In unusual situations, international transactions can be initiated and consummated in a short period of time.
Sometimes, when companies are dealing with foreign subsidiaries, individual new transactions might be arranged quickly, but these would usually involve detailed planning at a corporate level where logistical and financial aspects are well understood.
More often, ventures into buying or selling goods or services from companies in one or more other countries without sufficient planning or without the necessary long-term commitment, would fail or would consume profits before proving successful.
Too frequently, companies, especially smaller organizations, have reacted to perceived opportunities for global business deals quickly without fully evaluating all the costs, time and effort, only to discover they have sold a product at a loss or have purchased at a total cost that far exceeds the cost incurred by the competition.
Properly and adequately researching foreign markets, evaluating all the costs, and assessing product marketability and the competition requires a long-term commitment.
Offsetting both the hard and hidden costs of this activity cannot reasonably be achieved in the short term.
Recognize all cost and price elements of global business deals to avoid setbacks
Trading on international markets requires a solid understanding of numerous elements, several of which do not exist in domestic business transactions. For instance, environmental factors include foreign exchange rates, varying inflation rates and applicable laws and regulations, at home and abroad. Market factors include competition, market share and the purchasing power of potential multinational clients.
Despite all these variables, pricing a product for export is one of the most important steps in evaluating the viability of transactions and should therefore be as accurate as possible. The cost of the sale will set the lower limit at which the export price will be set, and this will in turn set the basis for the negotiation between the exporter and importer.
Apart from the base price set by the exporter that will reasonably meet profitability requirements, the final price will ultimately depend on the trade terms agreed on by the two parties. Among other things, trade terms establish the responsibilities of the exporter and the importer for shipping the goods, responsibility for insurance in transit, title to goods in the transport process and payment of the loss if the goods cannot be delivered.
The complexities of global business deals render negotiation of trade terms more difficult than domestic trade. To make this process easier, international standards have been established by the International Chamber of Commerce (ICC).
Called Incoterms (short for International Commercial Terms), these standards and definitions were first introduced in 1936, and are the only internationally recognized terms for defining the rules of trade and resolving contractual disputes. The latest version of Incoterms is available on the ICC website.
The choice of a term of trade, or Incoterm, is normally governed by which party can provide the service most efficiently or most cost-effectively, sometimes because of the varying cost of services in different countries. For instance, it is often desirable or necessary for the exporter to arrange the export permits and documentation. As well, the exporter is usually in a better position to package the goods to withstand shipment, while the importer is better placed to arrange inspection of goods.
In some countries, because of subsidies to shipping and logistics companies, the importer will be inclined to undertake the payment of freight. On the other hand, concerns of the exporter about transfer of title and access to insurance coverage in the event of accidents, etc., may influence the exporter’s willingness to relinquish control of these elements.