goals is the first step to determining a cohesive marketing strategy when considering exporting goods. Once the firm
has established its intentions in entering the international market, it should identify a target market for its product or
products. Following this essential process, the small business is ready to examine potential channel members. There are
a number of options when considering an export distribution channel. The firm must first determine whether an indirect
distribution channel or a direct distribution channel is more suited to its particular needs. An indirect distribution
channel is domestic-based, with firms actually located on U.S. soil, while a direct distribution channel is foreign-based.
Although an initial reaction might be that it would be more effective to select a direct distribution channel since it
implies direct customer contact and knowledge of the area by the distributor, research has shown that direct exporting
is preferable only if the customers are geographically homogeneous, have similar buying habits, and are limited in
number. Indirect exporting appears to be preferable when customers and buying habits are heterogeneous and a number
of different methods of exporting are necessary (6). Therefore, the choice of a direct vs. indirect distribution channel
would seem to be dependent upon the target market(s) identified and the intended export product.
If a firm decides that indirect distribution is most compatible with its marketing strategy, it has a choice between
dealing with agents (those firms which do not take title to the goods), or with merchant middlemen (those firms which
actually take title). Agents include export management companies, manufacturer's export agents, Webb-Pomerene
Association members, foreign freight forwarders, commission agents, country controlled buying offices, and selling
groups.These agents perform different functions. An export management company (EMC) is a U.S. firm which handles
all aspects of export operations under a contractual agreement. A manufacturer's export agents essentially the same as
an EMC except that it covers limited markets and is under contract for a short time only (a few months to a year).
Members of the Webb-Pomerene Association represent a group of manufacturers who are exempt from antitrust laws
as a result of the Webb-Pomerene Act of 1918. Foreign freight forwarders specialize in handling overseas shipping
arrangements, while commission agents represent foreign clients interested in buying U.S. goods. Country controlled
buying offices act as official buyers for foreign governments, and selling groups are U.S. firms who sell excess
capacity overseas. Merchant middlemen relieve the company of a great deal of risk in taking title to the goods,
frequently resulting in significant cost savings. Within an indirect distribution channel, a small business may choose
among export merchants, who buy directly from the manufacturers according to their specifications, cooperative
exporters, who distribute other manufacturer's goods along with their own on a contractual basis, or export vendors
who specialize in buying poor quality or overproduced goods.
Direct distribution channels also include agents and middlemen merchants. A firm may deal with export brokers,
purchasing agents, sales representatives, factors, or managing agents, if it wishes to retain title to the goods. Export
brokers bring foreign buyers and U.S. sellers together. A purchase agent operates in the U.S. searching for products of
interest to foreign buyers. Sales representatives, armed with literature and samples from the exporting company, travels
abroad developing interest in the company's products. Factors perform normal brokerage functions, but also finance
sales transactions. Managing agents have exclusive contractual arrangements with a parent company, while working
within a foreign country.
If the firm wishes to relinquish title (and accompanying risk), it may choose among export distributors, retailers, export
jobbers, or trading companies. Export distributors purchase goods from U.S. companies at the greatest possible
discount and then resell them at a profit. Using a retailer involves dealing directly with a foreign retailer who then sells
the goods through its own outlets. Export jobbers fill specific foreign customer needs by purchasing from U.S.
companies. Trading companies are usually country-specific import- export agencies who handle export activities and
are frequently responsible for an exclusive product specialty.
With this multitude of choices, how does a small business determine which distribution channel will be most effective
for its particular objectives? It seems obvious that the firm's intention in marketing internationally will have a
significant bearing on which distribution channels may be available. Certain types of channel members handle only
certain types of transactions. Initially, there will be a sort of "natural selection" which will result in consideration of
only those types of channel members who specialize in the sorts of transaction a firm desires (e.g., marketing of excess
goods, poorer quality goods, etc.). Within this group, however, there may be a number of potential agencies who could
perform the functions desired by the firm, and the small business must decide which of these would be the most
Such a decision necessitates a careful consideration of projected revenues and costs associated with each potential
channel member. Once the field has been narrowed down to the above, a firm should list all potential channel members,
regardless of type, as long as these channel members have been identified as being capable of accomplishing the task.
