Chapter 5

Export Channels of DistributionExport Channels of Distribution

Global competition is motivating firms to seek innovative ways of enter-

ing new markets. Export managers have to decide which marketing func-

tions are to be delegated to other intermediaries or partners and which are to

be performed internally. Selecting and managing the right distribution sys-

tems is the key to successful internationalization. They provide a competitive

advantage in global markets by helping identify market opportunities. Chan-

nels are also more difficult to change and thus require careful planning.

Williamson (1991) argues that contracting is determined by the gover-

frequency and volume of transactions. Studies indicate that asset specific-

ity, uncertainty, and frequency in volume of transactions are associated with

direct forms of market entry (vertical integration). There is an incentive to

integrate distribution channels to minimize transaction costs (McNaughton,

1996; Tesfom, Lutz, and Ghauri, 2004). In many developing countries, di-

rect entry may be needed, in spite of their limited market size, due to the

problem of asset specificity and lack of contract enforcing institutions.

Export firms can be involved in two principal channels of distribution

when marketing abroad:

Indirect channels. With indirect channels, the firm exports through an

method provides small firms with little experience in foreign trade access to

overseas markets without their direct involvement. However, using indirect

channels has certain disadvantages: (1) the manufacturer loses control over

the marketing of its product overseas, and (2) the manufacturer’s success

totally depends on the initiative and efforts of the chosen intermediary. The

latter could provide low priority to, or even discontinue marketing, the firm’s

products when the competitor’s product provides a better sales or profit

potential.

Direct channels. With direct channels, the firm sells directly to foreign

distributors, retailers, or trading companies. Direct sales can also be made

government agencies as well as its international network of sales agents and

distributors. The company now exports to approximately twenty-five coun-

tries on four continents.

The decision to market products directly or use the services of an inter-

mediary is based on several important factors.

International Marketing Objectives of the Firm

The marketing objectives of the firm with respect to sales, market share,

profitability, and level of financial commitment will often determine chan-

nel choice. Direct exporting is likely to provide opportunities for high profit

margins even though it requires a high degree of financial commitment.

ership (Kogut, 1986). Firms tend to use independent intermediaries during

the early phases of their internationalization efforts compared to those with

greater experience (Anderson and Coughlin, 1987; Kim, Nugent, and Yhee,

1997).

96 EXPORT-IMPORT THEORY, PRACTICES, AND PROCEDURES

Availability and Capability of Intermediary

Every country has certain distribution patterns that haveevolved over the

years and are complemented by supportive institutions. Firms that have used

specific types of distribution channels in certain countries may find it diffi-

cult to use similar channels in other countries. This occurs in cases in which

Osaka market area (Cateora, 1996). Another factor is that customers may

also have developed a habit of buying from a particular channel and are re-

luctant to change in the short term.

Direct exporting is often preferable if customers are geographically ho-

mogeneous, have similar buying habits, and are limited in number, which

allows for direct customer contact and greater control (Seifert and Ford,

1989). The choice of channel structure is primarily dictated by market con-

siderations. However, in certain situations, the nature of the product deter-

mines channel choice. In a study on export channels of distribution in the

United States, 52.7 percent of the respondents indicated that the distribu-

profit) or for products that are custom-made or highly differentiated. Smaller

equipment, industrial supplies, and consumer goods, on the other hand, tend

to have longer channels. In Canada, for example, consumer goods are pur-

chased by importing wholesalers, department stores, mail-order houses,

chain stores, and single-line retailers.

Marketing Environment

The use of direct channels is more likely in countries that are more similar

in culture to the exporter’s home country. Forexample, U.S. sales to Canada

are characterized by short (direct) marketing channels compared to the

Export Channels of Distribution 97

indirect channels used in Japan and Southeast Asia. In certain cases, firms

have limited options in the selection of appropriate channels for their prod-

owned by nationals of the country. Exporters must market their goods indi-

rectly by appointing a local agent or distributor. Some studies support the

use of direct/integrated channels when there is a high degree of environ-

mental uncertainty. The establishment of integrated channels is intended to

place the firmcloser to the market so as to react and adapt to unforeseen cir-

cumstances (Klein, Frazier, and Roth, 1990).

