Exporting and Trading info

SUMMARY  ■ Political and economic changes within the former communist bloc have led to optimism about business therein because (a) political barriers may be lessened and (b) economic growth will enhance market potentials. H As political relationships have varied in this century between Western countries and what are now known as HPEs, business relationships have fluctuated substantially. This has been especially true of trade between the United States and the former Soviet Union. Trade flourished when the two countries were allies but fell when animosities arose. ■ Trade controls have been instituted to hurt an unfriendly country, to try to make a country change some policy, or to make a public statement of displeasure about another country's actions. ■ Not all HPEs plan to transform themselves into market economies, nor will transformation to a market economy necessarily make HPEs economically successful. ■ Regardless of the model of market economy that countries follow, th...

Advantages of Companies and Countries Company and country advantages depend, of course, on the particular products, services, and resources that they can provide. In addition, one may look at comparative opportunities by size of company, location of production facilities, and some particular operating characteristics. Among the so-called Triad Powers (the United States, Japan, and Western Europe), Western Europe would seem to have a location advantage in trade with Eastern Europe and the Soviet Union as markets open. Furthermore, it is probable that preferential trading relationships will develop between the European Community and various Eastern European countries. Japan has a similar location advantage with China and is already the largest exporter to China. In addition, Chinese industrial purchasers rate the quality of Japanese products higher than those from the United States and higher than those from any European country except Germany.62 U.S. production has a location advant...

Types of Products and Services Because so many products and services are in short supply within the HPEs, it is difficult to speculate where more advantages lie for Western firms. As long as all resources enter from abroad and as long as transferees are willing to wait long-term to repatriate their capital and earnings, almost any type of product and service will be welcome. However, when locally scarce resources have to be added to those brought in from abroad, HPEs will likely try to promote those projects that offer hope of economic growth, while allowing just enough expenditure on consumer goods and services to placate their consumer-products-hungry populations. The composition of imports by HPEs from the West is an indication of their industrial emphasis. Nearly one third of imports are classified as engineering products, and the HPEs have been particularly eager to expend their resources on importing advanced machinery and equipment. From numerous examples it is obvious that ...

Comparison of HPEs Western firms are more willing to expend resources where they see greater opportunities. Their perception of opportunities is thus mirrored by their expansion plans. In a 1990 survey of CEOs from the United States, Western Europe, and Japan, 34 percent included Eastern Europe and only 13 percent included the then USSR in their next five-year capital-spending plans. Within Eastern Europe, intentions were polarized by area. There was a much higher intent to exploit opportunities in Czech and Slovak, Poland, Hungary, and what was East Germany than in Yugoslavia, Romania, Bulgaria, and Al- bania.59 Unfortunately, there are no similar surveys for other HPEs; however, China seems to be perceived as a high-opportunity area. After the Tiananmen uprising, there was some "wait-and-see" attitude on the part of Western companies, but this was quickly replaced by a sharp increase in the number and value of all types of contracts between China and Western firms.60 Th...

Planning Exports to HPEs The steps needed to develop profitable business with HPEs can be long and expensive. Recall McDonald's long negotiation process with authorities before reaching a joint venture agreement in Russia. Furthermore, there are many examples of firms that expended considerable effort without reaching their business objectives.58 Table 10.4 outlines the major steps a U.S. manager would have to undertake to export profitably to an HPE, which is still operating close to its traditional CPE methods. Note that each step is effectively a decision point. For example, in step 1, if there are insurmountable objections within the company for doing business with HPEs, it would be fruitless to incur the costs inherent in the other steps. LOOKING TO THE FUTURE   This chapter has differed from others in that the emphasis throughout has been on the future. Events within HPEs and between HPEs and successful market economies have been changing so rapidly that any business de...

Cooperative Arrangements Because they want to gain Western products and services with high-technology and management skill inputs and, at the same time, minimize the outflow of hard currencies, HPEs prefer arrangements by which they license Western technology, have a Western firm build and/or run the establishment for them under turnkey or management contracts, or participate in joint venture arrangements. Of particular interest are the coproduction arrangements, which involve having a Western firm provide equipment, technical input, or management for a plant owned by HPE partners in exchange for a portion of the output or output from another HPE plant. For instance, Siemens, a German equipment manufacturer, receives telephone relay equipment in Bulgaria in exchange for providing a telephone system. Even when HPEs allow 100 percent ownership by Western foreign investors, the Western firms generally prefer joint ventures. The regulatory and bureaucratic environments within HPEs are ...