At this point, these channel members should be screened by the firm's management on the basis of compatibility,
availability and individual organizational characteristics (9). Compatibility serves as the initial screen. This should be
evaluated in terms of the channel member's market coverage, its functional capabilities, its service capacity, overall
image, and any other qualities deemed important to the exporting company. Such criteria will be of special importance
if the exporting firm has decided on a direct distribution channel, since the reputation of a foreign- based company
would be vital to projected sales of any product. Availability relates to whether or not the considered channel member
is willing to become a part of the exporter's channel structure. Organizational characteristics of the potential channel
member involve considerable judgment on the part of the exporting firm pertaining to the probable performance of the
channel member, its growth potential and its financial stability.
Once this screening has taken place to limit potential channel members, the firm is in a position to project revenues and
costs for each considered member. Projected revenue is the starting point for any effective cost analysis. This will
involve variable price setting and serious consideration of expected sales by each potential channel member. Pricing
structure for a particular product may differ depending on whether a channel is direct or indirect. More costs and more
risks are associated with direct channels than with indirect.
Within each of these areas, price differentials may exist with respect to whether the potential channel member is an
agent or a merchant middleman. Since merchant middlemen take title to the goods, many of the costs associated with
marketing overseas are held by the middlemen, and not by the originating company. Prices to merchant middlemen
would therefore be lower than prices through agents. Beyond this level, prices may change based upon the type of
agent or middleman. For example, since export management companies are compensated in the form of commissions
or from discounts on goods purchased for export, selling prices to these groups may be lower than selling prices to
other indirect agents. Although such variable pricing analysis is time-consuming, careful analysis of potential revenues
is an essential step in the analysis of distribution channels.
Once revenues have been projected for each channel member under consideration, costs associated with that channel
member must also be estimated. These costs should be separated into one-time non-recurring costs and on-going
expenses, as well as fixed and variable components. It should be noted that fixed costs per channel member may vary
depending upon the functions undertaken by that channel member and/or the marketing support necessary. One-time
start-up costs should be estimated for each channel member and costs and availability of capital must be analyzed. The
small business must evaluate its capital requirements, and its capability to acquire and repay any financing it might
Variable production cost for a particular product should be the same for all potential channel members, so the total
variable production cost for each channel member would be based on expected sales volume. Commissions or fees to
the distributor must be considered in most of the agent situations, regardless of whether the channel is direct or indirect.
Since commissions are normally a percentage of sales, the wisdom of projecting a relevant sales figure becomes readily
apparent. Certain agents, however, do not require a commission from the exporter. These include foreign freight
forwarders who receive a discount or fee from the shipping company, and commission and purchasing agents, who are
paid by their foreign clients. In addition, country controlled buying offices are usually paid by the foreign government
for whom they work, and managing agents operate under an exclusive contractual arrangement with the parent
company on a cost-plus basis.
Distribution costs must be included in all cases, although once again, these will vary with the particular distribution
channel contemplated. Distribution costs cover a wide variety of functional areas, including transportation costs,
inventory holding costs, warehousing, tariffs and duties, and insurance. Transportation costs will differ subject to
distance, method of transportation selected, time constraints and shipping terms. Shipping to indirect channels in the
United States will normally be less expensive than shipping the product overseas to direct channel members, depending
upon the shipping terms. Considering only indirect channels, dealing through agents, rather than merchant middlemen,
would be more expensive since middlemen would take title to the goods and assume the overseas shipping costs.
Shipping products internationally will obviously result in higher costs than shipping domestically, regardless of
whether the shipping is to an agent or a middleman. Choices are to ship to the final buyer via an agent, or to a
middleman merchant. Once middlemen merchants take title to the goods, further shipping costs are their responsibility.
