have you developed an acceptable sales and marketing plan with realistic goals you agree to?

Marketing Your Product or Service

Given the market potential for your products in international markets, how is your product or service distinguished from others? Is it more or less competitive?

  1. What are your product’s advantages?
  2. What are your product’s disadvantages?
  3. What are competitive products’ advantages?
  4. What are competitive products’ disadvantages?
  5. What needs does your product fill in a foreign market?
  6. What competitive products are sold abroad and to whom?

How complex is your product? What skills or special training are required to:

  1. Install your product?
  2. Use your product?
  3. Maintain your product?
  4. Service your product?

What options and accessories are available?

  1. Has an aftermarket been developed for your product?
  2. What other equipment does the buyer need to use your product?
  3. What complementary goods does your product require?

If your product is an industrial good:

  1. What firms are likely to use it?
  2. What is the useful life of your product?
  3. Is use or life affected by climate? If so, how?
  4. Will geography affect product purchase. For example, will transportation problems exist?
  5. Will the product be restricted abroad by tariffs, quotas or non-tariff barriers?

If the product is a consumer good:

  1. Who will consume it? How frequently will the product be bought?
  2. Is consumption affected by climate?
  3. Is consumption affected by geography?
  4. Will the product be restricted abroad by tariffs, quotas or non-tariff barriers?
  5. Does your product conflict with traditions, habits or beliefs of customers abroad?

Support Functions

To achieve efficient sales offerings to buyers in the targeted markets, you should address several concerns regarding products, literature and customer relations.

Step 1: Identify product concerns.

Can the potential buyer see a functioning model or sample of your product that is substantially the same? What product labeling requirements must be met? (Metric measurements, AC or DC electrical, voltage, etc.) Keep in mind that the European Community requires three languages on all new packaging and Mexico requires labels in Spanish under the North American Free Trade Agreement. When and how can product conversion requirements be obtained? Can product be delivered on time as ordered? This is especially important since letters of credit are unforgiving when it comes to delivery promise dates.

Step 2: Identify literature concerns.

If required, can you produce product literature in a language other than English? Do you need a product literature translator to handle the technical language? What special concerns should be addressed in sales literature to ensure quality and informative representation of your product? Keep in mind that translations should reflect the linguistic nuances of the country where the literature will be used.

Step 3: Identify customer relations concerns.

What is delivery time and method of shipment? What are payment terms? What are the warranty terms? Will inspection/acceptance be required? Who will service the product when needed? How will you communicate with your customer (through a local agent, fax, e-mail)? Are you prepared to give the same order and delivery preference to your international customers that you give to your domestic customers?

Marketing Strategy

In international sales, the chosen “terms of sale” are very important. Where should you make the product available: at your plant, at the port of departure, landed at the port of importation or delivered free and clear to the customer’s door? The answer to this question involves determining what the market requires and how much risk you are willing to take.

Pricing strategy depends on “terms of sale” and also considers the value-added services of bringing the product to the international market.

Step 1: Define international pricing strategy.

How do you calculate the price for each product? What factors have you considered in setting prices? Which products are very sensitive to price changes? How important is pricing in your overall marketing strategy? What are your discount policies? What terms of sales are most appropriate for your export product?

Step 2: Define promotional strategy.

What advertising materials will you use? What trade shows or trade missions will you participate in, if any? What time of year and how often will representatives travel to foreign customer markets?

Step 3: Define customer services.

What special customer services do you offer? What types of payment options do you offer? How do you handle merchandise that customers return?

Sales Forecast

Forecasting sales of your product is the starting point for your financial projections. The sales forecast is extremely useful, so it is important you use realistic estimates. Remember that sales forecasts show the expected time the sale is made. Actual cash flow will be affected by delivery date and payment terms.

Step 1: Identify the units-sold for markets 1, 2 and 3 for each year.

Step 2: Identify the sales price per unit for products sold in markets 1, 2 and 3.

