International Trade and Investment

In this lesson, you’re expected to learn about:
– the basics of import and export
– restrictions and barriers to trade
– intellectual property rights and licensing
– foreign direct investment

International business is classified into three categories:
(1) trade,
(2) intellectual property rights (trademarks, patents, and copyrights) and international licensing agreements, and
(3) foreign direct investment.

To the marketer, these broad categories describe three important methods for entering a foreign market. To the lawyer, they also represent the form of doing business in a foreign country and the legal relationship between parties to a business transaction.

Each method brings a different set of problems to the firm because the level of foreign penetration and entanglement in various countries is different.


Trade consists of the import and export of goods and services.

Exporting is the term generally used to refer to the process of sending goods out of a country, and importing is used to denote when goods are brought into a country.

However, a more accurate definition is that exporting is “the shipment of goods or the rendering of services to a foreign buyer located in a foreign country.” Importing is then defined as “the process of buying goods from a foreign supplier and entering them into the customs territory of a different country. ”

Every export entails an import and vice versa. 

A country will have a trade deficit when it consumes more than it produces and imports the difference from other countries. A country will become a debtor nation when there is a huge trade deficit and when it borrows to finance the domestic budget deficit.


Trade is often a firm’s first step into international business. Compared to the other forms of international business (licensing and investment), trade is relatively uncomplicated.

It provides the inexperienced or smaller firm with an opportunity to penetrate a new market or at least to explore foreign market potential, without significant capital investment and the risks of becoming a full-fledged player (i.e., citizen) in the foreign country.

For many larger firms, including multinational corporations, exporting may be an important portion of their business operations. The U.S. aircraft industry, for example, relies heavily on exports for significant revenues.

Exporting is generally divided into two types: (1) direct and (2) indirect. 

1) Direct exporting seems similar to selling goods to a domestic buyer. A prospective foreign customer may have seen a firm’s products at a trade show, located a particular company in an industrial directory, or been recommended by another customer.

A firm that receives a request for product and pricing information from a foreign customer may be able to handle it routinely and export directly to the buyer. With some assistance, a firm can overcome most hurdles, get the goods properly packaged and shipped, and receive payment as anticipated.

Although many of these onetime sales are turned into long-term business success stories, many are not. A firm hopes to develop a regular business relationship with its new foreign customer. However, the problems that can be encountered even in direct exporting are considerable.

Direct exporting is often done through foreign sales agents who work on commission. It also can be done by selling directly to foreign distributors.

Foreign distributors are independent firms, usually located in the country to which a firm is exporting, that purchase goods for resale to their customers. They assume the risks of buying and warehousing goods in their market and provide additional product support services.

The distributor usually services the products they sell, thus relieving the exporter of that responsibility. They often train end users to use the product, extend credit to their customers, and bear responsibility for local advertising and promotion.

2) Indirect exporting is used by companies seeking to minimize their involvement abroad. Lacking experience, personnel, or capital, they may be unable to locate foreign buyers or not yet ready to handle the mechanics of a transaction on their own. There are several different types of indirect exporting.

– Export trading companies (ETCs) market the products of several manufacturers in foreign markets. They have extensive sales contacts overseas and experience in air and sea shipping. They often operate with the assistance and financial backing of large banks, thus making the resources and international contacts of the bank’s foreign branches available to the manufacturers whose products they market.

– Export management companies (EMCs), however, are really consultants who advise manufacturers and other exporters. Firms that cannot justify their own in-house export managers use them. They engage in foreign market research, identify overseas sales agents, exhibit goods at foreign trade shows, prepare documentation for export, and handle language translations and shipping arrangements. As in direct exporting, all forms of indirect exporting can involve sales through agents or to distributors.

Importing and Global Sourcing

Here, importing is presented from the perspective of the global firm for which importing is a regular and necessary part of their business.

Global sourcing is the term commonly used to describe the process by which a firm attempts to locate and purchase goods or services on a worldwide basis. These goods may include, for example, raw materials for manufacturing, component parts for assembly operations, commodities such as agricultural products or merchandise for resale.

[Optional] How to Start an Import/Export Business
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Tariffs, non-tariff barriers, and domestic content laws have a tremendous influence on how firms make their trade and investment decisions.

These decisions in turn are reflected in the patterns of world trade and the flows of investment capital.

1) Tariffs 

A tariff is a tax imposed on imported goods, usually as a percentage of the product’s value. Import duties, or tariffs, have been a source of government revenue far longer than income and value-added taxes.

Goods entering a country are taxed on an ad valorem (percent of value) basis. Many foreign countries prefer to use tariffs since it is relatively easy to check and control as goods come through designated ports.

2) Non-tariff Barriers

Non-tariff barriers are all barriers to importing or exporting other than tariffs – they are generally a greater barrier to trade than tariffs. Unlike tariffs, which are published and easily understood, non-tariff barriers are often disguised in the form of government
rules or industry regulations and are often not understood by foreign companies.

Countries impose non-tariff barriers to protect their national economic, social, and political interests. Imports might be banned for health and safety reasons. Imported goods usually have to be marked with the country of origin and labeled in the local language, so consumers know what they are buying.

Specific examples of non-tariff barriers include the following: 

• Technical barrier to trade or product standard
Examples of product standards include safety standards, electrical standards, and environmental standards.

• Embargo
An embargo is a total or near-total ban on trade with a particular country, sometimes enforced by military action and usually imposed for political purposes.