Control and Coverage

A direct or integrated channel affords the manufacturer more control

over its distribution and its link to the end user. However, it is not a practical

option for firms that do not have adequate foreign market knowledge or the

(selling technique, servicing procedure, promotion, etc.). Output controls

are used to influence indirectly the ends achieved by the distributor. The lat-

ter includes monitoring sales volume, profits, and other performance-based

indicators (Bello and Gilliland, 1997). It is important to note the following

salient points with respect to manufacturers’coordination and control of in-

dependent foreign intermediaries:

•

Manufacturersmust rely on both unilateral and bilateral (collaboration)

control mechanisms in order to organize and manage their export rela-

tionships with independent foreign intermediaries.

98 EXPORT-IMPORT THEORY, PRACTICES, AND PROCEDURES

Firms that export highly technical and sophisticated products tend to

exercise high levels of control (process and output controls) over for-

eign intermediaries in order to protect their proprietary rights (trade

secrets/know-how) as well as to address unique customer needs.

In terms of coverage, firms that use longer channels tend to use different

relationship between channel directness and intensive coverage. This means

that firms employing direct methods to reach their overseas customers tend

to use a large number of different types of channel intermediaries.

Types of Intermediaries

Export Channels of Distribution 99

or thin overseas market. It is also used when the product is new and demand

100 EXPORT-IMPORT THEORY, PRACTICES, AND PROCEDURES

management companies obtain low freight rates by consolidating ship-

ing into commercial fields (Meloan and Graham, 1995).

The disadvantages of ETCs are similar to the ones mentioned for EMCs.

Export Channels of Distribution 101

Exporters That Buy for Their Overseas Customers

Export Commission Agents (ECAs)

Export commission agents represent foreign buyers such as import firms

and large industrial users and seek to obtain products that match the buyer’s

preferences and requirements. They reside and conduct business in the

102 EXPORT-IMPORT THEORY, PRACTICES, AND PROCEDURES

firms empowered to locate and purchase desired goods. They could operate

cess a foreign market. There is little credit risk, and the exporter has only to

fill the order.

Another variation of the ECA is the resident buyer. The major factor that

distinguishes the resident buyer from other ECAs is that in the case of the

former, a long-term relationship is established in which the resident buyer

not only undertakes the purchasing function for the overseas principal at the

best possible price, but also ensures timely delivery of merchandise and

facilitates principal’s visits to suppliers and vendors. This allows foreign

buyers to maintain a close and continuous contact with overseas sources of

supply. One disadvantage of using such channels is that the exporter has lit-

and, hence, assume all risks associated with ownership. Export merchants

generally handle undifferentiated products or products for which brands are

not important. In view of their vast organizational networks, they are a pow-

erful commercial entity dominating trade in certain countries.

When export merchants, after receiving an order, place an order with the

manufacturer to deliver the goods directly to the overseas customer, they

are called export drop shippers. In this case, the manufacturer is paid by the

drop shipper, who in turn, is paid by the overseas buyer. Such intermediar-

ies are commonly used to export bulky (high-freight), low-unit value prod-

ucts such as construction materials, coal, lumber, and so forth.

Export Channels of Distribution 103

organization; financial, marketing, and promotion capability; installation

the firm has selected an agent or distributor based on the aforementioned

CONTRACTS WITH FOREIGN AGENTS

mination without good cause, for example, a Belgian distributor is entitled

to an indemnity.