Step 3: Calculate the total sales for each of the different markets

Step 4: Calculate the sales (all markets) for each year.

Step 5: Calculate the five-year total sales for each market.

Cost of Goods Sold

The cost of goods sold internationally will differ from cost of goods sold domestically if significant product alterations are required. These changes will affect costs in terms of material, and direct and indirect labor costs.

To ascertain the costs associated with the different terms of sale, it will be necessary to consult an international freight forwarder. For example, a typical term of sale offered by a U.S. exporter is cost, insurance and freight (CIF) to the port of destination. Your price can include all the costs to move the product to the port of destination and other costs necessary to complete the export transaction. However, many of these costs are incurred by the exporter. For example, you can price your product Ex Works and let your customer worry about getting the product to their destination from your factory or warehouse. However, most exporters arrange many of the details (transportation, insurance, etc.) for their customers. These costs should be identified separately on the invoice and passed through with little or no markup.

A typical cost work sheet will include some of the following factors. These costs are in addition to the material and labor used in the manufacture of your product:

  • Export packing
  • Forwarding
  • Container loading
  • Export documentation
  • Inland freight
  • Consular legalization
  • Truck/rail unloading
  • bank documentation
  • Wharfage
  • Dispatch
  • Handling
  • Bank collection fees
  • Terminal charges
  • Cargo insurance
  • Ocean freight
  • Bunker surcharge
  • Demurrage
  • Courier mail
  • Telex
  • Import duties
  • Tariffs

To complete this section, you will need to use data from sales forecasts. Certain costs related to your terms of sale may also have to be considered. For example, include cost of capital if you are extending payment terms.

Step 1: Identify the units-sold for markets 1, 2 and 3 for each year.

Step 2: Identify the cost per unit for products sold in each of the three markets.

Step 3: Calculate the total cost for each of the products (units sold times cost per unit).

Step 4: Calculate the cost of goods sold — all products for each year.

Step 5: Calculate the five-year cost of goods for each market.

International Marketing Expenses

To determine marketing costs for your export products, you should include costs that apply only to international marketing efforts. For example, costs for domestic advertising that do not pertain to the international market should not be included. Examples of most typical expense categories for an export business are listed below. Some of these expenses will be first-year start-up expenses; others will occur annually.

Step 1: Review the following expenses that are likely to be incurred by your international business:

Legal fees, accounting fees, promotional material, travel, communication, equipment/fax/PC modem, advertising allowances and promotional expenses (e.g., trade shows, etc.). If there are other expense categories not listed, identify them as “other expenses.”

Step 2: Estimate your cost for each expense category.

Step 3: Estimate any domestic marketing expense included that is not applicable to international sales.

Subtract these from the international expenses.

Step 4: Calculate the total for your international overhead expenses:

Total expenses less domestic expenses (if any) = total international marketing expenses.

Projected Income Statement — Year 1 to 5, All Markets

You are now ready to assemble the data for your projected income statement. This statement will calculate your net profit or net loss (before income taxes) for each year.

Step 1: Identify the sales for each year.

Step 2: Identify the cost of goods sold for each year.

Step 3: Calculate the gross margin for each year (sales minus cost of goods sold).

Step 4: Calculate the operating expenses specifically associated with the international marketing program for each year.

Step 5: Allocate the international division’s portion of the firm’s overall domestic operating expenses:

This would include international’s portion of lighting, office floor space, secretarial pool, etc.

Break-Even Analysis

The break-even is the level of sales at which your total sales exactly cover your total costs, which includes non-recurrent fixed costs and variable costs. This level of sales is called the break-even point (BEP) sales level. In other words, at the BEP sales level, you will not make a profit. If you sell more than the BEP sales level, you will make a net profit. If you sell less than the BEP sales level, you will have a net loss.