Marketing A distinction needs to be made between consumer and industrial sales. For the former, brand recognition and pent-up demand often precede the Western firm's entry so that little promotion has been necessary to date.54 In a 1990 study combining recognition and esteem to rate 400 Western trademarks in terms of brand power, CIS, Hungarian, and Polish adults all put Sony, Adidas, Ford, and Mercedes-Benz in their top-ten list. On average the Hungarians, Poles, and former Soviets recognized 250, 175, and 100 brands, respectively.55 However, pent-up demand will not last forever; and some companies, such as American Express, Procter & Gamble, and Levi Strauss, are advertising to build brand recognition and image. Large Western advertising agencies, such as Young & Rubicam and McCann-Erickson, and market research groups, such as Gallup, have established offices in HPEs so that they will be ready when there is more than an ample supply of goods and services to sell. Indu...

METHODS OF DOING BUSINESS WITH HPEs Thus far we have focused on differences in doing business with HPE enterprises. Yet in spite of these differences many firms have adjusted to the nuances. The following discussion highlights ways to deal with some major concerns. Financial Arrangements Although balance-of-payments problems in HPEs have inhibited their ability to buy goods in the West, sales may be financed in several ways. Exports may be sold for credit, cash payment in a convertible currency, or through some type of barter arrangement. Western banks such as Dresdner, Citibank, Paribus, and Bankers Trust are now well established in the HPEs. Vneshtorbank, the CIS Foreign Trade Bank, has correspondent relations with over 1300 banks in over 100 countries and owns banks in Western Europe. Through these networks, one can export by means of letters of credit or bills of exchange, which function substantially the same as the instruments used for trade with other Western countries.51...

Import Controls In addition to virtual embargoes on goods from Vietnam, Cambodia, North Korea, Laos, and Cuba, the United States uses the 1930 tariff rates (the highest in U.S. history) on goods coming from Albania, Bulgaria, Mongolia, and Romania. The embargoes as well as the failure to grant most-favored-nation status put much HPE production at a competitive disadvantage in the U.S. market. (As of late 1990, China, Czech and Slovak, Hungary, Poland, and the former USSR did receive MFN treatment in the United States.)46 Because of the high level of education and labor skills of many HPE populations, Western companies are interested in sourcing production in those countries. Or, they may seek markets within the HPEs but export sufficient amounts to earn foreign exchange. The lack of MFN status hampers these potentials. Furthermore, even when MFN treatment is extended, it may be taken away, thus increasing operating uncertainties. For example, the U.S. suspended Poland's MFN statu...

TRADE RESTRICTIONS Export Controls  Countries maintain export controls to ensure national security, promote for- eign policy objectives, and prevent the export of certain raw materials that  are m sjj0rt suppiy while these controls may be applied to any other country, sales DY industrial countries to HPEs have been most affected, especially those from the United States. Cuba, Cambodia, Mongolia, and North Korea receive practically no goods from the United States. China, on the other hand, is treated quite leniently, with few procedural requirements and restrictions on only a limited number of products that could be of strategic military importance. The other European and Asian HPEs fall somewhere in between in terms of the severity of U.S. export restrictions. These restrictions include technology exports through licensing and joint venture arrangements and vary by product as well as destination.37 The Office of Export Control maintains a list of products for which spec...

Legacies of Central Planning The historical differences in economic systems underlie current conditions that affect Western business with HPEs. The HPEs, unlike the market-driven systems of the West, did not rely much on the market to determine what to produce or what price to charge. In the former USSR, for example, 95 percent  of prices were changed only twice between 1955 and 1991. Prices therefore  bore jjttje resemblance to what prices or costs would be in a market economy. Currencies were not convertible, and their values were set arbitrarily in relation to Western ones. Since the countries decided centrally what was to be produced and consumed domestically, they planned certain production to be in excess of domestic consumption and certain production to be less. Those excesses and shortages became in turn their planned exports and imports, respectively. These then were varied only on an emergency basis because of supply problems.29 Imports were bought by large forei...

The Need for Two-Way Business Flows There has been much recent discussion about HPE plans for making their currencies convertible. Inevitably, the questions are "for whom?" and "for what?" For example, convertibility could be for foreigners, but not for residents; it could be for trade, but not for dividends. Regardless of the regula-     tions or intent, business with HPEs must inevitably be two-way to succeed.  If HPEs earn insufficient hard currencies, they will have insufficient hard cur-rency for payments to foreign firms under trade, licensing, or investment agreements. As HPEs have turned toward reform or economic transformation, they have favored fixed rather than fluctuating exchange rates and have had to make large currency devaluations when unable to sustain their existing rates. For some time, basically because of ideological differences, many people in market economies assumed that all HPE-made products were inferior, pointing to items that are in ...

