Indirect exports

From CEOpedia | Management online

Indirect exports is one of the three export patterns among direct exports and total exports. Indirect exports means that exports are done through trade intermediaries, both meaning export to or export from a country. Reasons of choosing indirect export might be as below[1].

  • conditions of home market are not preferable to produce goods,
  • at home market there is poor availability of resources,
  • production costs at home market are high,
  • property rights are not protected by the law,
  • governance regulation is not supportive,
  • there does not exist supporting industries.

Partners engaged in indirect exports

Indirect exports are happening through cooperation with specific partners (marketing representatives). They might be located in domestic country or foreign country. Partners have specific responsibilities related to distribution and sales. They receive part of margin for their work. These partners might be[2][3]:

  • agents or agencies,
  • wholesalers,
  • distributors,
  • dealers,
  • resellers,
  • multinational offices,
  • also purchases might be done directly abroad.

Indirect exports in European Union

In European Union countries indirect export is understood as situation when good is leaving European Union countries. They are controlled by Export Control System (ECS)[4].

Indirect exports for Small and medium-sized enterprises

Dutch SMEs were researched in case of using indirect export. The survey showed that it does not matter if company is old or new (established less than 8 years). What matters is how big the company is - bigger companies are, they are more willing to use indirect export[5]:

  • Company size: up to 9 employees with indirect export 5%,
  • Company size: 10-49 employees with indirect export 12%,
  • Company size: 50-250 employees with indirect export 21%.

Other outputs of the survey were that researched companies used mostly foreign intermediaries (81%) instead domestic intermediaries (42%). 25% of companies were using both domestic and foreign intermediaries, 16% only domestic and more than 50% only foreign[6].

Examples of Indirect exports

  • Licensed production: This type of export involves a foreign company engaging with a domestic firm to produce and sell the goods in their own country. This is a common approach for companies that have limited resources and are looking to expand into a new market without the risk of setting up their own operations.
  • Export processing: This approach involves a foreign company contracting with a domestic firm to assemble or manufacture goods in the domestic market. The foreign company then imports the finished goods back into their own country for sale. This is a popular approach for companies that want to take advantage of lower labor costs or other advantages of the foreign market.
  • Franchising: This is another indirect export approach that involves a foreign company granting a license to a domestic firm to manufacture and/or sell their goods in the domestic market. This is a popular approach for companies that want to establish a presence in a new market without the costs and risks of setting up their own operations.
  • Distribution: This approach involves a foreign company entering into an agreement with a domestic firm to import and distribute the goods in the domestic market. This is a popular approach for companies that want to take advantage of the distribution networks of the domestic firm.

Advantages of Indirect exports

The advantages of indirect exports include:

  • Lower risk - By outsourcing export activities to a third-party, companies can reduce the risk of their own operations. This can help to reduce the costs associated with export activities, as well as any potential losses due to export failure.
  • Increased access to markets - By using a third-party to export their goods and services, companies can access markets that may otherwise be inaccessible due to geographical or economic reasons.
  • Lower cost of entry - As the third party is responsible for the export activities, companies can enter new markets without having to invest in the necessary infrastructure. This reduces the cost of entry into the export market.
  • Expertise - Having a third-party handle the export activities can provide access to expertise and knowledge that the company may not have. This can help to ensure that the export activities are successful.
  • Compliance - As the third-party is responsible for the export activities, the company can be sure that they are compliant with any export regulations. This can help to reduce the risk of any potential fines or other penalties.

Limitations of Indirect exports

Indirect exports have several limitations that should be considered when choosing this export pattern. These include:

  • The lack of direct control over the foreign market, as the intermediary is in charge of the export process. This can lead to delays in the delivery of goods, as well as other issues, such as language and cultural barriers.
  • Higher costs associated with the additional middleman, as well as the additional complexity of the export process.
  • A lack of knowledge and information about the foreign market, as the intermediary is more likely to be more familiar with the local market than the foreign one.
  • Reduced flexibility and responsiveness, as the intermediary will likely be slower to react to changes in the foreign market than the exporter would.
  • Reduced profits, as the intermediary will likely take a portion of the profits from the exports.

Other approaches related to Indirect exports

  • Re-exports: This refers to products which are imported from one country, modified, combined with other goods, and then re-exported to another country.
  • Third-country exports: This refers to exports that are shipped from one country to another, but through a third country.
  • Transit trade: Goods imported from a third country into the country of origin and then sent to another country without being subject to customs duties.
  • Countertrade: This involves trading goods for other goods, usually on a barter basis.

In summary, Indirect exports involve the utilization of trade intermediaries and other approaches such as re-exports, third-country exports, transit trade and countertrade. These approaches allow businesses to access new markets and increase their export revenues.

Footnotes

  1. ↑ Schröder P. J. H., Trabold H., Trübswetter P. (2003), p.8-10
  2. ↑ Schröder P. J. H., Trabold H., Trübswetter P. (2003), p.15
  3. ↑ Bryan C. (2012), p.167
  4. ↑ Rimmer A. (2016), p.189-190
  5. ↑ Schröder P. J. H., Trabold H., Trübswetter P. (2003), p.15
  6. ↑ Schröder P. J. H., Trabold H., Trübswetter P. (2003), p.15


Indirect exports — recommended articles
Sole distributor — Export merchant — Business format franchising — Export management company — Sole agent — Direct export — Mercantile agent — Local agent — Syndicate

References

Author: Andżelika Stefańska

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