To calculate the break-even point, costs must be identified as being either fixed or variable. Fixed expenses are those that the business will incur regardless of its sales volume — they are incurred even when a business has no sales — and include expenses such as rent, office salaries and depreciation. Variable expenses change directly and proportionately with a company’s sales and include such expenses as cost of goods sold, sales commissions, etc. Some expenses are semi-variable in that they vary somewhat with sales activity but are not directly proportionate to sales. Semi-variable expenses include utilities, advertising and administrative salaries. Semi-variable expenses ideally should be broken down into their fixed and variable components for an accurate break-even analysis. Once a company’s expenses have been identified as either fixed or variable, the following formula is used to determine its break-even point:

Break-Even Point: Total Fixed Expenses – Total Variable Expenses = Sales Volume

Note: In addition to a break-even analysis, it is highly recommended that a profit and loss analysis be generated for the first few actual international transactions. Since there are a great number of variables relating to costs of goods, real transactions are required to establish actual profitability and minimize the risk of losses.

Timetable

You will need to work on your timetable periodically as you progress in the workbook. The purpose is to ensure that key tasks and objectives are identified and completed to ensure accomplishment of your stated goals.

Step 1: Identify key activities.

Review other portions of your marketing plan to compile a list of tasks that are vital to the successful operation of your business. Be sure to include travel to your chosen market as applicable.

Step 2: Assign responsibility for each activity.

For each identified activity, assign primary responsibility for the completion of that activity to one person.

Step 3: Determine scheduled start date.

For each activity, determine the date when work will begin. You should consider how the activity fits into your overall plan as well as the availability of the person responsible.

Step 4: Determine scheduled finish date.

For each activity, determine when the activity must be completed.

International Marketing Plan Summary

Step 1: Verify completion of previous pages.

You should have finished all the other sections in the workbook before continuing any further. You are now ready to summarize the workbook into an exporting plan for your company.

Step 2: Identify your international marketing plan audience.

What type of person are you intending to satisfy with this plan? A banker? The company’s chief executive officer? The summary should briefly address all the major issues that are important to this person. You may want to have several different summaries, depending on who will read the marketing plan.

Step 3: Write a one-page summary.

You will now need to write no more than a page summarizing all the previous work you have completed in this workbook. Determine which sections are going to be most interesting to your reader. Write one to three sentences that summarize each of the important sections. Keep in mind that this page will probably be the first read by this person. It is extremely important the summary be brief yet contain the information most important to the reader. This section should make the reader want to read the rest of your plan. Summarize the sections in the order that they appear in the workbook.

Preparing an Export Price Quotation

Setting proper export prices is crucial to a successful international sales program; prices must be high enough to generate a reasonable profit, yet low enough to be competitive in overseas markets. Basic pricing criteria — costs, market demand and competition — are the same for domestic and foreign sales. However, a thorough analysis of all cost factors going into producing goods for export, plus operating expenses, result in prices that are different from domestic ones (remember freight costs, insurance, etc., are pass-through costs identified separately and include little or no markup).

“Marginal cost” pricing is an aggressive marketing strategy often used in international marketing. The theory behind “marginal cost” concludes that if the domestic operation is making a profit, the non-recurrent annual fixed costs are being met. Therefore, only variable costs and profit margin should be used to establish the selling price for goods that will be sold in the international market. This strategy is used for domestic pricing as well. This results in a lower price for international goods yet maintains the profit margin. The risk of this strategy becomes apparent when the domestic operation becomes unprofitable and cannot cover the fixed costs, as each incremental sale could result in a larger loss for the company. This is a complex issue that can yield substantial benefits to a company with manageable risks. Some effort should be made by management to understand this pricing strategy.

Cost Factors

In calculating an export price, be sure to take into account all the cost factors for which you, the exporter, are liable.