• Boycott
A boycott is a refusal to trade or do business with certain firms, usually from a particular country, on political or other grounds.

 Export control
An export control limits the type of product that may be shipped to any particular country. They are usually imposed for economic or political purposes and are used by all nations of the world.

• Import quotas
A quota is simply a quantitative restriction applied to imports. Under World Trade Organization (WTO), import quotas are supposed to be banned, but there are so many exceptions that the ban is not that useful. In fact, as tariffs have been reduced as an instrument of protection, the tendency has been to replace them with quotas. Tariffs focus on taxes, while quotas focus on quantities.

3) Domestic Content Laws 

Another way many countries have attempted to assure the participation of domestic producers has been through domestic content laws.

These laws stipulate that when a product is sold in the marketplace, it must incorporate a specified percentage of locally made components. These laws must meet “local content requirements”.

Intellectual property rights are a grant from a government to an individual or firm of the exclusive legal right to use a copyright, patent, or trademark for a specified time.

Copyrights are legal rights to artistic or written works, including books, software, films, and music, or to such works as the layout design of a computer chip.

Trademarks include the legal right to use a name or symbol that identifies a firm or its product.

Patents are governmental grants to inventors assuring them of the exclusive legal right to produce and sell their inventions for a period of years.

Copyrights, trademarks, and patents comprise substantial assets of many domestic and international firms. As valuable assets, intellectual property can be sold or licensed for use to others through a licensing agreement.

International licensing agreements are contracts by which the holder of intellectual property will grant certain rights in that property to a foreign firm under specified conditions and for a specified time.

Licensing agreements represent an important foreign market entry method for firms with marketable intellectual property. For example, a firm might license the right to manufacture and distribute a certain type of computer chip or the right to use a trademark on apparel such as designer clothing. It might license the right to distribute Hollywood movies in a foreign market or it might license its patent rights to produce and sell a high-tech product or pharmaceutical.

U.S. firms have extensively licensed their property around the world and in recent years have purchased the technology rights of Japanese and other foreign firms.

Technology Transfer

The exchange of technology and manufacturing know-how between firms in different countries through arrangements such as licensing agreements is known as technology transfer. Transfers of technology and know-how are regulated by government control in some countries.

For instance, government regulation might require that the licensor introduce its most modern technology to the developing countries or train workers in its use.

International Franchising

Franchising is a form of licensing that is popular worldwide. The most common form of franchising is known as a business operations franchise, usually used in retailing.

Under a typical franchising agreement, the franchisee is allowed to use a trade name or trademark in offering goods or services to the public in return for a royalty based on a percentage of sales or other fee structure.

The franchisee will usually obtain the franchiser’s know-how in operating and managing a profitable business and its other “secrets of success” (ranging from a “secret recipe” to store design).

[Optional] 2017 Top Global Franchises
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The term foreign direct investment refers to the ownership and active control of ongoing business concerns, including investment in manufacturing, mining, farming, assembly operations, and other facilities of production. A distinction is made between the home and host countries of the firms involved.

The home country refers to that country under whose laws the investing corporation was created or is headquartered. For example, the US is home to multinational corporations such as Ford, Exxon, and IBM, to name a few, but they operate in host countries throughout every region of the world.

Investment in a foreign plant is often a result of having had successful experiences in exporting or licensing, and of the search for ways to overcome the disadvantages of those other entry methods.

For example, by producing its product in a foreign country instead of exporting, a firm can avoid quotas and tariffs on imported goods, avoid currency fluctuations on the traded goods, provide better product service and spare parts, and more quickly adapt products to local tastes and market trends.

Manufacturing overseas for foreign markets can mean taking advantage of local natural resources, labor, and manufacturing economies of scale.

Multinational corporations wishing to enter a foreign market through direct investment can structure their business arrangements in many different ways. Their options and eventual course of action may depend on many factors, including industry and market conditions, capitalization of the firm and financing, and legal considerations. Some of these options include the startup of a new foreign subsidiary company, the formation of a joint venture with an existing foreign company, or the acquisition of an existing foreign company by stock purchase.

For now, keep in mind that multinational corporations are usually not a single legal entity. They are global enterprises that
consist of any number of interrelated corporate entities, connected through extremely complex chains of stock ownership. Stock ownership gives the investing corporation tremendous flexibility when investing abroad.

The wholly owned foreign subsidiary is a “foreign” corporation organized under the laws of a foreign host country but owned and controlled by the parent corporation in the home country. Because the parent company controls all of the stock in the subsidiary, it can control management and financial decision-making.
The joint venture is a cooperative business arrangement between two or more companies for profit. A joint venture may take the form of a partnership or corporation. Typically, one party will contribute expertise and another the capital, each bringing its own special resources to the venture.

Joint ventures exist in all regions of the world and in all types of industries. Where the laws of a host country require local ownership or where investing foreign firms have a local partner, the joint venture is an appropriate investment vehicle.

Local participation refers to the requirement that a share of the business be owned by nationals of the host country. These requirements are gradually being reduced in most countries that, in an effort to attract more investment, are permitting wholly owned subsidiaries. Many American companies do not favor the joint venture as an investment vehicle because they do not want to share technology, expertise, and profits with another company.
Another method of investing abroad is for two companies to merge or for one company to acquire another ongoing firm. This option has appeal because it requires less know-how than does a new startup and can be concluded without disruption of business activity.
[Optional] Trade in goods and services
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