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What are the methods of carrying on international business?
US companies intending to carry on international business can do so in three separate manners:
• International Sales – A US company can carry out international sales by either selling directly to customers, selling to retailers, or selling to distributors (who then sell to retailers). Each of the methods of international selling requires different processes or procedures.
⁃ Direct Sales – Direct sales to customers may be achieved through foreign-listed websites, catalogs, and international mail. Payment from the customers is often facilitated through third-party payment websites, such as PayPal or Apple Pay. The main issues with direct sales are the cost of shipment can be high, and customer service and returns can be difficult.
⁃ Example: Doug is in the United States. He creates a website specifically targeting Brazilian customers. When someone from Brazil purchases a product, he undertakes international shipping to deliver the product. Doug also uses Ebay.com and Amazon.com to reach customers in these locations.
⁃ Sales to Retailers and Distributors – The export of goods to retailers is generally carried out through a complicated payment process using “letters of credit”. A letter of credit is a payment device issued by a bank. The buyer of goods works with a commercial bank to acquire a letter of credit. This buyer’s bank is the issuing bank. The letter of credit, like a certified check, says that the bank will make payment to a financial institution presenting the letter of credit for payment. The buyer will post money with the issuing bank in an amount sufficient to pay the letter of credit. The buyer then provides a bank in the seller’s location (the confirming bank) with the letter of credit. The letter of credit ensures a confirming bank that the issuing bank will release funds to the confirming bank upon receipt of a “bill of lading”. A bill of lading is a document identifying the goods for sale under the contract and stating that goods have been shipped. Once the seller ships the conforming goods, he gets the bill of lading from the carrier. The seller takes the bill of lading to the confirming bank to get paid. The confirming bank forwards the letter of credit to the issuing bank to recover its money. Now the buyer pays the issuing bank and gets the bill of lading. The buyer then presents the bill of lading to the carrier to receive the goods. Needless to say, the bill of lading must comply strictly with the letter of credit for the transaction to be consummated.
⁃ Example: Evan agrees to sell his product wholesale to distributors in Spain. As such, he needs to arrange to ship $50,000 in goods to Spain and receive payment from the distributor. He agrees to a letter of credit situation. The distributor will deposit funds in an acceptable bank and acquire a letter of credit. The letter of credit is sent to Evan’s bank. Evan ships the goods and receives a bill of lading, which he provides to his bank. His bank sends the bill of lading to the distributor’s bank. The distributor’s bank pays Evan’s bank once the bill of lading arrives and is used to acquire the shipped goods.
• Licenses or Franchises – Licensing a brand or other intellectual property is the process of allowing a third-party to use the licensed subject matter for a fee. This is very similar to franchising, which is a formalized process of licensing a brand, intellectual property, and operational plans to third parties who pay for the privilege. A business that decides to license or franchise can expand the brand, products, or services to international markets without directly performing services or selling goods in that market. While this model is far easier than navigating the legal and competitive environment of a foreign market, the downside of this method is that the licensor and franchisor lose a certain level of control over the license or brand. Further, the financial reward from licensing or franchising may be less than direct sales in the country.
⁃ Example: ABC Corp manufactures wood products. ABC wants to sell in Europe but does not want to navigate the various markets. ABC franchises its name and operational plans to European businesses. These businesses purchase and sell ABC’s products and pay a royalty to ABC.
• Direct Foreign Investment – US businesses may enter a foreign market by combining in some way with a business that already carries on business in the foreign market. The US business may choose to simply partner with a foreign business as a joint venture. In other situations, the US business may choose to acquire, merge, or otherwise combine with a foreign entity. In either situation, the US business may continue to carry on business in the US while the foreign entity introduces the US business’s product or service into the new market. The decision of whether to enter a joint venture or to acquire a foreign subsidiary business will depend upon competitive factors as well as the legal restrictions on such transactions.
⁃ Example: Acquiring a controlling interest in a foreign entity may be prohibited under that country’s laws. As such, entering the foreign market through a joint venture may be the only available option.
• Discussion: What do you think about the commonly accepted methods of transacting business in foreign countries? Can you think of other models of carrying on business? Hint: Think about services and Internet technology. Can you identify the legal challenges associated with each method of international business?
• Practice Question: ABC Corp is considering expanding the sale of its products into the international market. ABC has identified 5 countries where it would like to first sell its goods. Can you describe to ABC the various methods of entering the foreign markets?