  1. Calculate direct materials and labor costs involved in producing the goods for export.
  2. Calculate your factory overhead costs, prorating the amount of overhead chargeable to your proposed export order.
  3. Deduct any charges not attributable to the export operation, especially if export sales represent only a small part of total sales.
  4. Allow yourself a realistic price margin for unforeseen production costs, operating expenses, unavoidable risks and simple mistakes that are common in any new undertaking.
  5. Also allow yourself a realistic profit or mark-up.
  6. Be sure operating expenses are covered by your gross margin. Some of these expenses directly tied to your export shipments may include:
  • Travel expenses
  • Taxes*
  • Catalogs, slide shows, video presentations
  • Rent*
  • Promotional material
  • Insurance*
  • Export advertising
  • Interest*
  • Commissions
  • Provision for bad debts
  • Transportation expenses (usually pass-through costs)
  • Market research
  • Packing materials
  • Credit checks
  • Legal expenses*
  • Translation costs
  • Office supplies*
  • Product modification
  • Patent and trademark fees*
  • Consultant fees
  • Communications*
  • Freight forwarder fees (usually pass-through costs)

*These items will typically represent the expenses of the total operation, so be sure to prorate these to reflect only the operating expenses associated with your export operation.

Other Factors To Consider

Market Demand

As in the domestic market, product demand is the key to setting prices in a foreign market. What will the market bear for a specific product or service? What will the estimated consumer price for your product be in each foreign market? If your prices seem out of line, try some simple product modifications to reduce the selling price, such as simplification of technology or alteration of product size to conform to local market norms. Also keep in mind that currency valuations alter the cost of goods. A good pricing strategy should accommodate fluctuations in currency, although your company should quote prices in dollars to avoid the risks of currency devaluations.

Competition

As in the domestic market, few exporters are free to set prices without carefully evaluating their competitors’ pricing policies. The situation is further complicated by the need to evaluate the competition’s prices in each foreign market an exporter intends to enter. In a foreign market that is serviced by many competitors, an exporter may have little choice but to match the going price or even go below it to establish a market share. If, however, the exporter’s product or service is new to a particular foreign market, it may be possible to set a higher price than normally charged domestically.

This chapter appeared in the book Breaking Into the Trade Game. 2004.
Topic: Strategies
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If your company is interested in delving further into the international trade arena, licensing, joint ventures and offshore operations should be explored. While direct exporting may be a profitable method of market entry for some businesses, licensing your company’s manufacturing rights to a foreign company or setting up a foreign manufacturing joint venture may be viable alternatives.

In comparison, setting up offshore manufacturing operations may be a more economical way of doing business. Firms choosing to set up operations in different countries should check for local incentives. Government agencies will usually assist foreign businesses to set up operations and will provide a wide range of grants and taxation incentives, both for the corporation and its expatriate employees.

This chapter will discuss the relative advantages and disadvantages of alternatives to direct exporting, how to find licensing and joint venture manufacturing partners, and how to finance overseas investment.

Strategic Alliances

Licensing

Licensing involves a contractual arrangement whereby a company licenses the rights to certain technological know-how, design and intellectual property to a foreign company in return for royalties or other kinds of payment.

Licensing offers a small business many advantages, such as rapid entry into foreign markets and virtually no capital requirements to establish manufacturing operations abroad. Returns are usually realized more quickly than for manufacturing ventures.

The disadvantages of licensing include a lack of control over manufacturing and marketing, and more importantly, that the licensee may become a competitor if too much knowledge and know-how is transferred. Take care to protect trademarks and intellectual property.

One way to help ensure that your intellectual property is protected is to secure proper patent and trademark registration. In the interim before your patent is filed, you may ask a potential licensee to sign a confidentiality and non-disclosure agreement barring the licensee from manufacturing the product itself, or having it manufactured through third parties. Make sure such agreements are not in violation of laws in the host country.

Patents should be filed with the appropriate foreign government within one year of U.S. filing, in order to obtain patent protection under the Paris Convention, the international agreement on patents. Patent rules vary from country to country, so it is important to consult a competent international patent and trademark attorney.

