Risks in Export Market There Is Need

Risks in Export Market

There is need for companies to develop a professional approach before venturing into the exporting business. The management of the company is supposed to be committed extremely as well as devoting time and money in commencing the campaigns of export. A company is supposed to be ready to face greater competition as well as more stringent rules and regulations concerning products and packaging due to the variance in rules to which or across which the company will be exporting.

In the process of exportation, there are a number of risks that the company will face. These elements of risks are encountered in every commercial transactions as well as the complexity of the environments that exporters operate in. The content of this paper will analyze risks that a company can face while entering the field of exporting as well as discussing the roles of intermediaries in the field of trade.

Some of the risks involved include: credit risk, poor quality risk, transportation and logistics risks, legal risks, political risks, unforeseen risks, and cultural and language risks as indicated by Andrew Bernard B. et.al, (2007).

Credit risks

This is where a counter party to a transaction fails to perform as per the contracts' terms and conditions, resulting in loss by the holder of the claim. Banks all over the world tend to be very sensitive to credit risk in various financial sectors such as trade financing, loans, foreign, equities, bonds, swaps as well as inter-bank transactions. In many occasions, majorly as a result of long distances and alien environments that are involved, the exporter always finds it difficult to verify the importer's creditworthiness and reputation. In any case the creditworthiness of a foreign buyer is unknown, there is increased risk of late payment, or even fraud. This makes it very essential for an exporter to determine the credit worthiness of the foreign buyer. This can be done through the help of commercial firms by checking credit of the foreign companies.

Poor quality risks

This always happens when the goods to be exported don't get inspected prior to shipment through an independent third party. It may turn out that the entire shipment of the exporter could be rejected after arriving at the premises of the exporter because of poor quality of goods resulting in massive losses for the exporting company. An unscrupulous importer is able to do such a thing when they want to put pressure on the exporter so that they can negotiate at a lower price. For the experienced importers, they will request for a pre-shipment inspection to be carried out by an independence inspection company so as to guard against such mischief down the export chain.

This can be countered through shipping one or two samples of the goods produced to the importer through an international courier company. Even if the importer is not present during the dispatch for inspecting the quality of goods, they can still use the service of the independent inspection company.

Transport and logistics risks

When goods are being moved from one continent to another or within the continent, there are possibilities that the goods face various hazards. The risks could be damage, theft and the goods may sometimes not reach the destination at all.

It is of importance of for the exporter to understand every aspect of international logistics, especially the carriage contract. Such a contract is always drawn between a carrier and a shipper. The importer and exporter are supposed to understand their legal rights for them to claim against carriers incase of loss or damage. The party that will pay the main carrier can be either the importer or the exporter, depending on the export agreements.

Legal risks

Due to frequent change in international laws and regulations or within the country of the exporter, these international laws and regulation that change may affect the exportation negatively. Many of the exporters try to prevent this change of laws and regulation from affecting them through drafting a contract which is in conjunction with a legal firm, to make sure that their interest are taken care of. They make sure that they draw up a checklist containing legal questions that are basic which aim at prior to signing any formal contract, which is a safeguard against impromptu changes in terms of export and incase there are to be any changes, then ample time must be availed for the exporter to accordingly adjust (Cornelius Bothma, 2012).

a good instance is the exporter is supposed to be certain of whichever law and dispute-settlement procedure should be applied to what contract.

The legal environment should be considered more when an exporter wants to do trade with some countries such as the Muslim governed countries like Saudi Arabia. An exporter is supposed first to approach legal organizations in such countries before entering into any determined negotiation.

Moreover, when an exporter wants to appoint middlemen or intermediary, which can be agent or trading house, the exporter is supposed to have knowledge of many issues and responsibilities that influence these intermediaries appointment. The agreement must include a list that clearly states these issues, by providing specification of the duties and rights of the parties who are part of trade traction for this can prevent any serious legal conflicts that may arise at later stage.

Political risks

Political risks come about due to politics of a country. When the country where the exporter is to carry out trade with experience political instability, there are various risks that an exporter might face. Any exporter has to have knowledge of the policies of the foreign government so that they are in a position to change their strategies of marketing tactics accordingly, to take the necessary steps for the loss of business and investment.

Within countries that experience instability, they may end up in a loss due to wars. Additionally, exporters are supposed to be aware of the intervention of the government within the targeted market, for example, many of the countries operate under capitalist system within which the volumes as well as value of goods and services be it of local provision or through way of imports tend to be pegged on the forces of supply and demands.

Several countries still have their government play intervention role in their export and import. Some of the countries that practice these economies are like Cuba, Vietnam, North Korea among others. Some other countries have already achieved partial liberalization of trade; however, there is still need for an exporter to investigate the extent of such liberation before trading with them.

On the other hand, some countries that tend to have advanced towards a more open market, still have some constrains that may arise, like in their foreign currency reserves. Within these countries, their Reserves or Central Banks may not have such enough foreign exchange that can allow the progress of the payments; this may result in a risk of non-payment for the exporter.

