EXPORT MANAGEMENT COMPANIES
Export Management Companies
Domestic firms that specialize in performing global business services as commission representatives as distributors are known as export management companies (EMCs). Although few directories listing EMCs are available, more than 1,000 of these firms are estimated to be operating in the United States. A study conducted by the National Federation of Independent Businesses found that more than 20 percent of all manufactured goods exporters in the United States are EMCs43. Most EMCs are quite small. Many were formed by one or two principals with experience in global business or in a particular geographic area. Their expertise enables them to offer specialized services to domestic corporations.
Export management companies have two primary forms of operation: They either take title to goods and operate globally on their own account or they perform services as agents. Because they often serve a variety of clients their mode of operation may, vary for one client and as distributor for another. It may even act as both for the same client on different occasions.
The EMC As an Agent
When working as an agent the EMC is primarily responsible for developing foreign business and sales strategies and establishing contact abroad. Because the EMC does not share in the profits from a sale, it depends heavily on a high sales volume, on which it charges commission.
Export management companies that have specific expertise in selecting markets because of language capabilities, previous exposure, or specialized contacts appear to be the ones most successful and useful in aiding client firms in their global business efforts. For example they can cooperate with firms that are already successful in global business but have been unable to penetrate a specific region. By sticking to their area of expertise and representing only a limited number of clients, such agents can provide quite valuable services.
The EMC As a Distributor
When operating as a distributor the EMC purchases products from the domestic firm takes title and assumes the trading risk. Selling in its own name, it has the opportunity to reap greater profits than when acting as an agent. The potential for greater profit is appropriate, because the EMC has drastically reduced the risk for the domestic firm while increasing its own risk. The burden of the merchandise acquired provides a major motivation to complete an international sale successfully. The domestic firm selling to the EMC is in the comfortable position of having sold its merchandise and received its money without having to deal with the complexities of the global market. On the other hand it is less likely to gather much global business expertise.
For the concept of an export managementcompany to work, both parties must fully recognize the delegation of responsibilities; the costs associated with these activities; and the need for information sharing, cooperation, and mutual reliance. Use of an EMC should be viewed just like domes channel commitment. This requires a through investigation of the intermediary and the advisability of relying on its efforts a willingness to properly reward its efforts. The EMC in turn must adopt a flexible approach to managing the export relationship. It must continue to upgrade the levels of services offered constantly highlighting for the client the dimensions of post sales service and providing in depth information since these are its biggest sources of differential advantage44. By doing so the EMC lets the client know that the cost charged is worth the service and thereby reduces the desire for circumvention.
Legislation enacted in 1918 that led to webb-pomerene associations permits firms to cooperate in terms of global sales allocation, financing and pricing information. The associations must take care not to engage in activities that would reduce competition within the United States. To more successfully pent rate global markets however they can allocate markets fix quotas and select exclusive distributors or brokers.
In spite of this early effort to encourage joint activities by firms in the international market, the effectiveness of webb-Pomerene associations has not been substantial. At their peak, from 1930 to 1934, 50 webb-Pomerene associations accounted for about 12 percent of U.S. exports. By 1991, only 22 associations were active and accounted for less than 2 percent of U.S. exports45. In addition it appears that most of the users of this particular form of export intermediary are not the small and medium size firms the act was initially intended to assist, but rather the dominant firms in their respective industries.
The lack of success of this particular intermediary has mainly been ascribed to the fact that the antitrust exemption granted was not sufficiently ironclad. Further specialized export firms are though to have more to offer a domestic firm than does an association, which may be particularly true if the association is dominated by one or two major competitors in an industry. This makes joining the association undesirable for smaller firms.
A third major intermediary is the trading company. The most famous ones are the general trading companies or sogoshosha, of Japan. Names like Mitsubishi, Mitsui, and C. Itoh have become household words in the United States. The nine trading company giants of Japan in 1945 acted as intermediaries for about one-third of the country's exports and two fifths of its imports46. These general trading companies play a unique role in world commerce by importing, exporting, counter trading, investing, and manufacturing. Because of their vast size they can benefit from economies of scale and perform their operations at high rates of return even though their profit margins are very low.