Licensing the rights to your product to a foreign company will require a carefully crafted licensing agreement. Consulting an attorney is critical since rules on licensing also vary from country to country. Be careful that the agreement does not violate host country antitrust laws. Under the antitrust laws of many countries, the licensee cannot set the price at which a product will be resold by the licensor.

Check with the United States Trade Representative’s Office (USTR – www.ustr.gov) for current information on intellectual property rights (IPR) protection in different foreign countries or refer to the Country Commercial Guides on the National Trade Data Bank (www.stat-usa.gov). In certain countries, USTR has applied a priority country label because of IPR violations. You may want to avoid licensing your company’s patents and trademarks to these countries.

Foreign Manufacturing Joint Ventures

In contrast to licensing arrangements, foreign manufacturing joint ventures allow for the U.S. company to have a stake and management role in the foreign operation. Joint ventures require more of a direct investment than licensing and require training, management assistance and technology transfer.

Joint ventures can be equity or non-equity partnerships. Equity joint ventures are contractual arrangements with equal partners. Non-equity ventures involve the host country partner in the arrangement with a greater percentage. In some countries, a joint venture is the only way for a foreign company to set up operations. Laws often require that a certain percentage of stock belong to a citizen of the host country.

Foreign manufacturing joint ventures are risky in that geographical and cultural factors may interfere with the smooth running of operations. You will have to deal with entirely new management, located in a different country, whose first language may not be English. Despite the drawbacks, using a foreign partner can have many benefits: the partner likely will have intimate knowledge of the target market and may have business and political contacts to make market entry easier.

Partner Selection Issues

Finding a suitable partner is critical to the success of any licensing or manufacturing joint venture arrangement. However, the selection process can be time-consuming and difficult without proper assistance. The United States government has developed a number of special programs to assist U.S. companies to select overseas partners.

The SBA-supported Unisphere Institute’s International Ventures Network partners U.S. high technology firms with firms throughout the world (www.unisphere.com). Unisphere, Inc. sources, assesses, develops and commercializes technologies. Unisphere serves as an independent third party that provides to clients the best possible advice and support in the field of technology commercialization by developing plans and assisting in the execution of plans for penetrating defense and commercial markets with cost-effective product solutions. Strong and stable firms are identified through Unisphere’s network of public and private trade promotion and economic development organizations in Europe, Asia and the Americas, to facilitate cross-border, high-tech ventures. Once specific venture opportunities are identified, Unisphere brings prospective partners face-to-face to define the venture.

The DOC Matchmaker Trade Delegations are an excellent way to make joint venture and licensee contacts. Matchmakers provide one-on-one, pre-screened business appointments, arranged by the United States & Foreign Commercial Service (US&FCS) (www.ita.doc.gov) overseas staff, for U.S. companies in a foreign country.

A number of Matchmaker Trade Delegations are held each year. For companies unable to take advantage of a specific Matchmaker, you may consider the DOC’s “Gold Key Service.” For U.S. firms planning to visit a country, US&FCS overseas staff will assist in developing a market strategy, setting up orientation briefings, making introductions to potential joint venture partners, providing interpreters for meetings and helping with follow-up planning. Fees vary from country to country.

To follow are several involved in foreign partner selection:

  1. Contact your local DOC office or U.S. Export Assistance Center (EAC). Discuss your target market and what kind of partner you are seeking. They can tell you whether a Matchmaker program fitting your needs is scheduled. If not, they will send your request to the appropriate FCS representative abroad.
  2. A list of potential partners will be forwarded to you. Contact each one with letter of introduction.
  3. After responses from potential candidates are obtained, conduct a financial and business reference check on the most qualified candidates. If you are unable to do this in-house, use a credit reporting firm.
  4. Make a trip abroad, either with a Matchmaker Trade Delegation or on your own, to meet with potential licensees or joint venture partners.
  5. Having made your final selection, begin contract negotiations with the assistance of legal counsel.

Foreign Investment Opportunities

Establishing a manufacturing facility abroad requires greater investment than licensing or joint venture manufacturing, but it also affords the greatest amount of control over operations. Additional factors may include foreign government investment incentives, the need to eliminate high transportation and tariff costs, and the desire to lower production costs.

