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Methods of foreign trade

International trade is the exchange of capital, goods, and services across international borders. In most countries, such trade represents a significant share of GDP. Five forms of international business: foreign trade, international production cooperation, international investments, international finance and credit relations, and international services.

International production cooperation - is a type of foreign economic activity when the business units of different countries carry out the production process of separate types of intermediate products, which are used as component elements for production of the finished good. Foreign trade may be carried on direct sales, international production cooperation and sales through associations and firms at a government level.

Manufactures also may choose to deal in their goods through intermediaries. When new markets are to be gained, it may be advantageous to use the services of foreign agents who have a long experience of trading and know the markets in their countries better.

Thus, foreign trade is carried on in two main ways: directly between enterprises and foreign firms, and indirectly through intermediaries. Direct sales imply trade based on continual ties between a producer and an ultimate consumer of the product without any intermediary. Such sales mean direct delivery from the seller to the buyer and are practiced by well-established large companies which have good experience of foreign trade and which can gain from the economy of scale. The process of direct sales can be divided into episodic and systematic foreign trade operations. It is used for sale and purchase of raw materials under long-term contracts, large-size and expensive equipment. “+” Costs are reduced by the sum of a commission to the intermediary. The risk and dependence of the results of commercial are reduced. This method also allows a company to be constantly on the market, to take into account its changes and duly react to them. “-“Less commercial qualification and trade experience, otherwise financial charges will increase considerably. Moreover, international trade is riskier than internal – it leads to additional costs.Indirect Salesare sales through intermediaries or mediators. It is used by less experienced or smaller firms because of absence of their own sales network abroad. Their purposes are to achieve serial production and reach remote markets for promotion of new goods. Indirect sales include:Associations and companies at the government level deal in raw materials such as oil, gas and some foodstuffs and consumer goods.

Commodity exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials and contracts based on them.It includes both spot markets and forward or futures markets.Nowadays commodity exchanges are losing their role as markets of physical goods and are becoming futures exchanges where deals are made for speculation purposes or for hedging.



Non-standard goods like tea, fur, bristles sold at auctions, where dealers deal with a certified stock. A certified stock is a commodities stock which was checked and acknowledged proper for delivery. The goods traded at auctions are sold according to sample. The delivery is usually performed on a tale quale basis which means selling without the guarantee of quality.

An auction is the way of buying and selling things by offering them up for a bid. It is the sale where the price is fixed by an auctioneer. The highest bidder wins the action.

Competitive tendering is the system of purchasing goods or services by inviting bids or ‘tenders’ and choosing the supplier from among the bids received. There are one buyer and a number of sellers. The cheapest tender win.

Trade fairs and exhibitions attract thousands of visitors and many prospective buyers. Usually trade fairs and exhibitions are held in the world centers of international trade in order to:* demonstrate new products and goods, promote them to new markets or launch them in the already developed markets; *see innovations; * find investors for the production of novelties; * conclude new contracts and involve partners into cooperation;*analyse the activities of rivals.

Agent- is a person who acts on behalf of principal that is another person, group, business, etc; representative. Distributor – is a wholesaler or intermediary engaged in the distribution of a category of goods. Principal - a person or firm employing another to act as their agent

 

Functions of Agents and Distributors Types of AgentsA large amount of international trade is carried out not by direct contact between a buyer and a seller, but by intermediaries.

Selling firms turn to commercial agents for their services mostly when they try to develop a new market for their goods in a foreign territory. Because agents know the commercial conditions and changes in the market of their country. They have their own storehouses, showrooms and so on.However, sellers are not in a direct contact with the market. They also completely depend on agents’ diligence, efficiency and experience in handling business.

  Number of firms Control over product price Type of the product Entering barriers Existence of non-price competition
PC Many No Indentical without No
MC Large number Some Some product differentiation Low Considerable use
OL Few (>2) Some Diff. and indentical Very high Heavy use
MO Considerable control No differentiation Is blocked Utilized

The main purpose of an agent is seeking out customers and contracting with them on the principal’s behalf for the sale of the principal’s products in their country. An agency agreement defines the territory, time of the agreement validity, quantities to sell annually and an agent’s remuneration. A sales agent comes as an intermediary between the principal who sells and the customer who buys. The relations between commercial agents and their principals can be determined by agency agreements. The commission agent buys and sells goods in the principal’s name and for the principal’s account and charges a commission for their work.