Similar laws exist in France, Germany, and other countries. In Germany,

maximum compensation payable to agents usually equals one year’s gross

commissions based on an average over the previous five years or the period

of existence of the agency, whichever is shorter. In countries such as Egypt,

Indonesia, Japan, and South Korea, representation agreements must be for-

mally registered with and their contents must be approved by the appropri-

ate authority. In many Latin American countries, local law governs service

contracts if the services are to be performed in local jurisdictions and any

specificclass of buyerssuch as governments or quasi-government agencies.

110 EXPORT-IMPORT THEORY, PRACTICES, AND PROCEDURES

If agreements do not explicitly state that they are exclusive, they will often

a reasonable time. The contract should also state whether the representative

Definition of Product

The contract should identify those products or product lines covered by

the agreement as well as the procedures for the addition of successive prod-

ucts. It should also provide for the alteration or deletion of certain product

lines based on the exporter’s continued production, representative’s perfor-

mance, or other events.

Representative’s Rights and Obligations

The agreement should state that the representative will do its best to pro-

mote and market the product and cooperate to attain the objectives of the

tomer lists; (3) a provision as to whose responsibility it is to arrange for all

the necessary approvals, licenses, and other requirements for the entry and

sale of goods in the foreign country; and (4) the right of the representativeto

carry noncompetitive and complementary products.

An agency agreement should state the nature and scope of an agent’s au-

thority to bind the exporter (which is often denied) as well as the agent’s dis-

cretion with respect to pricing. All sales of products are to be in accordance

with the price list and discount structure as established in the contract. The

parties could also agree on mechanisms to implement changes in prices and

terms. It is also important to stipulate the amount of compensation (commis-

Distributor agreements should state clearly that the overseas distributor

acts as a buyer and not as an agent of the seller. The agreement could require

Export Channels of Distribution 111

the distributor to maintain adequate inventories, facilities, and competent

ing a minimum value or quantity shall be placed within a fixed time. The

pearing at regular monthly intervals in the national journals or maga-

zines of the industry circulating generally throughout the territory.

Exporter’s Rights and Obligations

In agency contracts, the exporter is often required to provide the agent

with its price schedules, catalogs, and brochures describing the company,

its product and other pertinent features. In distributor contracts, the exporter

is required to provide the distributor and his or her personnel with training

and technical assistance as is reasonably required in order to service, main-

tain, and repair products. In both agency and distributor agreements, the

exporter should warrant that the product complies only with the specified

the price list and discount structure agreed upon between the parties. How-

ever, the seller reserves the right to change prices at any time, usually upon

a thirty- or sixty-days’ prior notice.

Distributor agreements also contain provisions relating to the price to be

charged by the seller upon purchase of goods by the distributor. Any dis-

counts available are also stated. In the case of products that are affected by

inflation, the parties could set a definite price ruling on a specific date, such

as the date of the sales contract or shipment. The parties could also agree that

the exporter charge the distributor the best price it provides other customers

at the time of sale (the most-favored-customer price) except for those prod-

ucts supplied to a holding company, subsidiary, or other associated compa-

nies of the supplier. The distributor agreement should also stipulate the terms

112 EXPORT-IMPORT THEORY, PRACTICES, AND PROCEDURES

as well as the method of payment (open account, letter of credit, etc.), for

In many countries, issues relating to appointment, renewal, or termination

of representatives are largely determined by local law. Many foreign repre-

sentation agreements provide for a short trial period followed by a longer-

term appointment if the representative’s performance proves satisfactory. It

is important to state the duration of appointment and the basis for renewal

or termination. Any renewal or termination requires an act of notification to

the representative.

In certain countries, the longer the period the representative has been

appointed, the more difficult and expensive it is to terminate the contract.

Representative agreements are terminated in cases when one of the parties

notice shall havethe right, at its election, to terminate the agreement.

The previous clause is often used to terminate nonperforming represen-

tatives. It is, however, important to set certain targets and objective perfor-

sales volume, inventory turnover rates, advertising, and market share. It is

also advisable to include other causes of termination, such as the following:

Right to Terminate Without Cause

A significant number of contracts allow for termination of the contract

by either party with no prerequisite of action or omission by the other party

upon giving advance notice, for example:

Export Channels of Distribution 113

Either party shall havethe right to terminate the agreement at any time

the other party.