FACTORS AFFECTING BUSINESS EXPANSION The preceding section on stumbling blocks described several factors that could affect the future of business between companies in HPEs and companies in market economies. The more HPEs are economically successful, the more attention Western companies are apt to give them. History of Internal Dependence The combined populations of European HPEs and China make Western businesses optimistic about commercial opportunities. The combined area comprises approximately one third of the world's population, with China alone accounting for about one fifth. The CIS has a population slightly larger than the United States, and the other European HPEs have a combined population that is slightly smaller. The CIS and China rank as the world's first- and third-largest markets in terms of area. Although the large population and land mass indicate possible opportunities, they are in some ways a deterrent to expanded business with the West. Their natural re...

Stumbling Blocks Many factors could impede the orderly progress to becoming a successful market economy. The following discussion highlights the major hurdles. Economic Shocks In bringing about a market transformation, there are some negative economic consequences, at least in the short term. The basic problem is that the costs are up front, and the benefits are much later. For example, a move to increase efficiency by allowing foreign competition brings unemployment. HPEs are neither accustomed to unemployment, nor do they have the safety nets of fall-back compensation, retraining, and job-relocation assistance that were developed over a long time period in industrial countries. A deregulation of prices brings rapid inflation because the old prices were below the true market values for many of the goods being sold. When Poland deregulated most of its prices, the standard joke was, "We used to have long lines and empty shelves. Now we have no lines, full shelves, but no money ...

Models of Successful Market Economies Countries in the process of transforming their economies obviously aspire to become economic successes, not to join the ranks of the LDCs. There is considerable debate within HPEs as to which model to emulate. The social market economies of northern Europe are characterized by heavy govern-economies are mental spending and high taxation to pay for such social services as health,care, education, subsidized housing for the poor, and unemployment benefits. The consumer-directed market economy, as seen in the United States, involves minimal government participation while promoting growth through the mobility of production factors, including high employment turnover. An administratively guided market economy, as exemplified by Japan, requires a great deal of cooperation among government, management, and workers to achieve growth and full employment with low job turnover on a nonmandated basis. But regardless of model differences, there are a numbe...

TRANSFORMATION TO MARKET ECONOMIES As we have already discussed, historically planned economies differ greatly in terms of the commitment and progress they have made toward achieving the goal of transforming their centrally planned economies into market economies. At one extreme is the former German Democratic Republic (GDR), which has been reunited with and in fact is being absorbed into the German Federal Republic. At the other extreme is Cuba, whose leader, Fidel Castro, Some HPEs want to in reference to the political liberalization and other changes within Eastern Europe, said, "We are witnessing sad things in other socialist countries, very sad things. We are astonished at the phenomena that we see." These differences are important when assessing whether and when a country might become a market economy. It is likely that in the foreseeable future HPEs will be at different points along the continuum. The nearer countries are to the central-planning end of the continuu...

Examples of Change, Especially in the United States The twentieth century opened with peaceful trading operations between the United States and what was then Russia. The two countries were neither allies nor enemies, so there was no official governmental effort to expand or restrict the volume of trade. When the two countries became allies in World War I, U.S. exports to Russia jumped more than eighteenfold, due largely to war-related credits. When the Bolsheviks came to power, Soviet foreign trade became a state-controlled monopoly, credits nearly disappeared, and U.S. exports to the country became negligible. A formal trade agreement between the countries in 1935 resulted in the Soviet Union's becoming the biggest customer for the United States during the Depression. In 1939 the German-Russian nonaggression pact and subsequent invasions of Poland and the Baltic states led to the imposition of certain U.S. export embargoes, which were dropped in 1941 when the two countries agai...

Introduction to business with historicall palnned economies The demolition of the Berlin Wall and the overthrow of European communist dictatorships in 1989 brought renewed Western interest in the possibility of conducting business in countries that had heretofore been considered off limits. The countries that sparked this interest were those that had been commonly called communist, nonmarket economies (NMEs), centrally planned economies (CPEs), Second World countries, or the Eastern bloc. (This latter term was political rather than geographic; that is, East-West trade referred to business between communist and noncommunist countries rather than between the Eastern and Western Hemispheres.) The changes were so unforeseen and have occurred (and continue to occur) so rapidly that one risks making statements that will quickly become obsolete. Nevertheless, because of the changes taking place within many of these countries, the old terminology no longer seems appropriate for them. At the...