Export comparison with investment abroad

Product export usually begins when a producer saturates the local market with products or local market isn’t big enough. To achieve economies of scale and utilization of production capacities, it is very important to find a larger market for manufacturer. Export usually begins by shipping one or multiple of products to a buyer abroad. In this case, additional investments are practically not required, except of costs to comply foreign requirements. However, as the demand for such orders from abroad increases, companies have to consider at least the establishment of a separate department that deals exclusively with exports. In some cases, it may be necessary to open a sales department in another country. Often this is done simply by establishing a subsidiary organization abroad that is an integral part of the parent company. There may be cases when it is more convenient to set up a subsidiary in another country than a branch that takes care of foreign sales and advertising. Even though in this case an investment is made in another country and all the signs of FDI are present, FDI in this case is only intended to support sales and advertising. Actually, here the primary type of doing business remains exporting of products manufactured domestically, a foreign investment is considered as supportive. Such sales offices abroad are established in industries that have various product compliance requirements, such as the pharmaceutical sector, or when the product requires specific installation and use consultations before use, for instance a room heating and cooling system. In the initial stages of exporting, while export volumes are relatively small, organizations can use existing distribution channels and send their products to other countries with the products exported by other manufacturers consolidated by logistics service providers. Very often, for the beginning of export, the consolidation of a cargo transportation is happening in a less than truck load delivery schemas or combining shipments in containers. The concept and reasons of consolidation are described in more detail in chapter. As the volume of exports increases, when the size of a shipment reaches the fully loaded truck FLT or container, it is possible to consider the formation of a regular distribution chain, that could include use of a regional distribution warehouse and other means of increasing logistics efficiency. There is an opportunity to reduce logistics costs comes with larger export shipments, but at the beginning, while export volumes are small, logistics costs are often higher when evaluated per unit of production. In the first phase of an exporter usually aims to distribute the products through retail chains and use their storage system. As an export volume increases, it is possible to consider the creation of distribution strategy and structure. This happens often when an exporter intends to strengthen its brand in foreign country (Burt & Mavrommatis, 2006). In such cases, the organization chooses to distribute its products through its branded stores. However, these branded stores can be established either by an exporter or by local entrepreneurs abroad if an exporter launches franchise. In electronics, computer, phone, fashion apparel businesses exporters often choose to have an international network of branded small boutique stores abroad. So here an exporter is converting business model into franchising. This is ideal illustration of the synergy between export and franchising. It happens that in some country a manufacturer sales product through own network of stores, and there it acts as foreign investor, while in another country exporter acts as franchisor.

The main advantages of pure exporting to compare to FDI are:

• Relatively cheap way to internationalize business.
• Relatively fast way to internationalize business.
• There is no requirement of sharing profit with anyone.
• The risk is limited to the value of a specific shipment or parcel.
• It is feasible to conduct foreign market testing at relatively low costs, before penetrating the foreign market through alternative ways of doing business.

The main disadvantages of pure exporting against FDI are:

• Distance to a consumer.
• Less of knowledge of the foreign market.
• Inability to provide quick after-sales service.
• Possible tariff or non-tariff trade restrictions.
• Costs and risks during transportation can be significant.
• An independent retailer abroad is often not involved and not motivated enough, so it is necessary to support the export through a franchise or a network of controlled sales representatives created through FDI.

Domestic manufacturing and assembly to fulfil foreign order could have a form of export driven by the foreign business partner, actually by importer. In that case a local assembly is somewhat like providing services to foreigners. Final product assembly is one of the lowest value-added processes in the entire product manufacturing cycle. Economically advanced countries are trying to create higher value-added businesses in their countries. However, in the case of a factory that specializes in the final assembly of certain goods or the final stage of manufacturing it is pull driven opportunity to expand the size of the market being served, to achieve economy of scale and internationalize business. Organizations that declare themselves as final assemblers are essentially contract manufacturers from the point of view of their customers. Local assembly is a form export, driven by foreign industrial buyer. Local assembly means that components, parts and raw materials are brought into the country, and after they are made into a final product in a factory, it is taken out of the country again. Local assemblers often become vertical alliance partners for international companies, especially those which have a strong brand.

The main advantages of local assembly and production in home country:

• Allows expanding the market and specializing, when it is not possible to do so in home country due to market insufficiency and lack of specialization.
• An entire production base, investments and labor are accumulated in their own country, and the income comes from abroad, which is very useful for the organizations providing such buyer driven manufacturing and export and for a country, because taxes paid to local budget.

The main disadvantages of local assembly and production in home country:

• In another foreign country where labor is cheaper, a competitor may appear who will offer to carry out assembly cheaper.
• It can be difficult to get enough skilled labor, especially in countries with small populations or for specific industries like assembling electronics or cars.

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