Methods of shipping and time constraints are directly related. In considering how to ship, the exporter must recognize
that all methods of shipping are not available in all locations. He must investigate and price the various shipping modes
for each channel member. In addition, he must weigh the trade-off between slower (cheaper) shipping modes against
possible time constraints and customer satisfaction. Shipping terms, particularly in the area of international marketing,
should be carefully analyzed with respect to who pays which costs. It should be noted that if the seller pays all shipping
costs, the price of the product should be correspondingly higher than if the buyer assumes part or all of the cost.
Inventory holding costs increase the longer the exporter holds his inventory. Consequently, one way, of reducing such
costs is to turn the inventory as rapidly as possible. Merchant middlemen, who take title to the goods, also take on the
costs of holding the inventory. Agents, on the other hand, do not incur inventory holding costs--either the exporter
does, waiting for the agent to generate orders, or the buyer does, having ordered specific goods in the hope of selling
Cost of warehousing a product can vary dramatically. In theory, products should be centrally located to the selected
distributor in order to decrease transportation costs. In actuality, the cost of warehousing such products domestically
and internationally needs to be weighed against probable demand and the possibility of import quotas. Warehousing
may be neither desirable nor necessary. It may be preferable to simply ship directly from the originating company in
the case of small businesses. Costs of warehousing at various locations should be closely investigated.
Tariffs and duties normally will be incurred by the owner of the merchandise at the time an international border is
crossed. In most cases, that is the seller. This implies that if an exporter uses indirect distribution, only sales to
merchant middlemen will allow him to escape the tariff and duty costs. This is not necessarily the case. Certain
domestic agents, e.g., commission agents and country-controlled buying offices, buy on behalf of foreign clients. Since
the goods are purchased in the United States, the buyers assume responsibility for tariffs and duties. The same situation
does not hold when considering direct distribution. In situations where the agent is acting on behalf of a foreign
principal, the buyer generally pays tariffs and duties. On the other hand, use of merchant middlemen for direct
distribution does not necessarily relieve the original seller of tariff and duty costs. Since the buyer (merchant
middleman) is located overseas, the seller (the exporter) is normally liable for tariff and duty.
Insurance costs of marketing internationally must also be analyzed. Exporters are susceptible to risks of war,
expropriation, and currency inconvertibility, in addition to the usual commercial losses resulting from insolvency or
default. Much of the risk (and cost) may be averted through the use of domestic merchant middlemen. The risk is
increased when the small business attempts direct distribution. At that point, the small business should consult with the
Foreign Credit Insurance Association (FCIA) and Overseas Private Investment Corporation Insurance (OPIC
Insurance). FCIA offers umbrella policies to companies who are either new to exporting or who have limited export
experience. OPIC Insurance insures primarily against political risks. Unlike the FCIA, OPIC Insurance does not insure
against commercial risk.
In analyzing costs associated with prospective channel members, the firm should not neglect the concept of marketing
support costs. Advertising, customer discounts, promotional materials, in addition to frequent visits from the exporter,
may be necessary to generate demand for the product. Any marketing support costs should be estimated for each
potential channel member.
Once all of these costs have been estimated, the small business is in a position to evaluate the potential channel
members. Projected revenues less estimated costs should give the firm a better picture of estimated income by channel
member. Viewing the estimated income figure, the firm should also take into consideration the expected growth
potential of the channel members being analyzed. Lower earnings in earlier years may be countered by higher earnings
in later years.
Although no one knows for certain what will happen in 1992, there is general agreement that a united European
Community presents numerous opportunities for U.S. businesses. Small businesses are already a part of the
international market. For those businesses who are unable or unwilling to enter that market through joint ventures or
mergers and acquisitions, selection of the proper export distribution channel is of paramount importance. Careful
consideration of the costs and revenues associated with the, potential channel members is a crucial part of the selection
(1) Barrett, Gene R., "What 1992 Means to Small and Midsized Businesses," Journal of Accountancy, July 1990, pp.
(2) Barrett, Gene R., "Where Small and Midsized Companies Can Find Export Help,"Journal of Accountancy, Sept.
1990. pp. 46-50.
(3) Bowersox, Donald J., Logistical Management, 2nd ed., MacMillan Publishing Co., Inc., 1978, pp. 498-508.