Four major reasons have been given for the success of the Japanese sogoshosha. First by concentrating on obtaining and disseminating information about market opportunities and by investing huge funds in the development of information systems, these firms now have the mechanisms and organizations in place to gather evaluate, and translate market information into business opportunities. Second economies of scale permit the firms to take advantage of their vast transaction volume to obtain preferential treatment by negotiating transportation rates or even opening up new transportation routes and distribution systems. Third these firms serve large internal markets not only in Japan but also around the world and can benefit from opportunities for counter trade. Finally sogoshosha have access to vast quantities of capital both within Japan and in the global capital markets. They can therefore carry out transactions that are too large or risky to be palatable or feasible for other firms47.
In the United States, export trading company (ETC) legislation designed to improve the export performance of small and medium sized firms was implemented in 1988. In order to improve export performance bank participation in trading companies was permitted and the antitrust threat to joint export efforts was reduced through recertification of planned activities by the U.S. Department of Commerce. Businesses were encouraged to join together to export or offer export services.
Permitting banks to participate in ETCs was intended to allow ETCs better access to capital and therefore permit more trading transactions and easier receipt of title to goods. The relaxation of antitrust provisions in turn was meant to enable firms to form joint ventures more easily . The cost of developing and penetrating global markets would then be shared, with the proportional share being for many small and medium sized firms much easier to bear. As an example in case a warehouse is needed in order to secure foreign market penetration one firm alone does not have to bear all the costs. A consortium of firms can jointly rent a foreign warehouse. Similarly each firm need not station a service technician abroad at substantial cost. Joint funding of a service center by several firms makes the cost less prohibitive for each one. The trading company concept also offers a one stop shopping center for both the firm and its foreign customers. The firm can can be assured that all global functions will be performed efficiently by the trading company and at the same time, the foreign customer will have to deal with few individual firms.
The legislation permits a wide variety of possible structures for an ETC. General trading companies may handle many commodities, perform import and export services, countertrade and work closely with foreign distributors. Regional trading companies may handle commodities produced in only one region, specializing in products in which that region possesses a comparative advantage. Product oriented trading companies may concentrate on a limited number of products and offer their market penetration services for only these products. Trading companies may also be geographically oriented, targeting one particular foreign nation, or may be focused on certain types of projects, such as turnkey operations and joint ventures with foreign investors. Finally trading companies may develop an industry oriented focus handling only goods of specific industry groups such as metals chemicals or pharmaceuticals48.
Independent of its form of operation an ETC can engage in a wide variety of activities. It can purchase products, act as a distributor abroad or offer services. It can provide information on distribution costs and even handle domestic and international distribution and transportation. This can range from intensifying distribution costs to booking space on ocean or air carriers and handling shipping contracts.
Although ETCs seem to offer major benefits to many U.S. firms wishing to go abroad, they have not been very extensively used. By 1998 only 164 individual ETC certificates had been issued by the U.S Department of Commerce. Since some of these certificates covered all the members of trade associations, more than 6,000 companies were part of an ETC49.
Export trading companies may still become the major vehicle for the generation of new global business entry activities by small and medium sized firms. The concepts of synergism and cooperation certainly make sense in terms of enhancing the global competitiveness of firms. Yet the focus of ETCs should perhaps not b pure exporting. Importing and third-country trading may also generate substantial activity and profit. Through the carrying out of a wide variety of business transactions, global market knowledge is obtained. This management and consulting expertise may in itself be a salable service.
INTERNATIONAL FINANCIAL RISK MANAGEMENT
All firms are in some way influenced by three financial prices; exchange rates interest rates, and commodity prices. The management of these prices, these risks, is termed financial risk management.
The Role Of Management
The type and quality of its management are the keys to whether or not a firm will enter the international marketplace. Researchers have found that management commit-mint is crucial in the first steps towards international operations.