If you are considering setting up an offshore manufacturing plant, you will need to assess whether or not to acquire an existing facility or to construct a new one. Key factors in this decision include legal and tax ramifications, location and how to finance the foreign investment.

Legal and Tax Implications

Much of the decision-making process surrounding joint ventures or offshore manufacturing involve legal and tax issues. Since some countries actively pursue foreign investment, they have relaxed their laws on the types and amount. In addition, they offer tax incentives. Consequently, U.S. and host country attorneys and accountants need be an integral part of the team to assess whether and where joint venture or offshore manufacturing would be most profitable.

Overseas Private Investment Corporation (OPIC)

Investing overseas requires a substantial commitment of a company’s time and money, and a certain amount of risk. To provide investment assistance and to address the risk insurance needs of U.S. companies, the U.S. government created OPIC, a separate business-oriented agency to support American investors entering the international marketplace. OPIC (www.opic.gov) is the lead agency assisting U.S. businesses interested in investment overseas. OPIC programs are available if the project:

  1. Is a new venture, or expansion of an existing business,
  2. Is located in a developing country where OPIC operates (OPIC operates in 140 countries),
  3. Will assist in the socioeconomic development of the host country,
  4. Is approved by the host government, and
  5. Is consistent with the economic interests of the United States and will not have a significant adverse effect on the U.S. economy or U.S. employment.

If your potential overseas investment fits these criteria, OPIC can be an extremely useful resource. OPIC offers a variety of programs, including financing and political risk insurance to help protect your investment and several pre-investment services.

Pre-investment Assistance

OPIC sponsors investment missions to introduce U.S. business men and women to key foreign private sector leaders, government officials and potential joint venture partners. Since 1971, OPIC has accomplished its developmental mission by supporting more than 3,100 projects throughout the developing world. Over the agency’s 32-year history, OPIC has supported nearly $145 billion worth of investments that have helped developing countries to generate over $11 billion in host-government revenues and create over 680,000 host-country jobs.

In addition to pre-investment assistance, OPIC provides financing to assist in the setup of overseas operations and risk insurance to mitigate some of the problems associated with investment in developing countries.

Financing

In July 2003, OPIC announced the establishment of a new department focusing on small and medium-size businesses. The Small and Medium Enterprise Department is responsible for OPIC’s Direct Loan program, which provides financing to U.S. businesses with annual revenues under $250 million. Other finance activities will be housed in a new Structured Finance Department, which will be responsible for the current Investment Guarantee program as well as special initiatives.

Insurance

Private investors may be hesitant to undertake long-term investments abroad, given the political uncertainties of many developing nations. To alleviate these concerns, OPIC insures U.S. investments against three major types of political risks: inconvertibility, expropriation and political violence, including civil strife.

Foreign Governments

Foreign governments, particularly in developing countries, often sponsor special agencies to aid and facilitate foreign direct investment. Some examples include the Mexican Investment Board (MIB), the Portuguese Trade Commission and the Bahrain Promotions and Marketing Board. These foreign investment promotion agencies can provide detailed market information, joint venture leads and make contacts with key officials. They often maintain offices in the United States.

Some countries also may have special funds or financing arrangements to spur foreign investment in particular sectors or geographical areas. Foreign investment promotion agencies can lead you to these sources. Contact the appropriate foreign embassy in the United States for the name of the agency that can assist you.

A Final Word on Going Global

How you decide to enter overseas markets will depend on a variety of factors unique to your own small business. Going global can be a challenging experience for a small business, but the rewards can be substantial. Let optimism and enthusiasm be your guide as you go global. The U.S. Small Business Administration, as well as numerous other government agencies at the state and federal level, support and encourage your entry into the international arena.

This chapter appeared in the book Breaking Into the Trade Game, 2004.
Topic: Strategies
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