(4) Doost, Roger K., "Distribution Cost Accounting and Control," CPA Journal, February 1988, pp. 77-79.
(5) Keefe, Gary L., "Helping Clients Prepare for Global Markets," Journal of Accountancy, July 1989, pp. 54-65.
(6) Reid, Stan, "What Do We Know About Export Behavior?" in International Marketing: Managerial Issues, Research,
and Opportunities, American Marketing Association, 1983, pp. 39-46.
(7) Seifert, Bruce, and John Ford, "Export Distribution Channels," Columbia Journal of World Business, Summer
1989, pp. 15-22.
(8) Simpson, Chris D., and John J. Korbel, "Getting U.S. Companies Ready for Europe 1992," Journal of Accountancy,
May 1990, pp. 60-76.
(9) Zoltners, Adris, Kasturi Rangan, and Robert Becker. "DESIGNER: A Decision Model for Distribution Channel
Selection." Working paper, Northwestern University, The Center for Marketing Sciences, Kellogg Graduate School of
Management, October 1982.
"PASSIVE" VS "ACTIVE" EXPORTING: FACTORS AFFECTING
ENTRY INTO INTERNATIONAL MARKETS BY AMERICAN SMALL
Diana Reed, Drake University, Des Moines, IA 50311
Delaney J. Kirk, Drake University, Des Moines, IA 50311
In order to determine variables that affect whether a small business would engage in active exporting, a questionnaire
was used to identify differences in "active" and "passive" exporters. A second telephone survey was conducted of
exporters and non-exporters to examine differences between the two groups. A profile of active exporters was then
developed involving factors of size, annual sales, product differentiation, exporting experience, management, location
of firm, and perception of risk to assist both current exporters and non-exporters in becoming "active" or high-volume
The national trade deficit in the United States has been a matter of real concern since the early 1970's and has led to
numerous articles and studies regarding exporting of goods. Although a number of programs have been proposed and
some even implemented in order to lessen imports, it is now obvious that a greater need lies in increasing exports. A
number of federal and local organizations had been established to look at this need and to assist firms in adopting an
export strategy. As about 98 percent of the nation's businesses have fewer than 100 employees (Trewatha, 1988), one
important strategy would be to assist small businesses in becoming exporters. The purpose of this paper then is
twofold: to examine small firms that are currently engaged in exporting in order to determine differences between
"passive" or low-volume exporters and "active" or high-volume exporters and second to examine exporters and non-
exporters to determine variables which affect whether or not the firms engage in active exporting. Once identified, the
non-exporters that fit the profile for potential high-volume exporting can then be targeted for financial and other
support to enable them to become "active" exporters.
A number of studies in the past decade have examined various aspects of the exporting question. Many of these have
concentrated on analyzing current exporters in order to determine which variables affected their decision to export.
Bilkey (1982) studied 168 Wisconsin manufacturing firms to examine variables associated with profitability of
exporting. Other studies (Czinkota & Johnston, 1983; Bilkey, 1978; Wiedersheim-Paul, et al, 1978) looked at
management attitudes, characteristics, and perceptions about exporting as a key factor in a firm's export decision.
Perceptions of risk and "peer pressure" from competitors are also viewed as factors (Root, 1987; Bilkey, 1978). In
addition, other studies have distinguished firms that actively export from those which engage in "sporadic" exporting.
Sporadic exporters would fill unsolicited orders but do not aggressively pursue exporting. Bilkey (1978) states that
many firms enter exporting in this way. However, Czinkota & Johnston (1983) state that higher-volume exporters
usually actively solicit their first export order.
Other research has concentrated on determining differences between firms that export and those which choose not to
export. Location within large population areas (Wiedersheim-Paul et al, 1978) and product uniqueness (Root, 1987;
Bilkey, 1978) were often cited as factors leading to the exporting decision. Size is considered to be a critical factor in
the decision to export (Jatusripitak, 1984; Reid, 1985; Bilkey, 1978). Czinkota & Johnston (1983) concentrated on size
of the exporting firm in relationship to problems inherent in exporting. Smaller firms are said to be less likely to export.