The consignment agent also sells goods in the principal’s name and for the principal's account and operates like a commission agent but the consignment agent performs a wider range of functions. The consignment transactions are concluded on a sale or return basis. If the agents fail to sell the goods within the stipulated time, they are to return the unsold goods to the principals. The liability of either party for return of the goods should be stipulated in the agreement. Agents may be granted the exclusive right to represent the principals. Under the exclusive agency agreement, the principals will have the right to sell their goods only through these particular agents inside the territory agreed upon by the two parties.

Agents versus DistributorsWhereas the commercial agent is engaged in the negotiation with customers about a contract for the sale of goods on behalf of the principal and for the principal’s account for which the agent gets an agreed commission, the distributor operates on their own account as an independent purchaser for sale of the supplier’s products, getting remuneration from whatever profit they may make out of these sales.

The principal usually incurs the obligation to supply to and has the right to be paid directly by the customer; The distributor who enjoys all rights and incurs all liabilities attached to contracts of supply. The appointment of a sole and exclusive distributor holds considerable advantages for the supplier. The distributor is a specialist trader, their knowledge of local trading conditions and possession of a distributive network in a given territory. Legal and linguistic problems are overcome, sales are more easily promoted and marketing is made more intensively. The continuity of distribution is made more effective.

The relations between commercial agents and their principals are determined by agency agreements, while the relations between the distributor and the supplier are determined by a distributorship agreement. Agency agreements are usually concluded for three or five years, while distributorship agreements are signed for longer periods of up to seven years.

Agents take no financial risk. Distributors assume financial risk.

Joint ventures is a business where the provision of risk capital is shared between two or more firms. International production cooperation may include the creation of large trading and production corporations, associations and joint ventures.

A joint venture is an entity formed between two or more parties to undertake economic activities together. A joint venture is created on the basis of capital of two or more parties or countries. This method of production is often adopted for projects which are too large or too risky for any one firm to attempt alone. Internal reasons for forming a joint venture are: *building on company's strengths; *spreading costs and risks; *improving access to financial resources; *economies of scale and advantages of size; *access to new technologies and customers; *access to innovative managerial practices.

The parties agree to create a new entity and they then share in the revenues, expenses, and control of the enterprise. The firms joining in such a venture may provide different kinds of expertise, for example, technical expertise. Russian enterprises also have the right to set up joint ventures with foreign firms on the Russian territory. Joint ventures are established on the basis of joint capital with the share of foreign participation not exceeding 49 %, and with being normally 51 % of capital belonging to residents. It may be a corporation, limited liability company, partnership or other legal structure. The point which makes joint ventures so effective is combining different resources of different countries. The country which has a better or cheaper resource provides it to float to a joint venture. In Russia the residential party usually provides land or buildings. A counterparty provides equipment and usually finances all short-term assets. Joint ventures are fully independent. They should be self-supporting and self-financing. The only thing they should do for the purpose of creation of joint ventures is to get the registration and an export license.

If the parties want to form a joint venture, a Protocol of Intent is normally signed. A joint venture becomes a juridical person after it has been registered with the Russian authorities. Only after the registration a company may open a bank account and conclude agreements and contracts in its own name. The most important documents for the application procedure are the foundation documents and the feasibility study.

The foundation documents include the agreement between the partners on the establishment of a joint venture, and the Charter of a joint venture. These documents outline the legal status of a joint venture, the funds raised, management and personnel, and some other provisions.

The feasibility study is jointly prepared by the partners involved. It covers objectives of a company, working capital, a product to be manufactured, marketing possibilities and technical back-up of the project.

A joint venture is managed by a Board of Directors. The Board is represented both by the residents and foreign participants. It sets out the strategy of a company.

 

 


Date: 2015-12-17; view: 1546


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