Unforeseen risks

This is where natural disasters or terrorists attacks may occur destroying completely an export market for a company. This situation may make the exporter to suffer a big loss that can hinder the progress of the company, (Jitena Kumar Rawat, 2012). Another risk that an exporter may face under unforeseen risks can be where unexpected occurrences may just increase the transportation cost and because of that the exporter may suffer a great loss. This explains why it is important for an exporter to make sure that a force majeure clause has been included in any international contract that the exporter has to commit to.

Exchange rate risks

This is where a fall happens in the currencies, some of the currencies gain strength while others loose strengths. As a result one party who is involve in the trading may benefit over the other and the exporter is not an exception of these, it can affects the exportation costs and even the profit margin might come down. Because the exporter may not be in apposition to identify when there will be a fall or gaining of strength in the currencies, they can quote their currencies before trading. They can go to an extent of approaching the foreign Exchange division of their banks before they quote any prices internationally, for them to be advised. Another direction which the exporter can take in avoiding this exchange rate risk is through purchasing a forward exchange rate contracts.

Culture and language risk

This is where there is language as well as culture barriers between the exporter and the importer. Sometimes it can be a misunderstanding in terms of communication and in international trade transactions, majorly because the importer and exporter originate from different cultures and express themselves in different languages. Many a times business practices, such as rules and regulations, tax systems, accounting methods, customs systems and currency tend to differ from the one exporter to another.

Roles of Intermediaries

Even though research has been done concerning the performance of firms that export their own product, determinants of the performance of intermediaries in export has never been studied empirically, (Aaby, N. & S. Slater. 1989). Acting as entrepreneurial firms, export intermediaries help exporters who are inexperienced in breaking into overseas markets, they also help experienced exporters as well as multinational corporations to enter countries which are unfamiliar. Export intermediaries can be described as specialist firms that function or take the export departments of many manufacturers in noncompetitive lines. As much as the suggestions of a certain emerging body is that intermediaries are capable of making impact on the performance of exporter by finding ways for the exporter to reach a wider range of foreign markets, the focus of the literature has widely concentrated on firms that export their own products. Therefore, a rigorous understanding of determinants for the performance of exporters may be an essential missing link within the research that exists, (Peng, M.W. 1998).

An intermediary is capable of inhibiting the advancement of a manufacturer along the line of export development for them to preserve their intermediary profits, though on doing this, they may as well suffer a loss because this may scare away the potential and existing clients. Therefore, they always have to enhance their own performance and should not alienate their own clients. When the intermediary practitioner have knowledge of whatever works and the one which does not work, makes them to come up with better strategies and this will as well help their client firms in making informed decision over the choice of channel to use. Moreover, when the determinants of export intermediary performance are known, the policymakers may use this to enhance the effectiveness of government export promotion efforts.

Intermediaries have very crucial roles of acting as middlemen in linking organizations and individuals that without them could have not find the connection. As much as they can have more resources, several larger firms may not be willing to commit to newer nonessential markets. This is where intermediaries may come in to act as indirect distribution channels that connect the domestic firms and foreign customers.

There are many intermediaries that exist ranging from the ones within the exporting country such as freight forwarders, customs brokers and trading companies to the ones within the importing country such as representatives of manufacturers to distributers. Within the United States, these intermediaries are referred to as Export Trading Companies (ETCs) and Export management Companies (EMCs) who are handling approximately 5- 10% of total exports of U.S. As per the statistics which was carried out.

Theoretical Background

There are three theories which can be used in discussing export intermediaries. They are: Transaction Theory, Agency Theory and Resource-Based Theory. Transaction cost theory give explanation as to why an exporter may opt to use intermediaries in the first place. Agency theory explains the costs and benefits that are associated with intermediaries. Resource-based theory gives explanations why some intermediaries outperform others.

Transaction Cost Theory

This theory refers to the way firms come up with governance choices, depending on the choice that minimizes their transaction costs. It concentrates on the ex-post costs that are associated with haggling and maladaptation in addition to costs of governance for maintaining the contractual relationship that have been chosen, (Williamson, O. 1985). These costs may go up because of the bounded rationality of decision makers, asymmetric distribution of information between parties to an exchange as well as uncertainty and complexity of the environment. Since such costs tend to be nontrivial during their transaction across borders, many of the activities of international business are believed to be able to minimize property transaction cost and export channels and this makes them to be chosen to minimize the costs incurred in achieving export sale.

While exporting, there are two export channels that manufacturer has:direct export, or indirect export via export intermediaries. For an intermediary to make sure that the second option is chosen by the exporter, he has to lower his client's export related costs of transactions relative to the one of the first choice. This shows that their performance depends on how successful they are in reducing their costs.

Agency Theory

As much as firm-market conflict is being emphasized in transaction cost theory, agency theory as well focuses on the principle-agent conflict. An exporter may look at a way that he can maximize his export performance by use of agents, intermediaries who are the agents, may be interested too in extracting a maximum fee for its services using minimum efforts. Moreover, an agent might misrepresent his knowledge and skills to principals. Such problems do come up due to inability of principals in verifying the agent's skills and behaviors.