In one article, several sources were quoted saying that "small business manufacturers . . . lack the resources and time to
explore overseas trade opportunities," and that smaller firms were "less aware of the potential of exporting and less
confident about their ability to do it" and thus needed more help than larger firms in beginning to export (Czinkota &
Johnston, 1985: 158). However, according to Wiedersheim-Paul, Olson & Welch (1978) most firms are small when
they first start exporting. In addition, as noted in a study by the U.S. Department of Commerce, small-to-medium sized
firms could potentially sell 51 percent of U.S. exports, although currently they only account for 16 percent (Edmunds &
As stated by Reid (1985) there has been "no conclusive evidence as to the relevance of firm size to exporting."
According to Reid, one major reason for this is lack of interest on the part of researchers. However, as the trend toward
small businesses increases into the year 2000, this represents an important area of research into the "how's" and "why's"
of exporting behavior.
Iowa was chosen for the study as it is an "above average" state for exporting, ranking 17th nationally in total value of
exports (IA Dept. of Economic Development, 1988). An estimated 22 percent of all Iowa manufacturers export to
foreign markets. However, none export more than 20 percent of their total sales, and only a few export more than 10
percent. This clear orientation toward domestic markets indicates that there is definitely room to expand foreign sales.
Two surveys were conducted in order to examine variables that affect whether or not an organization would engage in
active exporting. The first study used a questionnaire that was mailed to the CEO's or plant managers of all Iowa
manufacturers who had
exported products in the past year. Information on exporting activity was gained from the Iowa Manufacturers
Directory. A total of 544 exporters were identified and 198 usable questionnaires were returned, a response rate of 36.4
percent. Questions regarding the percentage of total sales that resulted from exporting, number of years firms have been
engaged in exporting and the countries exporting to, along with percentage of sales from each country were asked.
Also, information was collected on export methods, future exporting investment and expectations, and export terms. In
addition, information about the firms was obtained, including number of employees, annual sales, and type of products
After analyzing the data from the questionnaires, the second survey was then conducted by telephone. Two groups
were developed using the Iowa Manufacturers Directory. One group represented firms that did export and the other was
composed of firms that did not engage in exporting. A total of 58 firms were randomly chosen to be contacted by
telephone. Of these, 32 were exporters, of which 27 resulted in usable information (a response rate of 84%). Twenty-six
non-exporters were originally chosen, with 19 completed calls obtained (a response rate of 73%). In order to be
considered usable information, the CEO or plant manager had to be contacted and complete answers given to a set of
questions previously chosen. The questionnaire had been pretested for clarity and face validity with calls made to two
exporters and two non-exporters. Calls were made during normal business hours.
The first three questions in the telephone survey dealt with a general attitude toward exporting. These statements were
taken from a study done in Illinois on export attitudes, and had been tested for validity (Jatusripitak, 1984). These
questions were modified slightly to allow for ease in completing the questionnaire during the telephone interview. In
addition, questions on geographic market, product differentiation, export payback, and after-sales support were used
that had been previously developed by a Bradley University research team to quiz potential exporters (Cavusgil and
Monahan, 1987). These questions were also modified for ease of questionnaire completion. Also, additional questions
were asked as to the respondent's foreign living experience and language ability. The exporters were asked five
additional questions aimed at their experiences with exporting. As many of the questions involved nominal data, the
Chi-square test was chosen to test for significance in the data.
Results of mailed survey of exporters
A survey of 198 exporters was used in order to examine the relationship between the volume of exporting and the size
of a firm, years of exporting experience, number of countries to which products are exported, and the location of the
firm. Volume of exporting was determined in terms of the percent of sales exported by a firm. A "passive" exporter was
defined as one exporting less than five percent of annual sales while an "active" exporter would be those firms
exporting five percent or more of sales.
Obviously, the terms "passive" and "active" will only be relative here; however, as many profit margins in small
business are fairly small (5-10%), exporting may become a significant concern for management as success or failure in
exporting can greatly affect the firm's profitability.
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