114 EXPORT-IMPORT THEORY, PRACTICES, AND PROCEDURES

well as the place of incorporation and place of business of the parties. The

to the validity, interpretation, and performance of the agreement.

3. Availability and capability of intermediary

Export Channels of Distribution 115

5. Marketing environment

2. Discuss three major determinants of channel selection to market

116 EXPORT-IMPORT THEORY, PRACTICES, AND PROCEDURES

5. Discuss the disadvantages of using export management companies.

and Europe; (2) handling complex logistics and outsourcing of various

phases of the production process when necessary; (3) managing complex

construction and infrastructure requirements by coordinating with multiple

manufacturers of equipment worldwide and assembling the end product;

(4) establishment of links with several financial institutions to help over-

seas buyers to finance their purchases, enhance their cash flows, and ex-

pand U.S. exports; and (5) arrangement of independent financing of turn-

key projects for qualified government agencies and corporations from

eligible foreign countries.

Farouk Systems: Farouk Systems, Inc. (FS), a Houston-based manufac-

Singapore was considered a good market for U.S. beauty care products

Export Channels of Distribution 117

goods, compared with 17 cents spent by women in China. There is, however,

Final selection of the distributor (True Line Beauty) was based on a

number of factors: experience within the Southeast Asian market, solid

foundations within the industry, experience in conducting hair shows and

educational seminars, sound financial position, personal chemistry, and gut

instinct. They also considered the extent to which the potential candidates

were willing to look at the long-term perspective and invest in the brand.

The distributor, True Line Beauty (TLB) was formed twelve years ago

and has twenty employees. True Line Beauty asked for and received exclu-

sive distribution rights in a number of other countries including Malaysia

Efforts have been quite slow in developing markets outside Singapore.

True Line Beauty’s approach appears to focus on tackling one market at a

gins) as stated in the contract remain unmet over a given period of time, the

U.S. company has the option of finding another distributor with the requi-

site capability to do the job. However, flexibility is the key in evaluating

A business that would like to succeed in export markets needs information

about market prospects and must continually fine tune its marketing skills,

sales of U.S. retailers will be online. Business-to-business sales volume is

also expected to outpace business-to-consumer sales by a factor of twenty

118 EXPORT-IMPORT THEORY, PRACTICES, AND PROCEDURES

and the provision of extended services. Even though these new possibilities

pose a serious threat to export intermediaries, a virtual market presence is

not likely to be a substitute for existing networks since physical distribution

channels still have several positional advantages compared with virtually

organized ones. A number of value added services, for example, can only

be provided via traditional distribution outlets. The Internet will not en-

tirely replace the need for interpersonal relations and trust building. The

Internet also poses organizational and managerial challenges (Peterson,

not previously available.

A study by Freund and Weinhold (2000) on the effect of the Internet on

international trade shows its increasing and significant impact from 1997 to

1999. The study shows that a 10 percent increase in the relative number of

Web hosts in one country would lead to about 1 percent greater trade. It also

finds the effect of the Internet to be stronger for poor countries than for rich

ones. However, the Internet does not seem to have reduced the impact of

distance on trade. Clarke and Wallsten (2004) also find a positive correla-

tion between Internet penetration in developing countries and their increas-

with the intentionof expandingintotheglobal market. Global orders are exe-

In spite of the increase in the number of users, Internet penetration rates

in most developing countries remain low (see Table 5.1). Online trade is

limited. Other factors contributing to lowerthan average e-commerce activ-

ity include low per capita incomes, low credit card usage, lack of relevant

products or services, or poor logistics and fulfillment services.

In more advanced developing nations such as Taiwan, for example, the

Internet is widely used in most sectors of the economy. Taiwanese firms are

more concerned with improving forward linkages to their customers than

Export Channels of Distribution 119